[Senate Hearing 106-721]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 106-721


 
                          FEDERAL DAIRY POLICY

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

                                HEARING

                               before the

                       COMMITTEE ON AGRICULTURE,
                        NUTRITION, AND FORESTRY
                          UNITED STATES SENATE

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                                   ON

                          FEDERAL DAIRY POLICY

                               __________

                          FEBRUARY 8, 9, 2000

                               __________

                       Printed for the use of the
           Committee on Agriculture, Nutrition, and Forestry


                                


                      U.S. GOVERNMENT PRINTING OFFICE
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           COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY



                  RICHARD G. LUGAR, Indiana, Chairman

JESSE HELMS, North Carolina          TOM HARKIN, Iowa
THAD COCHRAN, Mississippi            PATRICK J. LEAHY, Vermont
MITCH McCONNELL, Kentucky            KENT CONRAD, North Dakota
PAUL COVERDELL, Georgia              THOMAS A. DASCHLE, South Dakota
PAT ROBERTS, Kansas                  MAX BAUCUS, Montana
PETER G. FITZGERALD, Illinois        J. ROBERT KERREY, Nebraska
CHARLES E. GRASSLEY, Iowa            TIM JOHNSON, South Dakota
LARRY E. CRAIG, Idaho                BLANCHE L. LINCOLN, Arkansas
RICK SANTORUM, Pennsylvania

                       Keith Luse, Staff Director
                    David L. Johnson, Chief Counsel
                      Robert E. Sturm, Chief Clerk
            Mark Halverson, Staff Director for the Minority

                                  (ii)



                            C O N T E N T S

                              ----------                              
                                                                   Page

Hearing:

Tuesday, February 8, 2000, Federal Dairy Policy..................     1
Wednesday, February 9, 2000, Federal Dairy Policy................   211

Appendix:
Tuesday, February 8, 2000........................................    69
Wednesday, February 9, 2000......................................   271
Document(s) submitted for the record:
Tuesday, February 8, 2000........................................   195

                              ----------                              

                       Tuesday, February 8, 2000
                    STATEMENTS PRESENTED BY SENATORS

Lugar, Hon. Richard G., a U.S. Senator from Indiana, Chairman, 
  Committee on Agriculture, Nutrition, and Forestry..............     1
Fitzgerald, Hon. Peter G., a U.S. Senator from Illinois..........    38
Craig, Hon. Larry E., a U.S. Senator from Idaho..................    33
Santorum, Hon. Rick, a U.S. Senator from Pennsylvania............    24
Harkin, Hon. Tom, a U.S. Senator from Iowa, Ranking Member, 
  Committee on Agriculture, Nutrition, and Forestry..............    22
Leahy, Hon. Patrick J., a U.S. Senator from Vermont..............    34
Specter, Hon. Arlen, a U.S. Senator from Pennsylvania............     4
Grams, Hon. Rod, a U.S. Senator from Minnesota...................     5
Kohl, Hon. Herb, a U.S. Senator from Wisconsin...................     7
Jeffords, Hon. James, a U.S. Senator from Vermont................     8
Feingold, Hon. Russell, a U.S. Senator from Wisconsin............    11
Wellstone, Hon. Paul, a U.S. Senator from Minnesota..............    13
                              ----------                              

                               WITNESSES

Kind, Hon. Ron, a U.S. Representative from Wisconsin.............     9
Green, Hon. Mark, a U.S. Representative from Wisconsin...........    15
Ryan, Hon. Paul, a U.S. Representative from Wisconsin............    16
Thompson, Hon. Tommy, Governor, State of Wisconsin...............     2

               Panel One - Review of Federal Dairy Policy

Collins, Keith, Chief Economist, U.S. Department of Agriculture, 
  Washington, DC.; accompanied by Larry Salathe, Senior 
  Economist, USDA................................................    25

       Panel Two - Current structure/status of the Dairy industry

Bok, Wayne, Dairy Farmer, Geddes, South Dakota...................    56
Engles, Gregg L., President and CEO, Suiza Foods Corporation, 
  Dallas, Texas..................................................    43
Gorder, Richard, Wisconsin Farm Bureau Federation, WI............    54
Hoover, Gordon, National Milk Producers Federation, PA...........    53
Rudgers, Nathan L., Commissioner, New York State Department of 
  Agriculture and Markets........................................    19
Vanderstelt, Dennis, President, Western States Dairy Producers 
  Trade Association, ID..........................................    50
Wilson, John, Corporate Vice President for Marketing/Economic 
  Analysis, Dairy Farmers of America, MO.........................    48
Yoder, President, Indiana Professional Dairy Producers, IN.......    46
                              ----------                              

                                APPENDIX

Prepared Statements:
    Lugar, Hon. Richard G........................................    70
    Helms, Hon. Jesse............................................   190
    Santorum, Hon. Rick..........................................   110
    Harkin, Hon. Tom.............................................   108
    Leahy, Hon. Patrick..........................................   135
    Breaux, Hon. John............................................   191
    Grams, Hon. Rod..............................................    80
    Schumer, Hon. Charles, E.....................................   189
    Specter, Hon. Arlen..........................................    77
    Wellstone, Hon. Paul.........................................    87
    Green, Hon. Mark.............................................    92
    Kind, Hon. Ron...............................................    85
    Kohl, Hon. Herb..............................................    83
    Ryan, Hon. Paul..............................................    96
    Bok, Wayne...................................................   186
    Collins, Keith...............................................   112
    Engles, Gregg L..............................................   150
    Gorder, Richard..............................................   182
    Hoover, Gordon...............................................   174
    Rudgers, Nathan L............................................   102
    Thompson, Tommy G............................................    71
    Vanderstelt, Dennis..........................................   170
    Wilson, John J...............................................   164
    Yoder, Martin................................................   159
Document(s) submitted for the record:
    Statement of the American Association of Grain Inspection and 
      Weighing Agencies..........................................   196
    Letter to Hon. Richard G. Lugar, from James A Graham, 
      Commissioner, Department of Agriculture, Raliegh, North 
      Carolina, submitted by Hon. Jesse Helms....................   199
    Letter to Hon. Richard G. Lugar, from John W. Lincoln, 
      President, New York Farm Bureau............................   201
    Testimony by the National Grange Regarding Current U.S. Dairy 
      Policy and the U.S. Dairy Pricing System...................   204
    Comments on the Federal Milk Marketing Order program from 
      Fred LaClair...............................................   209
    Survey on bottled milk and cheddar cheese prices in several 
      states, and the Market Administrators Bulletin, submitted 
      by Fred LaClair (this information is retained in the 
      Committee files)...........................................

                              ----------                              

                      Wednesday, February 9, 2000
                    STATEMENTS PRESENTED BY SENATORS

Lugar, Hon. Richard G., a U.S. Senator from Indiana, Chairman, 
  Committee on Agriculture, Nutrition, and Forestry..............   211
Santorum, Hon. Rick, a U.S. Senator from Pennsylvania............   245
Fitzgerald, Hon. Peter G., a U.S. Senator from Illinois..........   231
Grassley, Hon. Charles E., a U.S. Senator from Iowa..............   223
Grams, Hon. Rod, a U.S. Senator from Minnesota...................   228
Harkin, Hon. Tom, a U.S. Senator from Iowa, Ranking Member, 
  Committee on Agriculture, Nutrition, and Forestry..............   238
Leahy, Hon. Patrick J., a U.S. Senator from Vermont..............   247
Conrad, Hon. Kent, a U.S. Senator from North Dakota..............   221
Daschle, Hon. Tom, a U.S. Senator from South Dakota..............   212
Lincoln, Hon. Blanche L., a U.S. Senator from Arkansas...........   224
                              ----------                              

                               WITNESSES

Brey, Bill, President, Wisconsin Farmers Union, Sturgeon Bay, 
  Wisconsin, on behalf of the National Farmers Union.............   258
Clayton, Kenneth G., Associate Administrator, Agricultural 
  Marketing Service, U.S. Department of Agriculture; accompanied 
  by Richard M. McKee, Deputy Administrator for Dairy Programs, 
  Agricultural Marketing Service, U.S. Department of Agriculture, 
  Washington, DC.................................................   213
Jaeger, Arthur S., Assistant Director, Consumer Federation of 
  America, Washington, DC........................................   226
Jensen, Larry J., Senior Vice President of Supply, Distribution 
  and Business Development, Leprino Foods, Denver, Colorado......   236
Frydenlund, John E., Director, Center for International Food and 
  Agriculture Policy, Citizens Against Government Waste, 
  Washington, DC.................................................   252
Furth, Mark, General Manager and Chief Executive Officer, 
  Associated Milk Producers, Inc., New Ulm, Minnesota............   229
Hinsdale, Clark W. III, President, Vermont Farm Bureau Inc, on 
  behalf of The American Farm Bureau Federation, Richmond, 
  Vermont........................................................   248
Hughes, Will, University of Wisconsin, Center for Cooperatives, 
  Madison, Wisconsin.............................................   254
Meyer, Dennis, Member, Board of Directors, Family Dairies, USA, 
  Bernard, Iowa..................................................   238
Paul, Eugene, Legislative Coordinator, National Farmers 
  Organization, Ames, Iowa.......................................   256
Scarlett, John N., New Market, Tennessee, on behalf of the South 
  East Dairy Farmers Association.................................   249
Tillison, James, Alliance of Western Milk Producers, Sacramento, 
  California.....................................................   234
Vanblarcom, James, Columbia Cross Roads, Pennsylvania............   232
                              ----------                              

                                APPENDIX

Prepared Statements:
    Fitzgerald, Hon. Peter.......................................   148
    Harkin, Hon. Tom.............................................   379
    Daschle, Hon. Tom............................................   272
    Grams, Hon. Rod..............................................   373
    Baldwin, Hon. Tammy..........................................   274
    Brey, Bill...................................................   362
    Clayton, Kenneth C...........................................   279
    Erb, Debora, A...............................................   371
    Frydenlund, John E...........................................   331
    Furth, Mark..................................................   296
    Hinsdale, Clark W. III.......................................   323
    Hughes, Will.................................................   339
    Jaeger, Arthur S.............................................   288
    Jensen, Larry J..............................................   312
    Meyer, Dennis................................................   317
    Paul, Eugene.................................................   355
    Scarlett, John N.............................................   326
    Tillison, Jim................................................   306
    Vanblarcom, James............................................   298
Documents submitted for the record:
    Testimony on the Northeast Dairy Compact, submitted by Linda 
      Smith Dyer, Chair, Northeast Diary Coompact Commission 
      (this information is retained in the Committee files)......



                          FEDERAL DAIRY POLICY

                              ----------                              


                       TUESDAY, FEBRUARY 8, 2000

                                       U.S. Senate,
         Committee on Agriculture, Nutrition, and Forestry,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 9:00 a.m., in 
room SH-216, Hart Senate Office Building, Hon. Richard G. 
Lugar, (Chairman of the Committee), presiding.
    Present or submitting a statement: Senators Lugar, 
Fitzgerald, Craig, Santorum, Harkin, Leahy, and Conrad.

OPENING STATEMENT OF HON. RICHARD G. LUGAR, A U.S. SENATOR FROM 
  INDIANA, CHAIRMAN, COMMITTEE ON AGRICULTURE, NUTRITION, AND 
                            FORESTRY

    The Chairman. This hearing of the Senate Agriculture 
Committee is called to order. We have this morning a number of 
distinguished witnesses including the distinguished governor of 
Wisconsin, at least six of our colleagues in the U.S. Senate, 4 
members of the House, and the Commissioner of Agriculture, Mr. 
Rudgers of New York. And we look forward to hearing from all 
you. I will dispense with an opening statement except to say 
that the hearing comes about through agreement at the end of 
the last session of the Congress. Those of you were following 
our deliberations on that day will recall that pledges were 
made to Senators who were conducting extended debate on the 
dairy issue that the Committee would hold hearings on dairy 
policy in which all views could be heard and which once again 
we could examine this very, very important industry in America.
    And so this is the first of the 2-days of hearings. 
Tomorrow we will have another full day of opportunities and we 
have called witnesses from public life. Likewise, the United 
States Department of Agriculture; we will have Keith Collins 
reviewing from the standpoint of USDA agricultural policy and 
dairy policy, and then, including that this morning, a number 
of witnesses describing the current status and structure of the 
dairy industry.
    It is my privilege to call upon the distinguished witnesses 
and I will ask the governor of Wisconsin to testify first and 
then we will proceed through our colleagues in the Senate. I 
will ask each of you, if you will, to give 5-minutes of 
testimony. Your remarks in full will be published in the 
record, but as a courtesy to all of the witnesses, because we 
know that our public witnesses will take us well into mid-
morning, if not longer, and then we still have the USDA and the 
other witnesses, we will try to proceed with the 5-minute time 
limit for testimony. Likewise, for comments or questions from 
Senators if we come to those rounds. Governor Thompson, it is 
good to have you, as always.
    [The prepared statement of Senator Lugar, can be found in 
the appendix on page 70.]

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

    Governor Thompson. Well, thank you so very much, Chairman 
Lugar, and thank you so very much for holding this hearing. It 
is wonderful and I thank you so very much for taking me out of 
order. Mr. Chairman, I would like to thank you for holding 
these hearings. I certainly appreciate your interest in 
agriculture and your desire for agriculture and for this 
committee to reclaim the issues associated with dairy, issues 
that affect Wisconsin probably more so than any other state in 
America.
    Wisconsin is the Nation's top producer of cheese. In fact, 
if Wisconsin were a Nation, it would be the second leading 
cheese producer in the world, second to New Zealand. My state 
has more dairy farms than the states of California, New York, 
and Pennsylvania combined. However, the number of family farms 
in my state is dwindling rapidly, and with their loss, we are 
witnessing the demise of the very people who helped build this 
great country, our proud farm families.
    In 1990, to give you some idea, 34,000-dairy farm families 
existed in Wisconsin. Today, that number has plummeted to 
21,000, representing a loss of three daily, farms each day for 
an entire decade. What is most distressing is the dramatic 
increase in the number of farms that have gone out of business 
since the Northeast Dairy Compact was enacted. Between 1997 and 
1998, more than 2,000-family farms have folded, increase of 
roughly 100-percent over the previous average yearly loss.
    Ladies and gentlemen, to say Wisconsin's dairy farms are in 
trouble is an understatement. They are in dire straits and I am 
at a loss to understand why Congress continues to stand with a 
heavy foot on the throat of the Wisconsin dairy farmer. As all 
of you know, Wisconsin dairy farmers have been discriminated 
against under the Federal milk marketing order system commonly 
known as the Eau Claire rule ever since 1937.
    Congress has attempted to update this pricing regime for 
years. Farm bills in 1980, 1985 and 1990 all called for reform 
but failed. When discussions began to take place in the last 
farm bill, we thought our dairy farmers might finally get equal 
treatment. However, when the final version of the 1996 farm 
bill emerged, there were no market based reforms. Instead the 
farm bill let the USDA decide what type of changes were 
necessary to reform the 1937 system and was able to consolidate 
the 31-milk marketing regions nationwide. It did consolidate it 
to 11.
    It also granted temporary consent to the Northeast Compact 
while the USDA considered action. In January 1998, Agriculture 
Secretary Dan Glickman proposed two potential approaches to 
reforming the milk pricing system. While I personally as 
governor was not pleased with the scale of the reforms, I was 
pleased finally that some reforms would be implemented and that 
the Northeast Dairy Compact would be eliminated when the new 
fiscal year began October 1, 1999.
    I was confident the reforms the USDA created would be 
implemented because there was no reason to believe otherwise 
for the Senate held no debates on the Federal milk marketing 
order system or dairy compacts in any committee nor on the 
Senate floor. However, as the Congress was wrapping up the 
final appropriation conference bill, dairy became the issue. At 
the last minute, a bill was added to the final package to throw 
out the reform plan the USDA spent 2-years developing. The 
spending package also included language to extend the Northeast 
Dairy Compact until September 30, 2001.
    Wisconsin farmers, along with many of their Midwestern 
peers, were again left on the political auction block. Compacts 
were supposedly designed to save family dairy farms. Instead 
the opposite has proven to be true. Together compacts and the 
Federal milk marketing orders have resulted in a devastating 
effect on Midwestern dairy farmers, driving milk prices to 
record lows and family dairy farms closing to new heights.
    Mr. Chairman, some individuals argue that a compact in one 
area of the country has no effect in another part of the 
country. This is either economic ignorance or intentional 
misrepresentation. Try as we might, we cannot evade the power 
of the marketplace. A compact in one region will lead to lower 
prices in another region because we are lessening, not 
increasing, consumer demand due to higher prices.
    When supply outstrips demand, something has to give. In the 
case of compacts, the Federal Government is again asking 
consumers in the compact regions and dairy producers in the 
non-compact regions of the country to do the giving. Vermont's 
production increased 4-percent in 1998. Production in the other 
five compact states was up 2\1/2\-percent. In fact, a 
University of Wisconsin--I got one final page and I will finish 
up quickly, Mr. Chairman--in fact, a University of Wisconsin 
study estimates the real cost of dairy impacts exceed $145,000 
in lost farm revenues per year in non-compact regions.
    Even those states with compacts are witnessing a decline in 
small family farms, as Vermont is losing farms with herds with 
less than 100-cows. So while the United States is charging into 
the longest period of economic growth in history, our dairy 
farm families are watching it roll by and over them.
    Simply stated, we are doing our national dairy industry a 
real disservice if we continue to price milk based on the 
location of the cow and proceed down the path of regional 
pricing compacts. What the Wisconsin and American dairy farmer 
will benefit most from is bold and dramatic reform that 
eliminates Eau Claire as the standard for setting milk prices 
paid to farmers and forgets about pricing milk regionally.
    Mr. Chairman, I urge you strongly and this committee to rid 
the entire country of dairy compacts and do not create more. 
Thank you so very much for having this opportunity, Mr. 
Chairman.
    [The prepared statement of Governor Thompson, can be found 
in the appendix on page 71.]
    The Chairman. Thank you very much, Governor Thompson. The 
Chair will say that as each of our distinguished public 
witnesses concludes, he or she is free to leave the podium as 
opposed to participating in the further dialogue, and I will 
call upon our distinguished colleagues from Congress in the 
order in which they have appeared. And that will be Senator 
Specter, Senator Grams, Senator Kohl, Senator Jeffords, 
Congressman Kind and Senator Feingold. Senator Specter.

     STATEMENT OF HON. ARLEN SPECTER, A U.S. SENATOR FROM 
                          PENNSYLVANIA

    Senator Specter. Thank you very much, Mr. Chairman, and 
thank you for convening these important hearings. This is an 
extraordinary group of witnesses in this major Senate hearing 
room so I will be very brief. My full statement, I know, will 
be included in the record as you have announced.
    The Chairman. Included in full.
    Senator Specter. And I appear to strongly support the dairy 
compact being extended to the Mid-Eastern states, states like 
Pennsylvania. There has been an extraordinary fluctuation in 
the price of milk, as high as $17.34 per hundredweight in 
December of 1998 to exactly 1-year later $9.63 per 
hundredweight. And with that kind of a fluctuation, it is just 
impossible for dairy farmers to plan and more fundamentally for 
dairy farmers to stay in business.
    Pennsylvania has many small dairy farmers and in the era 
from 1993 to 1998, Pennsylvania lost between 3- to 500-dairy 
farmers a year, more than 11-percent of the farmers in the 
state. Now, it is a Pennsylvania issue that agriculture is 
Pennsylvania's number one industry and that dairy is the 
largest component of Pennsylvania's agriculture. But it is a 
national matter to maintain an adequate supply of milk so that 
it gets to the consumers and there is a delicate balance to be 
maintained between a free market and just the bit of 
governmental assistance which will maintain the small dairy 
farmer.
    We do not want to see a situation arise where the large 
corporations control dairy, nor do we want to see a situation 
arise where certain states which may have a competitive 
advantage because grain costs dominate the market and, in 
effect, squeeze out other dairy farmers. The compact which has 
been in existence in the northeastern part of the state has 
been very successful--northeastern part of the country--has 
been very successful and when some of the states, Vermont, New 
Hampshire, Massachusetts, Connecticut, have the benefit of 
these compacts, as a matter of fundamental fairness, it ought 
to be extended to states like Pennsylvania and other states 
which wish to participate.
    There is not a matter of cost to the Federal Government and 
it is a matter of basic fairness. Now, we had a fierce battle 
last year known to those even beyond the people assembled in 
this room, and I sit next to one of my best friends, Senator 
Herb Kohl, who chaired with me the hearings on Ruby Ridge in 
this room where we saw eye to eye and we see eye to eye on most 
matters, and I believe this matter can be accommodated so that 
Pennsylvania farmers can live as well as Wisconsin farmers. So 
I urge you, Mr. Chairman--I know your fairness and your 
astuteness and your experience--I know you will give 
consideration, but I think the merits support extension of the 
compacts to states like mine. I yield the balance of my time, 
Mr. Chairman.
    [The prepared statement of Senator Specter can be found in 
the appendix on page 77.]
    The Chairman. Well, thank you very much, Senator Specter, 
and I appreciate your compliment. This really requires the 
wisdom of Solomon and beyond.
    Senator Specter. I still feel confident about the judgment 
in this matter, Mr. Chairman.
    The Chairman. I appreciate that. Senator Grams.

   STATEMENT OF HON. ROD GRAMS, A U.S. SENATOR FROM MINNESOTA

    Senator Grams. Thank you very much, Mr. Chairman, and the 
members of the Committee. I want to thank you for the 
opportunity to be here today and to address you concerning the 
critical issue of Federal dairy policy. It is my hope that 
these hearings will shed some light on the unfair and the 
outdated pricing structure that we currently live under and 
help turn the tide in our country to free markets for our dairy 
farmers.
    Mr. Chairman, I want to point out first today that milk, 
which is an important member of the food group, is also a 
beverage that competes with a host of other beverage choices 
for the consumer's dollars. In 1998, each American consumer 
drank 23.8-gallons of fluid milk products. This is compared to 
56.1-gallons of soft drinks, 15-gallons of fruit juices, 13.9-
gallons of bottled water. In fact, per capita beverage milk 
consumption has declined from 28.6-gallons in 1975 to just 
23.9-gallons in 1997.
    Our Federal pricing policies also run counter to the 
conventional wisdom that we need to be promoting milk 
consumption as an important part of a healthy diet. If we 
continue to artificially raise milk prices, we cannot expect 
farmers to be successful in the long-run competing against each 
other and other beverages available in the grocery store. Our 
daily policy must be focused on permitting farmers to capture 
additional market share, both domestically and internationally.
    That is one of the reasons I have introduced legislation, 
Senate bill 1930, which would eliminate the Federal milk 
marketing orders and allow farmers to compete in the free 
market. Eliminating the milk marketing orders would end the 
regional price discrimination that hamstrings Upper Midwest 
dairy producers and would obviously benefit the consumer, 
especially low income families with children that need milk for 
good health and spend a high percentage of family income on 
food.
    The milk marketing orders artificially inflate prices for 
beverage milk and other dairy products within a region which 
prevents producers from lower cost regions, such as in the 
Upper Midwest, from penetrating markets in other areas. Not 
only does it keep Upper Midwest producers from increasing 
market share in other regions with lower cost, high quality 
milk, but the Federally mandated higher prices for fluid milk 
in other regions stimulate production there resulting in more 
milk flowing into the production of manufactured dairy products 
which in turn depresses prices that Minnesota producers 
receive.
    So the adverse effects of milk marketing orders on 
Minnesota farmers are twofold. In fact, the milk marketing 
order system, while raising the price farmers receive for 
beverage milk, actually depresses the prices farmers receive 
for manufactured dairy products, and the Upper Midwest Federal 
Order used only 13-percent of its milk as beverage milk in 
January 1999, the remaining 87-percent going to the production 
of manufactured dairy goods.
    Mr. Chairman, without Federal orders, Upper Midwest farmers 
would receive a higher price on the 87-percent of its milk used 
for production of processed products. How can Congress possibly 
justify artificially raising the price that farmers receive for 
fluid milk and depressing the price they received for processed 
products? It cannot. Congress absolutely should not be picking 
winners and losers in such an arbitrary manner.
    Minnesota farmers do not want special advantages. They 
simply want the heel of an antiquated system off their neck. No 
other consumer food product is micromanaged as much in America 
as the dairy industry. As our colleague, Phil Gramm, memorably 
put it last year, ``dairy compacts would make a Soviet 
commissar blush.'' The same goes for the U.S. milk marketing 
order system. The communist countries used to price goods and 
services using complicated formulas representing estimated 
values of input. Like the Federal milk marketing orders, it had 
little to do with supply and demand.
    Mr. Chairman, my bill would allow the production of milk in 
the United States to be based on a fair playing field for all 
producers and would that be good for the Upper Midwest? Yes, it 
would. Would it be good for the consumer and for American 
agriculture as well? Yes. The Upper Midwest is blessed with the 
natural conditions conducive to milk production including a 
favorable climate, low feed costs and ample water supplies. We 
are the most competitive producers in the country and the 
American consumer should be able to reap those benefits.
    So, Mr. Chairman, in closing, I just want to thank you 
again for holding these hearings. I hope it does lead to some 
changes in this dairy industry or the pricing. Our dairy 
farmers, as Governor Thompson pointed out, are just at the 
mercy of antiquated, old-fashioned, outdated milk marketing 
order system. We would never put a dairy policy like this in 
place if it were being constructed today. So I just hope we can 
put some fairness into this dairy policy so when I go home that 
I can tell my dairy producers, our farmers who get up every 
morning to go out and milk those cows, that we are not going to 
discriminate against them.
    Mr. Chairman, I also have the remaining part of my 
statement I would like to have entered into the record as if 
read.
    [The prepared statement of Senator Grams can be found in 
the appendix on page 80.]
    The Chairman. The record will include your statement in 
full. We thank you, Senator Grams.
    Introducing our next testimony of Senator Kohl, I would 
simply mention, as I said at the outset, before Senator Kohl 
arrived, that on the concluding day of our session, our 
Majority Leader, Senator Lott, called me to the floor because 
he said that Senators from Wisconsin and Minnesota in 
particular wanted assurance from this committee, as did Senator 
Lott, that we would hold hearings. And one reason for 
concluding the debate on that day was a pledge on my part on 
behalf of our committee to hold the hearings. So I am very 
pleased that Senators from Wisconsin and Minnesota are here. 
Senator Kohl was a leader of that debate and it is good to call 
upon you and have you here in our hearing this morning, Herb. 
If you would commence with your testimony.

   STATEMENT OF HON. HERB KOHL, A U.S. SENATOR FROM WISCONSIN

    Senator Kohl. We thank you, Mr. Chairman, and we thank you 
for holding these hearings today as you promised you would. We 
also thank witnesses who have come a long way to help us sort 
out our antiquated and unfair dairy pricing system. Mr. 
Chairman, there are those who think that these hearings are 
meaningless. They argue that Wisconsin dairy farmers need 
justice and we are only giving them words. They point to the 
long history of backroom deals and last minute betrayals that 
have tilted our current dairy laws hopelessly against the 
family farmers of the Upper Midwest.
    Mr. Chairman, I am not ready to give up on my colleagues in 
Congress. I continue to hope that they will side with us when 
they come to understand how far our dairy pricing system has 
strayed from the basic American principle of honest pay for 
honest work. Last November, as you point out, when we forced 
Senate leadership to look at our argument literally by barring 
the door, we got strong and open commitments from the majority 
and minority leaders to fight the regional dairy pricing fixing 
cartels known as dairy compacts.
    This year with hearings like this and with legislation I 
hope this committee will report and through the efforts of 
those of us from the Midwest committed to this fight, I believe 
that we can change more minds. The current pricing system is 
like a vampire. It cannot survive in the light of day. So I am 
not ready to give up on Congress and I am certainly not ready 
to give up on the struggling family dairy farmers of my state.
    Right here with me today I have a list of the 10,519-dairy 
farmers who stopped milking over the last 3-years. If these 
were farmers ruined by a natural disaster, then it would be a 
list of those eligible for FEMA loans and grants to rebuild 
their businesses. If these were farmers put out of business by 
unfair trade practices in other countries, then it would be a 
list of those eligible for trade adjustment assistance. But 
because their ruin was brought on by an unfair policy 
intentionally imposed by their own Federal Government, this is 
only a list, a sad, sad record of a way of life that should not 
have to die.
    Mr. Chairman, we in the Upper Midwest are not asking for a 
bailout. We are only asking that Congress end a dairy pricing 
system that is uncompetitive and un-American. The facts are 
clear, number one, increased prices in some regions either 
through compacts or Federal orders result in overproduction 
that lowers prices for farmers outside the protected region. 
History shows this to be demonstrably true.
    Number two, dairy compacts are an unprecedented price 
fixing scheme contrary to the principles of free markets that 
have made America's economy the strongest in the world.And 
three, the way to end regionalism and divisiveness is not to 
expand compacts and exacerbate milk price distortions but to 
develop and enact policies that help all farmers equally. Those 
who suggest we can have a national dairy policy to help all 
farmers and regional policies like compacts are just plain 
wrong.
    Mr. Chairman, it is ironic that the Midwest is often 
accused of regionalism for opposing policies which help only 
other regions. The Upper Midwest has never sought special 
treatment. We have only sought a level playing field. We need a 
national dairy policy that will help all family dairy farms 
throughout our country, that will neither distort markets nor 
tax consumers. And we need you, Mr. Chairman, and the members 
of your committee, to commit to pursuing that goal and pursuing 
it openly. Congress should never again agree to a last minute 
special interest dairy deal that goes against every basic 
principle of fairness and American free enterprise. I thank 
you, Mr. Chairman.
    The Chairman. Thank you very much, Senator Kohl. Senator 
Jeffords.

 STATEMENT OF HON. JAMES JEFFORDS, A U.S. SENATOR FROM VERMONT

    Senator Jeffords. Thank you, Mr. Chairman. It is a pleasure 
to be here with you. As you know, I have been deeply involved 
in dairy policy since I got here some 20-odd years ago and so I 
have been through a number of trials and tribulations and 
programs and all, and it is just seems to us here in Vermont 
that the one that we have now certainly is the best one we have 
had as far as allowing compacts to be able to satisfy the needs 
of a region.
    We have to remember what the basic policy of the dairy 
policy is and that is each region of this country is entitled 
to have an adequate supply at a reasonable cost of fresh milk. 
To say that it can all be supplied from the West or the Midwest 
is not consistent with the policy nor is it consistent for the 
Nation as we have varying times when various production levels 
are available. Again, the basic policy is to assure consumers 
of adequate and dependable supplies of pure wholesome milk 
products from the least costly source.
    I recognize that my Senate colleagues from the Midwest 
have, and very understandably, raised the dairy issue to a new 
level of concern and I welcome the opportunity to respond to 
their call for productive changes in our dairy policy. There is 
nothing I would like more to do than to join my friends from 
the Midwest in common cause to improve our dairy situation. I 
say I have worked over the years with the Midwest and time and 
time again we have found common ground. It is time to work 
together again.
    But let me be frank with each other. The key issue that has 
divided us in our time here and which continues to divide us is 
the insistence that one part of the country should be seen as 
the source of our nation's supply of milk beverage. This 
insistence has been and still remains simply contrary to the 
overwhelming will of Congress and contrary to the law. The real 
issue, the very nature of our basic supply and demand, so 
extends way beyond the mere interest of a single constituent 
group, regionally and on behalf of the Nation as a whole, the 
Congress simply will not yield to the destruction of our local 
supplies of fresh wholesome drinking milk which is the basic 
law.
    So I call upon my colleagues in the Senate, especially my 
friends from the Midwest, to look elsewhere than to reformation 
of the fluid marketplace for the solution of our problems that 
dairy faces. I make this call in the spirit of cooperation and 
with a positive spirit. One looks at the increase in milk 
production and cow numbers in the western states, such as 
California, Arizona, New Mexico, Idaho, Washington, and one 
could determine that the fight is not regional supplies of 
milk, but it is the production of cheese and other manufactured 
products which when overproduced caused depressed farm milk 
prices across the country and difficulties.
    Let me go through what has happened in that regard and I 
ask my members from the Midwest to take note. USDA's Commodity 
Credit Corporation purchases of surplus dairy product 
percentage by regions show that in fiscal year 1996-97 the 
Midwest accounted for 56.8-percent of surplus dairy products 
purchased, 43.2-percent from the West, 0-percent from the East.
    In 1997-98, the Midwest percentage was 9.6-percent and the 
West was 90-percent, and the East was .2-percent. As of April 
1999, the West contributed 97.2-percent of the Commodity Credit 
Corporation [CCC] purchases. It is clear that the 
overproduction is not in the East; the solution may be in the 
East, but it is the West that is the problem. I also have here 
to show you what has happened for consumers in our area. The 
price to consumers has gone down. It is just purely 
coincidental that we picked Kohl's Market out in Wisconsin to 
compare with, but I would point that in Vermont at this 
particular time the price per gallon was $1.39 and out in 
Wisconsin it was $1.79. So we have a compact which has cut the 
cost to the Government, which has cut the cost to consumers, 
which has aided our farmers, and it is something that ought to 
be looked at as a solution because it is not the problem. Thank 
you.
    The Chairman. Thank you very much, Senator Jeffords. I call 
now upon Congressman Kind of Wisconsin. We are glad to have you 
at our hearing this morning.

    STATEMENT OF HON. RON KIND, A U.S. REPRESENTATIVE FROM 
                           WISCONSIN

    Mr. Kind. Thank you, Mr. Chairman. I am delighted to be 
here and thank you for the opportunity of having not just 
myself but a couple of my colleagues from the House side 
testifying in regards to this very important matter, and let me 
just begin by coming to the defense of my esteemed Senator from 
Wisconsin that some of the best consumer purchases that can be 
made in the country can be found in Kohl's department stores so 
I hope you are not under any illusions with that last graph 
that was just put in front of you.
    But, Senator Lugar, I represent a district in western 
Wisconsin that is one of the largest dairy producing districts 
in the Nation. It also happens to be home of a very fine city 
called Eau Claire. And I am sure the Chairman is aware of the 
significance of that geographic location. I have over the last 
3-years representing that district found it incredibly 
difficult trying to explain to the family farmers back home why 
we have a milk pricing system that discriminates upon them 
merely because of geography and location. And the bottom line 
is that there is no real economic justification for it anymore. 
What may have made sense back in the 1930s to ensure an 
adequate supply of fluid milk in certain regions of the country 
that had deficient milk supplies no longer holds true today, 
not with the interstate highway system, the ability for us to 
transport milk to all regions of the country with relative ease 
overnight. There is no economic justification anymore today.
    The dairy industry is the largest industry in the state of 
Wisconsin. It is a very proud industry. We have approximately 
22,000-dairy farmers that produce close to 23-billion pounds of 
milk yearly. Gross milk receipts for 1998 were approximately 
$3.5 billion. Roughly 160,000-people are employed in our 
state's dairy industry. 85-percent of Wisconsin's milk is 
processed into cheese and other manufactured products and 
Wisconsin cheese is recognized nationally and internationally.
    What does not exist in the state of Wisconsin, and this is 
true for the Upper Midwest, are our family farmers who are 
looking for any particular advantage. All they are asking for 
is the ability to compete fairly in our own domestic market 
with a level playing field and to end the regional competition 
that now exists in this country. What also does not exist in 
Wisconsin, and it is true in the Upper Midwest, are large 
corporate dairy farms. In fact, there have been some fallacies 
perpetuated out here with some members of Congress in the 
national media who think that the representatives from the 
Upper Midwest are here going to bat for large corporate 
interests back home. Just the opposite is true. The average 
dairy herd size in Wisconsin is 59-head, compared to Vermont 
which is 85-head; New York has 81-cows. In Wisconsin, just 2-
percent of our farms have over 200 cows. In Vermont, it is 7-
percent of their farms over 200-cows. In New York, 6-percent 
over 200-cows. So it is not as if we have a lot of large 
corporate dairy interests that are demanding change. What we 
have are a lot of small family farmers who are just asking for 
an opportunity to make a decent living, compete domestically, 
so they can provide for their families. It is a very proud 
history.
    One other point I would like to make to the Chairman here 
today, there are, I believe, international trade implications 
with our dairy policy in this country and we saw the results of 
the World Trade Organization [WTO] talks in Seattle. One of the 
greatest obstacles we have in a new round of international 
trade talks is in the agricultural sphere. Agriculture is our 
number one export market industry in this country and yet if 
our trade representatives are to have any credibility going 
into a new round of trade talks, we need to get it right at 
home first.
    In fact, I along with Senator Pat Roberts, a distinguished 
member of this committee, and a handful of other 
representatives had a chance about a year ago to go to Brussels 
to meet with members of the European Commission and members of 
the European Parliament in regards to the changes or proposed 
reforms of their common agricultural policy. We all know that 
the European Union [EU] has a heavily subsidized export dairy 
program in place right now and as we discussed with them in 
gentle terms the desire for change, their response was quite 
illuminating. Basically they responded do not come over here--
and I am paraphrasing, of course--and lecture us on our dairy 
policies and our state subsidies to the dairy industry when you 
cannot even get it right at home.
    And I think we are going to run into this difficulty in 
future trade talks with other nations as long as we are quick 
to point the finger of blame on other countries who refuse to 
negotiate in good faith and practice good fair trade policies 
in accordance with WTO policies, so long as we pit region 
against region, continue this 1930 antiquated milk pricing 
system in our country, and I just leave that with you today, 
Mr. Chairman. I have a more fully and detailed written 
statement that I will submit for the record, but thank you 
again for the opportunity to testify. Thank you.
    [The prepared statement of Representative Kind can be found 
in the appendix on page 85.]
    The Chairman. Well, thank you for coming. Your statement 
will be published in full. I take the point that you have made, 
Mr. Kind, that WTO apparently yesterday made a late 
announcement that they are going to attempt to revive 
agriculture, and not the large agenda that was in Seattle that 
crashed and burned. But now the embers are being blown on 
again. Perhaps some negotiations starting in March with no 
promise of when they will conclude, but certainly your point is 
well taken and I appreciate your interest in this.
    Let me just now call upon your colleague from Wisconsin, 
Senator Feingold. Russ, it is good to have you as always. Would 
you please testify?

    STATEMENT OF HON. RUSSELL FEINGOLD, A U.S. SENATOR FROM 
                           WISCONSIN

    Senator Feingold. Thank you very much, Mr. Chairman. And I 
want to thank the entire committee for holding these hearings 
and I especially want to thank my colleagues from both the 
Senate and my friends from the House and Governor Thompson for 
all joining together to testify today. And I would ask that my 
whole statement be placed in the record.
    The Chairman. It will be published in full.
    Senator Feingold. Mr. Chairman, I am here to simply 
underscore the simple point that the current Federal dairy 
policy is not helping anyone. In fact, to put it very simply, 
Mr. Chairman, it is destroying farmers. It is hurting consumers 
and it is hurting taxpayers. Over the past 70-years, we have 
witnessed a tragic transformation of America's dairy industry. 
Year after year, consolidation and consolidation and 
concentration have run rampant through our dairy industry and I 
certainly agree that in nearly every region, whether it be the 
Northeast, Midwest or west coast, we have seen the 
disappearance of small and moderate size family farms. But 
nowhere in the United States has this trend been more glaring 
than in America's dairyland, my home state of Wisconsin.
    Let us just again look at the effect of the Federal dairy 
policy on Wisconsin dairy farmers. Mr. Chairman, in 1950, 
Wisconsin had over 143,000-dairy farms. After 50-years, 
Wisconsin is left with only 20,000-dairy farms. During the 
1990s alone, Wisconsin lost more than 39-percent of its dairy 
farms. In other words, the number of farms we started the 
decade with, by the end of the decade we had 39-percent less. 
That is three dairy farms a day being lost for a total of over 
13,300-dairy farms. So Wisconsin has lost over 39-percent of 
its dairy farms in the past 10-years.
    Now my colleagues can imagine the impact that this has on 
communities across Wisconsin. When dairy farms that have been 
in a family for generations are forced out of business, rural 
communities are truly devastated. Unfortunately, it seems that 
the main result of America's dairy policy is its depressing 
effect on prices. If these policies continue, our farmers will 
soon be paid 1930s prices for their milk.
    Instead of collectively addressing the challenges facing 
our dairy farmers, Congress has played political games with 
America's dairy policy. The most significant changes over the 
past few years, the Northeastern Dairy Compact and the 
implementation of Option 1-A, failed to ever pass the Senate as 
a discrete issue on which the Senate voted yes or no. In fact, 
the only Senate vote explicitly on the Northeast Dairy Compact, 
and which I was very much involved, resulted in a clear 
rejection of the dairy compact.
    So I have to take this opportunity to take exception to the 
continuing assertion that compacts are an answer to the 
problems facing America's dairy farmers. Despite its original 
intent, I think dairy compacts have hurt small independent 
producers. Since the Northeast first implemented its compact in 
1997, small size family dairy farms in the Northeast have gone 
out of business 41-percent faster than they had in the two 
previous years. In fact, compacts often act simply as a device 
to transfer wealth to large farms. Compacts afford large farms 
a per farm subsidy that is 20-times greater than the meager 
subsidy afforded to small farmers.
    However, compacts only exacerbate the regional inequalities 
inherent in our current system. So my message is simple. Just 
as the compacts ought to end, I think these regional arguments 
have to stop. We need to restore equality, stop regional 
bickering, and work to ensure that our nation's dairy farmers 
can get a fair price for their milk. The simple fact is that 
our Federal dairy pricing policy is failing to protect our 
nation's farmers. In fact, one of the greatest forces driving 
Wisconsin dairy farmers out of business and off the land, Mr. 
Chairman, is the current structure of the Federal dairy 
program. And I am not going to go through the whole history of 
that again as my colleagues have done.
    Let me just say that Congress has to recognize that 
America's dairy market is truly national and that we are in 
need of a national solution or, to put it more personally, I 
look forward to the day when I can think of the name of Eau 
Claire being associated with the fact I hope my daughter is 
studying hard at the University of Wisconsin Eau Claire today 
rather than a pricing system that is putting a knife in the 
heart of Wisconsin dairy farmers.
    Finally, Mr. Chairman, I do want to mention one other trend 
that has gone unchecked and substantially unaddressed and that 
is the increased concentration in America's dairy industry 
which is causing farmers to receive a declining share of the 
retail dollar. In 1981, dairy farmers were receiving a national 
average of $13.76 per hundredweight, while fluid milk at the 
grocery store was selling for about $1.85 per gallon, while in 
August of 1997, dairy farmers were receiving a national average 
of $12.70 per hundredweight and retail fluid prices were at 
$2.76 per gallon.
    While we have heard a great deal about the merger mania in 
the grain and livestock industry, market concentration in the 
dairy industry has gone unnoticed for far too long. We need to 
address the potential problems raised by the vertical 
integration of cooperatives, mergers of cooperatives and 
retailers, and possible price manipulation by retail stores. 
Mr. Chairman, since you were kind enough to allow me last week 
to present some of the specifics of this merger mania, I will 
not go over it again, but I believe this is part of the problem 
for us in the Upper Midwest and I would say to Senator Jeffords 
for farmers across the country.
    So instead of dealing with an important issue like that of 
market concentration, Congress has instead been playing 
political games with America's dairy policy. So again the 
message is simple. The backdoor deals, Mr. Chairman, have to 
stop. American dairy farmers deserve a fair and truly national 
dairy policy and one that puts them on a level playing field 
from coast to coast, and again thank you very much for 
following through on your commitment to hold these hearings. I 
do appreciate it.
    The Chairman. Thank you very much, Senator Feingold, and 
thank you also for your testimony on the agricultural 
concentration issue. These are both very serious issues and 
that is why the Committee in its first 2-weeks has tried to 
tackle both and we appreciate your testimony on this occasion 
likewise. Senator Wellstone.

STATEMENT OF HON. PAUL WELLSTONE, A U.S. SENATOR FROM MINNESOTA

    Senator Wellstone. Thank you, Mr. Chairman. I have a 
complete statement that I would like to submit for the record.
    The Chairman. It will be published in full in the record.
    Senator Wellstone. And I want to just mention that Mark 
Furth from the Associated Mike Producers of Minnesota, I think, 
will be also testifying later. Let me thank you, Mr. Chairman, 
and Senator Conrad, for holding the hearings. Let me thank all 
my colleagues and I think rather than going with any prepared 
statement--you will just have that on the record--let me just 
highlight a couple of things that have been said.
    First of all, I mean probably the informal way for me to 
say it is that the extension of the Northeast Dairy Compact, I 
think, as much as what it means substantively to us, and we 
have a different interpretation than my colleague from Vermont, 
is the way in which it was done. I do not think any of us think 
it was appropriate that it was put on to the omnibus bill. I 
think there is a lot of anger about it. I think that is what 
Senator Feingold meant when he talked about a kind of backdoor 
process.
    Second of all, let me also mention this milk marketing 
order system which is just irrational and very discriminatory 
toward the Midwest, and we thought Secretary Glickman was 
taking a step in the right direction, and again what sort of 
adds salt to the wound is that his, I think, proposal, which 
was constructive and helpful, was basically blocked.
    Third of all, I want to mention this whole issue of forward 
contracting and where I think--you know, I just have had the 
most poignant meetings and conversations with hog producers, 
and they just basically have pretty much lost their right to be 
entrepreneurs. And, you know, what happens you get low prices, 
which, of course, with this unbelievable fluctuation in dairy 
prices is happening to our producers, and then they forward 
contract with these processes and it becomes vertically 
integrated, and before you all know it, it just becomes a very 
corporatized agriculture with conglomerates kind of muscling 
their way to the dinner table and the kind of family farm 
structure of agriculture that we all cherish is gone. And I 
want to signal to you that I think that is an incredibly 
important issue.
    And then finally, I just want to say that ultimately I 
would like to be up here working together with Senator Jeffords 
because I think the other issue that we are faced with is that 
we were at 16.26 and then we went down to 9.63-per 
hundredweight. I mean producers just cannot survive this kind 
of wild fluctuation. We need some kind of a stability. We need 
some kind of decent price. We need some kind of price targeted 
toward our midsize producers and ultimately I will just tell 
you if we do not do that, then we are just going to lose our 
producers.
    Finally, I want to emphasize what my colleagues from 
Wisconsin said, which is, you know, our typical dairy farm is 
60-cows. We are the fifth largest producer in the Nation. It is 
a $1.2 billion business for those farmers and that dollar 
multiplies over and over again, and if I was to add to what is 
happening to dairy farmers with what is happening to some of 
our crop farmers with what has happened to some of our 
livestock producers with what is happening to our small banks 
and our small schools and our hospitals and our rural 
communities, I would say that you have an absolute economic 
convulsion taking place in rural America.
    And I just hope we do not sort of go about our business as 
usual because I think we need to respond to it. I know that 
there is a wonderful effort being planned, led I think by the 
religious community and farm organizations and AFL-CIO and 
environmental organizations, to come to Washington with a focus 
on rural America, around March 20, March 21, and I think lots 
of people will be here with really good meetings with Senators 
and representatives, and I think that will be good because we 
just cannot put into parentheses or put aside what is happening 
in our rural communities.
    I really appreciate your holding these hearings, Mr. 
Chairman, and while I do not always agree with you on some of 
your positions, I always respect your integrity and I never 
doubt your word. I thank you.
    [The prepared statement of Senator Wellstone can be found 
in the appendix on page 87.]
    The Chairman. Well, thank you very much, Senator Wellstone. 
I appreciate your leadership in rural America and wish that you 
were a member of our committee so you could be a part of this 
dialogue day by day, but thank you for coming again this 
morning.
    I would like to call now on Congressman Green.

   STATEMENT OF HON. MARK GREEN, A U.S. REPRESENTATIVE FROM 
                           WISCONSIN

    Mr. Green. Thank you. Thanks, Mr. Chairman. Thanks for the 
privilege of being able to appear and offer some thoughts. The 
disadvantage of going so late in the process is perhaps you are 
already confused by all these contradictory details and bizarre 
details of milk marketing orders. The advantage, however, from 
my standpoint is I will only summarize my testimony and not 
have to repeat much of what has been said.
    Mr. Chairman, I would ask that my written testimony be 
submitted in full to the record.
    The Chairman. It will be published in full.
    Mr. Green. Thank you, Mr. Chairman. Mr. Chairman, as you 
have heard, farmers all across America are hurting. You have 
heard that not only here but obviously back home and dairy is 
no exception. When members of this house and the House of 
Representatives voted to overturn the very modest reforms 
proposed by Secretary Glickman, many did so with the best of 
intentions, responding to the pain, the suffering that they are 
hearing in their home states and their dairy sector. But 
perhaps what they did not fully appreciate is the depth of the 
crisis and suffering in the Upper Midwest. You have already 
heard it from Senator Feingold, but in Wisconsin by this time 
tomorrow we will have lost at least three dairy farms, three 
per day.
    Over the last 10-years, we have lost more dairy farms than 
every other state save Minnesota ever had. That is the depth of 
the crisis that we are facing. The farmers, the observers back 
in my home state, have a number of frustrations. I will 
summarize five frustrations that they see.
    The first frustration is that many of those who voted to 
overturn the proposed reforms who voted to restore the current 
system, have argued that they need this system because of 
fluctuating prices and instability. Let us not forget those 
fluctuating prices and instability are under the current 
system, not under the reforms that the USDA has proposed.
    Second, the reforms that the USDA, that Secretary Glickman 
proposed, were so very modest, they would not have had a huge 
effect. In fact, they probably would have benefitted just about 
every district in this Nation, congressional district, just 
about every state. My consumers are frustrated because if we 
cannot get these very modest reforms, what hope is there for 
the more fundamental reforms that we need? When I testified 
before the counterpart to this committee in the House, Governor 
Ventura of Minnesota said that in his state people become so 
frustrated that they have concluded it would be easier to 
physically relocate the city of Eau Claire to the west coast 
than to actually get relief within Congress.
    My third frustration, frustration we are hearing back home, 
is that overturning the very modest reforms that have been 
proposed ignores history. It as if the supporters of the 
current system are part of the flat earth society. They are 
locked in a time warp. We all understand why this system was 
created in the first place back in the 1930s. Since then, 
technology has changed things. We have refrigeration. We have 
an interstate highway system. My dairy farmers can get their 
milk product to your consumers almost as fast as the dairy 
farmers in your home state.
    Now I will not go over it in detail, but Mr. Chairman, you 
have before you a chart. Actually it is a cartoon from the 
Pioneer Press that poses the question which of these is Federal 
policy? All computers are price adjusted according to their 
distance from Seattle? All oranges are price adjusted according 
to their distance from Florida? All country music price 
adjusted according to its distance from Nashville? Or all milk 
is price adjusted according to its distance from Eau Claire? We 
know the answer unfortunately.
    Fourth frustration. The system that we have now is out of 
line with current economic and trade policy. And you have heard 
that. We have in our compact system mini-cartels. We have trade 
barriers between our own states. At the very time that we are 
going to every Nation around the world and saying lower your 
trade barriers or else, we have trade barriers between the 
states. At the very time when we have missionaries of 
capitalism from this country going from the tip of Africa to 
Southeast Asia, telling those nations that their economy does 
not make sense, that they have to introduce capitalistic 
forces, in our dairy sector, we are going the other way. That 
is crazy.
    And the final frustration that I would point to in direct 
contradiction to my colleague and friend Senator Jeffords is 
the reforms that we are looking for are reforms supported by 
looking not just at our home state but around the Nation. The 
coalition which has come together on our side of the issue 
ranges from the teamsters to Americans for Tax Reform to the 
Congressional Black Caucus to the National Restaurant 
Association. The system that we have in place costs taxpayers 
$149 million per year in tax dollars. It is a tax on milk that 
artificially drives up the cost of milk to consumers. That 
chart that the Senator pointed to, those prices are under the 
current system, the system that we want to change and reform.
    And finally, this system weakens WIC and other poverty 
relief programs by driving up the cost of milk to consumers and 
weakening the benefits that they receive from the Federal 
Government. So this is not only current law, bad for our dairy 
farmers, but more significantly it is bad for taxpayers. It is 
bad for consumers. It is bad for those who we are trying to 
help through our poverty relief programs. It is time to end the 
flat earth society. It is time to recognize modern technology. 
It is time to restore some basic ideas of capitalism and free 
trade into our system. Thank you, Mr. Chairman.
    [The prepared statement of Representative Green can be 
found in the appendix on page 92.]
    The Chairman. Thank you very much, Congressman Green, for 
coming and for offering your testimony this morning. 
Congressman Ryan.

    STATEMENT OF HON. PAUL RYAN, A U.S. REPRESENTATIVE FROM 
                           WISCONSIN

    Mr. Ryan. Thank you very much, Chairman Lugar. I appreciate 
it. Thank you, Senators Harkin and Conrad. It is a pleasure to 
be here. I ask that my full written text of my comments be 
inserted into the record.
    The Chairman. It will be published in full.
    Mr. Ryan. Thank you. And I too know that at the end of the 
hearing, you do not want to read your long full statement so I 
would like to just paraphrase. And I know that my colleagues 
talked about the issue. I would like to talk about the politics 
of the issue. What happened this last year shows me as a new 
member of Congress that it is very difficult to get dairy, 
modest dairy reform from Congress. We have entrenched regional 
political differences, not based on fact, not based on the 
merits of the case, not based on core principles that we as 
elected officials aspire to achieve, but based on regional 
politics. Basically it is the rest of the country versus the 
Upper Midwest. That is really what it boils down to.
    I will not rehash all the arguments. We in Wisconsin 
between 1990 and 1998 lost 11,000-dairy farmers. As Mark said, 
we are losing three a day. This time tomorrow another three 
dairy farmers we will lose. In my district, which is the 
southern part of the state, we have lost 3,000-dairy farmers 
this decade. Why are we losing it? Because we are held at a 
competitive disadvantage. Rather than going into the facts and 
the reasons why we are held at a competitive disadvantage, why 
we are operating under this sort of horse and buggy economic 
system, let us look at the politics of this.
    1996, in the 1996 farm bill that you, Chairman Lugar, did 
so well to help achieve was a very momentous time for 
agriculture. In 1996, that farm bill attempted to decouple and 
give farmers the freedom to farm. That was the case with a lot 
of our commodities. However, in dairy, because of the 
difficulties of this issue and because of the regional politics 
tilted against the Upper Midwest in this issue, we had a 
problem. So what we solved and tried to do--I was not in 
Congress at that time--was to get the USDA to come forward with 
reforms after the 1996 act. The USDA did do that. They came 
with very, very modest reforms in an attempt to try and 
equalize and liberalize the dairy markets, try and give more 
equity to all dairy farmers. So that their success will be 
determined upon their ability not so much as their proximity to 
Eau Claire, Wisconsin.
    Well, that was what we face this year. Yet, those very 
modest reforms, which arguably put other regions of the country 
in a better position or a very similar position such as the 
Northeast and other parts of this country, were rejected out of 
hand. What I am convinced is necessary is a strong 
administration that will push this issue all the way to the 
end, a USDA that did its work that we saw last year, but an 
administration working hand in hand with principled members of 
Congress with midwestern members of Congress to see this 
through so that at the end of a budget cycle when you are going 
down the road and you have a big appropriations battle, winding 
up in October we do not see the capitulation that we saw.
    What we saw this last year was a capitulation on the part 
of the administration and leaders in Congress to bend to the 
prevailing political forces meaning the plurality of the vote 
from the Northeast and the South. We need to stand against 
that. We need a strong administration proposal, an 
administration that is willing to back its proposal to the end, 
and leadership in Congress that will see this through to make 
sure that farmers can prevail based on the merits, farmers can 
prevail based on the markets, not based on how far away from an 
arbitrary location in this country they live. Thank you.
    I want to summarize it with basically that, but I just want 
to tell you, Mr. Chairman, you have provided leadership on this 
issue. Everybody here on this committee understands the issue. 
We do not have to rehash it, and I think if you talk to our 
colleagues from the Northeast, some of them in confidence have 
told me you are right, we agree, but the politics are too 
strong. I believe that if those members of Congress went home 
and actually discussed what was included, what were the details 
of the USDA's proposal, I think that we could have made some 
momentum.
    Lastly, one of my colleagues who was voting against us on 
the floor--we had several amendments during this--told me that 
they lost 20-dairy farmers in the last 5-years in their 
district. We lost 20-dairy farmers in the last week in my 
district. So I think that the proportionality of this problem 
has yet to be realized. I think that we have members of 
Congress who are sticking with their region, not necessarily 
with their district or with their consumers, who purchased milk 
pricing. This committee can help educate the rest of Congress. 
It is an issue that most members of Congress do not know about. 
It is an issue that most members of Congress, unless they 
represent dairy districts, have no conception of what is 
actually happening.
    This committee by having this hearing can elevate these 
issues. I encourage you to continue to do so. I thank you for 
this and what we need is to work together to push the 
administration to stand firm behind their proposal and work 
with our leaders in Congress to see that we do not undercut 
them. Thank you very much, Mr. Chairman.
    [The prepared statement of Representative Ryan can be found 
in the appendix on page 96.]
    The Chairman. Thank you very much, Congressman Ryan. Let me 
just comment because you have offered a historical note about 
the 1996 farm bill. Obviously, great leadership was given by 
many members of our committee and the House Agriculture 
Committee, but the compromise that was reached in the 
conference, and which I think most of us at this table were 
present throughout that night, early morning, and so forth 
because dairy was decided last, was essentially, as you have 
stated, that USDA would offer proposals to try to take the 38-
marketing orders or however many there were at that time down 
to a much smaller number to rationalize the system more along 
market principles and that the New England Dairy Compact would 
terminate what amounts to a year ago of October, I guess, the 
first of October 1998.
    Senator Leahy, the distinguished former chairman of the 
Committee, ranking member at the time, a strong proponent of 
the dairy compact. Many were likewise backing that position and 
many thought we ought to rationalize the system. So the 
compromise was a new marketing order business in America and 
the dairy compact concluding. Now, both of these situations 
have been frustrated, and so we are at this point, as you have 
suggested, through legislative process other than direct action 
by our committee through its authorizing procedures or through 
the farm bill at this pass.
    So I understand the dispute vividly, having experienced for 
many years, but nevertheless that is the purpose of the hearing 
today. Our committee is a part of American democracy. We have 
many members with strong views. If there is a consensus in our 
committee to act upon any of a number of legislative proposals, 
we will attempt to do so, and I presume the House will act 
correspondingly, and the parliamentary procedures will be as 
they always are in the Senate, in which we have unlimited 
debate and considerable leverage, particularly when the session 
runs long, when appropriations bills are not passed and 
literally everything is up for grabs including dairy policy.
    At that point, our committee is no more effectual than any 
of you individually, but this is one reason for acting in 
February to hear this. And we appreciate all the members of 
Congress taking time this morning in your busy schedules to be 
with us to offer this testimony.
    The Chairman. I want to conclude this panel by asking for 
our final governmental witness, at least governmental in the 
sense of Congress, and something other than the USDA and the 
industry, the Commissioner of Agriculture of New York, Nathan 
Rudgers. And we appreciate your coming, Sir.

 STATEMENT OF NATHAN L. RUDGERS, COMMISSIONER, NEW YORK STATE 
             DEPARTMENT OF AGRICULTURE AND MARKETS

    Mr. Rudgers. Thank you, Senator Lugar, and I appreciate 
very greatly the opportunity to address this panel in the final 
position this morning. My comments this morning are going to be 
somewhat different than my written testimony. I would ask that 
you submit that for the record.
    The Chairman. It will be published in full.
    Mr. Rudgers. I appreciate that. You are to be commended as 
well as the rest of your committee for having these hearings. 
Governor Pataki and my department have been both very involved 
in dairy policy and we witnessed first hand some of the 
challenges that Congress has had in working through this 
complex issue, and we appreciate the opportunity to address you 
today.
    In New York, we value our antiques and we recognize the 
opportunity sometimes to take them off the shelf and dust them 
off, and Congress is to be praised for having the vision and 
fortitude to direct USDA to change the rules by which price 
discovery is accomplished in the dairy industry and effectively 
consolidating a still vital and relevant Federal milk marketing 
order system. Simply put, milk remains a perishable product 
which is difficult to value and orderly market. The Federal 
milk market order system accomplishes those tasks. Effective 
price discovery mechanisms and the orderly marketing of milk 
are two essential components of a healthy dairy industry 
nationwide and certainly in New York.
    Milk and dairy products are New York's leading agricultural 
commodities and are processed by leaders in the cheese and soft 
dairy products industry. Production in 1998 totaled 11.7-
billion pounds with a value of $1.8 billion and that was 56-
percent of our total farm gate sales which are just over $3 
billion. We have 8,000-dairy producers and 140-dairy processing 
plants. These statistics hopefully show you the importance of 
dairy to New York's economy.
    Besides being the third largest producer in the U.S., New 
York is a part of a regional block of producers that provides 
the east coast with dairy products from Maine to Washington, 
DC. That percentage is about 20-percent of the Nation's milk 
supply. Our resources are plentiful as they are in the Midwest: 
water, good soils, and a cool climate. Our farmers are 
progressive and our industry is well positioned for the future. 
We have an advantage in our proximity to major markets. The 
richest market in the world is a 750-mile circle centered in 
New York state. Within this region, you will find half of the 
United States and Canada's population, personal income and 
wholesale and retail trade.
    The state of dairy farming in New York is one of a dynamic 
industry, one that is poised to use these advantages 
competitively in the new millennium. Our dairy farmers tell me 
that the regional future looks very promising. However, they 
need some short-term help while they position themselves in the 
new volatile dairy environment. Policy tools exist that 
Congress can provide to help our family farms transition and 
react to changing conditions in what is a very competitive 
marketplace.
    One of those tools is obviously the dairy compact and it 
should be expanded to reflect the regional nature of our 
market. The low prices our farmers are currently facing is the 
most pressing issue ahead of them right now as prices are at 
their lowest level in 20-years. The Class III price, the new 
benchmark price, was announced on Friday at $10.05 a 
hundredweight. Now forecasters predict that, that price will 
increase slightly later in the year. However, I do not believe 
that some more of our dairy farmers can last that long at those 
price levels.
    On January 1 of 2000, the long awaited Federal reform was 
finally implemented. The three northeastern orders were 
consolidated into one and after careful review USDA determined 
that the northeast region should extend from New England to 
Washington. It would be appropriate for Congress to follow in a 
similar manner by permitting the Northeast Compact to be 
extended to cover that region.
    Additionally, with regard to the compact, some issues have 
been articulated about the declining share of the retail price 
that farmers have. In the compact region, the compact provides 
a tool for increasing that share of the farmer's price. Some 
concerns have been articulated by this panel this morning about 
fluctuations in price. In the compact region, those 
fluctuations in price have been blunted.
    At this panel this morning, there was some concerns about 
the compact being a trade barrier. My state is not a member of 
the compact currently. However, a thousand of my dairy farmers 
participate within the compact region. Clearly, there is no 
trade barrier for those producers.
    With regard to additional tools that could be offered, we 
would call on USDA to use their authority through the Commodity 
Credit Corporation to directly assist and increase purchases of 
cheese and other commodities for school lunch programs. 
Additionally, it would have been thoughtful for the USDA to use 
the 125-million appropriated by this committee to address the 
butter-powder price tilt to support nonfat dry milk at a higher 
level. This also would have supported the price nationwide.
    I additionally applaud you and Congress for directing USDA 
to hold hearings on the Class III pricing formulas under 
Federal milk market orders. This is an important and time 
sensitive issue that impacts all dairy farmers nationwide. I 
would also ask that Keith Collins, if possible, enter into 
testimony the information collected by USDA on the mailbox 
price survey for prices paid to farmers from all over the 
Nation. What I think that survey will show is that the price 
disparities articulated at this table this morning might not be 
so profound and actually might be a little bit different than 
what has been articulated.
    We continue to need Congress' help in providing tools as we 
transition our dairy industries, and in closing I should 
mention that I was raised on a dairy farm. I have two brothers 
still operating farms in western New York. Dairy farming is 
something I am close to and it is a part of me. It is also an 
intrinsic part of the rural landscape culture and heritage of 
New York state. It is because of this importance that Governor 
Pataki and I have worked so hard and so closely with our 
congressional delegation in New York to see New York join the 
Northeast Compact.
    If New York is not permitted to join the compact, then our 
continued efforts to transition farmers to be more market 
oriented and able to succeed in the new dairy economy will be 
much more difficult. I hope these discussions today can lead us 
to the goal of helping our farmers succeed and we can have 
healthy prospering dairy operations throughout New York and the 
United States. Thank you again, Senator Lugar, and the rest of 
the Committee for inviting me here to testify today and I look 
forward to working with you as we address the issues that face 
our dairy industry.
    [The prepared statement of Mr. Rudgers can be found in the 
appendix on page 102.]
    The Chairman. Thank you very much, Commissioner Rudgers. 
Let me just say that in structuring the hearing this morning 
because of a large number of our colleagues from the Senate, 
the House, as well as the distinguished governor of Wisconsin 
and the commissioner from New York, the Chair made an arbitrary 
decision that I hope was fair and that was that we not get into 
cross-examination among yourselves. That is a mini-Senate 
debate as you were offering direct testimony quite apart from a 
mini-Senate debate with us at this point.
    Often when we do have congressional witnesses, and there 
are a few of them, and they are the major cause, why we have 
had dialogue back and forth, but it seemed to me given the 
importance of the issue, the number of witnesses in addition to 
all of yourselves that we want to deal with, we thought we 
would ask you to testify for 5-minutes each, offer your full 
testimony for the record that we will digest, and it could very 
well be that members of our committee will want to interrogate 
you personally or by correspondence as they have further 
questions. The issue clearly will not be resolved today. We 
will all be back together, I suspect, in one form of another. 
But I very much appreciate your coming and giving us this time 
this morning.
    Senator Jeffords. Mr. Chairman.
    The Chairman. Yes.
    Senator Jeffords. Could I have 30-seconds on a couple of 
things that were raised?
    The Chairman. Of course.
    Senator Jeffords. Now, first of all, the compact was put in 
sort of as a demonstration program. At least, as you know, I 
was the one that worked this deal out.
    The Chairman. Yes.
    Senator Jeffords. To see whether it worked. Well, it has 
worked. So I think to say it should end now because it was that 
kind of a program when it works you ought to be improving on 
it. second, OMB was requested to do a study of the compact by 
the Midwest and they came back and found there were no increase 
in the cost of Federal food programs. There is some testimony 
to the contrary on that. I wanted just to bring that up.
    And second, New England is a negative producer as the last 
witness pointed out and Wisconsin could ship milk down to there 
now. Of course, as we saw with the evidence we put on, it would 
end up probably having over $2.00 a gallon a milk versus $1.39. 
So just thank you, Mr. Chairman.
    The Chairman. All right. Well, we will have at least an 
equal rebuttal then from, yes, Mr. Green.
    Mr. Green. Thank you, Mr. Chairman. The Senator is pointing 
out that dairy producers within compact states are benefiting 
from the compact. We will stipulate to that. That is not the 
issue. The issue instead is how it is benefiting producers and 
consumers all around the Nation. I think the evidence is pretty 
clear that we are suffering as a result. And with respect to 
whether or not there are trade barriers as a result of the 
compacts, I suppose it was legally true that OPEC nations could 
purchase oil from the U.S. However, I would doubt that would be 
the case given the advantage that their cartel had given them 
and the same thing is true with compacts: maybe not a legal 
barrier to the entry of our products but clearly with the 
forces and restrictions within those compacts, it put outside 
states' producers at a tremendous disadvantage.
    The Chairman. Thank you. Having announced the rule and now 
having violated it twice------
    [Laughter.]
    The Chairman.--still that was a useful exchange and I just 
trust the members will know that we will try to weigh as 
carefully as possible.
    Senator Jeffords. I would like to go back------
    The Chairman. Thank you very much for coming. Before I call 
Keith Collins, our next witness before us, let me ask the 
distinguished Ranking Member if he has any opening comment or 
statement?

STATEMENT OF HON. TOM HARKIN, A U.S. SENATOR FROM IOWA, RANKING 
   MEMBER, COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY

    Senator Harkin. Mr. Chairman, thank you very much. I have 
been reading the testimony and am delighted to listen to the 
witnesses. I am sorry I was late. I had a couple of prearranged 
meetings I had to go to this morning. But I just want to note 
for the record that from I believe 1980 to 1984 I was chairman 
of the Livestock, Dairy and Poultry Subcommittee on the House 
Agriculture Committee. All I can say is I am sure glad we got 
this dairy thing worked out at that time so we are not having 
any problems with it today.
    But some of these problems have been around for a long 
time. I also want to say, Mr. Chairman, in case I have to leave 
I know the Indiana Professional Dairy Producers are up. I was 
reading their testimony and Mr. Yoder here had this statement 
here. He said it is no secret that how milk is priced is the 
second-greatest mystery known to man. I take issue with that. 
It is the greatest mystery known to man, not the second.
    And I also wanted to, for the record, note that--well, now 
I lost his testimony--one of the individuals from Wisconsin put 
the formula in the back of his statement. I recommend it to 
everyone--to work out--again, I forget who that was. Anyway, 
one of the congressmen from Wisconsin had the formula in the 
back for how you get the basic price for milk.
    Mr. Chairman, I did want to correct one other--just say one 
thing about some of the statements that were made that, well, 
would you price computers how far they are from Seattle or 
oranges from Florida or beer from St. Louis, Anheuser-Busch? 
Well, milk is different. I mean, you know, if you are producing 
too many computers, you can slow down the line, you can lay a 
few people off and slow it down a little bit. You do not have 
to produce that many. You cannot slow down a cow, you know, it 
just produces milk, and you just cannot quite slow it down. I 
suppose you could feed it a little bit less, I suppose. But you 
really cannot slow it down.
    And what the heck, I might as well state again for the 
record that last summer I bought some beer. I stored it in the 
refrigerator. I opened one the other day and it is still good. 
You know so beer can stay for a long time in your basement and 
milk cannot.
    And third, there is a value to the consumption of milk for 
healthy bodies and for kids. Like I said, we have been through 
these debates before. Looking back, I think what should have 
been done a long time ago was two things. One, basic formula 
price for milk should have been based on solids, not fat. It 
should have been done a long time ago. Dairy industry was way 
behind the eightball in this, way behind it. Consumers are 
moving ahead. They did not want to consume so much fat. And 
they wanted a more high protein product and yet we continued to 
base it on butterfat content. Well, now they have changed it a 
little bit. They now include proteins and lactose and some 
other things in the price, but way too late.
    And second, we should have had a two-tier pricing formula a 
long time ago. Congressman Gephardt and I proposed that in the 
mid-1980s. I proposed it earlier on. We fought for it. We never 
got it. But I think if we had had a two-tier pricing formula in 
existence for the last 10-years, 15-years, I do not think we 
would be where we are today. The marketing orders are outdated 
in many ways. We can transport milk more rapidly. I do 
understand that there is a problem. Senator Jeffords said it 
appropriately. I mean if you are transporting it halfway across 
the country, obviously it is going to cost more for consumers 
in one part than it is in another part.
    Well, maybe yes, maybe no. Again, it depends upon how you 
price it and just how far you have to transport it. But it may 
be a little bit more costly, but there are ways of getting 
around that, too. So, Mr. Chairman, there are a lot of cross-
currents in this whole dairy policy, and it has become one of 
the most bitter regional conflicts that we face today. We do 
need some common ground. I hope we can find an equitable, fair 
and sustainable national dairy policy, one that is good for 
farmers and fair to consumers and processors, and so again I 
still believe there should be an adequate safety net.
    There is in the Northeast now. There is a safety net for 
the dairy farmers in the Northeast. But there is not out our 
way. So there should be a better safety net. So I hope that we 
can find some way to end the unfair regional preferences that 
we have in dairy policy today and move ahead with some 
equitable system. Like I said, I think there are some things in 
the past that we could take a look at that might be more 
equitable than marketing orders are today. And there may be 
some way of taking care and addressing the problem of 
transportation of fluid milk to deficient areas and that might 
be cheaper in the long run than keeping this outdated, 
antiquated marketing order system going.
    So Mr. Chairman, I congratulate you for calling these 
hearings. This is a byzantine area and it is, as I said, it 
just has provoked, as you know, just a lot of regional 
conflicts in the Senate and it cross-currents. It is not 
Democrat or Republican. It just flows across all kinds of 
different lines, and I hope through these hearings we could 
hopefully find some equitable solution. Thank you, Mr. 
Chairman.
    [The prepared statement of Senator Harkin can be found in 
the appendix on page 108.]
    The Chairman. Thank you very much, Senator Harkin. Senator 
Santorum, do you have a comment?

     STATEMENT OF HON. RICK SANTORUM, A U.S. SENATOR FROM 
                          PENNSYLVANIA

    Senator Santorum. Very briefly, Mr. Chairman. Just let me 
thank you for holding these hearings. There is probably no 
issue in my state that, as Senator Specter, I am sure, 
testified to, has gotten more concern and more angst not just 
among dairy farmers but among all of us in rural Pennsylvania. 
As I always say here on the ag committee and rural affairs 
committee, we have the largest rural population of any state in 
the country in Pennsylvania and we are the fourth largest dairy 
producing state. Agriculture is the number one industry in 
Pennsylvania and dairy is the number one industry within 
agriculture.
    And so this is an incredibly important issue, not just to 
our dairy farmers, but to all of rural Pennsylvania, and I 
listened with great interest to what Senator Harkin just 
referred to as these incredible cross currents as we see in 
this industry. And listening to some of the congressmen from 
Wisconsin talking about how much their dairy farmers are 
hurting, I will match my hurt in my dairy farmers with your 
hurt in your dairy farmers any day, and it is not just in 
Wisconsin or the Midwest. Our folks are hurting, too. And we 
have on top of that the problems with drought last year which 
has made it even tougher for our folks and I will remind my 
colleagues we did not do very much on drought relief last year, 
as my farmers are going into the FSA office and being told they 
are going to get 30-cents on the dollar when some folks across 
the country are getting double Agricultural Market Transition 
Act [AMTA] payments and gosh knows what else in support, and my 
folks have no crops to sell, have low dairy prices, and are 
getting a pittance for relief.
    So I think we have some more work to do on that front, but 
obviously on the fundamental look at dairy and how we can 
structure a system that can provide stability as well as a 
solid price is something that we should strive to attain. I 
thank the Chairman for looking into this.
    [The prepared statement of Senator Santorum can be found in 
the appendix on page 110.]
    The Chairman. Thank you very much, Senator Santorum.
    Keith Collins, always good to have you, a fount of wisdom 
and good counsel for the Committee. You have heard already a 
number of distinguished witnesses. So you may take almost any 
position you want and at least find some support here today. 
But thank you for coming and we will give you 10-minutes or 
whatever is reasonable because I know Senators will have 
questions of you after you conclude. We are glad to have you, 
Mr. Salathe, with Keith Collins. Please, proceed.

STATEMENT OF KEITH COLLINS, CHIEF ECONOMIST, U.S. DEPARTMENT OF 
  AGRICULTURE, WASHINGTON, DC., ACCOMPANIED BY LARRY SALATHE, 
                     SENIOR ECONOMIST, USDA

    Mr. Collins. Thank you very much, Mr. Chairman and Mr. 
Harkin and Mr. Santorum. On behalf of USDA, I want to thank you 
for again inviting me up here to participate in this review of 
dairy policy--always a challenge, a challenge that we welcome 
today. My task this morning, my invitation asked me to explain 
and to review the major Federal dairy programs concentrating on 
their economic effects and also to offer a couple of thoughts 
on the coming year for dairy to provide a context in which 
dairy policy will operate.
    Dairy policy has had a lot of objectives over the years. 
They have ranged from ensuring adequate supplies of milk to 
protecting farm income to expanding demand, just to name a few. 
Well, when you have many objectives, sometimes the consequence 
of that is many programs and we have many Federal programs that 
affect dairy which I think should be considered when you think 
about the Federal role in dairy policy. We have the price 
support program. We have the marketing order program. We have 
the compact, dairy export incentive program, checkoff programs, 
and the the loan and payment programs. I would point out that, 
for example, in the year 2000, we estimate that the average 
dairy farm business in the United States will receive about 
$6,000 in direct government payments from these programs.
    We also have import controls. We have food and nutrition 
assistance programs. We have research and extension programs 
and all of these things have to be considered as a package when 
thinking about Federal dairy policy. Having said that, because 
you were kind enough to give me 10-minutes, I am just going to 
focus on two of these programs, which are mainly the price 
support program and the Federal milk marketing order program.
    Well, prior to 1981, we had milk price support levels tied 
to parity and generally they trended up. In the 1980s, late 
1970s, and early 1980s, we started to see very strong 
productivity gains in milk combined with the firm price support 
floor. The result of that was we saw increasingly imbalanced 
and unsustainable dairy markets. Congress, as a result of that, 
trying to restore balance to these markets, did several things. 
They implemented supply controls in the 1980s for milk. They 
implemented producer assessments and they lowered the price 
support level. In fact, between 1981 and 1990, the price 
support level was reduced about 25-percent.
    The result was that when you look at the price support 
program in the 1990s, you see a program that has operated very 
differently than had operated during the 1980s. In the 1980s, 
we had year after year after year of billion dollar costs in 
the program. The record was $2.5 billion in 1983. But by the 
time we get to the mid-1990s, 1995, the cost of the dairy price 
support program is basically zero. Government stockpiles, the 
legendary caves were gone, and disposal programs had largely 
disappeared.
    However, one consequence of this is that producers have 
faced greater price variability as the lower support level has 
permitted market forces to operate over a much wider price 
range. The price support program thus has gone from being quite 
distortionary in the 1980s with very pronounced economic 
consequences to being pretty benign by the mid-1990s. Over the 
past couple of years, however, we have seen the role of price 
support start to pick up, as we have started to buy more nonfat 
dry milk, and most recently the price of cheese has fallen to 
near support.
    If we look out to the year 2001 when the price support 
program is expected to terminate, we think that without the 
program, the annual average all-milk price would decline 35- to 
55-cents a hundredweight or about three to 4-percent. Because 
of the income support the price support program is now 
providing, the administration has proposed extending the price 
support program through the year 2002.
    Tomorrow we have a couple of USDA staff that will be 
reporting to you on Federal milk marketing orders. They run the 
program. So I am not going to say too much about orders, but I 
want to give a couple of thoughts on their general effects. And 
I think it is helpful to contrast the price support program 
with the Federal milk marketing order program. The price 
support program reduces the available market supply of butter, 
cheese and nonfat dry milk because the Government purchases the 
product and takes it off the market.
    Now that pushes up the price of those products. It pushes 
up the price of the milk that is used to manufacture those 
products. The price is higher than it would otherwise be. This 
also pushes up the price of fluid milk because, of course, the 
minimum Class I price, the Federal order price of fluid milk, 
is tied to the price of manufacturing milk. So the price 
support program at least temporarily raises the whole spectrum 
of dairy product and milk prices, and it does it in all regions 
of the United States.
    Federal orders have very different effects. If Federal 
orders raised prices above competitive levels in one use or in 
one region of the country, prices would decline in another use 
or another region of the country. This has to happen because 
Federal orders do not have supply controls. So the national 
supply and demand for milk must balance. Orders establish 
minimum prices for milk in four uses with Class I being the 
minimum for fluid products. And the Class I prices, of course, 
vary by location.
    Now suppose that USDA does not have it right. Suppose we do 
not have the right Class I differential, and by that I mean 
suppose in an order we set a differential that is higher than a 
differential that would prevail in a freely competitive market. 
Then the price of fluid milk is being supported in that region. 
The higher fluid price reduces fluid consumption which makes 
more milk available for manufactured uses and reduces the price 
of milk for manufactured uses.
    If an order has a higher proportion of its milk going into 
Class I use, then the average producer price would be higher 
than in a freely competitive market. And that would encourage 
milk production. If a low proportion of milk is going into 
Class I use, then the average price, or the blend price, would 
be pulled down by the lower manufactured price, and that would 
discourage milk production relative to a freely competitive 
market.
    So the whole debate about Federal milk marketing orders and 
its economic effects and whether they are distortive or not, I 
think, really comes down to whether the Federal order minimum 
Class I price is supporting the Class I price or not in markets 
across the United States. Well, what do economists think about 
that? I think they think this occurs to some degree, not a huge 
degree, but that it occurs. A review of economic studies 
suggests that nationally farm level milk prices would decline 
by 1- to 3-percent in the absence of Federal orders with U.S. 
farm income and consumer expenditures on dairy products falling 
by a parallel amount.
    However, producers in markets where Class I use is high 
would see larger price declines and producers in areas where 
Class I milk is low could actually see a price increase. In the 
last year the Secretary reached the same conclusion and 
concluded that Class I differentials were unduly high in some 
regions and too low in others and proposed lowering the Class I 
differential on average in the United States from $2.57 per 
hundredweight down to $2.28 per hundredweight. That was a 29-
cent per hundredweight decline that was proposed. Well, we all 
know the fate of that proposal.
    I would like to point out that despite widespread concern 
that the Secretary's proposal was going to reduce the average 
blend price to producers, we have gone back and calculated what 
that price would have been over the last 18-months using the 
data which is available starting in September of 1998. And the 
Federal order blend price would have averaged about 20-cents a 
hundredweight higher under the Secretary's proposal had that 
been in effect since September.
    Well, a comment on dairy compacts. I think they essentially 
have the same general effects as Federal orders. They raise 
farmers' incomes by trying to raise the price of milk used in 
fluid products. Studies have indicated that resulting higher 
production in a compact area leads to more milk production and 
higher retail prices for fluid milk consumption. This makes 
more milk available for manufacturing uses, pushes down prices 
for those products and prices to producers marketing outside 
the compact. And the adverse effects on producers outside the 
compact would be amplified as more states were to join a 
compact.
    Let me conclude with a couple of comments about the 
financial condition of dairy farmers. We have seen quite a 
price collapse in the last couple of months with the Basic 
formula price [BFP] in November and December reaching 21-year 
lows. Fortunately, record high milk prices this past marketing 
year and low feed costs have put most dairy farmers on a fairly 
solid financial footing going into the year 2000. We estimate 
that 11-percent of dairy farm businesses were having debt 
repayment problems by the end of 1998. That compares with 22-
percent for all farm businesses. Lower milk prices this year we 
think could increase those debt repayment problems to about 17-
percent by the end of this year.
    Structural adjustment in the dairy industry continues with 
no end in sight. In 1999, the number of operations having milk 
cows dropped 5-percent from 117,000 to 111,000. That continues 
the long-term trend. Over one-half of all dairy farms have 
fewer than 50-cows and their numbers dropped by 8-percent. Two-
percent of all dairy farms have more than 500-cows. And their 
numbers increased by 6-percent. And milk production continues 
to expand rapidly in the West supported by favorable weather 
and forage availability.
    It is hard to see how dairy programs or market conditions 
will have much effect on these structural trends over the next 
few years. And that concludes my comments. We would be happy to 
take any questions.
    [The prepared statement of Mr. Collins, can be found in the 
appendix on page 112.]
    The Chairman. Thank you very much, Mr. Collins. Let me just 
pick up where you left off. You point out in your testimony 
that in the past decade, milk production increased about 1.2-
percent a year. Production per cow increased about 2.2-percent 
a year during the decade while milk cow numbers declined about 
1-percent per year. And you point out that this year we are now 
in, however, would be the second largest percentage increase in 
milk production during the decade of the 1990s surpassed only 
by last year's 3-percent increase, a sizable increase last year 
and this year, as distinct from pretty level lie for the 
previous years in the decade.
    Having said that, you also point out that dairy farms 
improved their financial positions in 1998 and 1999 and that 
concentrated expenses dropped 10-percent in 1998 and further in 
1999. A drop in feed costs likewise. So this has led, by and 
large, and this is always the problem of average statistics 
because the problems of those who are in trouble are not 
average, but you point out that farms with gross sales of 
50,000 or more averaged--the income, cash income--averaged 
95,000 in 1998 and in 1999 compared with 1994-98 average of 
64,800.
    Now the net cash income of dairy farms this year, you think 
may fall by 21-percent to 74,900. But as you are pointing out, 
in comparison to all of agriculture, the debt structure 
problems for dairy farms appear to be substantially less, 
although given this year 2000 situation they might increase. 
And as you pointed out, the number of dairy farms total has 
been in decline throughout this century, perhaps for two 
centuries, as has been the case with corn farms, soybean farms 
or whatever. Thus, confirming a higher degree of concentration.
    You pointed out the larger cow situation has gone up by 6-
percent and other situations declined by 8. That is the 
smaller. Now taking a look at this whole situation, the Cato 
Institute, to be the devil's advocate for a moment, suggested 
that about $400 million is transferred from the general public 
consumers to the dairy industry, whatever the size might be of 
the farms or whatever the configuration of our programs, by the 
marketing orders or the supports that you have described.
    In other words, a transfer payment of consumers to 
dairymen, however many there are, 400-million a year. Now 
earlier this morning we heard a contention that within this 
$400 million of support from taxpayers, about 145-million 
transfers to the New England situation away from everybody else 
so that, as you pointed out, it is a fairly stable pie, 
whatever it may be, but the pieces are redistributed through 
the politics and the polls of this situation.
    First of all, do you believe that the Cato Institute's idea 
that essentially the rest of the taxpayers of the country are 
supporting dairymen by 400-million is correct, and is the 
transfer to New England from the rest of that size, and if not, 
can you give us any idea of the proportions of these shifts?
    Mr. Collins. First of all, I would say that the Cato 
Institute study was really a summary of other people's work and 
it is consistent with the one to 3-percent I mentioned.
    The Chairman. In other words, the programs themselves 
probably increased dairy income by one to 3-percent?
    Mr. Collins. Right. I indicated that the national average 
all milk price might be 1- to 3-percent lower without orders, 
sort of a summary conclusion from lots of studies. One to 3-
percent would be about a--the midpoint would be about a $500 
million increase in consumer expenditure or a $500 million 
increase in farm income.
    The Chairman. Stated another way, if you had no programs, 
no dairy programs, we had free market, consumers would pay 1-
percent to 3-percent less for milk on average throughout 
America?
    Mr. Collins. Yes, that is sort of a general finding. So 
that would be consistent with the Cato study. Apart from that, 
there are also the effects of the dairy price support program, 
which actually right now and over the next year or so would 
probably be greater, I think, than the effects of the milk 
marketing order program.
    The Chairman. In other words, they increase production?
    Mr. Collins. They will increase production. They will have 
a larger effect on the all-milk price than the Federal milk 
marketing order program would in the aggregate across the 
Nation.
    Now regarding the compact, I cannot really tell you. I have 
not done a calculation on what the distribution of the gains 
are by different regions of the country due to the compact 
over-order price. That, of course, varies from month to month. 
Since the compact was first implemented, and they established a 
minimum $16.94 per hundredweight price on Class I milk. That 
was a fair amount above the Federal order minimum Class I 
price. Then as time went on and milk prices got stronger, of 
course, that difference dissipated. As the difference 
dissipates, then there is no differential effect of the 
compact. So the effect sort of depends on looking at prices 
over a period of time and I have not done such a calculation.
    The Chairman. Has anyone done so? Obviously, this is a part 
of our debate as you heard this morning. It was described as a 
regional dispute with winners and losers.
    Mr. Collins. I would let Dr. Salathe respond, who I might 
say has assiduously spent a career at USDA decoding Federal 
dairy programs for their effect on consumers, producers and 
taxpayers.
    The Chairman. Well, give us the benefit of your wisdom.
    Mr. Collins. So I will let him take a shot at that.
    Mr. Salathe. Well, I will try to live up to that. But I 
would refer back to the OMB study that was done and looked at 
the period from July 1997 through the end of 1997. That study 
basically indicated that if you looked outside the compact, the 
effect was fairly small at that time. And the all-milk price 
outside the compact was probably reduced about 2-cents a 
hundredweight which if you multiply that by milk production 
outside the compact would come to on the order of about $30 to 
$40 million. Now that is just for that second half of 1997.
    The Chairman. So the losses to the people outside the 
compact you think were 30- to 40-million------
    Mr. Salathe. Yes.
    The Chairman.--on an annual basis?
    Mr. Salathe. Right.
    Mr. Collins. And then there would be whatever consumers in 
New England had to pay for higher fluid milk as a result of the 
compact. That would be another transfer.
    Senator Leahy. Well, wait a minute. Consumers, the record 
will show, Mr. Chairman--I do not want to let that one just 
slip through here--in the compact, consumers are paying a lot 
less for their milk in New England than they are in Minnesota 
and Wisconsin and these places that object to the compact. I 
mean that is, as GAO has found, that is an absolute fact.
    Mr. Collins. There is no disputing that. I think the 
question for economic analysis is what would the price of fluid 
milk be in New England with and without the compact? Not so 
much how it compares with other regions of the country. And I 
think there have been studies that have shown that there is an 
effect, an increase in the price of milk in New England as a 
result of the compact.
    Senator Leahy. Mr. Chairman, I find this--and I am sorry to 
butt in on your time--but I mean these are the kind of 
misstatements we keep getting on this. There is an objective 
report done requested by the, primarily by those who were 
opposed to the compact, and it came back that milk costs less 
in the compact area than it does in places like Minnesota and 
Wisconsin where they do not have a compact.
    The Chairman. Well, that point apparently is not in 
dispute, you know, without trying to mediate between the 
Senator and the witness.
    Senator Leahy. I understand. I apologize.
    The Chairman. But the question is even low as the prices 
are in New England, would they be lower still without the 
compact, at least as I understand the issue with economists? So 
that is my understanding. Now, let me just ask one final 
question and that is policy wise why do we have a dairy 
program? In other words, last year a distinguished colleague in 
the House, Congressman Boehner, offered legislation, as I 
understand, simply to terminate all of this so we would not 
need to have any more debate. People just simply would sell 
milk in a free market situation without need for either 
compacts, marketing orders, supports, Eau Claire and distances 
or all the rest. As a matter of policy, why do you support, or 
if you do, a program at all?
    Mr. Collins. I try not to support or not support anything, 
just to comment on their effects. I would say that the answer 
to that question obviously is an economic, political, and 
social collection of reasons for having programs. From the 
economic point of view, you trade off the effects on consumers 
or economic efficiency against the gains you are providing to 
producers. And the political system has decided that those 
benefits to producers outweigh those other effects and so that 
is why we have the program. Effectively, the gains to produce 
from a price support program would be higher prices than would 
otherwise be the case when markets are weak, some measure of 
stability provided to prices for producers. It prevents prices 
from falling to unduly low levels that might not prevail in the 
longer term and therefore keep people from going out of 
business that might be able to persist in business if the 
prices were prevented from falling to those levels that we know 
they are not going to stay at. So I think that is a strong 
reason for the price support program that the political system 
has recognized.
    I think with respect to milk marketing orders, part of its 
rationale goes back to Senator Harkin's comment about 
distinguishing between the perishability of fluid milk plus the 
durability and the storability of manufactured products and the 
need to ensure an adequate supply of fluid milk in fluid milk 
markets, understanding that there is seasonality in production 
and seasonality in demand that do not match up.
    The free market system would provide a pattern of 
differential prices across the United States: higher prices for 
Class I use because much Class I use takes place in 
metropolitan areas like Boston, New York, Philadelphia and so 
on. The milk obviously is not going to be produced there; it is 
going to be shipped in, there are going to be transportation 
costs. As economists say, the elasticity of demand for Class I 
milk is very inelastic and so there is going to be a higher 
value to that milk and that would occur in a free market. And 
so the order system in imposing minimum differentials is in 
some sense mimicking what might occur in a free market system.
    So then the question becomes, well, if the free market 
would provide this pattern of differentiated prices and provide 
the incentives to move milk, why do you have to have the 
Federal Government ensure that minimum? And I think there the 
question gets into very difficult issues to evaluate such as 
balance of competitive power and negotiation between dairy 
producers and dairy processors.Does the order system help 
producers compete with concentrated processing markets?
    Another example I think that is probably more cogent is 
this question of balancing fluid needs. Because the seasonality 
of production, and the seasonality of demand differ, you are 
going to have a draw for milk into fluid uses for fluid 
processors at certain times. Needs are going to swing up and 
down. If you happen to be a producer that lives close to the 
fluid bottling plant, then maybe all of your milk 100-percent 
of the time will go to that fluid bottling plant, but if you 
live further away, then when the fluid plant needs extra milk, 
your milk will get pulled in. When the fluid plant does not 
need extra milk, then your milk is going to go to some 
manufacturing plant for a much lower value. And so this person 
that lives a further bit away is, in effect, paying the costs 
of balancing the fluid milk market.
    So the order system is an attempt to have everyone share in 
those costs and have everyone share in the higher value that 
comes from the Class I use. So that Class I differential that 
is paid by a processor goes into a pool and is paid out to 
everyone including the person who is performing the balancing 
function. So there is a lot of things going on in Federal milk 
marketing systems that have to be weighed, and I think it is 
because of this whole constellation of effects that take place 
that the administration and Congress have continued the system.
    The Chairman. I thank you for that comprehensive answer. It 
is a very important part of our testimony and I appreciate that 
excellent summary. Now I am going to ask each Senator to try to 
take only 5-minutes in the first round and if there are 
additional comments and questions, we will have a second round. 
I call now upon my distinguished ranking member, Senator 
Harkin.
    Senator Harkin. I thank you, Mr. Chairman. And I 
appreciated that last question you asked and the response from 
Mr. Collins. Those of us who have been through this for the 
last, as you have been, for I do know not how many years 
recognize that there is an imbalance. I mean most milk 
production is in the spring, the spring flush. The biggest 
demand is in the fall and the winter. Most people buy their 
milk on the weekends, but cows do not just wait till the 
weekend to produce the milk. They do it everyday and so you 
have got not only weekly fluctuations, you have got annual 
fluctuations.
    And the dairy price support program if it does cost one to 
3-cents more, 3-percent more as the Cato Institute said, I 
figured that would add to half a gallon of milk probably about 
a penny, maybe 2-cents at the most, $1.89, about 2-cents maybe. 
How much then would that milk fluctuate to the consumer if we 
did not have such an order and in the springtime, yeah, a 
consumer might buy milk pretty cheap in the spring, but wait 
till next winter. You are going to get stuck for higher prices. 
So I am just saying that on an annualized basis, the consumer 
is probably spending less under the system of orders than they 
would if we had this sort of total free market.
    I am just saying that. I do not know. Because you are going 
to get spikes in prices in the wintertime even though you might 
have lower prices in the spring. I just think on an annualized 
basis. Plus it is a more stable price. You could see this if 
you just opened the doors and did away with everything, you 
could see milk in the spring. You could probably buy it for 
almost nothing. Wintertime you would pay through the nose for 
it.
    So I think there is some need for stability in the system. 
Having said that, do I believe that we do not need to change 
the system. I am not saying that at all. I think perhaps the 
recent action of reducing the number of orders was probably 
well overdue. It perhaps could be reduced even further. I do 
not know. We could look at that. In terms of the compacts, with 
all due regard to my good friend from Vermont, I am not certain 
that the compacts really are benefiting the entire Nation in 
terms of milk production and milk pricing. And it could lead to 
a whole regionalization of the whole milk thing and we will be 
back where we were before.
    While my good friend from Vermont is right that the price 
is cheaper than it is in Minnesota and in Wisconsin, I am not 
certain that the consumers in that area of the country would 
not be better served without the compact in terms of their 
overall prices. And the steady price at which they pay on an 
annualized basis. Mr. Chairman, thank you very much.
    The Chairman. Well, thank you very much, Senator Harkin. 
Senator Craig.

  STATEMENT OF HON. LARRY E. CRAIG, A U.S. SENATOR FROM IDAHO

    Senator Craig. Mr. Chairman, let me ask unanimous consent 
that my statement become a part of the record.
    The Chairman. It will be published in full.
    Senator Craig. And I thank you very much for building a 
record on this issue. I think it is continually important as 
the Northeast Compact has stayed in place for a time, I think 
we are going to get a better evaluation of the market and how 
the producer and the consumer reacts to it than we have had. 
And gentlemen, let me thank you for your testimony.
    Mr. Collins, when you examine inside the Northeastern 
Compact the stability of the producer, is the attrition or the 
change in production any different than it was prior to the 
implementation of the compact? I mean dairies going out of 
business, size of dairy scopes, that kind of thing. Have you 
spent any time looking at that?
    Mr. Collins. I have not, but there has been a recent study 
that was done and issued in November of 1999 that looked at 
that. Unfortunately, I do not recall the result. Do you, Larry?
    Mr. Salathe. Well, we have looked at the number of farms 
with milk cows in the compact area since 1997 through 1999, and 
basically it shows a similar pattern outside the compact as 
well: declining number of small farms, farms with 50-cows or 
less, and increasing numbers of farms with 200-cows or more.
    Senator Craig. Yeah. Well, that has been my understanding. 
The mantra here was to save the family dairy farmer and while 
those larger dairy farms may be family or family business 
oriented, my guess is you do not save the small farmer by 
creating artificial kinds of marketplace involvements and my 
guess is it is not happening from what I understand in the 
Northeast. And I think that my colleague from Vermont and I can 
debate price, but we also cannot compare apples and oranges 
when we debate price as it relates to what prices would have 
been for producer and consumer with or without the compact. 
There are clear records of reality forces that deal with the 
price in the northeast and what it is today versus what it was. 
And I think that is what we can argue if that becomes an 
argument. There are plenty of studies out there that I think 
justify that.
    The reason obviously I am sensitive to dairy--a lot of 
people do not think of Idaho as a dairy state. We think of 
Wisconsin and we think of the Northeast and Minnesota. Well, we 
are now sixth, headed for fifth, in production in the Nation. 
Obviously, the dairies of my state are large dairies and 
growing larger. We now have 5,000-cow units out there. We milk 
around the clock. We produce cheese and manufactured products 
around the clock. There is a whole dynamic in the West that is 
significantly different than the East and so the marketplace is 
important and policy program here is important.
    Let me thank you for your testimony, and Mr. Chairman, let 
me say that I wanted to recognize--I think I will be able to 
stay, but in your next panel, we have Dennis Vanderstelt, who 
is president of the Western States Dairy Producers Trade 
Association from my state of Idaho, a producer from the Kuna 
area. I am pleased that you have allowed us to help you shape a 
broad base of those who come to testify because I think it is 
clearly important that as we look at this industry and our 
policy that we hopefully will emerge out of regionalism into 
the reality of a marketplace and our policy will reflect that. 
Thank you.
    The Chairman. Well, I thank the Senator for his suggestion 
of the witness. We look forward to hearing from the 
distinguished citizen from Idaho. Senator Leahy.

STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR FROM VERMONT

    Senator Leahy. I would say to the distinguished Senator 
from Idaho, if you would to have it totally on the market, does 
that mean that we in the East would no longer have to subsidize 
water and all throughout the West as we have for------
    Senator Craig. Well, it is our water out there. We do not 
need you to subsidize it.
    Senator Leahy.--for decades. And, of course, they have paid 
every cent of the dams, the river changes and all the rest, but 
that is theirs. Mr. Collins, of course, continually ignores the 
fact that if we get rid of the compact, 30- to 40-percent of 
the farmers in Vermont and New England would probably go out of 
business, which, of course, would raise the prices very 
substantially.
    But it is a good thing, though, to have this hearing, Mr. 
Chairman. I am a person who believes in inclusive, and it was 
so great to see all the people you brought together here. These 
poor folks from some of the dairy processors, you know, just, I 
mean they have to spend all the money to take a cab or a 
limousine or whatever to come here to the Hill. I do think one 
thing about the compact. It does bring people together. It is 
the one thing that Mrs. Clinton and Rudy Juliani both agree on 
and so I think possibly there is hope for both of them in that 
regard.
    But in dairy farms, dairy families, it is a serious topic 
and I do not want dairy farmers in Minnesota, Wisconsin, and 
Mississippi or Iowa, North Carolina or Idaho or Vermont or 
anywhere else to go out of business. I will say this to 
everybody. I will support, I will vote for, as I have, a 
reasonable legislation that helps the dairy farmers in each of 
those places and I will work with any region of the country. 
But back in my office I have got this huge stack of diatribes 
against the dairy contract. Scores of charges were made before 
the compact legislation was passed the first time. 
Notwithstanding the official view or even the official view of 
neutrality from the USDA and the administration, there are 
those in the Department of Agriculture who worked every single 
day to try to defeat it even though they are told to do 
otherwise by their bosses.
    But they were wrong and the compact has gone on to do just 
what we said it would do. So let me just talk about some of the 
myths, some of the euthanistic language. Here is number ten: 
Compacts are designed to bar dairy products from outside the 
state or region. Well, anybody can sell into the compact area. 
In fact, New York, which is not part of the compact area gets 
about a quarter of all the compact's payments. So it shows that 
it does not bar anybody.
    One of they myths: the compact is more terrifying than the 
Blair Witch Project. I have not seen the Blair Witch Project, 
but I understand it made a lot of money, as do the lobbyists 
who now use it. But it adds 50-cents to one dollar to the price 
of milk. Well, the only thing more terrifying I guess than the 
Blair Witch Project is milk prices in Minnesota and Wisconsin, 
which the GAO reports are often much higher than the Northeast, 
and as they show the Northeast prices are on the average less 
than other parts of the country.
    Or they say the compact is a milk tax. And thus it hurts 
the School Lunch Program and WIC. Well, in fact, the School 
Lunch Program and WIC are exempt from the compact. They are not 
exempt from the high milk prices in the Midwest and maybe, Mr. 
Chairman, we should find out why it is in the Midwest that the 
WIC programs are paying so much more than we are. I hope we are 
not going back to the kind of price fixing we saw on the WIC 
program a few years ago, but it something we can look at.
    They say the compact has dramatic effects and impacts upon 
price of farmers in other areas, especially in the Upper 
Midwest. Well, OMB reports that the compact region which 
produces only 2.9-percent of the fluid milk in the Nation has 
little effect on dairy markets outside its region or national 
prices and trends. In fact, once it was put in place, Wisconsin 
had about a 2-percent increase.
    Production is expanded beyond the compact region's fluid 
needs, they say. Well, production in New England is tied to our 
needs unlike in the Midwest where there is about 85-percent 
overproduction and has to go to other needs.
    And this, Mr. Collins, I just thought I would mention to 
you. We have been told the Secretary of Agriculture opposes the 
compact. Could have fooled me. He twice approved the compact 
and he signed its charter. I do not know if that word has 
gotten down throughout out beyond his office and sometimes the 
reaction of some--I am not going to name them--but some who go 
contrary to what their boss says, they should know that.
    The compact helps large dairy farmers more than small ones, 
we are told. The average--I do not know what the size of a 
large farm is, but the average size in the compact is 80-cows. 
The higher prices--they say consumption goes down and children 
are the biggest losers. Well, milk prices in the compact region 
are considerably lower than Wisconsin or Minnesota and 
consumption of milk has increased in the compact area which 
should be good news for every parent.
    And despite what some have argued, the Northeast Dairy 
Compact has not even helped small northeast farmers, we are 
told. Well, the Farm Bureau Federation reports significantly 
below average losses of farms in New England with some compact 
states reporting actual increases. Just the opposite of the 
claims that have been made.
    And then last, let me tell you about this. We had--I am 
sorry, Mr. Chairman, I am taking more of my time, but I will 
just close with this. We had two ice cream socials here last 
year. International Dairy Foods Association [IDFA] had their 
social and were opposed to the compact and showing their usual 
subtlety, they were then quoted in the press as saying 
basically that any milk from Vermont or ice cream from Vermont 
ought to have the name of cow manure. You know it is a kind of, 
they wanted to make sure that subtly we got the point. Well, I 
asked our biggest producer of milk, Ben and Jerry's, because I 
said after all the Ben and Jerry's ice cream social had 
outdrawn IDFA, and asked them if that was sour grapes. Ben 
Cohen told me they are always looking for new names, but he 
found that Chunky Monkey, Fish Food and Jerry Garcia probably 
sells a little bit better. And so I just wanted to get that on 
the record.
    The Chairman. I thank the Senator.
    Senator Leahy. Thank you, Mr. Chairman.
    [The prepared statement on Senator Leahy can be found in 
the appendix on page 135.]
    The Chairman. Senator Santorum.
    Senator Santorum. Thank you, Mr. Chairman. In your 
statement, you talked about several things you wanted to review 
but you did not review in your testimony and that is the Export 
Incentive Program. And one of the things I always talked about 
to my farmers is, well, there are several things we have to do 
to improve your prices and one thing is this battle with 
exports. And up in my end of the country we hear a lot about 
Canada and the problems we are having there. Can you give us a 
little bit of a refresher on how we are doing in the export 
market and whether the Dairy Export Incentive Program [DEIP] 
program is being helpful or not, and what are the prospects of 
us expanding our markets in the dairy area?
    Mr. Collins. I would be happy to, Senator Santorum. On the 
export side, we are largely not competitive with other 
countries in the world. Most of world trade is occupied by the 
United States, Australia, New Zealand and European Union. 
Together we account for 80-percent or more of trade in each of 
the major dairy products. Our trade basically exists because of 
the dairy export incentive program. We do have some specialty 
cheeses and products like that, that we can export without 
subsidies, but by and large our subsidy rate under DEIP is 
roughly 50-percent of the market price which shows you that our 
prices are way above the world price. So without DEIP we would 
not be exporting. So DEIP is very important to us exporting.
    Under the Uruguay Round agreement, the volume and value of 
subsidized exports has to decline between 1995 and 2001 with 
value coming down 36-percent, volume coming down 21-percent. We 
underutilized our maximum permitted export subsidies in 1996 
and 1997 and as a result of that, using the flexibility 
provisions of the Uruguay Round agreement, we increased our 
exports the last couple of years. This past year, 1999-2000, we 
will probably DEIP something on the order of 100,000-tons of 
nonfat dry milk. Under the terms of the agreement, we can 
subsidize no more than 68,000-tons next year, the 2000-2001 
year, which is the last year of the implementation period. So 
there will be a substantial dropoff in subsidized exports of 
nonfat dry, milk which is the principlal DEIP product, if we 
are to meet our WTO commitments.
    Senator Santorum. What do you see? How does that impact the 
price? I mean can you give me a------
    Mr. Collins. I think somewhere in my statement I had 
indicated that the total amount of subsidized DEIP exports have 
about a 30-cent per hundredweight effect on the price of milk. 
So we are talking about a one-third drop, something in the 
order of a 10-cent per hundredweight drop in the price of milk 
nationally as a result of going from where we are this year to 
where we will have to go next year.
    Senator Santorum. You made a comment that we have to DEIP 
our products to sell them because we are 50-percent above the 
market price?
    Mr. Collins. That is a rough estimate, yes, somewhere in 
that neighborhood. I could give you exact figures, but they 
were quite high.
    Senator Santorum. How can we be that uncompetitive in the 
world market?
    Mr. Collins. Well, we have very rigid tariff rate quotas 
holding out imports. That helps keep up our price. We have a 
price support program and the rest of the world consists of the 
three countries that I mentioned of which Australia and New 
Zealand are very efficient, low cost producers. I might mention 
that Australia's production went up 8-percent last year. New 
Zealand's production we think this year will go up something 
like 10-percent. These are huge increases when you compare them 
to our trend growth of 1- to 2-percent. In addition to that, 
the world is dominated by the European Union which subsidizes 
enormously to get into world markets.
    Senator Santorum. My question is we are not uncompetitive 
vis-a-vis production. We are competitive vis-a-vis subsidies. 
Is that now------
    Mr. Collins. Well, I would say studies that compare the 
cost of production between New Zealand and Australia with the 
average in the U.S. would show them to be lower, not true for 
the European Union.
    Senator Santorum. How much lower?
    Mr. Collins. Several dollars a hundredweight at least. With 
respect to other countries that have been significant 
exporters, like Canada over the last couple of years in cheese 
and the European Union, they are heavy subsidizers. So there 
are sort of two factors going on. There are some efficient 
producers in the world and there are some heavy subsidizers in 
the world.
    If the other competing countries did not subsidize, clearly 
that would raise the world price of dairy products closer to 
ours. And just because we are a high cost producer relative to 
say New Zealand does not mean we would not enjoy exports. You 
know you can export based on the size of the world market that 
is out there. A strong and growing world market would 
accommodate lowest cost producers and highest cost producers, 
as you move up to fill the needs in the world marketplace. So 
if we were to ultimately eliminate export subsidies, that 
would, I think, enormously help our competitive potential in 
the world market place, but we are a long ways from doing that.
    So as we stand here today, our exports are pretty much 
contingent on the Dairy Export Incentive Program. We are 
talking about something on a milk equivalent basis for the DEIP 
program of exporting something like three billion pounds of 
milk, something in that range, out of the 160-billion that we 
produce each year. So our exports are not very prominent, but 
nevertheless they are helpful and they do help support prices.
    Senator Santorum. But I understand. You recommend getting 
rid of the DEIP program as a way to improve our opportunity to 
trade?
    Mr. Collins. Only multilaterally. I would not recommend it 
unilaterally.
    Senator Santorum. OK. Thank you.
    The Chairman. Thank you very much. Senator Fitzgerald.

  STATEMENT OF HON. PETER G. FITZGERALD, A U.S. SENATOR FROM 
                            ILLINOIS

    Senator Fitzgerald. Thank you, Mr. Chairman. Mr. Collins, 
thank you for your good testimony before our committee.
    Mr. Collins. Mr. Fitzgerald.
    Senator Fitzgerald. Senator Leahy mentioned or pointed out 
that the Women, Infants and Children's program and the School 
Lunch programs are exempt from the compact and he therefore 
said that it was not costing the taxpayers money by adding to 
the cost for those programs. But it seems to me that there are 
other Federal nutrition programs out there such as the Food 
Stamp program. And somebody who is on food stamps, I would 
imagine when they go to the grocery store, they are just using 
their electronic benefits card to buy their milk like everybody 
else. The higher prices that people in those compact states 
have to pay at the retail level for milk would be passed on to 
participants in the Food Stamp program. Would that not be 
correct?
    Mr. Collins. Absolutely correct, Mr. Fitzgerald.
    Senator Fitzgerald. So part of that transfer that we were 
talking about earlier that the Cato Institute cited, money 
being transferred from consumers in general to the producers in 
an effort to make more money for the producers, part of that 
transfer is occurring from some of the absolute most needy 
people in our society. Would that not be correct?
    Mr. Collins. That is correct. I would also point out that 
there have been studies that looked at the extent to which the 
compact has offset the higher cost of milk for WIC 
participants. I would point out one study by the University of 
Vermont concluded that the WIC participants in Boston were 
fully compensated for the price increase due to the compact. 
However, in Hartford, Connecticut they were not. So it depends 
on where you are and what the effect is on the retail price of 
milk and to what extent the compact commission provides money 
back to WIC participants to make them whole. It does not always 
line up one for one.
    Senator Fitzgerald. And in addition to WIC and food stamps, 
there are other Federal nutritional programs, I think the Child 
and Adult Care Food Program, the Nutrition Program for the 
Elderly. My understanding is those programs are not exempted; 
is that correct?
    Mr. Collins. That is correct.
    Senator Fitzgerald. So we are looking at a transfer from 
some very needy people to the producers of the milk in those 
compact states. It is also my understanding that our United 
States Constitution in the commerce clause forbids compacts, 
essentially trade barriers, amongst the states unless they are 
approved by Congress; is that right?
    Mr. Collins. I believe that is the case. Not being a 
lawyer, but I think that is the case.
    Senator Fitzgerald. And so Congress had to come in and 
approve this compact because really what we are getting into 
here is trade barriers amongst the states. I guess my feeling 
would be leaving aside, let us say, for example, that 
everything that Senator Leahy and the advocates of the compact 
say is true and that it does not cost consumers more, but yet 
somehow the producers do better, and that nobody comes out the 
loser here, everybody is a winner. Let us stipulate for a 
moment or assume for a moment that, that is true. I would be 
concerned about the precedent here because really what we are 
allowing here is trade barriers between states where we are 
protecting producers within certain states and when you think 
of our whole world economy going toward more globalization, 
more free trade, here in the United States we are actually 
setting up balkanizing our country and allowing trade barriers 
between states. And so I would be very concerned about the 
adverse precedent that the dairy compact sets.
    And certainly if it were to come to any other part of our 
economy, I think you would hear a lot of people up in arms 
about this. I think of this as a classic case of what Milton 
Friedman wrote about in his book Capitalism and Freedom, where 
he talked about how it is easy for someone who is going to 
benefit from a program or a subsidy to go and lobby Congress to 
get that subsidy or that protectionist legislation that is 
going to make them a whole lot of money real quick. And the 
rest of us, the general public, it only costs us a dollar or a 
couple of dollars a year so we are not impelled to go to 
Congress to lobby to fight against this new subsidy program. 
This seems to me to be a classic case of what Milton Friedman 
was talking about. Thank you very much.
    The Chairman. Well, thank you very much, Senator. Mr. 
Collins, let me just preface this question by saying that at 
the time that USDA came forward with its so-called 1-B policy, 
the reform policies, last year, I studied that as an individual 
Senator and I wrote a public letter published in the 
Congressional Record commending the Secretary and supporting 
that idea. I did so simply because I appreciated that it 
undoubtedly was going to be controversial. Members of our 
committee, however, agreed or disagreed, but not strongly, and 
as a result, and I just say for the record, we did not have a 
hearing. We did not take legislative action to countermand what 
you were doing or to improve upon it.
    Essentially we recognized that the farm bill we passed in 
1996 advocated that you do just what we had asked you to do. 
Some of us felt you should have done more and some maybe less, 
but nevertheless this was clearly consonant with the law that 
we had passed. Now the House of Representatives did take action 
specifically in opposition to what you had done, but it did not 
pass two houses, was not debated by the Senate. And so the 
point has been made how could this possibly in a democracy come 
to pass? It happens in a democracy because some decisions are 
made when appropriations bills are not passed, when there is a 
large big casino at the end of a situation, where people who 
are around the table have an opportunity to write law without 
benefit of this committee or the Senate or what have you. That 
is the situation we are examining and one reason why those who 
disagreed with that procedure demanded these hearings today 
which we are giving.
    Now I have no prediction of what the Senate will do this 
year, even what this committee will do. But I appreciate your 
laying before us the facts and we may inquire of you for some 
more as we have this morning, as well as Mr. Salathe, who has 
been very helpful to us. Even as we have been talking about 
this, your testimony includes lots of other things and I would 
commend everyone to read it because it describes monies paid by 
the Congress or through legislation to dairy farmers, largely 
because of emergency relief both last year and a signup period 
that is proceeding now for additional payments this year.
    These payments are fairly substantial and we have talked--
whether the Cato Institute is right that $400 million is 
transferred from the public to dairy farmers, it is very clear 
that at least two or $300 million are going to be transferred 
in these programs. Now, dairy farmers will say, well, that is 
only justice because of weather conditions or other problems 
that we faced and, indeed, they would say what about the corn 
farmers and the soybean people and the folks in rice and cotton 
who the Congress at least in total has awarded after all the 
payments they finally made and you worked out the regulations 
maybe almost $9 billion last year.
    Now, in part the rationale for that came from some other 
statistic that you furnished. Even though these are in agate 
type, people were reading carefully last year what net farm 
income was throughout the 1990s, the last 10-years, the last 5-
years, the last year, and your prediction for this year, very 
relevant. Now without your trying to remember off the top of 
the head any better than I can, but roughly you have said in 
your publications that the farm net income for about a 10-year 
period is somewhere, as I recall, in 45 to $46 billion range, 
and that was roughly true for 5-years plus or minus a billion 
either side.
    But last year you predicted ominously in 1999 that this was 
going to dip to maybe 43-billion. Now that was not nine billion 
underneath the average. It was arguably two or three billion. 
Congress could have said, all right, we want to make farmers in 
America whole in the aggregate without picking states or 
classes or crops so somehow we will provide two or $3 billion 
more. But instead we provided nine, dairy farmers as a part of 
that. Our part was really very small, you know, leaving aside 
the economics or the social justice or movement to consumers. 
We really got our part of it and maybe not as much as someone 
said today, the AMTA payment people, who were out there in 
other fields.
    Now this year preliminarily as I read, you come up with 
something like $40.5 billion prediction for net farm income, at 
least right now. Now you probably will revise that as the year 
goes on up or down. I don't know how market prices will go. For 
the moment, future prices, hog and cattle prices, other things 
seem to be moving in a pretty good trend. You hate to say that 
for fear that, that will jeopardize that progress, but it is 
probably substantial. But can you give us any idea of how often 
will you revise the forecast? And I make that request because 
my guess is that before long a debate will ensue in the 
Congress and people will say, well, we are back to trying to 
make things fair again and level and Mr. Collins and his 
associates have said they are going to go here if we do not do 
something. Do you have any overall comment about this?
    Mr. Collins. Yes, a few comments. We try to revise these 
forecasts every month. We publish price and supply and demand 
forecasts every month for commodities and then we use those to 
scale up and estimate farm income for agriculture as a whole. I 
would say that if you look back over last year, those numbers 
were used quite a bit to justify the size of the emergency 
package. One of the things that we also do is to sort of take 
that figure apart and look at crops versus livestock. And that 
is one of the reasons that I think a lot of people justified 
the larger package last year because the drop in income to 
principal crop producers was greater than the drop in farm 
income to agriculture in its entirety.
    As we look out for the 2000-2001 marketing years, we see a 
similar development. We expect to have stronger livestock 
revenues, but we will have weaker crop revenues and so for the 
moment, we are looking at a year over year decline of something 
in the order of $7 billion or so for principal crops. Likewise, 
milk revenues will come down because we are going to see a 
several billion dollar drop in milk revenues, understandably 
coming off of a record high milk price in 1998-99.
    So these are numbers that can be used, I think, to look at 
a benchmark and make some judgment about the appropriate size 
of a package. Last year's package when we go back and look at 
it for the 1999-2000 crop year, the $6 billion component of it 
which was for major field crops, that brought net cash income 
for the major field crops, in fact, higher for the 1999 crop 
than it was for the 1998 crop.
    The Chairman. Yes.
    Mr. Collins. But it did bring it about where it was for the 
previous 5-year average, again understanding that, that 
previous 5-year average had some very high years in it. So in 
that sense, you could argue that (a) it was too high because 
you moved up above the previous year's income or (b) it was 
about right because you were at the previous 5-year average. So 
we will be happy to provide all of the benchmark data you would 
want for agriculture as a whole for crops by themselves on a 
calendar year, or on a marketing year basis, so we we'll give 
you all kinds of numbers from which you can justify almost 
anything that you would want to justify for the year 2000. I 
say that a little bit facetiously, but the numbers will show a 
fairly sizable drop because markets are extraordinarily weak, 
particularly for crops. They are coming back for livestock, but 
for dairy, as we have talked about here at this hearing today, 
they are also extraordinarily weak for dairy. So I think that 
can be a guide when you think about what might be done 
legislatively this year.
    The Chairman. When will the next report come out? Do you 
have a------
    Mr. Collins. Well, we publish our numbers every month in 
Agricultural Outlook magazine.
    The Chairman. Yes. When will the next issue of that?
    Mr. Collins. It normally comes out about the third week, 
third week of the month so in another couple of weeks here we 
will have the February numbers come out.
    The Chairman. But you would at least preliminarily see that 
the crop situation is in decline, livestock situation going 
upward, and dairy in decline?
    Mr. Collins. Well, the numbers for net cash farm income are 
in my head. For 1999, net cash farm income was about $59 
billion. For the year 2000, our forecast is $49.7 billion which 
is a 20-percent drop and that would be the lowest level since 
the 1980s. You would have to go back to the 1980s. Of course, 
that projection does not include any emergency supplemental 
payment program, but it does include $17 billion of government 
payments we would expect to make in calendar year 2000 even 
without an emergency supplemental.
    The Chairman. Often comment is made about the lack of a 
safety net, but, as you say, there are 17-billion which is a 
fairly sizable net plus whatever else we may want to talk about 
at that point.
    Mr. Collins. At USDA, we say that it is not parsimonious.
    The Chairman. No. Do my colleagues have other questions of 
the witness? We thank you as always. We look forward to your 
testimony and opportunities really to gain information from you 
at each juncture of this debate. Thanks for coming.
    Mr. Collins. Thank you.
    The Chairman. The Chair would like to call now a 
distinguished panel that will include Gregg L. Engles, chairman 
and CEO of Suiza Foods Corporation, Dallas, Texas; Mike Yoder, 
President, Indiana Professional Dairy Producers from 
Middlebury, Indiana; John Wilson, Corporate Vice President, 
Marketing and Economic Analysis, Kansas City, Missouri; Dennis 
Vanderstelt, president of the Western States Dairy Producers 
Trade Association from Kuna, Idaho; Gordon Hoover, a dairy 
farmer from Gap, Pennsylvania; Dick Gorder, Wisconsin Farm 
Bureau Federation Board member; and Wayne Bok, a dairy producer 
from Geddes, South Dakota.
    Gentlemen, we appreciate your participation in our hearing. 
As many of you have listened to portions of the testimony that 
has preceded your appearance, we will ask each of you to 
summarize your comments in 5-minutes. I will just say for the 
record that each of your testimonies will be put in the record 
in full so you need not ask permission to do that. That will be 
automatic for a full record what you have to say and then we 
will have questions of members, a round of 5-minutes and more 
if more is required. Mr. Engles.

  STATEMENT OF GREGG L. ENGLES, CHAIRMAN AND CEO, SUIZA FOODS 
                   CORPORATION, DALLAS, TEXAS

    Mr. Engles. Thank you very much, Mr. Chairman and members 
of the Committee. I am Gregg Engles. I am chairman and the CEO 
of Suiza Foods which is the largest fluid dairy processor in 
the United States. Let me thank you for the opportunity to 
testify about dairy policy from the perspective of a fluid 
processor. First, let me make clear that as the number one 
dairy processor in the United States, Suiza Foods is absolutely 
committed to the economic viability of our nation's dairy 
farmers.
    Dairy farmers are our partners. They must have a fair and 
steady stream of income. Without them and a safe and reliable 
raw milk supply they produce, we simply cannot operate our 
business. The Dairy Farmers of America, which is the largest 
dairy cooperative organization in the United States, now owns 
34-percent of Suiza's fluid dairy operations. America's dairy 
farmers, therefore, now have a very significant and common 
interest in the growth of demand in sales for fluid dairy 
products and share in the processing of profitability of the 
dairy processing sector and because of that we have a common 
interest in strengthening the growth of fluid dairy sales in 
the dairy industry generally.
    But fluid milk consumption is not increasing. It is 
decreasing and has been steadily decreasing for the past three 
decades. During that time, per capita consumption of fluid milk 
has fallen from approximately 250-pounds per year to around 
200-pounds per year or a 20-percent decline. Why is fluid milk 
consumption declining? Certainly fluid milk faces increasing 
competition from other beverage sectors, particularly the soft 
drink manufacturers whose gigantic corporate competitors 
constantly bombard the consumer with marketing, distribution 
and product innovation investments.
     This is clearly one factor driving consolidation in the 
fluid processing industry.
    Suiza Foods and other fluid dairy processors are working 
very hard to bring product innovation and marketing to life to 
reverse this trend of declining fluid milk consumption, but as 
an industry we are constrained by what we believe is an archaic 
and inequitable milk pricing system that Congress has allowed 
to continue. As you all know, our existing Federal milk pricing 
system was developed in the early 1930s in response to market 
conditions existing during the depression era.
    Low milk prices required emergency legislation that created 
the first Federal milk marketing orders. Although the milk 
market pricing system has been modified periodically, its 
fundamental purpose has always been to maintain viable economic 
condition for dairy farmers which we fundamentally support. Its 
fundamental mechanism has always been to tax the consumption of 
fluid milk by forcing milk processors to pay higher prices for 
milk that manufacturers of other dairy products including 
cheese and butter. This we do not support.
    I would like to introduce into the record a recent 
editorial by Dick Groves, who is the editor of the Cheese 
Reporter, a cheese industry publication. Mr. Groves points out 
that at inception of the Federal program, fluid milk sales 
greatly outweighed cheese sales and thus the logical place to 
tax milk usage to support the farm sector. Because of that tax, 
however, over the last 60-years, fluid milk sales have 
consistently declined while cheese sales which are subsidized 
have grown dramatically. Yet the tax is still levied only on 
fluid milk sales, now by far the smaller part of total milk 
usage in the United States.
    Mr. Engles. The historic rationale for fluid milk premiums 
is out of touch with today's reality. Fluid milk production and 
processing are no longer local in nature. Technological 
improvements have resulted in milk with a longer shelf life. 
Improvements in refrigeration and distribution systems and our 
national highway system have brought milk freely into all areas 
of the country. New technologies such as ultrafiltration and 
reverse osmosis are rapidly blurring regional production 
differences even further. Milk now regularly travels coast to 
coast.
    Notwithstanding these significant changes in the dairy 
industry, Congress has been unwilling to move the industry to 
an unregulated status or materially change the regulatory 
scheme. Congress seems content to allow the current system to 
continue to charge fluid milk processors higher premiums than 
those charged to other dairy processors. As we know from 
experience in many areas, consumers will avoid paying even 
hidden taxes reflected in artificially high prices by choosing 
substitute goods.
    The higher price charged to fluid milk processors increases 
costs to consumers and drives down consumption. The declining 
consumption will, in turn, reduce dairy farmer income unless, 
of course, Congress is willing to authorize additional 
subsidies to support the price. Regional dairy compacts are at 
their core an amplification and continuation of the traditional 
approach to dairy support. That is Class I premiums, albeit on 
a regional basis today.
    The Northeast Dairy Compact has only one purpose: to raise 
the price of raw milk used for bottling above the prevailing 
Federal price. Mind you this increased price applies only to 
bottled milk, not milk used in the manufacture of cheese, 
butter or other dairy products. As of January 2000, raw milk 
processed for bottling in New England Compact states cost 
$16.94 per hundredweight, while that used to make cheese cost 
$10.05. That is a 69-percent premium for identical raw 
material. This premium raises the price of fluid milk to 
consumers. Therefore, is it any wonder that consumers view 
cheese as a better nutritional value for their dollar, driving 
growth in cheese sales, while fluid milk sales have declined.
    If we continue to try to enhance dairy farm income by 
taxing fluid milk sales alone, we will ultimately drive the 
category down to the point where we have insufficient volume to 
support farm incomes. Not surprising, at the same time that 
fluid milk consumption is declining, New England dairy farmers 
who are receiving more money for their milk under the compact 
system have increased production. Milk production in the New 
England states has grown far faster as a whole than in the 
United States since the compact began. This increased 
production together with decreased consumer demand has resulted 
in excess production. Some of this excess production has been 
absorbed in neighboring states, driving down the prices at 
which dairy farmers in those states can sell their products and 
some has been purchased by the Government as surplus 
production.
    Understandably, all dairy farmers would like to receive the 
higher premiums paid in the compact states for their products. 
What rational businessperson would not choose a higher price 
for his product. If, however, that is a course that you choose 
and you authorize compacts for other states, dairy farmers in 
those states will also increase production. It is human nature. 
It is good business. Then on an even larger regional or 
national scale, the cost of milk to consumers will increase and 
consumption will decline. This imbalance of supply and demand 
is a deadly downward spiral that ultimately must result in you, 
Congress, getting back in the business we have struggled as a 
Nation to put behind us. That is being excess production.
    To extricate yourself from such a cash subsidy which in the 
early 1980s exceeded $2 billion per year, you might then take 
taxpayer money, pay dairy farmers to slaughter cows, which we 
have done before, which would in turn lower beef prices and 
bring the cattle ranchers to your door knocking for subsidies 
to give them relief from excess beef supplies. Surely we have 
learned from the mistakes of the past and must not let history 
repeat itself.
    Unfortunately, the purported benefit of the Northeast Dairy 
Company, the protection of the small dairy farmer, has not been 
realized. During the first year of the compact, dairy farms in 
the New England states declined at a 25-percent faster rate 
than during the previous 2-year period. Dairy farms in New 
England and elsewhere in the country have been exiting the 
business at a rate of approximately 5-percent per year. That 
decline is due according to the American Farm Bureau Federation 
not to milk prices but to the increasing age of farmers, the 
unwillingness of children to take over the business of dairy 
farming, and the attractiveness to farmers of market prices for 
their land.
    Our economy has created enormous opportunities and 
alternatives for dairy farmers and their families. There are 
many among us who believe that this represents progress and is 
the intended result of a prosperous capitalist economy rather 
than a case for continued government intervention.
    What the Northeast Dairy Compact has done is benefit a 
handful of very large farmers who receive by far the lion's 
share of payments from the compact premium. But this marginal 
benefit has come at the expense of consumers who have paid $85 
million more for milk than they would have paid without the 
compact and at the expense of the dairy industry as a whole.
    In summary, the dairy industry is complex and so are the 
issues surrounding it, but the solution does not have to be 
complex. I believe that Congress should not expand the dairy 
compacts to additional states and should allow the Northeast 
Dairy Compact to sunset on schedule. We need to move to a 
transparent and simple pricing system for raw milk in which the 
users of that product compete in the market place for the 
product and pay the price that the market will bear.
    My vision for the future of the industry is quite clear. I 
see a vibrant and growing industry. I see technological change 
and innovation reducing cost to consumers. I see product 
innovation and marketing new products, attracting more 
consumers and increasing their consumption of dairy products. 
And finally I see Suiza Foods 18,000 hardworking and dedicated 
employees have a reason to fill secure about their futures and 
excited about their industry and the opportunities to creates 
for them and their families. We can make this vision a reality, 
but we need your help in creating a playing field that is not 
constrained by the heavy hand of government regulations.
    Like every other successful industry in our country, we 
need market forces to drive supply and demand and set prices 
for the raw materials we use in our business and we need 
Congress to have the wisdom and courage to take a stand and 
seek market oriented solutions which address the needs of all 
constituents in our industry, our dairy farmers, our dairy 
processors and our consumers. Thank you very much.
    [The prepared statement of Mr. Engles can be found in the 
appendix on page 150.]
    The Chairman. Thank you very much, Mr. Engles. I allowed 
you to continue beyond the red light for awhile because it is 
important to complete your thoughts, but to the extent that 
each of you are able to stay within the 5-minutes or a little 
bit of leeway, we would appreciate that. Mike, it is good to 
have you here today, always a fount of common sense from 
Indiana, which I know you will share with this committee. Mr. 
Yoder.

STATEMENT OF MIKE YODER, PRESIDENT, INDIANA PROFESSIONAL DAIRY 
                 PRODUCERS, MIDDLEBURY, INDIANA

    Mr. Yoder. Thank you, Mr. Chairman. By way of introduction, 
I would say that my comments today are, as you asked to be, 
presenting what we view as the status of the dairy industry, 
but also my comments represent not just my views but my entire 
board of directors, and they have okayed my comments today. 
Nonetheless, I am the only one here today to take the heat.
    From our view, dairy farming has been one of the United 
States agriculture's bright spots, especially the last 2-years, 
which have been great in terms of prices received and because 
of low feed prices pretty good profits. We believe that for the 
most part dairy farmers are operating from very healthy 
financial positions and are well situated to deal with a short 
period of low prices. Although some would say that the current 
prices are disastrous, I guess I would differ with that point 
of view.
    If we examine the current low milk price compared with some 
actual costs of production, I can demonstrate that the two 
numbers are very close together for most dairy farmers. For the 
year 2000 on my farm, we are projecting that our cost of 
production will be in the neighborhood of $13.45 per hundred 
pounds of milk produced. This correlates well with data from 
universities that benchmark these types of cost production. 
They indicate a range for my dairy farm to be somewhere between 
13.20 and 13.60. As near as I can determine, our price for milk 
that we will receive for January's milk will be approximately 
12.50 to 12.75 per hundredweight.
    In addition to that mailbox price, we will add on average 
another dollar per hundredweight through the sale of surplus 
dairy cattle. So although the gross dollar income that we 
expect to receive in January will be between 13.50 and 14.50, I 
have here that while it is not as much fun as the $18 we got 
last year, it is still a far cry from disaster for our farm and 
I think for most farms.
    The last 2-years, the industry has experienced a 
significant volatility in prices which is something I think we 
are not accustomed to managing in the dairy industry. I do 
believe, however, that dairy farmers can learn to manage a more 
volatile market with a few provisions. First of all, I think 
confidence in the futures market that has recently been 
developed needs to be restored. It is our perception that last 
year, some of the volatile, the dramatic swings in price were 
the result of some inaccurate reporting of stocks. And I think 
that we need to somehow improve that reporting of dairy 
inventories.
    I think expansion of the Dairy Options Pilot Program would 
be helpful as well. I know that in my particular case, we are 
going to take advantage of that program this winter. Perhaps 
some of the volatility has already been taken out or has been 
taken care of with the new Federal orders structure although I 
really do not know because nobody has really received a milk 
check from this new structure yet and so I think it is a little 
too early maybe to make that judgment.
    Also, we are a little concerned about the rumor of changing 
the nature of the support price to one that is tied to a cost 
of production. We are very much opposed to anything like that. 
In Indiana, dairy farmers believe that a support price more 
closely reflects a very low safety net. Closely related to 
dairy prices is the issue of dairy imports. Over the last year, 
we have seen significant amount of imports, an increase in 
imports, a number of these imports are used for cheese 
production. And a number of these imports are imported that are 
not classified in such a way that they are subject to any 
import quotas. So we are concerned that the United States has 
become the sponge of choice when there is a need to soak up 
surplus dairy products produced elsewhere in the world.
    During times of excess production in the U.S., we do not 
believe it makes sense for the United States government to be 
purchasing surplus dairy products, domestic dairy products, 
especially cheese, that are manufactured using foreign-produced 
surplus dairy components. This amounts to using our tax dollars 
to help solve other countries' dairy surplus problems.
    I would close with just a comment on dairy compacts. In the 
state of Indiana, we took a look at that last year. We had a 
committee that represented dairy farmers from across the state. 
We did not like what we saw. We felt that if the dairy compacts 
were allowed to expand, that the dairy industry in Indiana 
would be--that would be a detriment to our industry. Our 
conclusion was we would like to see the dairy compacts die or, 
at least, at the very least, contained to where they are now in 
the Northeast. Thank you.
    [The prepared statement of Mr. Yoder can be found in the 
appendix on page 159.]
    The Chairman. Thank you very much for your testimony. Mr. 
Wilson.

 STATEMENT OF JOHN WILSON, CORPORATE VICE PRESIDENT, MARKETING 
 AND ECONOMIC ANALYSIS, DAIRY FARMERS OF AMERICA, KANSAS CITY, 
                            MISSOURI

    Mr. Wilson. Thank you and good morning, Chairman Lugar and 
committee members. My name is John Wilson. I am corporate vice 
president of Marketing and Economic Analysis at Dairy Farmers 
of America. I am speaking on behalf of the 24,200-dairy farmers 
who own our cooperative. DFA is a dairy cooperative that is 
owned strictly by dairy farm families. Our purpose is to market 
all the milk produced everyday by our members at a fair return. 
DFA's owners operate dairy farmers in 45-states and will 
produce about 21-percent of the U.S. milk supplied during the 
year 2000.
    DFA is structured to assure dairy farmers control the 
organization. To ensure that the cooperative serves its local 
members, DFA maintains a grass-roots structure made up of seven 
geographic areas. Each area's marketing strategies and policy 
development is set up and controlled by an area council made up 
of dairy farmer members who are elected by the area's farmers. 
Each area council elects representatives to the corporate board 
which oversees the policy development and direction of DFA. To 
ensure even more grass-roots participation, each area council 
has district leadership, delegate and resolution structures 
that allow for many voices to contribute to the direction of 
their cooperative.
    On behalf the members of DFA, I want to express my 
appreciation for the action Congress took to correct the 
Federal order final rule. As you recall and as has been 
mentioned earlier today, USDA did attempt to lower dairy farm 
income by lowering Class I differentials that processors are 
required to pay dairy farmers. This action was reversed by 
Congress with the passage of the Consolidated Appropriations 
Act of 2000. Congress sent a clear message that it was not 
their intent to lower farm income when it called on USDA to 
reform Federal orders.
    DFA strongly supports Federal orders for three basic 
reasons. One, Federal orders establish minimum farm prices. 
They assure consumers of a steady supply of fresh milk and they 
provide for orderly marketing. An unregulated milk market would 
be extremely disorderly with investor owned processing plants 
taking advantage of dairy farmers during times of excess 
supplies. Federal orders cannot completely solve the problem, 
but they do play a major role in equalizing the imbalance of 
bargaining power between producers and purchasers of milk. For 
these reasons, DFA strongly supports Federal orders.
    The economic environment in which today's dairy farmer must 
operate is a tough one. Price volatility is the name of the 
game. Within the last 2-years, the Class III price has been as 
high as $17.34 and as low as $9.63 back in December of 1999. 
The last time the Class III price was that low was July of 1978 
which is over 21-years ago. So obviously dairy farmers are not 
very happy about current price levels.
    Cheese and nonfat dry milk is currently trading at or very 
near the price support level. Without our dairy price support 
program, it is likely that cheese and nonfat dry milk would 
fall significantly to lower levels. Some would say we should 
let our dairy prices fall to world levels and thus become 
competitive with the world trade.
    Currently the world price for milk used to produce butter 
and nonfat dry milk is calculated to be $7.03. The comparable 
price for milk used to produce cheese is $6.68. I cannot 
imagine the impact on our commercial dairy industry if our 
prices were allowed to go that low. The safety net provided by 
our dairy price support program is real. We strongly advocate 
its indefinite continuation.
    DFA and others will be asking Secretary Glickman to modify 
the make allowance used in the price support calculation to 
equal the effect of make allowance in the Federal order prices. 
Today if you calculate the new Federal order Class III price 
using the commodity prices established under the price support 
program, the resulting price is $9.74 per hundredweight, not 
the 9.90 that Congress has mandated. It would be only fair that 
Secretary Glickman make the appropriate adjustments to the 
price support make allowance to reflect the intent of Congress 
which is to floor the price of milk to dairy farmers at $9.90.
    The Dairy Export Incentive Program is a very important tool 
for the dairy industry. Without this benefit, our dairy farmers 
cannot afford to export their product in the heavily subsidized 
world trade. If we expect our dairy farmers to be players in 
the world dairy trade, we must continue to maximize the use of 
the Dairy Export Incentive Program.
    Another issue of concern involving world trade deals with 
cheese standards of identity. We understand the National Cheese 
Institute may petition the United States Food and Drug 
Administration to allow the use of imported milk protein in the 
manufacture of domestic cheese. Like other dairy commodities, 
the world case in price is well below our price due to foreign 
subsidies. As a matter of fact, the world price is so low, 
there is essentially no case in produced in the United States. 
The quantity of imported foreign milk protein would directly 
displace milk produced by the U.S. dairy farmer. This would be 
a tremendous slap in the face of the farmer if FDA approves the 
cheese processor's request.
    Governmental intervention is important to assure dairy 
farmers get a fair and equitable price for their product. 
However, the Government cannot provide dairy farmers with 
everything they need. They need market security. They want to 
control their own destinies. They are fearful they will be 
swallowed up like the poultry farmer who has become a piecemeal 
worker. They look at their neighbors who used to raise hogs and 
no longer have the ability to compete with the vertically 
integrated corporations which control the pork industry today. 
They see the beef industry controlled by a handful of buyers.
    These fears have caused dairy farmers to create our 
cooperative called Dairy Farmers of America. Our cooperative is 
the farmers' answer to a quickly consolidating industry that 
threatens the livelihood of dairy producers and their future as 
independent business people. As we look around other segments 
of agriculture, we see significant vertical integration from 
the processor back toward the farmer. Dairy farmers use DFA to 
vertically integrate from the farm toward the consumer. This 
gives them market security and perhaps a bigger share of the 
consumer's dollar.
    We believe the United States needs a secure domestic food 
supply and the best source for that food is from the 
independent business people that we call farmers. We are doing 
what we can to perpetuate the farming tradition that has made 
this country the best place to live in the world. On behalf of 
our over 24,200-dairy farmer members of DFA, I thank you for 
your time.
    [The prepared statement of Mr. Wilson can be found in the 
appendix on page 164.]
    The Chairman. Well, thank you for coming, Mr. Wilson, and 
for that testimony. Mr. Vanderstelt.

STATEMENT OF DENNIS VANDERSTELT, WESTERN STATES DAIRY PRODUCERS 
                 TRADE ASSOCIATION, KUNA, IDAHO

    Mr. Vanderstelt. Mr. Chairman and members of the Committee, 
thank you for this opportunity to appear before you today to 
discuss dairy policy with you. My name is Dennis Vanderstelt 
and I operate a dairy in Kuna, Idaho, 20-miles south of Boise. 
I appear before you today on behalf of the Western States Dairy 
Producers Trade Association and the Idaho Dairymen's 
Association.
    Western States is an organization of ten western dairy 
producer organizations which came together in May of 1996 for 
the purpose of identifying mutual problems and finding common 
solutions. Our membership which represents approximately 35-
percent of U.S. milk production including all three dairy 
producer groups in California--Western United Dairymen, Milk 
Producers Council and California Dairy Campaign--and then dairy 
producers of New Mexico, Idaho Dairymen's Association, Oregon 
Dairy Farmers Association, Texas Association of Dairymen, Utah 
Dairymen's Association, and Washington State Dairy Federation. 
In addition, we have been working with United Dairymen of 
Arizona. We actively promote a competitive, market driven and 
price discovery system for pricing milk.
    I also represent the Idaho Dairymen's Association which is 
at trade organization that represents all 932-dairymen in the 
state of Idaho. The industry in Idaho has grown in the double 
digits for the last 5-years and will continue this pace if the 
atmosphere continues to be positive for the dairy industry. 
Cheese is the main use of milk in Idaho, accounting for 
approximately 90-percent of utilization.
    We need to ask why do we need to have dairy policy? The 
nature of our product determines that we should have an orderly 
marketing system. The shelf life of most dairy products is 
short because of our product is perishable. We would also be in 
trouble if there were not the mechanism for uniform testing and 
pricing of the components of milk. There also is the need for 
price transparency in our industry. Producers need to be 
assured that they are getting the same basic price as everyone 
else and processors need the assurance they are paying the same 
price as their competitors.
    Three things have made our industry successful in the past: 
the Federal milk marketing orders, the coop system, and the 
increase of milk production per cow, which has doubled since 
1970.
    Diary looks at some of the other agricultural commodities 
and is thankful that we are not vertically integrated, but the 
main reason that the dairy policy and the Federal order system 
needs to be maintained is to assure an adequate supply of milk 
for the consumer. You can go into any supermarket and most 
convenience stores and get your supply of milk at a reasonable 
price. The price, by the way, is usually below soft drinks, 
juices and bottled water, our competition in the marketplace. 
Market forces are driving the price for milk on the farm. We 
are truly in a supply and demand market. With only 1-percent 
overproduction, we see prices that fall dramatically.
    At the last meeting of the Western States several policy 
positions were adopted. First, we are in favor of national 
programs, not regional programs. Second, we believe that price 
stabilization such as the support program needs to stay in 
place. Third, we believe that the market access program such as 
the Dairy Export Incentive Programs need to remain. Fourth, we 
are opposed to direct payments to producers.
    What policies do we want? We need the Federal order system 
to continue but would like some corrections in the Class III 
and IV formulas. This should happen in the next several months. 
The Federal order system does not create surplus milk, nor 
discourage privately owned cheese companies from locating in an 
area. Idaho is proof of this. Order 135 was established in the 
early 1980s. Major cheese companies 10-years later did a major 
expansion in Idaho. They could have located in Montana but did 
not because it does not have a Federal order. However, they did 
come to Idaho instead.
    There should also be a mechanism to stabilize our market. 
The price support program now at 9.80 should be left in place. 
The cost of this program is very small to the taxpayers. In 
fact, the GAO scored it at zero cost when Congress extended the 
program until 2001. Most of the time it is far below the price 
of milk, but in times such as these it helps stabilize the 
market. Without the price support system, the volatility in the 
marketplace would be even greater.
    There are also needs to be a way that the industry can 
access the world markets at prices lower than our domestic 
prices. DEIP has helped enhance our markets. We would like it 
to remain in place. In fact, if the direct government payment 
of 125-million was added to the DEIP, it would at the present 
bonus price of $690 per metric ton of cheese just about use up 
the surplus of cheese in the market. The DEIP program also 
helps with the marketing of dry milk powder which is used in 
most areas as a balancing product. We have our work cut out for 
us.
    What policies do we not want? Direct payments to producers 
that are unfair and ineffectual in helping producers are a 
waste of money. Put the money where it will enhance our market 
such as DEIP program. Under the present distribution, a certain 
Midwestern state produced 14.5-percent of the milk last year, 
but received 22-percent of the $220 million Market Loss 
Assistance Program payments. Is this fair or is this suggesting 
that the western dairymen are a different class of dairymen?
    In Idaho, virtually all of our dairies are family owned and 
operated. Some are large; some are small. But this is America.
    The last issue is trade. Let me ask you is there greater 
danger to opening our markets than there is to expanding 
exports? All you have to do is look at some of the other ag 
products in our country and you will have to say emphatically 
yes.
    Should the dairy industry export more? It has to be viewed 
as an additional market. However, it is a market that says we 
can only sell at an amount that is less than our domestic 
price. We still have reservations about fairness in trade and 
are unwilling to increase our production just to become 
exporters. We are not willing to export at a loss. The third 
world countries would like to develop their own agriculture. 
The question is how do we compete without lowering our domestic 
price below the cost of production? It is our belief that if 
our companies are given a chance to develop foreign markets, 
our industry can find ways to meet the lower prices demanded 
but only if the world is truly a market price and not a dump 
price from subsidized product.
    If some of the major countries like China, Russia, India 
and all of Indonesia decide to import rather than develop their 
own dairy industry, then U.S. dairy producers need to be ready 
to fill those markets. Once again, leave the DEIP program and 
as the opportunities present themselves, we can supply the 
product.
    The other side of this equation is imports. This is 
important. Do not trade away our domestic dairy industry for 
some high tech considerations. Do not allow cheap imports to 
ruin our industry. If in the trade negotiations the imports of 
dairy are trade for something else, then the domestic industry 
will have to shrink. The economic benefits derived from the 
dairy industry will shrink and rural America will suffer again. 
We have seen this happen in the sheep industry. Do not do it to 
the dairy. This is not positive for our country. If we can 
restrict imports to the current levels, then our industry will 
survive and will grow.
    In closing, just let me say that without these dairy 
policies, I probably would not be here. The dairy industry 
would be a fraction of what it is now and we would be importing 
far greater amounts of dairy products. Without government 
policy, we would have far fewer farmers and far greater imports 
in all areas of agriculture. Yet U.S. consumers spend less on 
food as a percentage of their income than any country in the 
world. This is not an accident, but the result of many years of 
strong government policies that have maintained a healthy and 
efficient agriculture that is the envy of the world. Thanks 
again for letting us share with you.
    [The prepared statement of Mr. Vanderstelt can be found in 
the appendix on page 170.]
    The Chairman. Well, thank you very much for coming, Sir. We 
appreciate your testimony. Mr. Hoover.

 STATEMENT OF GORDON HOOVER, DAIRY PRODUCER, GAP, PENNSYLVANIA

    Mr. Hoover. Thank you, Mr. Chairman. In school, I failed 
more tests and questions because I failed to listen to the 
instructions. So I hope to be done before that red light comes 
on. Good morning. My name is Gordon Hoover. I am from Lancaster 
County, Pennsylvania. I am a dairy farmer. My family and I milk 
120-cows. I serve on the board of directors of Land of Lakes, 
the second largest dairy cooperative in the country, and I am 
here today representing National Milk Producers Federation.
    First of all, I would like to say that we believe that 
USDA's final rule has complied with the congressional directive 
in the farm bill. Moreover, we believe that USDA has 
established a solid framework for the future of the Federal 
order system, one that preserves the elements of the existing 
system that historically has served consumers, processors, and 
producers, and one that also makes significant changes to 
reflect the realities of the marketplace in the future. It will 
take time to assess all the impacts of these changes and we are 
hopeful that we can allow this system to function without any 
further tinkering.
    Three other dairy policy issues I would like to mention are 
continuation of the Dairy Price Support Program, proposed 
changes to the U.S. cheese standards, and continuation of the 
DEIP program. We believe that the Dairy Price Support Program 
needs to be in place to act as a safety net for dairy 
producers, especially in light of the catastrophic farm prices 
such as were experienced by the pork producers in recent times.
    We feel that the current support level of 9.90 per 
hundredweight will accomplish this while not encouraging any 
production increases. We urge this committee to endorse the 2-
year extension of the Dairy Price Support Program as outlined 
by Secretary Glickman in the administration's proposed farm 
plan for this year.
    Another threat to our dairy economy at the present time is 
a proposed change to the U.S. cheese standards that would allow 
the use of dried milk protein concentrate in the production of 
cheese. Due to insufficient quotas and tariffs, this could 
displace billions of pounds of U.S. produced milk with highly 
subsidized foreign imports causing depressed farm prices.
    Lastly, we encourage the continuation of the DEIP program. 
National Milk certainly supports all efforts to reduce 
international dairy subsidies since they grossly distort the 
world market and depress world prices. However, the DEIP 
program allows the U.S. dairy to compete in a limited way with 
the much more extensive support subsidy practices of some of 
our export competitors.
    Finally, Mr. Chairman, I would like to make two 
observations as to how we in the producer community are 
preparing and looking at the future dairy policies. First of 
all, a larger percentage of dairy producers than ever before, 
about 84-percent now, mark their milk through farmer owned 
cooperatives. I believe by working together within our coops, 
we can hope to balance the power and the marketplace of multi-
national corporate dairy produced processors and retailers. The 
marketing power of the giant conglomerates of the world needs a 
counterbalance in the form of strong healthy dairy cooperatives 
owned by farmers for the benefit of farmers.
    Second, National Milk Producers has taken the lead in 
sponsoring a new initiative, the Dairy Producer Conclave, to 
refocus the energies of the dairy producers and find areas of 
agreement within our community. We have arranged five regional 
grass-root sessions this spring to receive input on issues of 
importance to the industry such as animal health, environment, 
economic policy, product standards, trade and food safety. 
After the regional sessions, our steering committee of national 
dairy leaders will consider the input we have received and 
attempt to build a consensus on issues for the future.
    With that, I would like to thank you for the opportunity to 
testify today and I would be glad to answer any questions.
    [The prepared statement of Mr. Hoover can be found in the 
appendix on page 174.]
    The Chairman. Thank you very much, Mr. Hoover. Mr. Gorder.

 STATEMENT OF RICHARD GORDER, WISCONSIN FARM BUREAU FEDERATION 
             BOARD MEMBER, MINERAL POINT, WISCONSIN

    Mr. Gorder. Thank you, Mr. Chairman, members of the 
Committee, for the opportunity to appear and to testify before 
you today. I am Richard Gorder, a dairy farmer from Mineral 
Point, Wisconsin. I am by today's standards a small dairy 
farmer and when I say small, I mean by operation size, not 
necessarily stature, farming 200-acres and milking 50-cows. I 
am also a board member of the Wisconsin Farm Bureau Federation.
    I am like thousands of dairy farmers in Wisconsin who are 
faced with the decision of modernizing, expanding my dairy 
operation, or exiting the business in the next few years. I 
started dairy farming in 1979, rented land and facilities until 
1988 when I bought my current farm. In 1979, I was one of over 
46,000-dairy farmers in the state of Wisconsin. Today, a little 
over 20-years later, less than 23,000-farmers remain. Wisconsin 
continues to lose 3- to 4-dairy farmers a day, up to 1,500-per 
year. Wisconsin loses more dairy farmers in 1-year than most 
states have in total.
    As I decide on how to update my dairy operation, issues 
such as land base, facilities, technology, and financing are 
all issues I must consider. One factor that should not be part 
of my planning process is how the Federal dairy policy will 
impact my business. Mr. Chairman, I am not a dairy policy 
expert and if most are honest, few are. After years of debate, 
today's dairy policy continues to be plagued by regional bias 
and politics. In 1996, Congress ordered Secretary Glickman and 
the USDA to reform and to modernize the depression era Federal 
milk marketing order system. Farmers across the Midwest finally 
held out hope that the antiquated milk pricing system would be 
scrapped and a new marketing order system would take into 
account today's technologies and transportation advances.
    When the USDA reform hearings reached Wisconsin, over 500-
dairy farmers attended, more than all of the other hearings 
combined. This is important, Mr. Chairman, as marketing order 
reform has become more than just a business issue. It has 
become an emotional issue across the Midwest. Farmers have 
become apathetic and cynical as to whether reform would prevail 
over politics, whether government had the ability to bring 
equity and fairness to the industry. Last spring, the USDA 
unveiled its long-awaited order reforms. We in Wisconsin were 
not overjoyed by the modest reforms but realized that they were 
a small yet positive move towards a more market oriented 
pricing structure.
    Throughout the previous year, the USDA heard opposition 
from southern and eastern states to the intended proposal. So 
the USDA diluted its original modest reform to what eventually 
became the final rule. In the fall of 1999, farmers and coops 
across the country voted on the reform package and by an 
overwhelming vote, accepted the final rule. At that time we 
were to see implementation of the final rule that would 
consolidate the number of marketing orders and would bring 
modest changes to the old Class I differentials that price milk 
using Eau Claire, Wisconsin as a price basing point. We would 
also see the sunsetting of the price fixing scheme called the 
Northeast Dairy Compact. However, in November of this past 
year, regional politics prevailed.
    Members of Congress took it upon themselves to overthrow 
the USDA's final rule that had been voted on by farmers and 
their coops and instead imposed their own reform that was 
little different than the system that Congress had originally 
ordered to be changed. In doing this, Congress totally 
disregarded farmers' rights when they mandated the new 
marketing order rules without allowing farmers their rights to 
vote on these reforms as stipulated by USDA's own rules.
    Mr. Chairman, the question is now where do we go from here? 
First, I hope that you and the Committee have the resolve to 
help the dairy industry into the 21st century with an inclusive 
comprehensive policy that knows no regional barriers; to 
understand and accept that milk will be produced where it can 
be most economically produced and where there is the 
infrastructure that can service, process and deliver the 
product; and most importantly to create a policy that will 
allow a dairy farmer to profit because of their ability, not 
because of where they live.
    To achieve these goals, I believe that we need to have a 
policy that has a single nationwide Class I pricing structure, 
known as national pooling, and uniform rules that regulate the 
manufacturing industry or uniform make allowances. Only then 
will we be able to move beyond the regional price distortions 
and the temptation of politicians to manipulate the system. If 
this cannot be accomplished, I think Congress should consider 
total deregulation, a position that has been endorsed by the 
membership of the Wisconsin Farm Bureau Federation.
    Members of the Committee, please let this hearing be the 
beginning to meaningful change. Mr. Chairman, in all due 
respect, I trust that this hearing is genuine and not just held 
as a gesture to appease the Senators from the Upper Midwest. 
Mr. Chairman, there are many challenges that need to be 
addressed that can help all farmers across the country. The 
need for Congress to continue to work on developing trade 
dialogue that fosters free, fair and open trade; the need to 
continue to examine tax reform issues that would include risk 
management strategies; and a need to address environmental 
regulatory issues that threaten every farmer today.
    Mr. Chairman, Members of the Committee, thank you for the 
opportunity to come before you today.
    [The prepared statement of Mr. Gorder can be found in the 
appendix on page 182.]
    The Chairman. Thank you very much for your testimony. Mr. 
Bok.

  STATEMENT OF WAYNE BOK, DAIRY PRODUCER, GEDDES, SOUTH DAKOTA

    Mr. Bok. I too want to thank you, Chairman Lugar, and other 
members of this committee for allowing me to participate in 
this hearing. I am Wayne Bok of Geddes, South Dakota. I own and 
operate a dairy farm in south central South Dakota as well as 
serving as president of the Associated Milk Producers, 
Incorporated [AMPI]. AMPI is a Midwest dairy cooperative 
representing 6,500-members in seven Midwest states.
    Before driving to the airport yesterday morning, I helped 
milk my cows and while I am gone my sons will milk our 80-herd 
of Holsteins. Statistics define my Midwest dairy as average. I 
define our dairy as the sum of all I have worked for the past 
34-years. When I began dairying, I milked 20-cows using what is 
now considered antiquated equipment, but though milk prices 
fluctuated, there was always a strong support price. And as a 
Midwest dairy farmer, I was milking in America's dairyland, 
marketing through our hometown coop.
    I would not call my early years of milking the good old 
days, but it is important for you to know where we have been in 
this industry before discussing the future. Today I milk 80-
cows and that is not enough to support two sons and their 
families. To add value to my milk, I am marketing through a 
dairy cooperative which moves dairy products up the market 
chain.
    If the next generation of my family wants to milk for 
another 30-years, we must invest in our family business. Before 
we invest in state-of-the-art dairy facilities and technology, 
we need state-of-the-art dairy policy under which I can operate 
a multi-million dollar business. You cannot operate a 21st 
century dairy with depression era dairy policy.
    U.S. dairy policy must catch up with the dairy industry. 
The scope and size of today's dairy farms and cooperatives 
illustrate my point. We are moving from regionally based 
dairying to the national and international scene. Today I am 
competing with dairy farms on both U.S. borders for cheese, for 
nonfat milk and for butter markets. In coming years, I may be 
competing with dairy farmers on both sides of the ocean. We 
face an environment of accumulated change accelerated and 
caused by economic globalization, market volatility and intense 
competition. We need to leave regional mind-sets and move to a 
national approach for dairying, marketing and policy.
    The dairy policies passed by Congress last fall merely 
added another building block to dairy's growing domestic 
barriers. Efforts to bring rational reform to dairy policies 
failed as regions of this country that benefit from the status 
quo continue to block those reforms. Regionally based dairy 
policies such as Federal milk marketing orders and dairy 
compacts are destructive.
    How can I compete internationally when I am not allowed to 
compete domestically? In a country where California cheese can 
end up in a Minnesota cheese sauce plant or Iowa fluid milk in 
a Florida milk carton, it makes no economic sense to build 
trade fences for milk such as we have seen through regional 
dairy compacts. Is this not the very reason that our 
forefathers wanted a unified national economy?
    As congressional leaders, you can tear down these regional 
walls with nationally oriented dairy policies. When developing 
a policy ask yourself does this policy hinge on regional bias? 
And if the answer is yes, then discard that idea.
    Allow me to offer three ideas that work together to yield a 
program that helps every dairy farmer no matter where he milks 
cows. First we need to maintain the dairy price support system 
and for that to be successful, we need to protect our domestic 
milk markets. And we also, I think, need to manage our 
country's milk supply. We all know policy debates are driven by 
economic backdrop. With mounting milk surpluses and subsequent 
low prices, our industry is quickly joining other agricultural 
commodities facing depressed prices. We need to think outside 
of that dairy policy box.
    Mr. Chairman and other members of the Committee, dairying 
has gotten to be a big business. Since 1990, the size of the 
average dairy herd is up about 75-percent. Dairy farms are 
changing. Dairy cooperatives are changing. Markets are 
expanding and dairy policy must adjust to this new environment. 
If individual family farms commit hundreds of thousands, even 
millions of dollars, to an on-the-farm business, you need to 
adopt national dairy policies which support these efforts.
    It is time to move beyond regional discriminatory dairy 
policies that divide our nation's farmers and to work toward 
national policies that work for the Nation as a whole. Thank 
you.
    [The prepared statement of Mr. Bok can be found in the 
appendix on page 186.]
    The Chairman. Well, thank you very much, Mr. Bok. You 
mentioned in your testimony a point that others have likewise 
touched upon, and that is if you are going to proceed in the 
dairy business for another generation or two, you suggested you 
would need to make more investments and you already outlined 
the fact that you have a lot of money in your business now and 
this has become greater over the last 10-years. For this 
investment to be rational, I am just curious for many of you, 
as dairy farmers or as those who represent them, what kind of 
return on capital do you anticipate from that investment? Has 
anyone made a calculation as to the desirability of investing 
in an increased dairy situation as opposed to buying United 
States government 30-year bonds or high tech stocks or various 
other ways in which some people are making money? What is your 
calculation, Mr. Bok?
    Mr. Bok. The average return on my investment in my dairy, 
if I go back and average possibly the last 5-years, I am 
looking at a 5-percent return.
    The Chairman. Five-percent?
    Mr. Bok. Yes. When I compare that to one of my sons who has 
already left the farm and has purchased a small business, he is 
very disappointed if he is not yielding 30-percent.
    The Chairman. 30. He was making 30-percent on the dairy 
business?
    Mr. Bok. No, no, no. That is after he left the dairy 
business------
    The Chairman. I see. Yes.
    Mr. Bok.--and went into------
    The Chairman. I see.
    Mr. Bok. But our farm is yielding about 5-percent.
    The Chairman. Does anyone else have bookkeeping that would 
yield any--yes, Mr. Yoder.
    Mr. Yoder. Last year, we received a little closer to 18-
percent return on our capital, but, of course, that was record 
high years. Some of my research indicates that dairy farmers 
can sustain higher returns on their investment, but they tend 
to be the larger dairy operations, 500-cows and above. 
Especially if you get to the 1,000- or 1,200-cow dairy 
operations, there are some very fine returns at that level. So 
the smaller farms, 50-, 60- or 80-cows do suffer from a smaller 
return on investment.
    The Chairman. Well, how small? I mean can you give any idea 
of how do the 1,000-head do as opposed to the 30?
    Mr. Yoder. I do not have those figures right on top of my 
head.
    The Chairman. Are they out there anywhere? Has someone down 
research?
    Mr. Yoder. Well, you know, you indicated before that when 
you use statistics, they tend to be averages and I think in my 
testimony I indicated that some of the cost of productions that 
I found with dairy herds that are under 80-cows tended to be up 
closer to 15 or $16 per hundredweight. Now I know of farms that 
are less than that, but on the average, and this was from 
Cornell University and I think it included about 200 actual 
farms, their average cost of production was somewhat high.
    The Chairman. Right. So that would mean that their return 
on capital was low.
    Mr. Yoder. Low. I do not know what the range would be.
    The Chairman. But I am still trying to get some benchmark. 
In other words, this is not the only hearing in which this is a 
relevant question. Again and again, people are talking about 
modernizing and staying in the business and what have you. Now 
this implies that there is a gut reaction to what kind of 
return on capital or it does not matter. In other words, you 
have a lifestyle to which you become accustomed and regardless 
of the return you continue doing it because that seems 
preferable to doing something else, but then the question is 
whether public policy should support this or not. Now, thus far 
public policy has supported it.
    In other words, this question is not often raised as to 
whether anybody is making money in this field. Now you have 
testified that you had a good year and you made 18-percent on 
capital. Was this because you are a highly leveraged operation? 
In other words, do you have a lot of borrowed money as opposed 
to equity? Or is that a factor in this situation?
    Mr. Yoder. I think it might be a factor. In our situation, 
we are much more conservative in how we borrow money. Actually 
Farm Credit Services requires me to be somewhat conservative. I 
think they prefer it that way. I do not know. Maybe there is 
other members of the panel here. We tend to measure--I do know 
that some people would use a benchmark of gross profit on cash 
revenues and indicate good dairies can achieve 20- to 25-
percent. Now I know that there are dairymen on this panel that 
are really raising their eyebrows about that and doubt that, 
but it can be done. We have done it on occasion.
    The Chairman. That is their gross margin as opposed to once 
again return on------
    Mr. Yoder. Right. And, you know, Senator, that maybe it is 
just a characteristic of the United States, but I think this is 
probably the only place in the world where a farmer can lose 
money 20-years in a row and still be in business.
    The Chairman. I see. Another possibility. Anybody else have 
a thought about this business, return on capital? Is it a good 
business to be in? Is it something that--obviously all of you 
are in it.
    Mr. Gorder. I would only interject, Mr. Chairman, that I 
think that you would find that the numbers vary as many as 
there are farmers. There are just so many circumstances that 
get weighed into that. I think very few farmers actually sit 
down and have an actual calculation as to what their return on 
investment is. There is just so many more factors that are put 
in place here. And in my modernization plans, believe it or not 
I am not really looking at my return on investment as much as 
realizing that if I do not, I am simply going to have to exit 
the business and that might be a choice.
    The Chairman. And so that probably, as you say quite 
honestly, that is determinative as opposed to a calculation of 
other investments you might make or other returns?
    Mr. Gorder. Correct. But I mean I also understand what the 
interest rates are. So as the interest rates have started to 
move up, I get considerably more cautious and I think that is 
the general trend of consumers across the country
    The Chairman. Because you have to earn more than the 
interest rate.
    Mr. Gorder. Correct.
    The Chairman. Or the capital you are going to borrow?
    Mr. Gorder. Right.
    Mr. Vanderstelt. Chairman Lugar, in Idaho, rather than put 
a number on what the return is, I do know that Bank of America 
right now is offering 85-percent financing on a new large 
dairy. And that would suggest there is a fair amount of 
profitability in it.
    The Chairman. Yes, Mr. Engles, do you have------
    Mr. Engles. Well, I just think as an interesting 
counterpoint that returns to our company, which is a large 
dairy processor on invested capital last year was slightly less 
than ten percent. So the pressure on this industry in terms of 
margins extends really throughout the chain------
    The Chairman. Very competitive industry.
    Mr. Engles.--from the farm through the processing side of 
the business, and partly that is driven by the fact that at 
least in our segment of the industry, it is contracting, and 
that is a difficult environment in which to operate. So we are 
interested in policies that can start allowing the industry, I 
think, as you have heard many of the people here say, to drive 
growth because that solves a lot of problems in the business.
    The Chairman. Let me ask in the area of exports and imports 
which many of you have touched upon, earlier we heard the 
testimony from Keith Collins, an economist at USDA, that costs 
of production in New Zealand and Australia were significantly 
lower on average than they are in the United States, 
significantly lower, said several dollars per hundredweight.
    Now, on the other hand, the EU, the European subsidies, 
were extremely substantial. So you have it with dairy as well 
as with other products in agriculture a dumping from time to 
time and our national policy is to try to blow the whistle on 
this. The future of this is sort of a mixed bag. As Keith 
Collins said, on the one hand, you have dumping by the 
Europeans, but here you have the New Zealanders who have done 
away with all agricultural subsidies, decided as an ag policy, 
their national destiny is being very competitive. And one way 
to be very competitive is to have the Government out of it 
altogether. People simply reduce costs and they become 
competitive.
    And the policies that some of you are advocating are, on 
the one hand, watch the imports that are coming, particularly 
into the cheese situation, because that may undermine us. On 
the other hand, we are not really quite ready to compete 
worldwide given the fact that there are others that do a whole 
lot better. Ultimately, my guess is if we progress in the 
agricultural round with WTO to progressively lower export and 
import barriers, why our competitive situation in the world may 
improve vis-a-vis the Europeans, not necessarily with regard to 
others, and maybe they are a smaller factor. Maybe as Keith 
Collins was suggesting, the overall world market is big enough 
to pick up even all of our production which may not be the most 
competitive. So that is an interesting idea.
    But in any event, this is in play and it is an important 
part of it. Now you have all suggested the continuation of 
DEIP, even acceleration of that. I think Collins pointed out, 
out of 160-billion, 3-billion might be affected in terms of 
these export subsidies. So it is a fairly small issue, but 
nevertheless one that probably others are going to take a look 
at in the world. What are you doing? What kind of direct export 
subsidies are you involved in? We point to the Europeans as the 
worst offender.
    But let us say we got all that chopped back in the due 
course of time, how competitive is our industry likely to 
become? Is it possible without the investment we were just 
talking about in the first question for it to be more 
competitive to begin with, to actually lower costs, or are we 
at a point where the costs that we have are fairly stable, and 
we just have to accept the fact that even if we are not going 
to win the gold medal in the world olympics of this situation, 
why we at least might be competitive with some. Anybody have 
any idea about the future of that competitive situation?
    Mr. Hoover. Mr. Chairman.
    The Chairman. Yes.
    Mr. Hoover. I think one factor and you kind of alluded to 
it is, and Mr. Collins alluded to it, in other parts of the 
country such as New Zealand and Australia, their production 
practices are different. They use grazing so there is a less 
input cost there.
    The Chairman. Yeah.
    Mr. Hoover. In the United States, we have the ability to 
supply as much milk. You increase the price and we will supply 
you as much milk as you want in a minute's notice, whereas in 
those countries, in order to capture more of the world's 
market, they are going to have to start to implement more 
higher cost production practices than we are already at. So for 
them to capture much more of the world market than they already 
have is going to bring them up to a playing field that is more 
equal with our competitive prices.
    The Chairman. Is there any possibility, leaving aside the 
export market, and that is what we look to in many crops that 
we talk about in the Committee, for increasing demand in the 
United States? I think Keith Collins testified there had been 
an increase in production of about 1-percent annually for the 
last 10-years. Certainly there are a lot of advertisements--
some of you gentlemen are responsible for these--trying to 
encourage people to drink more milk. It is healthy for them, 
but this has not moved the market in a dynamic fashion. It is 
what might be called otherwise sort of a mature market which 
the extent of it is fairly well known plus or minus some 
increases in population in our country. But is there any hope 
out there in the industry that people will drink more milk, 
that the demand side of this equation in the United States 
might change? Yes, Mr. Engles.
    Mr. Engles. Well, I think, in fact, there is some hope 
there although clearly the political winds are blowing somewhat 
in a different direction today based on some of the things that 
I heard this morning, but I think that what you find is that, 
first of all, we have growing demand for cheese in the United 
States. There has been a significantly growing demand for 
cheese. One of the reasons I think that, that is the case is 
that Federal policy has, in effect, subsidized the price of 
milk that goes into the making of cheese and that has allowed 
the manufacturers of cheese to invest against their business 
and brands and market their product quite effectively and they 
have done a very good job of that.
    In the fluid milk industry, we have been on the other side 
of that equation. We are the side of the milk shed that 
subsidizes because that is where the Class I premium is charged 
and that is an uphill battle that we have had to face. The 
fluid milk industry is, however, consolidating pretty quickly 
and people have talked about that extensively in the political 
context. But one of the things that is driving that 
consolidation is the need to invest in the business in a 
proprietary way that develops brands, innovates in the product, 
and markets those products to the consumers. And you are seeing 
the larger fluid milk processors because they have greater 
collective resource being able to invest in product innovation.
    Dean Foods, one of the large fluid milk processors has been 
very innovative on the packaging side of the business end, and 
you see small and flavored milk sizes being driven by virtue of 
packaging innovations. Our company has recently introduced 
three new milk products that are fortified with nutritional 
benefits for children, active women and elderly people in the 
northeastern marketplace and we are spending very heavily to 
promote those and develop them as brands and we are seeing 
increased consumption of fluid milk products by virtue of that.
    But it takes that sort of investment in innovation and 
spending in a very crowded consumer marketplace to get people's 
attention, and if we are not able to do that as an industry, I 
think you will see continuing declines in the consumption of 
fluid milk. If we are able to invest back against this 
category, both collectively as an industry and as proprietary 
companies, I think we do have the chance to turn it around and 
get this side of the category growing.
    The Chairman. But you are suggesting you are doing this 
really by differentiating the product, advertising a specific 
attribute to your milk.
    Mr. Engles. Absolutely. You have to differentiate the 
product and you have to market it to people who perceive a 
benefit to that differentiated product.
    The Chairman. Because milk as milk is not going to have 
more than 1-percent, but if you have La Suiza milk or some 
product you have, conceivably you might do better than the 1-
percent growth; is that it?
    Mr. Engles. Well, that is certainly our hope and we are 
investing a significant amount of money to try and establish 
the proposition. I think generic advertising has some benefit 
when it comes to disabusing the public of the notion that milk 
is somehow bad for you and I think that Milk PEP and those 
sorts of things have been very effective in that regard. But in 
terms of building that emotional bond with consumers, I think 
generic advertising has a hard time being effective.
    The Chairman. Yes, Mr. Yoder.
    Mr. Yoder. I would just add to that, that I just recently 
read a statistic on cheese that if we look at American cheese 
consumption, we are only at the midpoint of what Europeans 
consume. So if the American appetite for cheese would be 
somewhat similar to European, I think there is reason to be 
optimistic in that area as well as continued cheese growth.
    You also asked a question about our competitiveness and I 
think there was a good point made that maybe we assume that New 
Zealand will continue to produce at that level and perhaps 
their cost of production will increase especially if countries 
like the United States would insist upon the same quality that 
goes into their production as far as sanitation techniques that 
we are required to produce milk under here in the United 
States. I am not convinced that milk produced in other 
countries is produced under the same sanitation requirements 
that I am required to.
    Also, as far as environmental regulations, which have been 
asked or talked about, I would suggest that I have invested 
substantially more to protect the environment from manure 
spills or just from a nutrient management standpoint than 
perhaps my counterparts in New Zealand. So those are issues 
that affect competitiveness of American dairy product. If we do 
not have any more unreasonable regulations, I guess, I think 
perhaps we can--I am optimistic that we can be competitive in 
time.
    The Chairman. Now Mr. Engles touched upon consolidation in 
a part of his remarks, but let me just carry this in a little 
different direction. As many of you have commented, this is an 
area our committee has been looking at. We had a hearing on 
concentration just last week and we are not unique because 
people are organizing in the pork industry and this has brought 
attention. We found this happened to a greater extent in cattle 
and some of you have suggested even further in poultry.
    But I think Mr. Hoover and Mr. Wilson both commented how 
coops have been an effective bargaining situation for producers 
and that has been suggested. We heard testimony last week, in 
the pork industry to an extent which clearly has not occurred 
there thus far. To what extent is there a reasonably level 
playing field in terms of small producers and people who are 
buying from you? How would you describe the market at this 
point? Is more extensive coop organization required? Are the 
coops the right size and location to do the job? Or does anyone 
have a comment about the bargaining power in America? Mr. 
Wilson.
    Mr. Wilson. I would try that one. We are a large 
cooperative. However, we are still a voluntary organization and 
so just because we today have a large group of dairy farmers 
together does not mean that we necessarily are able to just 
establish the price. And we sell a lot of milk to Suiza in 
partnership with Mr. Engles here, but we still bargin with them 
with an arm's length. We still bargain every month on the price 
of milk. We do not tell him what it is going to be. It is a 
two-way street. We do have more bargaining ability than dairy 
farmers individually certainly, but there is still an option of 
dairy farmers going out, jumping outside their cooperative, 
because really when we bargained for higher prices on Class I, 
we are really differentiating between different uses of milk, 
and saying, yes, we believe Class I milk is more valuable than 
Class III milk. Well, you cannot get that spread very wide 
because you have different utilizations of different milk 
purchasers in the market. The higher utilization guy, the more 
you spread that price, the more advantage he will have 
competitively.
    And so the cooperative, even though we may be large, there 
are still limits on how much price differentiation we can do, 
and consequently a limit on equalization of that bargaining 
power. We still are dealing with the fundamentals of the market 
that milk is produced everyday and the demand and the supply 
rarely match up. The balancing piece of that market, that milk 
market, is I think unlike any other agricultural commodity 
because it is perishable, it is bulky to move, and the fact 
that the supply and demand do not match up very well.
    The Chairman. Well, it is interesting, though, you and Mr. 
Engles, not the two of you, negotiating this month by month, 
but your associates do this sort of thing. And you represent 
24,000-farms, as I understand, which if 111,000 is what we were 
dealing with in Keith Collins statistics, that is almost one 
out of four. It is a pretty big cooperative.
    Mr. Engles. It is a big cooperative, and I think just to 
somewhat amplify on what John said, but also to give you a 
somewhat different point of view, the whole notion of, first of 
all, concentration between on the buy side and on the sell side 
is one that needs to be understood here, and the second thing 
what is the nature of negotiation with respect to price in the 
dairy business today?
    First of all, DFA is a much larger organization than we are 
and we are the largest fluid processor. We represent somewhere 
on the order of 20-percent of all fluid milk in the U.S., but 
fluid milk is somewhere around 30-percent of total milk 
utilization in the U.S. DFA, on the other hand, represents 25-
percent of all milk produced, whether it goes to fluid uses, 
cheese, or whatever. So they are an enormous organization that 
represents, I think, the supply side extremely well in terms of 
price negotiation.
    The other thing that is really important in this context is 
to understand that, by and large, we do not negotiate the price 
in this industry today. The Federal Government, USDA, tells us 
what the price is, minimum price for classes of milk, and to 
the extent there is any negotiation with respect to the price 
is how much more than the minimum am I or other users of fluid 
milk going to pay? So the fear of the users of milk taking 
advantage of producers of milk in terms of long supply is, I 
would say, virtually eliminated by virtue of the Federal 
regulatory scheme.
    On the other hand, when milk is short, you can be certain 
that premiums go up substantially as to do class prices. So it 
is a very interesting dynamic today in milk pricing. 
Negotiation with respect to price is very limited and you have 
powerful players on both sides of the equation. So I think 
concern about balance in this area is unwarranted.
    The Chairman. Let me ask a question of the panel. We were 
discussing in this committee, in fact, we will have a markup 
sometime in the next month on risk management. Some of you have 
touched upon this. Mr. Yoder, you mentioned the forward 
contracting, the pilot options program. This has not really 
been available in the industry. It is something that I have 
been a strong advocate of and supported by many members of the 
Committee who believe that these instruments ought to be 
available to dairy farmers. Many since the pilots have come 
into play have not availed themselves of it because it is 
complex, for the same reason corn farmers, bean farmers find it 
difficult to figure out how to handle puts options or the 
forward contracting process.
    But nevertheless, many farm managers who do this are doing 
better than those who do not. Sort of hope for the Lord will 
provide as opposed to becoming more sophisticated marketers. 
What has been your experience, Mr. Yoder? Are you just getting 
into this business of forward contracting or how does it help 
you as a dairy farmer?
    Mr. Yoder. Well, actually I am a little red-faced because 
as a good dairy manager, I should have contracted last year but 
did not. My experience in talking with other dairymen, there is 
a lot of skepticism in using the futures market. As I 
indicated, last year's violent price swings, that were to some 
degree due to some inaccurate reporting of stocks, I think sort 
of built, I mean increased that skepticism. My particular coop, 
which is foremost, does offer a forward contracting which is a 
little more straightforward and a little easier to understand. 
I guess I should have checked with them to just see how many 
dairymen did take advantage of that last year.
    My suspicion is, is that with time that will be utilized 
more than just using a hedge or purchasing an option. We are 
going to use the option, the Dairy Options Pilot Program, this 
year mainly because I would just like to learn a little more 
about what the connection is between the futures price and my 
mailbox price. And that has been the primary reason that I have 
not utilized those. We have utilized the futures market and 
options hedging for grain sales in the past but just have not 
taken those skills and transferred it to the dairy.
    Mr. Gorder. Mr. Chairman.
    The Chairman. Yes.
    Mr. Gorder. I, in fact, have used the--even on my small-
scale farm--have used the futures. I am not allowed to forward 
contract because of the discrepancies that regulate between a 
proprietary plant and a cooperative. Cooperative can forward 
contract. As we are proprietaries, we are not allowed to. I 
think that is supposed to at least change a little bit or at 
least under some trials, but I have gone into the marketplace, 
or into CME, and purchased contracts for this last fall. And I 
did quite well. I will be honest with you. When I purchased my 
put contracts in end of June when the prices started to 
escalating and I really could not see a good rhyme or reason 
for the reason that the prices were going to the degree they 
were, I thought, you know, this is the time when you lock in 
some prices.
    One of the big problems is that, you know, you have to 
simply look at it as an insurance policy and the idea is that 
you really do not want to collect on insurance policy. You know 
it is nice to get your premiums back, but you cannot look at in 
that respect. Believe me when the prices were where they were 
in July, I would have liked to had my $2,000 back, but as I let 
them mature in October and November, I did pretty well. I not 
only got my money back, but I think you need to continue. I 
think that your dairy option program is so spotty that it 
really does not do much of any good, and I need to do one other 
aspect of this and I need to bring this in. And that brings it 
back to the Northeast Dairy Compact.
    Ask the people in the Northeast have many of those went out 
and bought put contracts. When someone is guaranteed a floor, 
what incentive is there for them to go out and use risk 
management strategies? None. Thank you.
    The Chairman. Well, there would probably be less. Yes, Mr. 
Engles.
    Mr. Engles. Well, markets work when they are large and they 
are trusted and they are liquid. And the market in dairy 
futures is not that today. And I frankly have a hard time 
seeing how it is going to get there until you permit Class I 
buyers of milk to participate in the forward contracting arena. 
It is 30-percent of the market. It is that most immediate part 
of the market, and today from the most recent legislation, 
lower class utilizers of milk are allowed to forward contract, 
but Class I users are not. So if you are getting a blended milk 
check that has Class I utilization in it, and you can only 
forward contract on the basis of lower classes of milk, which 
obviously pull that average down, you will find it almost 
impossible for that forward contract to meet your expectations 
in terms of price. So for these markets to be fully developed 
and used, they have to be open.
    The Chairman. Yeah.
    Mr. Engles. And I think that we can say as a fluid 
processor, we would be active participants in those markets if 
we were able to do so because certainty is important to us and 
our customers and volatility is a very damaging thing for our 
business as well.
    The Chairman. Well, and a lot of discussion has gone on 
today about the volatility of price, and we all know tracing 
December, January, February prices, then through July and so 
forth, if we have this hearing in January and February, it is 
always a pretty dismal time. You know better to have a dairy 
hearing in the summer when the situation has changed. My own 
view, and I always hesitate to get into anecdotal personal 
circumstance in these things, but, you know, our USDA 
economist, Keith Collins, has testified, for instance, that the 
corn price for the coming year, given the overhang of supply 
and general conditions thus far, might very well be somewhere 
in the range of $1.90 to 2.10 a bushel. This is for all prices 
the whole season, which is not very high.
    The LDP is about $1.96 and so that sort of sets the floor 
for the corn farmer, but sort of balancing off of that. Now the 
week before last, in checking with my elevator there, Beech 
Grove, just outside of Indianapolis, I found even given the 
basis situation and so forth that I could get $2.45 for corn. 
So I sold some. Now for those who are not in the farming game, 
they said you do not even have that corn planted yet, quite 
apart from harvested. How do you know that you are even going 
to have something to sell? And that is always the problem of 
forward pricing, but if you have a crop insurance policy to 
cover 65-percent of your crop or 75 or whatever else we are 
reaching for now in that situation, why you know that you have 
got something to sell. So there is sort of a twin situation.
    And 2.45 is different from $1.96 or 2.10 or whatever is 
going to happen. Now, why does not everybody in America go out 
and sell corn at 2.45? In some cases, the basis is different in 
other parts of the country, but my point is that, just as Mr. 
Gorder is pointing out, you notice there are fluctuations. It 
is a volatile market, sort of things change. Now to the extent 
that we can get a more active forward contracting market, and 
your point is well taken with regard to the larger players and 
more of the situation involved in it, we have more 
possibilities.
    But we also have also possibility for people to fail more, 
too. You know what if you are not a sophisticated person up to 
date on the futures markets, puts options, or you just think 
this is ``Las Vegas West,'' or something of this sort, you have 
got a problem. And the whole dilemma of this committee trying 
to help agricultural America through our extensions or through 
professional groups, through coops, anybody, sort of get into 
the ball game is imperative even as we try to keep these 
floors, safety nets, various other situations, that are 
important. Yes, Mr. Wilson.
    Mr. Wilson. I would just like to add a little bit. We 
support at DFA the concept of forward contracting. We have a 
program within our cooperative. Roughly 3-percent of our 
membership participates, which is not a big participation rate, 
but that is getting more interest as time goes along. But I 
think we need to be very careful that we do not rely on forward 
contracting and futures markets as the savior of the dairy 
industry from the producer side, that hogs and cattle and 
grains have had futures markets for a long time, and they are 
probably worse off today than the dairy farmer on average. And 
so while it is a tool, I think we need to be very careful not 
to rely on that tool solely and that we still need Federal 
orders and price supports and all these other issues more 
importantly than we do a futures market.
    The Chairman. Yes, Mr. Vanderstelt.
    Mr. Vanderstelt. And if I might add to that, Senator Lugar, 
you know, my banker knows I am a good dairyman, but he does not 
know if I am a good gambler. And we did the milk futures 
through the fall, summer-fall, and we do a lot of grain 
futures, and we do what you are suggesting, but when you are a 
larger financed operation, you do get asked that question. OK, 
that banker--he knows the numbers, too, and he looks at them. 
And he expects certain performance. He would--like I say, he 
knows I am a good dairyman and when we did the milk futures 
this summer, it is really difficult because what if they do not 
work out and how I am going to explain this? And so there is 
that mental thing to it.
    And I do not know how far we are going to see dairymen 
pursue the futures. There are a lot of them playing with it, 
lot of them did quite well actually this last summer and late 
fall, actually November-December. Several of my neighbors were 
pretty happy through Christmas actually. But there is that 
drawback that can this get me in trouble? But I do like having 
them available.
    The Chairman. Well, I think your point is well taken. I 
would not want to get anybody into difficulty. And I was just 
saying that probably my banker would be happier than I made the 
sale at 2.45 than I was waiting for the LDP to clear it away at 
$1.96 later in the season. I would think that was a healthy 
move to sort of wicket it in. Now the other side of this is the 
crop insurance, you know, so the banker knows that I have got 
something to sell, that I am not out there selling something 
that is not going to be produced. Then he really would be 
worried.
    I think this whole area in dairy in terms of risk 
management is something that the Committee and the Congress 
needs to work with the industry more on so that there are the 
same elements that are available maybe for some other points of 
agriculture. And there may be more available than I know about 
and this is why I am trying to elicit some advice or comment 
from each of you as experts today because I suspect we are 
going to have dairy programs of one form or another. All these 
may go up and down. Congresses come and go and sort of public 
sentiment. But to the extent that farmers are better prepared 
really, whatever these markets are, to meet the volatility that 
we are talking about, why then probably we are better off.
    Well, I appreciate very much your patience. This has been a 
hearing now going on close to 4-hours and you have lasted 
through all of it and we are grateful to you for your 
testimony. As you have other ideas, why please furnish them to 
the Committee. We will keep the record open for a moment or 
more than that, for a day or two, so that Senators who were not 
able to attend who may have questions of any of you might be 
able to submit those and if you can respond to that. Thank you 
again for coming and the hearing is adjourned.
    [Whereupon, at 12:40 p.m., the Committee was adjourned.]
      
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                            A P P E N D I X

                            February 8, 2000

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

                   DOCUMENTS SUBMITTED FOR THE RECORD

                            February 8, 2000

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

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                          FEDERAL DAIRY POLICY

                              ----------                              


                      WEDNESDAY, FEBRUARY 9, 2000

                                       U.S. Senate,
         Committee on Agriculture, Nutrition, and Forestry,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 9:07 a.m., in 
room 328A, Russell Senate Office Building, Hon. Richard G. 
Lugar, (Chairman of the Committee), presiding.
    Present or submitting a statement: Senators Lugar, 
Santorum, Fitzgerald, Grassley, Grams (ex officio), Harkin, 
Leahy, Conrad, Daschle, and Lincoln.

OPENING STATEMENT OF HON. RICHARD G. LUGAR, A U.S. SENATOR FROM 
  INDIANA, CHAIRMAN, COMMITTEE ON AGRICULTURE, NUTRITION, AND 
                            FORESTRY

    The Chairman. This hearing of the Senate Agriculture 
Committee is called to order.
    We appreciated all of the witnesses in our hearing 
yesterday. A number of statements were made by Senators 
preliminary to the hearing and during the hearing, which 
proceeded for about 4-hours, as you will recall. I have no idea 
or prediction of the duration of this hearing today, but it 
will be equally thorough in questioning the witnesses and 
trying to gain information.
    The question has been asked, at least of the Chair--so let 
me try to express this informally--as to what will follow after 
the hearings. And I will consult, obviously, with our 
distinguished ranking member, Senator Harkin of Iowa. But I 
suspect that we will try at least some straw votes of members 
of the Committee as to their disposition.
    Among issues that might be discussed are whether members 
favor the so-called Policy 1A or 1B with regard to dairy, one 
policy being a policy suggested--in fact, more than suggested--
by the USDA last year and countermanded really by action of the 
Congress at the end of the session to go to the status quo or 
the so-called Policy 1B.
    So having heard--and we will hear a lot more today--about 
both of these policies, we will ask whether members have a 
disposition to confirm, change course, or are so divided that 
no consensus appears to be possible.
    Likewise, with regard to the compact issue, there are ways 
that we could proceed there. One would be to authorize more 
compacts, to confirm the status quo, that is, the New England 
situation, or to wind up the status quo, namely, the New 
England Dairy Compact. But that is clearly an issue that is 
before the Committee and that is suggested by these hearings 
and the friendly clash of personalities, States, and so forth 
that we heard yesterday.
    There may be other constructive policies that arise quite 
apart from disposition of the status quo of the past and what 
have you, and some of these were suggested yesterday by 
constructive dairymen who are pointing out sophisticated ways 
in which people are trying to make a living in this business 
and could be assisted by the Congress, leaving aside these age-
old quarrels. So a lot of us are much interested in that 
testimony. Hopefully we will have some more today.
    But in lieu of an opening statement, I thought I would go 
into this monologue to try to at least bring everybody up to 
speed that there was a thought expressed here and there that 
the hearing yesterday and today were simply a gesture by this 
committee to alleviate the panic that ensued when the 
distinguished Democratic Leader and our Republican Leader were 
trying to get the Congress stopped last November. We found that 
very difficult given the number of people that wanted to 
discuss dairy, and we are prepared to do so for several more 
days.
    So as a part of that situation, I was asked to come to the 
floor, make a statement that Senator Kohl in particular and 
other Senators from Wisconsin and Minnesota could hear and 
confirm and commend. And so these hearings we are holding 
promptly as a result of that, as a pledge to that.
    But some have suggested, having done that, that is the end 
of the affair. Not necessarily. It is if the members of this 
committee want it to be, and although I stated yesterday 
candidly my own preferences--and I think they are known--they 
are not determinative.
    So having said that, let me turn to the distinguished 
Democratic Leader who was here at 9 o'clock, let the record 
show, for this important hearing. Tom?

STATEMENT OF HON. TOM DASCHLE, A U.S. SENATOR FROM SOUTH DAKOTA

    Senator Daschle. Well, Mr. Chairman, thank you for your 
leadership and for following up with the commitment that you 
made last year. I well remember those days and remember what a 
vital role you played in bringing the session to a successful 
completion.
    These hearings are valuable, and as you say, your position 
or my position may not be determinative, but your position 
carries a lot of weight, and we are interested in pursuing the 
matter, as you indicated, and I think the manner with which you 
have outlined the way the Committee will address this issue is 
a very constructive one and one that I think we should all 
endorse.
    I did not have the good fortunate to hear the hearing 
yesterday, but I also commend you for your endurance if it 
lasted 4-hours.
    I am one who believes--and it is probably no surprise for 
any of us in my region of the country--that the system is 
outdated, it is archaic, and we do need to address the complex 
array of pricing mechanisms that we have based upon a system 
that was created generations ago. I am one who believes that it 
is time for a national system and that we can't intervene in 
the marketplace unnecessarily and in many cases unfairly.
    I think the time has come for us to create that national 
framework that doesn't benefit one region or the other, that 
doesn't benefit larger producers at the expense of the small. I 
am very hopeful that these hearings, as constructive as they 
are, could lead, as you have indicated, perhaps to a third way, 
a way that would allow for compromise and a way that would 
accommodate the concerns of those in the Northeast and the 
South, but also recognize the unfairness of the status quo.
    So I certainly pledge to work with you, and no one works in 
a more bipartisan and conciliatory manner than the Chairman 
does, and I look forward to a constructive way with which to 
resolve these matters, hopefully this year.
    But, again, I thank you for the hearings.
    The prepared statement of Senator Daschle can be found in 
the appendix on page 272.]
    The Chairman. Well, thank you for those comments. I really 
appreciate that because, as we found yesterday, this is not a 
partisan issue. It became much more sectional or State by 
State. So those are the more difficult issues to find 
consensus, to find majorities.
    We have three panels today: the first, administration 
witnesses, and then two panels, one that will review dairy 
pricing, and the third, do we have a need for a Federal dairy 
policy at all.
    I will ask that in the instance of the administration 
witnesses--and they are Mr. Kenneth C. Clayton, Associate 
Administrator of the Agricultural Marketing Service of USDA, 
accompanied by Mr. Richard McKee, Deputy Administrator for 
Dairy Programs of the Agricultural Marketing Service--that you 
give a summary of your comments in
    Ten-minutes or less, as the case may be, and we follow the 
procedure of 5-minutes for each Senator. If there are Senators 
who wish to be heard again, we will have another round with 
regard to each of the panels.
    With the other panels, I am going to ask, since there is a 
large number of witnesses--and we are grateful that each has 
come, some from a long distance--that each has 5-minutes to 
summarize the comments.
    Let me just make the statement in advance that all of the 
statements will be published in the record in full, so it won't 
be necessary for you to ask permission for that to happen. That 
will occur because we really want a very full record of 
prepared statements as well as the questions and answers.
    So at this point I will ask you to proceed, Mr. Clayton. We 
are very pleased that you and Mr. McKee have come to initiate 
our second hearing.

   STATEMENT OF KENNETH G. CLAYTON, ASSOCIATE ADMINISTRATOR, 
AGRICULTURAL MARKETING SERVICE, U.S. DEPARTMENT OF AGRICULTURE; 
ACCOMPANIED BY RICHARD M. MCKEE, DEPUTY ADMINISTRATOR FOR DAIRY 
 PROGRAMS, AGRICULTURAL MARKETING SERVICE, U.S. DEPARTMENT OF 
                  AGRICULTURE, WASHINGTON, DC.

    Mr. Clayton. Well, thank you very much, Mr. Chairman, and 
good morning. It is indeed a pleasure for us to appear before 
you today. We certainly appreciate your invitation to 
participate in today's hearing.
    Of course, yesterday Dr. Keith Collins, USDA's chief 
economist, testified and provide testimony describing the 
overall situation and outlook for the U.S. dairy sector and our 
dairy farmers. Dr. Collins also briefly touched on the role of 
the Federal Order Program within the larger constellation of 
dairy policy as well as some of the other actions which have 
been taken to support dairy farmers' incomes.
    Today what I would like to do is to address the Federal 
Milk Marketing Order Program in a bit more detail. My remarks 
will briefly describe that program, steps we have taken to 
implement the 1996 farm bill mandate, and to briefly touch on 
some of the anticipated effects of Federal Order Program 
changes on producers and consumers of dairy products.
    Let me start then with the Federal Milk Marketing Order 
Program and perhaps just a bit of perspective on that program. 
Basically, the Federal Order Program is intended to promote the 
orderly marketing of what clearly is a highly perishable 
product, namely, milk. The Federal Order Program I think does 
so by helping to prevent marketplace behavior that might 
otherwise erode the price of milk at the farm gate and 
ultimately drive producers out of business.
    The significance of this protection, of course, depends on 
the relative bargaining positions of dairy farmers and those to 
whom they sell their milk, the number and size of processors 
who are selling milk or bidding for producers' milk, the market 
strength of cooperatives that are selling farmers' milk, and 
other factors come into play, I think, when assessing the 
respective bargaining positions of dairy farmers and 
processors.
    Of course, under Federal orders, the proceeds from the 
sales of farmers' milk are pooled within a market area with an 
average price or value being returned to producers. The prices 
at which processors must account to that pool are based, of 
course, on the end value uses of milk. To allow pooling to 
work, a set of classified prices are established under the 
Federal Order Program. It is important, I think, to note that 
these are minimum prices that processors must pay for milk 
corresponding to its value in several end-product categories. 
It certainly is the case that from time to time, and depending 
on markets, we see premiums that are paid beyond these 
minimums.
    Class I milk, as you heard yesterday and as you already 
know, is the milk which basically goes in the bottle. It is 
fluid milk. It earns the highest minimum price basically for a 
variety of supply and demand characteristics that I think tend 
to make fluid milk more valuable in the marketplace.
    Class II products have somewhat lower minimum prices. Class 
II products are the so-called soft dairy products. They are 
manufactured, but still have a fairly high degree of 
perishability, things like ice cream, yogurt, and the like.
    And then, of course, we have got Class III and Class IV 
manufactured dairy products, things like butter, dry milk 
products, and cheese, which tend to have the lowest minimum 
prices under the Federal order structure.
    Importantly, I think, these products tend to be traded in a 
national market, and because they are more easily stored than 
fluid milk or soft dairy products, they serve really as the 
residual claimant for milk under the Federal Order Program, 
residual claimant for milk that is not going to be used in 
Class I or Class II products.
    Basically it is these manufactured products or the prices 
of these manufactured products then which provide the basis 
upon which these differentials are added to arrive at prices 
for Class I and Class II products.
    As already noted, producers selling milk under a Federal 
order receive a uniform or weighted average price, called the 
blend price, that reflects all the uses of milk in a given 
market area. Thus, under orders, all producers in that order 
area benefit from the higher price on milk that is marketed for 
fluid consumption. At the same time, all producers share in the 
lower prices for milk that is diverted to manufactured 
products.
    Under this arrangement, equity is preserved with producers 
not needing to engage in behavior that may be contrary to their 
interests, such as bidding the price of their milk down to its 
manufacturing value, even though it may be used for fluid milk 
consumption. In the same vein, under Federal order pricing, 
handlers are not in a position to play producers off against 
each other and drive that price down. And as I noted earlier, 
the important caveat there, I think, is ultimately the 
importance of all this does hinge certainly on the respective 
bargaining power of farmers and those to whom they sell their 
milk.
    Let me turn now quickly to the process that we undertook to 
meet the congressional mandate, the 1996 farm bill mandate. As 
you well know, Congress first directed the Department to reduce 
the number of milk marketing order areas--in essence, to redraw 
the geographic boundaries to reflect the larger marketing areas 
in which milk is now sold, distributed, and consumed. And, 
second, I think clearly Congress directed the Department to 
consider changes to the pricing structure which is utilized 
under the Federal Order Program. Both the system of classified 
prices was examined as well as relative levels of Class I 
prices within and between marketing order areas.
    The Department's final decision, which was issued in March 
1999, detailed the changes that the Department thought 
appropriate to the Federal milk order program. Basically, the 
program provided for 11 consolidated milk order areas, down 
from 31. It established a nationally coordinated Class I price 
structure that provided greater efficiencies in milk assembly 
and distribution, also established new methods for pricing milk 
that is used for manufacturing purposes, and made minor changes 
to the classification of milk provisions, as well as 
standardized a variety of provisions and definitions and terms 
that over the years had become somewhat dissimilar across 
orders, and this was an opportunity to true all that up.
    In August 1999, referenda were conducted to determine 
producer approval of the revised Federal milk orders. Dairy 
farmers approved the 11 orders and a final rule to consolidate 
and revise the orders was issued on August 23, 1999, with the 
revised orders to become effective October 1, in compliance 
with legislative mandates, certainly.
    A bit of history intervened, and by November 29th, the 
Consolidated Appropriations Act of 2000 was signed, which, of 
course, required that both the revised orders become effective 
on January 1, 2000, and also that those orders utilize the so-
called Option 1A Class I differentials. The Act further 
directed the Secretary to establish a temporary forward 
contracting pilot program and to hold a hearing on Class III 
and Class IV milk pricing formulas. The Department does expect 
to issue a notice soon on the pilot program for forward 
contracting, and on the just past January 31st , the Department 
put out a notice inviting proposals to be considered at a 
hearing, which we would hope to hold late April, early May on 
the Class III and Class IV pricing issue.
    Finally, of course, on January 1 of this year, the final 
rule was implemented, and the new order program began.
    With that bit of chronology, let me quickly then turn to 
the expected impacts of these changes on dairy farmers, and on 
consumers in particular. More specifically, as requested, I 
will focus on the differences between the Department's final 
decision and milk orders with the so-called Option 1A Class I 
price differentials. And in the interest of time, I will just 
cite a few of the summary impacts contained in my written 
testimony.
    For dairy farmers, the all-milk price across all Federal 
orders is expected to average less than 6-cents per 
hundredweight or about 0.4 of 1 percent higher under Option 1A 
compared to USDA's final decision, between 5-and 6-cents per 
hundredweight. Annual gross receipts, the total rack-up of 
receipts to producers across all Federal orders, are expected 
to average on the order of $107.7 million, or about 0.6 of 1-
percent higher, with the Option 1A differentials than would 
have been the case in the Department's final decision.
    In considering the impacts of milk order changes on 
consumers, we have assumed that all changes in fluid processor 
milk costs and wholesale manufactured dairy product costs are 
passed through immediately to the retail level without any 
changes in processor retail or wholesale retail margins. Those 
margins in the real world will move. Some of them are 
percentage-based, but for purposes of analysis, we have assumed 
an immediate and complete pass-through.
    Accordingly, consumer expenditures on fluid milk products 
in all Federal market order areas combined are estimated to 
average $116.8 million per year higher under the Option 1A 
differentials than under the Department's final decision. This 
is an increase of about 1.5-percent, given average annual 
consumer expenditures of $7.6 billion on fluid milk products in 
Federal market order areas.
    Average annual consumer expenditures on manufactured dairy 
products--the numbers I just cited were for fluid milk, the 
impact in terms of manufactured dairy products across all 
Federal market order areas--are estimated to decrease by about 
$9.1 million per year under the 1A differentials as compared to 
the Department's final decision. To put that in perspective, 
annual expenditures on manufactured dairy products at the 
consumer level total about $9.3 billion, so this decrease of 
$9.1 million in the cost of increased costs to manufactured 
products means for consumers about a 0.1-percent decrease in 
terms of prices paid for things like cheese and cottage cheese 
and yogurt and so forth.
    Mr. Chairman, that concludes my statement. My colleague and 
I will be happy to answer any questions that you or the 
Committee might have. Thank you.
    [The prepared statement of Mr. Clayton, can be found in the 
appendix on page 279]
    The Chairman. Thank you very much, Mr. Clayton.
    Let me ask you, first of all, about the referenda that were 
conducted last August. These were conducted by USDA, and were 
the voters dairy producers in each of the 11-districts? Or how 
were the votes arranged? And were there majorities in each of 
the 11-districts, if that was the demarcation line?
    Mr. Clayton. Well, first, yes, the way that the vote 
actually works is order by order. So in order for the 11 orders 
to pass, that vote had to be a two-thirds super majority vote.
    The Chairman. Two-thirds majority in each of the 11-
districts.
    Mr. Clayton. That is correct.
    The Chairman. How much participation was there by dairy 
producers in that referendum? Was this actively advertised and 
most voted?
    Mr. Clayton. Well, as to the advertising part, I can 
certainly speak to that. The Department itself took great pain 
to try to spread the word far and wide as to what was being 
voted on. Our market administrators, who were located, of 
course, outside Washington and throughout the country, have 
newsletters, have many, many meetings with producer groups, 
will go meet with co-ops or whoever it might be who is having a 
meeting. So a lot of effort was taken to advise producers as to 
what was at stake here.
    The voting process under the Agricultural Marketing 
Agreement Act of 1937 that this program operates under, does 
provide for block voting by cooperatives. Therefore, depending 
on how a cooperative would choose to determine the sentiment of 
its producer members, that would have something to do with the 
role that each individual producer played.
    There were some cases where milk pooled under an order was 
not associated with a cooperative. In those cases, individual 
ballots were provided.
    The Chairman. That is interesting. The cooperatives voted 
and a few individuals.
    Mr. Clayton. That is correct.
    The Chairman. Essentially.
    Mr. Clayton. Yes.
    The Chairman. But, in any case, well over a two-thirds 
majority in each of the 11 situations.
    Mr. Clayton. Yes, Sir.
    The Chairman. You know, I thought this was the case, but I 
wanted to just simply in your own words obtain the case, 
because at least superficially it appeared that USDA's 
compliance with our farm bill of 1996 was accepted and 
supported by producers. Not everybody was pleased by this 
result because, as you pointed out, chronologically, by the 
time the Congress was concluding our activities on November 
29th or thereabouts, what had been approved apparently by a 
two-thirds majority in 11 districts was abruptly disapproved, 
and we went back to something close to the status quo.
    Describe from your standpoint, why was there opposition to 
what you had done? And how could this have been resolved? Or 
perhaps I am asking you to look into the vagaries of 
congressional activity as to what we might have done or might 
not have done. But something that appeared to be moving in this 
direction with this kind of approval, obviously it didn't 
happen. What is your analysis of where the opposition is, where 
the argument is?
    Mr. Clayton. I probably would start, Mr. Chairman, by 
indicating I will not venture into the arena of suggesting what 
the Congress ought to think about on this. But having said 
that, certainly, as you point out, the votes that were taken 
were overwhelmingly in support.
    I would have to note, in fairness, that the alternative to 
supporting it was elimination of the orders. So, clearly, by 
virtue of the record as it unfolded, as you point out, there 
were people who voted in favor but not necessarily were 
enthused about some of the content, at least.
    Clearly, there is also, I think, as you pointed out in your 
opening remarks, there are great differences of view as to what 
the most appropriate pricing structure for dairy ought to be.
    The Chairman. More particularly, it appeared, as I visited 
with dairymen around the country at that time, some said, well, 
we are going to lose a lot in this. And other said, well, we 
are going to gain modestly. But there were winners and losers. 
When you went from the 31 to the 11, despite the fact that the 
conglomerate majorities in each of the 11, within this there 
were some subgroups who said under the 31 we did better. So, 
presumably, they contacted their local Members of the House or 
their Senators and said, you know, you have got to sort of 
stick up for us, leaving aside whatever USDA was doing in these 
referenda. And in a democracy all these factors are brokered 
in.
    But, in any event, as you know, I publicly commended USDA 
for work that you had done because it was consonant with what 
we had done in our farm bill. The dairy thing was the very last 
thing decided in the Congress.
    But, for the moment, why, we are back to square one. And 
prior to Senator Lincoln and Senator Conrad coming in, in my 
dialogue with my colleague, Senator Daschle, I indicated that 
at some point in the near future we will ask committee members 
what their own views are with regard to 1A and 1B or some 
other, 1C or D or so forth, as to how we proceed. But that is 
why I wanted to elucidate these thoughts from yourself.
    Now, you are making the comment, after all is said and 
done, however, and you have got down to 11-marketing-orders and 
simplified this thing, essentially you believe--well, stated 
another way, the action that Congress took to adopt the 1A, the 
status quo, resulted in about $107 million more revenue for 
dairymen and about $116 million more expense for consumers. 
That is sort of the nature of it, the 1-percent shift in terms 
of the volume of what is being done. Is that a fair 
characterization of the impact?
    Mr. Clayton. Yes, I think it is, Mr. Chairman, and as you 
point out, obviously the money to be provided to dairy 
producers has to come from somewhere, and we are talking about 
basically the marketing of a product to consumers. Clearly, 
that money--------
    The Chairman. I would have to trace back, but it seemed to 
me Keith Collins yesterday intimated he had done some 
computations of all of this and has come to conclusion that 
dairymen would have been, say, $100 million better off with 
USDA's policy. It is hard to tell, I suspect. The markets 
fluctuate rapidly. You have to stipulate certain things 
happening.
    Mr. Clayton. And the overall size of the market clearly is 
such that--not to minimize the importance of $100 million one 
way or the other, certainly that is a lot of money--------
    The Chairman. You are talking about a $9 billion market or 
something of that sort.
    Let me turn to my colleagues, and we will try to have just 
5-minute rounds of questioning. Senator Daschle, do you have a 
question?
    Senator Daschle. Thank you, Mr. Chairman.
    Mr. Clayton, you said in your opening comments that you had 
done an analysis of the impact that the 1A differential had on 
dairy farmers and consumers in various regions of the country. 
Did you do a similar study with regard to 1B and the 
administration proposal? And if so, could you share with us 
that study and the results?
    Mr. Clayton. Yes, Sir. In fact, the final regulatory impact 
analysis, which was published at the same time as we published 
the Secretary's final decision, does include all of that 
analysis.
    Senator Daschle. Could you just summarize it for us for the 
purposes of the hearing this morning, just briefly?
    Mr. Clayton. Sure. From the standpoint of producers and 
receipts to producers over the 5-year period that was a part of 
the analysis, clearly the Option 1A was going to result in the 
highest level of receipts, relatively speaking. The final 
decision I guess would be next in line, and the Option 1B would 
have been the lower of the three alternatives which were 
examined in that impact analysis.
    Clearly, the impact for consumers flips around and works 
just in the reverse. But answering that question is a little 
dangerous without getting into some of the detail, which I 
don't think we have time to do here this morning, but certainly 
one does need then also to look at implications in terms of 
fluid milk consumption--or let me step back, in terms of 
overall production levels of farm milk, of impacts in terms of 
fluid milk consumption, impacts in terms of the manufactured 
market. And those vary some across those three as well.
    Senator Daschle. Well, I guess I still don't know if I have 
as clear an understanding of the difference by region. Could 
you elaborate more specifically with regard to regional impact 
and contrast the two based upon your analysis?
    Mr. Clayton. Let me ask Mr. McKee, who dealt in some 
greater detail with the numbers--maybe he can help us with 
that. I don't want to be evasive here at all, but there are a 
lot of data.
    Mr. McKee. There is an extreme amount of data available, 
and we did do it by regions. We selected 36-points, basically, 
and analyzed the impact of Option 1A, Option 1B, and the final 
decision.
    We looked at each of these major primary population points, 
and as you can imagine, in about half of those areas you had 
income increases generated, in about half of those areas you 
had income decreases. And those depended largely upon the types 
of milk that are produced and consumed in those areas and 
largely, if you look at the map, there were winners and losers, 
as the Chairman indicated earlier. They are certainly outlined. 
If you have specific regions, we can certainly provide that 
detail, but--------
    Senator Daschle. Well, let's just take arbitrarily the 
Midwest region and the Northeast region. No particular reason 
why. I just--------
    [Laughter.]
    Mr. McKee. Under the Option 1B, there would have been a 
decrease in the Northeast area, on a 6-year average on price 
per gallon of milk, of around 6- to 9-cents on average over the 
6-years. In the upper Midwest, you would have had an increase 
of 2- to 3-cents.
    Senator Daschle. In the interest of time, for the record if 
you could provide us with it, I would appreciate a summary of 
your analysis of the impact that the two plans have had. I 
mean, we can work through the minutia of the data as well, but 
it would be helpful--the data itself isn't as useful as your 
analysis of the data, and I think if you could give it to us in 
summary form within a few days, that would be very helpful. I 
would like to see that. I am not sure that we can fully 
understand the numbers, but you can and you can articulate them 
in a way that would give us a far better appreciation of a good 
comparison between the plans. And I would like that, and I am 
sure some of my colleagues would as well.
    Mr. Clayton. Mr. Daschle, if I could, just for clarity, are 
we talking Option 1B or the Department's final decision?
    Senator Daschle. Well, actually, it would be nice if you 
could do all three: Option 1B, the final decision, and Option 
1A, I mean, three columns, winners and losers. Just what is the 
analysis?
    I think as we try to figure out what is the fairest way to 
proceed, I think it would be very helpful to know what the 
impact of these proposals are. And to be honest with you, I 
don't think that has ever been very clearly articulated yet. 
And I think you could do us a real service by providing that 
information in a way that goes beyond the data of that report.
    Thank you, Mr. Chairman.
    The Chairman. I would just underline Senator Daschle's 
thought. I tried to touch upon this, but, you know, literally, 
when you move from 31 to 11, this is what we asked you to do to 
rationalize it. But as you pointed out, you have got 36-
populations that half won, half lost. And so as a result, even 
though the Committee, the Congress said reduce these, when it 
came down to the particulars, with 18-losers, they all weighed 
in, and there is not much in it. It is hard to get consensus 
with 18 pulling one way and 18 the other. But it is probably 
best, just for the sake of accuracy, to know how much.
    Now, if these are de minimis changes, why, we might reason 
with our colleagues, now, come on, you know, 1-or 2-cents one 
way or another, given the variety of prices for dairy, for 
Class I milk or anything else, there is not much in it, and in 
the best interest, we might rationalize this thing.
    On the other hand, if we see huge changes--when I visited 
with the Texas dairymen, for example, they saw a big change 
there in how they may have overestimated their problem, but 
they didn't think so. So as a result, they were dug in, and 
there were others like this.
    But it would be helpful for us all of us to analyze this 
data because I think it is material.
    Senator Grassley, I will pass on you for a moment. Your 
turn will come right after Senator Conrad. You may question for 
5-minutes. Senator Conrad, would you proceed with your 
questions?

STATEMENT OF HON. KENT CONRAD, A U.S. SENATOR FROM NORTH DAKOTA

    Senator Conrad. Thank you, Mr. Chairman, and I thank the 
witnesses as well.
    First of all, I think the basic system under which we are 
operating here is really pretty hard to defend. It is pretty 
hard to defend a system that started in the 1930s based on 
presumptions that are no longer the case.
    At the time this was all devised, the Midwest was the only 
surplus area, and that is just no longer the case. And yet this 
whole plan is predicated on a fact that is no longer a fact. 
And we don't seem to be able to reform this system, even given 
the best efforts of Congress and the best efforts of USDA.
    First of all, I want to commend you for making the attempt, 
but I think Congress has really failed to meet its obligation 
and its responsibility. This is now an unfair system. It is 
absolutely unfair to our region of the country, and the results 
have been absolutely devastating. We have seen in the last 
decade our dairy farmers cut in half. Actually, it is even more 
dramatic than that, because that doesn't capture the most 
recent losses, which are very sharp.
    So we have a system that is unfair, and you came up--we had 
three basic options before us: 1A, 1B, and the final decision, 
which is somewhere in between. I would be very interested to 
know--my understanding is that in the referenda the people 
indicated they preferred Option 1B. Is that the case?
    Mr. Clayton. No. They were presented with the final 
decision, up or down.
    Senator Conrad. And they supported the final decision.
    Mr. Clayton. That is correct.
    Senator Conrad. And the final decision is between 1A and 
1B.
    Mr. Clayton. It is probably--yes. It is sort of built off 
of 1B, but with some higher prices.
    Senator Conrad. You said, as I heard you in response to 
Senator Daschle, that 1A--this is how I heard you; correct me 
if I am wrong--that 1A would have given the highest level of 
receipts. Is that your--------
    Mr. Clayton. Between the three options, yes.
    Senator Conrad. But that doesn't measure, obviously, 
regional differences?
    Mr. Clayton. No. I was just speaking nationally.
    Senator Conrad. And how much of a difference is there in 
overall receipts between the three, between 1A, 1B--which was 
the original Department recommendation, was it not? Option 1B 
was the original Department recommendation?
    You have to answer yes or no because nods of the head will 
not be captured in the record.
    Mr. Clayton. Oh, I am sorry. I thought you were going to 
continue. That is all.
    Senator Conrad. Option 1B was the original Department 
recommendation, was it not?
    Mr. Clayton. That is correct. Yes, 1B was the initial 
proposal by the Department.
    Senator Conrad. And those who are the advocates for the 
status quo, the anti-reform group--I like that.
    [Laughter.]
    Senator Conrad. I have been watching this Presidential 
campaign.
    The anti-reform group, they wanted to stick with what is 
that is based in the 1930s. Isn't that correct?
    Mr. Clayton. I will not join in your characterization, if 
that is okay.
    Senator Conrad. And the final decision is somewhere in 
between. Can you tell us the level of receipts between the 
three?
    Mr. Clayton. Yes, Sir. Option 1B would have resulted in 
around $129 million less than what we would have projected if 
the existing system had continued. Option 1A--------
    Senator Conrad. $129 million less in overall receipts.
    Mr. Clayton. That is correct.
    Senator Conrad. Overall receipts to dairy producers.
    Mr. Clayton. Cash receipts to dairy farmers.
    Senator Conrad. Cash receipts--okay. That is good.
    Mr. Clayton. For dairy farmers who are marketing milk 
through the Federal Order Program.
    Senator Conrad. Right.
    Mr. Clayton. Obviously, there are dairy farmers outside----
----
    Senator Conrad. OK. I think it is just very important to 
define these things for the record and for those who are 
listening. OK.
    Mr. Clayton. Option 1A, if we would like to take that one 
next, we estimate will result in cash receipts of $104.9 
million more than if the existing system had continued.
    Senator Conrad. OK.
    Mr. Clayton. And the final decision would have resulted in 
$2.8 million less cash receipts to producers.
    Senator Conrad. So, in terms of this one question, the 
final decision really is right between the two.
    Mr. Clayton. As it turns out, and, again, that is all 
relative to the kind of baseline of the world continuing as 
though we had done none of this.
    Senator Conrad. Now, as somebody who has been deeply 
involved in this process, how would you characterize the 
numbers of dairy farmers around the country? What is happening 
to the number of dairy farmers, active dairy producers?
    Mr. Clayton. It has been declining.
    Senator Conrad. And declining sharply?
    Mr. Clayton. Yes. I would not sit here and profess to be an 
expert on those numbers, but my reading of them would be that 
the decline has been significant.
    Senator Conrad. And can you tell us what kind of a price 
would a dairy farmer in the upper Midwest get versus what a 
dairy farmer in the Northeast would get? And let's put in the 
South.
    Senator Lincoln. Thank you.
    Senator Conrad. I don't know how you divide up the South.
    By the way, I have already filed a lawsuit on behalf of 
Senator Lincoln against the Committee, and I am hoping that it 
gets resolved quickly.
    [Laughter.]
    Mr. Clayton. Well, I would be happy to provide sort of 
detailed information on that. I do have some examples of the 
difference in the all-milk price under the final decision 
compared to 1A.
    Senator Conrad. If you could get that to me and other 
members of the Committee--my time has run out.
    Mr. Clayton. Sure.
    Senator Conrad. I would appreciate that.
    Mr. Clayton. It might be easier just to provide more 
complete information, yes.
    The Chairman. I thought it was very interesting. You have a 
$100 million loss one way, a $100 million gain the other, but 
your final decision was $2.8 million out of $9 billion--in 
other words, de minimis. So that was what we were arguing.
    Senator Grassley.

STATEMENT OF HON. CHARLES E. GRASSLEY, A U.S. SENATOR FROM IOWA

    Senator Grassley. I am not going to take much of my time 
because I came to hear the producers and I want to move on. But 
I think I share the frustration just expressed by Senator 
Conrad and would associate myself with it, and add to it that 
we have the ironic situation, for instance, in my State--and I 
will bet it even applies to--if it is in northwest Iowa, it 
applies to parts of Minnesota and South Dakota, and maybe even 
North Dakota--where actually some times in the year you can 
have a milk shortage. And so we have instances in which 
processors, in some cases even our Iowa Department of Economic 
Development, are trying to entice people to come to our State 
from even California to produce milk so that we have got a 
supply. And it all stems from an outdated marketing order 
situation that was worried about surpluses in the Midwest. But 
because of the lowest prices there, we have got a situation 
where now we have potential unemployment in milk processing, 
dairy processing.
    It is an example that if Government still has a legitimate 
role--at least as far as a safety net is concerned, they do 
have a legitimate role. But it is a perfect example if 
something isn't working, it has got to be fixed. This isn't one 
of these things you look at and say, you know, it is working.
    So I associate myself with those remarks and just urge 
whatever can be done to be done to correct this situation where 
Government has proven that it isn't better than the 
marketplace.
    Now, in this particular instance, if you are going to have 
a safety net for farmers, you are going to have to have some 
Government involvement. But it has got to be something that 
betters the situation and not worsens the situation.
    The Chairman. Thank you very much, Senator.
    Senator Lincoln.

   STATEMENT ON HON. BLANCHE L. LINCOLN, A U.S. SENATOR FROM 
                            ARKANSAS

    Senator Lincoln. Thank you, Mr. Chairman, and thank you 
again for holding these important hearings.
    I had hoped, as Senator Grassley, to be able to be here 
with the producers when they testify, but I am going to have to 
testify at another committee, and hopefully my entrance there 
will be a little more graceful in the second committee.
    The Arkansas dairy industry plays a tremendous role in our 
State's agricultural economy, and it generates more than $270 
million of economic activity every year for our State. Most 
people don't think of Arkansas as a dairy State, but we do have 
quite a few dairy farmers there. Unfortunately, Arkansas dairy 
farmers, like dairy farmers from all other areas, are 
struggling with volatile and low prices.
    In the past 10-years, nearly 40-percent of our Arkansas 
dairy farmers have gone out of business. There are nearly 500-
farmers left out of a number of well over 900 just 10-years 
ago. Recognizing those concerns, our Arkansas General Assembly 
approved the Southern Dairy Compact in 1997.
    I am pleased to know that John Scarlett will be testifying 
in the next panel, and I appreciate his representation of the 
Southern dairy farmers. One of the comments that he makes in 
his testimony--and I just would like to highlight that--is that 
the program, whatever the program is, is only as good as the 
quality of the information it gathers. We have talked about 
shortages and other things, the importance of how we gather 
that information, and certainly making sure that we do it 
correctly and in a timely fashion is going to be very 
important.
    I would like to ask this panel, seeing what has happened to 
dairy farmers in Arkansas over these past 10-years without a 
compact, what do we stand to see in the future? How long do you 
see Southern dairy farmers existing without a compact? You are 
here for your professional, and background in terms of these 
issues. What do you think?
    Mr. Clayton. Well, that crystal ball is a difficult one to 
deal with.
    Senator Lincoln. Sure.
    Mr. Clayton. Clearly, as you point out, dairy producers in 
lots of parts of the country are under financial pressure. 
Clearly, one of the driving issues, as the Chairman has 
indicated, is what we as a Government will choose to do to 
intervene on their behalf. Every intervention has implications 
which cut in a number of different directions, and probably not 
my place to try to attach significance to the importance of 
those impacts, be it on producers or on consumers. That is 
something that the public debate ought to sort out.
    Clearly, there is a lot of change going on: fewer farms, as 
has been pointed out already, to some extent larger farms, 
larger farms in parts of the country where we haven't seen that 
before. To some extent, producers have to do what is necessary 
to be efficient, and I don't intend that as an indictment of 
anybody. But, clearly, at the end of the day we do operate in a 
market economy, and one has to operate efficiently to do that.
    I realize I haven't answered your question, but--------
    Senator Lincoln. I was just getting ready to say, that is 
almost the same as a nod of the head. Completely unrecorded.
    Mr. Clayton. I am not going to, obviously, take a position 
this morning in terms of the appropriateness--------
    Senator Lincoln. So you have no opinion as to--whether or 
not Southern dairy farmers exist can without a compact?
    Mr. Clayton. Well, they have existed. I would guess that 
they can. But under what circumstances? We do not know, what 
the future will bring. We do know that there are going to be a 
lot of pressures there.
    Senator Lincoln. Well, I would just highlight Mr. 
Scarlett's testimony, and he points out, the very basics of 
transportation cost and what is involved in the South, where 
probably half the U.S. dairy farmers reside. When we run into 
those shortages that were mentioned earlier, the cost of 
transportation and what is involved and being able to make sure 
that there is a supply of milk. And let me tell you, I am 
pretty big consumer. I have got twin boys that are 3\1/2\, and 
we go through at least 4-gallons of milk a week.
    So it is important, in areas, like the Mississippi Delta 
and the Southern part of our country, to have that supply and 
have it in a cost-effective way for consumers.
    I will just highlight that, and I will tell the Chairman 
once again how much I appreciate his involvement in this issue, 
and certainly having the Committee to focus on it. Thank you, 
gentlemen. And I do appreciate the second panel, although I 
won't be able to stay.
    The Chairman. Thank you very much, Senator Lincoln.
    If there are no more questions, I think we will proceed to 
the second panel. But I want to thank both you, Mr. Clayton, 
and Mr. McKee for your testimony. Please furnish the Committee 
the information requested by Senators because you can tell from 
the intense interest on the figures that this is a subject that 
we are going to be into, and we really want to have the data to 
make sound decisions.
    [The information referred to can be found in the appendix 
on page 287.]
    Mr. Clayton. Yes, Sir. We will get that back to you.
    The Chairman. Thank you very much.
    The Chair would like to call now a panel composed of: Mr. 
Arthur S. Jaeger, Assistant Director of the Consumer Federation 
of America; Mr. Mark Furth, General Manager, Associated Milk 
Producers, Incorporated, in Minnesota; James Vanblarcom, a 
dairy farmer from Pennsylvania; Mr. James Tillison, Alliance of 
Western Milk Producers, from Sacramento, California; Mr. Larry 
Jensen, Senior Vice President of Supply, Distribution and 
Business Development of Leprino Foods, Colorado; and Mr. Dennis 
Meyer, member of the Board of Directors of Family Dairies, in 
Iowa.
    Gentlemen, we thank you all for assembling here with us 
this morning. As perhaps you heard at the initial part of the 
hearing, we would ask that each one of you summarize your 
comments in 5-minutes. The green, the yellow, and the red 
lights are an indicator of how you are doing in this respect. 
And if you would do that, that would be helpful because then we 
will have another 5-minutes per Senator a round of questions of 
you following your testimony.
    I will ask you to testify in the order that I introduced 
you, and that would be, first of all, Mr. Jaeger. Would you 
offer your testimony?

  STATEMENT OF ARTHUR S. JAEGER, ASSISTANT DIRECTOR, CONSUMER 
             FEDERATION OF AMERICA, WASHINGTON, DC.

    Mr. Jaeger. Thank you very much, Mr. Chairman. I am pleased 
to be here this morning, and I am very pleased the Committee 
chose to hold these hearings. I think they are important 
hearings, and I think they were very instructive yesterday and 
so far this morning.
    Last year's dairy controversies over the Northeast Compact 
and market order reform were most often portrayed and they were 
portrayed this morning as regional battles, New England versus 
the upper Midwest, the upper Midwest versus the rest of the 
Nation. I want to make the point that they were also consumer 
battles. My organization, the Consumer Federation of America, 
fought in favor of market order reform, the USDA's plan, and 
against compacts.
    We were joined in opposing compacts by both Consumers 
Union--I think that is probably the Nation's best-known 
consumer organization--and the Center on Budget and Policy 
Priorities, a respected research organization that focuses on 
low-income issues.
    Now, why are these programs problems for consumers? It is 
pretty simple. As a number of witnesses have pointed out, they 
raise retail prices to consumers. There was a lot said 
yesterday about prices in the New England versus the upper 
Midwest. I brought along a couple of charts which point out 
what the Northeast Compact did. This is milk prices in Vermont, 
and where my colleague is pointing--that is, June 1997--that is 
where the compact kicks in, and you will see a big increase in 
prices there. You will see prices, after the compact kicks in, 
stay pretty much at the $2.75 per gallon level.
    This, by the way, is the same GAO report that Senator Leahy 
likes to cite.
    Now, in the next chart, we have New Haven, and you will see 
essentially the same thing. It is not quite as dramatic. And 
there the prices tend to stay up at the $2.70 level after the 
compact kicks in.
    In the next chart we have Chicago. That is getting out 
towards the upper Midwest, and you will see there is no compact 
in Chicago, and so the price bounces around. It does not go up 
in June 1997, and you will see prices in Chicago peak out at 
about $2.65.
    And then the final chart is Milwaukee, and there, again, 
the prices bounce around, but, again, they peak out at about 
$2.65.
    It is that problem in New England that concerns my 
organization, and we don't want to see the same thing happen in 
the Middle Atlantic States and in the Southern States.
    It is interesting. A recent study commissioned by the 
Northeast Compact's own governing body basically reached the 
same conclusion, that there were dramatic increases in milk 
prices when the compact kicked in, and that it has continued to 
cost consumers a substantial amount of money in the 2\1/2\ 
years--well, that study only looked at the first year, but in 
that first year, it continued to cost consumers a substantial 
amount of money.
    In terms of Option 1A, you heard estimates this morning, 
that Option 1A is costing consumers about $116 million more for 
milk this year. That is why we opposed Option 1A.
    These price increases hit low-income consumers the hardest. 
That is because low-income families spend more of their income 
on dairy products. These higher milk prices cause a decrease in 
milk consumption. Again, there was some dispute over that 
yesterday, but Keith Collins, the chief economist at the 
Agriculture Department, certainly ought to know, and he said 
the Northeast Compact is decreasing milk consumption in New 
England. A slight decline in milk consumption, and that is what 
you are seeing. It may seem trivial, but the public health 
effects here may not be trivial. Milk, of course, as we all 
know, is an excellent source of calcium, yet something like 
three out of four of us don't get enough of it. Raising the 
price of milk will just make it that much harder to turn that 
situation around. And, of course, anytime you increase the 
price of milk, you do increase the cost of Federal nutrition 
programs.
    I think we heard the USDA witnesses say this yesterday. 
Last summer USDA said Option 1A would increase the cost of the 
four major nutrition programs nearly $10 million per year. It 
is true that the Northeast Compact, to its credit, has acted to 
insulate WIC and the School Lunch Program, but there is not a 
lot it can do about food stamps. Estimates are that the compact 
is costing food stamp recipients nearly $10 million in lost 
purchasing power.
    Supporters of the compact and Option 1A say they are needed 
to shore up struggling dairy farmers. My organization includes 
small dairy farm organizations and is very concerned about the 
decline in the number of small farms in this country. But we 
think compacts and Option 1A are not an efficient way to 
address this problem.
    Why not? First, not all dairy farms--again, as we heard 
yesterday--in this country are struggling. Keith Collins 
mentioned that the basic Federal price for milk recently 
tumbled, but it tumbled from record-high levels. He also said 
that feed prices have been very low. He said about 2.5-percent 
of dairy farms are financially vulnerable right now, and that 
is about half the percentage for all farms nationwide. So 
compared to all farms, dairy farms are actually doing better.
    Now, next, who are the farms that are struggling? They tend 
to be the small farms. Since 1982, three out of four dairies 
going out of business in the Eastern United States had less 
than 50-cows. Of course, when you change the farm level price 
of milk under either Option 1A or under compacts, you increase 
income on a per-gallon basis; that goes to all farmers. That 
means those with the most production get the most benefit. It 
gives the largest subsidies to those who least need the help. 
Some of these dairy farms have net worths of more than a 
million dollars. At the same time, the smallest farms, the ones 
that tend to need the help, get very little.
    What if you ran the Food Stamp Program on the same basis--
the more you earn, the more food stamps you would get? That 
doesn't make for an effective assistance program, and likewise, 
we think raising milk prices across the board for all farmers 
is not an efficient way to assist those farmers who are in 
trouble.
    Now, what is the solution? Yes, there are farmers in 
trouble. My organization is worried about them. We think 
Congress would be better off to enact a permanent, targeted 
assistance package for those small dairy farmers who need help 
to survive. We think there is a value in keeping those farmers 
on the land. And Congress has started down this road with the 
emergency assistance packages it approved in the last 2-years. 
These programs don't just cover the Northeast. They cover the 
South, where there are problems. They cover the upper Midwest, 
where there are problems. They cover any region where dairy 
farmers are struggling.
    These programs are capped in an attempt, at least, to 
target the benefits on the small-and medium-size producers who 
should need the help, and they do not increase prices to 
consumers. They do, of course--this approach does involve 
Government cost, but at least if this approach is done right, 
at least taxpayers know they are providing help to the small 
farmers who need the help, not to farmers who are doing fine.
    I had a number of other points in my statement, but I will 
cut it off right there. I see my time is up.
    [The prepared statement of Mr. Jaeger can be found in the 
appendix on page 288.]
    The Chairman. Thank you very much, Mr. Jaeger.
    It is a pleasure to have Senator Grams with us again today. 
He is a regular at the dairy hearings, and I am grateful that 
is so. But you have a witness that you would like to introduce, 
Senator.

   STATEMENT OF HON. ROD GRAMS, A U.S. SENATOR FROM MINNESOTA

    Senator Grams. Thank you very much, Mr. Chairman and 
members of the Committee. Thank you for giving me a distinct 
privilege this morning to be here to introduce to you Mr. Mark 
Furth, who is the chief executive officer and general manager 
of Associated Milk Producers, Incorporated, or AMPI, and it is 
a 5,000-member dairy cooperative based in New Ulm, Minnesota.
    Now, AMPI annually markets 5-billion pounds of milk for 
dairy producers from Minnesota, Wisconsin, Iowa, Nebraska, 
Missouri, South Dakota, and North Dakota, and it operates 13-
manufacturing plants.
    Now, Mark has been with AMPI for 30-years, beginning as an 
accountant, and he became general manager in 1990. Mark has 
also previously served on the Board of Directors for the 
National Milk Producers Federation and also for the Minnesota 
Dairy Leaders Roundtable.
    I appreciate his willingness to come to Washington today to 
highlight what we view as the fundamental unfairness of our 
Nation's dairy pricing system and to propose alternatives to 
the existing structure.
    Now, Mark has endured the same frustrations that I have in 
Minnesota, with family farmers being forced out of business due 
to a system that helps producers in other regions of the 
country gain a competitive advantage over them.
    Again, I want to thank you for the opportunity to be here 
this morning to introduce Mr. Furth and know that his 
suggestions will be useful for the work of this committee and 
for the Senate.
    Thank you very much, Mr. Chairman.
    [The prepared statement of Senator Grams can be found in 
the appendix on page 373.]
    The Chairman. Thank you for coming, Senator Grams.
    Senator Grams. You are quite welcome.
    The Chairman. Mr. Furth, you are recognized.

 STATEMENT OF MARK FURTH, GENERAL MANAGER AND CHIEF EXECUTIVE 
  OFFICER, ASSOCIATED MILK PRODUCERS, INCORPORATED, NEW ULM, 
                           MINNESOTA

    Mr. Furth. Thank you, Mr. Chairman. Thank you, Senator 
Grams.
    These 30-years that I have spent working for dairy farmers 
as part of this cooperative called Associated Milk Producers, 
most of that time has been spent in one way or another with 
milk marketing and milk pricing. And whatever little bit of 
expertise that I have gained in those 30-years, that is what I 
hope to be able to share with you this morning.
    In those 30-years, I have seen a lot of changes in milk 
marketing and milk pricing. Three changes that I think have 
been significant and that should bear on policy into the next 
decades:
    One is that cooperatives have become the major marketing 
vehicle for most United States dairy farmers. Almost all United 
States milk today is marketed by dairy cooperatives. That is a 
significant change from 30-years ago. It has increased 
dramatically, continues to increase.
    Second, 30-years ago, bottled milk, fluid milk, which you 
are hearing so much about this last couple days, was the major 
usage of milk by far and away. Today it is not. Cheese has 
become the major usage of milk in this United States, a 
significant change.
    Lastly, marketing has become very national. When I joined 
this business some years ago, markets were very local. They are 
no longer. Almost all dairy products are marketed on a very 
national basis today.
    In that same period of time, something that hasn't changed 
is that the two significant Federal dairy programs continue to 
exist almost exactly like they did 50-years ago: price supports 
and the dairy price support program. Now, to have that kind of 
longevity, they must either be very, very good programs or 
very, very outdated. Hopefully that is something that this 
committee will look at in the coming sessions.
    Although these 2 programs are both over 50-years old, they 
have in the last 15- or 20-years taken a very different 
direction. Starting in the early 1980s, the national safety net 
for dairy farmers through the price support program has been 
significantly lowered. At the very same time, the support level 
offered to dairy farmers through things like Federal milk 
marketing orders has actually increased. While we have lowered 
the safety net for most of the Nation, we have raised it for 
isolated areas. Fluid Class I prices have actually increased, 
giving price relief to farmers with higher Class I utilization 
and the benefit of Federal price control.
    To make this discrimination worse, reliable economic 
studies by the likes of USDA and Food and Agricultural Policy 
Research Institute [FAPRI] show that the relatively higher 
supports for some actually lower the price for the other dairy 
producers not so affected. Dairy is a national market today, 
with supply/demand setting the price and balancing the market 
for almost all products. Class I fluid use is a rapidly 
shrinking part of total U.S. milk production and an 
increasingly ineffective and unfair vehicle for supporting 
prices for U.S. dairy farmers.
    Meanwhile, the United States is a very attractive market 
for the rest of the world. Without the import tariff rate quota 
system that we have, we would be a magnet for any surplus 
production anyplace in the world. If U.S. trade policy lowers 
import restrictions, as is contemplated by many, without first 
leveling the playing field here in this United States, those 
regions without the safety net of higher Class I prices and/or 
compacts will be sacrificed. I trust you will not let that 
happen.
    We need a national dairy pricing system and a national 
dairy policy without regional distortions. I believe recently 
legislated Federal order changes and the Northeast Compact 
extension have further distorted our U.S. pricing system. How 
can Congress in good conscience consider international policy 
until it first ensures a fair domestic pricing system for U.S. 
dairy farmers?
    As you consider another farm bill, I propose the 
elimination of Federal orders and compacts as poor policy that 
helps some farmers at the expense of others. I propose a 
strengthened national price support program for all dairy 
farmers in this Nation.
    An effective national pricing system should include the 
pooling of all benefits and costs across the entire Nation and 
a two-tier pricing mechanism that provides disincentive for 
farmers to increase production into the face of a price-
depressing surplus, similar to that existing today.
    I hope this committee can reclaim jurisdiction over these 
issues. Your decisions will have a huge influence on the health 
of our industry for decades to come. Please ensure that dairy 
is a strong, healthy, and prosperous part of American 
agriculture. Give us a national policy, not a patchwork of 
regional manipulations.
    When the ever famous Titanic set to sea, there was great 
confidence that new technology and new markets were unbeatable. 
The Titanic was so unsinkable that it provided life boats for 
less than half the passengers. You know the rest of the story.
    As dairy sets to sea in a world market, it would be 
overconfident of us to eliminate price supports ad import 
quotas. The remaining safety net of Federal orders and compacts 
would save far too few dairy farmers.
    Not only would we be short of life boats, but have 
preassigned seating besides.
    Regional dairy policies must go. Our great industry and our 
great Nation deserve better.
    Chairman Lugar and committee members, I thank you very much 
for the opportunity to testify this morning. The dairy farmers 
of AMPI have great confidence in this committee's ability to 
help craft dairy policy into the next century.
    Thank you very much.
    [The prepared statement of Mr. Furth can be found in the 
appendix on page 296.]
    The Chairman. Thank you. I appreciate your testimony.
    I have a note. Do you want to make a short comment?
    Senator Conrad. Could I just make a quick comment? The 
Budget Committee is convening at 10:30.
    The Chairman. Very well.
    Senator Grassley. Is it 10:00 or 10:30?
    Senator Conrad. They moved it to 10:30.
    Senator Grassley. OK.
    The Chairman. That would affect you also.
    Senator Grassley. Yes.
    Senator Conrad. And I appreciate very much this 
accommodation. I appreciate my colleagues. I agree with 
everything Mr. Furth just said. As I examine what we have been 
talking about this morning, Option 1A, Option 1B, the final 
order, it strikes me that all of those are basically 
rearranging the deck chairs on the Titanic. We have got a 
policy that is a failed and flawed policy, and we have got to 
go back to first principles and rewrite the dairy policy for 
this country. If we do not, we are going to see a massive 
elimination of dairy producers in this country, and we will 
regret very much sometime in the future looking back on a 
failure to act.
    I just hope that people were listening as Mr. Furth 
testified because I think he hit on precisely what needs to be 
done.
    Mr. Chairman, thank you very much.
    The Chairman. Thank you, Senator Conrad.
    Senator Grassley, and then Senator Fitzgerald. I know each 
one of you needs to make comments at this point, and--------
    Senator Grassley. I am going to wait until my constituent 
is done testifying.
    The Chairman. Very well. Senator Fitzgerald?

  STATEMENT OF HON. PETER G. FITZGERALD, A U.S. SENATOR FROM 
                            ILLINOIS

    Senator Fitzgerald, if I may, I just wanted to make a 
comment before Mr. Clayton left the room. Is Mr. Clayton here? 
Thank you. I am sorry I wasn't here earlier.
    I just wanted to mention the milk forward pricing pilot 
program that we established last year prior to our adjournment, 
and I was just hoping that we would be able to follow the 
congressional mandate and make the program effective by March 
1st and publish broad guidelines as soon as possible in order 
to give dairy producers and processors the necessary details of 
the program. And, hopefully it would have a regulatory 
structure that makes it workable and not inoperable, and I 
would just appreciate it if you could let the Secretary and 
others know at USDA the importance of the milk forward pricing 
pilot program. I think it is very important to our dairy 
industry in this country. I think it would be a good step that 
would help a lot of people. And so I hope we can move forward 
with that. And I appreciate your taking that concern back to 
the Secretary.
    Thank you.
    The Chairman. Thank you, Senator Fitzgerald, and I would 
just second the Senator's comment. This is a very important 
program for our committee. You understand that. And we are 
really eager to know how the details are being formulated and 
what progress you are making. It is not a solution to the 
problem, but it is another tool that is important for the 
marketing for dairymen.
    All right. Now, pardon me, Mr. Vanblarcom, for interrupting 
your train of thought, but we are back to the panel again, and 
we are pleased to have your testimony. Would you please 
proceed?

     STATEMENT OF JAMES VANBLARCOM, COLUMBIA CROSS ROADS, 
                          PENNSYLVANIA

    Mr. Vanblarcom. Thank you very much. Good morning. My name 
is Jim Vanblarcom. I am a dairy producer from northeast 
Pennsylvania, Bradford County. My family and I manage a 100-cow 
dairy that we have owned and operated since 1974. I am also 
very actively involved in off-farm agricultural activities. I 
am the president of the Bradford/Sullivan County Farm Bureau, 
also serve on the Pennsylvania Farm Bureau's Dairy Policy 
Committee. I want to thank the Committee for providing the 
opportunity for me to give a brief perspective on how national 
dairy policy affects myself and other Pennsylvania dairy 
producers.
    The economic impact of the Pennsylvania dairy industry is 
huge. Total milk produced in the State amounted to $1.73 
billion. We are the fourth leading producing State in the 
Nation. While Pennsylvania's dairy industry continues to 
maintain a slow rate of growth in total milk production through 
greater producer efficiencies, our dairy farm numbers, cow 
numbers, and total market share of the Nation's production 
continues to shrink. In fact, about 30-percent of the State's 
dairy farmers have gone out of business in the last 10-years. 
At the same time, Pennsylvania dairymen have increased milk 
production by about 20-percent.
    Milk price volatility has made maintaining an economically 
viable operation a real challenge. Price swings of 30- to 40-
percent in 1-month has not become uncommon. I challenge anyone 
to run a business with this level of volatility that dairy 
producers have experienced in the past.
    My brother farms next door with 120-cow dairy. We share 
equipment and labor during planting and harvesting seasons. In 
this cooperative effort, we both save money. We are both hard-
working, experienced, knowledgeable dairy producers. My brother 
and I ranked third and fourth in milk production in Bradford 
County, which is the third largest milk producing county in the 
State. Even with our best management practices, if we had 
stakeholders, they would look at our present dairy operations 
as a poor investment due to the lack of financial performance.
    I have three children, all of which have varying degrees of 
interest in agriculture. Under present conditions, I would 
understand them not choosing a career in agriculture because 
they have seen the ups and downs and experienced it personally.
    Dairymen in the upper Midwest and the Northeast are slowly 
losing their ability to compete. Milk production is shifting to 
the West. Chart 1 shows that the percentage of milk produced in 
the Southwest, West, and California has more than doubled since 
1970 to 1997.
    The trends of westward and larger dairies would be all well 
and good if our only need is cheap milk. However, numerous 
consumer concerns come to mind. There are environmental issues 
created by very large dairies and future competition for water 
in the Western areas; also, most important, the lack of 
producers in proximity to the high population centers of the 
North and the Northeast. Over 25-percent of the United States 
population lives within a three-or four-truck-hour drive of 
Pennsylvania and New York dairy farmers. Just imagine how 
today's diesel fuel prices would affect a cost of California 
and Western milk in the city of New York.
    What dairy policy changes can be made to address the 
current challenges I as well as other producers face? First let 
me say thank you as a producer for your action that was taken 
by Congress last year to address producer concerns on Federal 
milk marketing order reforms. With positive action on Option 1A 
Class I pricing differentials and the extension of milk price 
supports for another year at the current level, combined with 
component pricing that allows the higher of Class III or IV to 
be used as a Class I mover, we have avoided an even more 
disastrous scenario on producer prices than we are already 
experiencing.
    I believe a regional approach to pricing milk is the best 
method to help stabilize producer prices and address producer 
price needs affected by local marketing conditions. If properly 
administered, we now know dairy compact pricing can bring 
benefits to producers, at little, if any, cost to consumers, 
with no impact on national marketing conditions. I believe the 
future national dairy policy should allow for expansion of 
dairy compacts.
    I would like to finish up quickly with--there are two other 
tools that we would really like to have. The Dairy Export 
Incentive Program should be fully funded to help maintain our 
presence in an international marketplace, a revenue insurance 
program for dairy producers similar to that as provided for 
other crops. And my most important message: I love dairy 
farming, the way of life it creates, and with your help, I 
would like to someday retire and help my children take over the 
farm.
    Thank you.
    [The prepared statement of Mr. Vanblarcom can be found in 
the appendix on page. 298.]
    The Chairman. Thank you very much, Mr. Vanblarcom, for your 
testimony.
    We are honored that Congressman Sherwood is with us, and he 
has a word for the previous witness.
    Mr. Sherwood. Well, thank you, Chairman Lugar. I would have 
liked to have been here a little earlier and said this before 
Mr. Vanblarcom testified, but he is one of the most respected 
dairy farmers, he and his brother, in Bradford County, and they 
run a very heads-up, modern, efficient operation, and they are 
well regarded in the community.
    And I wanted to say that so that everyone would understand 
it is easy to come and complain about market forces, but what 
you have heard from Jim Vanblarcom is from a forward thinking, 
modern agriculturalist. And I think what he mentioned to you is 
that if we don't pay attention, we will soon have all the milk 
for the whole country produced on factory farms, and it will 
lead to the type of scenarios like we saw in North Carolina 
where we all saw all the hogs floating in the river. Well, when 
you get these huge amounts of animals in confined spaces, it is 
a different landscape than we have been used to. And I would 
like to urge you to think about if that is what we really want 
in the future.
    Thank you very much, Chairman.
    The Chairman. Thank you very much for coming to our 
hearing. We are honored to have you. We appreciate your 
comments about your constituent, and we appreciate that, too, 
having heard the testimony.
    Mr. Tillison.

     STATEMENT OF JAMES TILLISON, ALLIANCE OF WESTERN MILK 
               PRODUCERS, SACRAMENTO, CALIFORNIA

    Mr. Tillison. Chairman Lugar, members of the Committee, I 
am Jim Tillison, executive vice president and CEO of the 
Alliance of Western Milk Producers, an association that 
represents the interests of dairy cooperatives in California 
and the milk producers who own them. We appreciate being given 
this opportunity to talk with you about the dairy price support 
program, international trade, and to provide a brief 
description of the California pricing system.
    Few Government programs have been as effective as the dairy 
price support program. It removes excess milk from the 
marketplace in the form of butter, nonfat powder, and cheddar 
cheese. When demand is up, these products are released back 
into the marketplace. In this way, the program assures 
consumers that milk and dairy products will be available by 
assuring dairy farmers of a market of last resort.
    In 1996, milk producers reluctantly agreed to phasing out 
the dairy price support program. At that time it was believed 
that the General Agreement on Trade and Tariffs would present 
additional opportunities for dairy exports. Unfortunately, that 
has just not been the case.
    It has been estimated by cooperative dairy economists that 
the average producer milk price would drop from $1.50 to $1.75 
per 100-pounds of milk should the support program end. The 
total cost to dairy farmers nationwide would be approximately 
$2.7 billion. We were successful in gaining an extension 
through this year and are hopeful that Congress will keep the 
program in place through the full term of the 1996 farm bill, 
at least at the current level of $9.90.
    The alliance believes that the dairy price support program 
is far superior to producer income supplemental payments. The 
support program is market-oriented and much less costly than 
the supplemental income program. In the past 2-years, Congress 
has approved $325 million in emergency income relief to milk 
producers, with a maximum payment to a producer of $5,000. USDA 
estimates the cost of extending the support program at $300 
million in total for 2001 and 2002. The net effect on producer 
income would be over $2 billion.
    The alliance member cooperatives believe that the U.S. 
dairy industry came out on the very short end of the stick in 
the GATT negotiations. The United States' ability to subsidize 
exports has been dramatically reduced while the European Union 
is able to continue to subsidize hundreds, even thousands of 
times the quantity of dairy products that the U.S. is allowed 
to subsidize. An excellent example is the ``Other'' dairy 
product category--products like ice cream--where the European 
Union will be able to subsidize a billion pounds of product 
while the U.S. is limited to just 70,000-pounds.
    Free trade appears to be a one-way street running toward 
the United States.
    I have the privilege of serving on USDA's Animal 
Agriculture Trade Advisory Committee. Most of what we hear at 
the meetings is how our various trading partners are not living 
up to their trade agreements with us. That is why the alliance 
will work for a continuation of the support program and the 
Dairy Export Incentive Program until world markets are truly 
free but, more importantly, truly fair. That means the complete 
elimination of Government-sanctioned activities like the EU's 
export subsidies and New Zealand's state trading enterprise 
monopoly. Until that time, significant limitations should be 
put on all dairy product imports from countries that employ 
these and other trade-distorting activities.
    The implementation of Federal order reform brings milk 
pricing in California and in the Federal order system much 
closer together. While differences still exist, the basic 
concept is now the same.
    Like California, Federal orders now use product-based 
pricing. As a result, prices will track much more closely than 
they previously did between the two systems. For the past 17-
months, the average difference in the cheese milk price between 
California and the Federal order reform system would have been 
just 3-cents per hundredweight of milk. The so-called 
California advantage is no more.
    If USDA is going to continue to use the National 
Agricultural Statistics Service [NASS] price series, it should 
have the authority to audit all plants reporting product 
prices, and reporting by all plants should be mandatory. It 
should also have the authority to require the reporting of 
manufacturing costs and to audit plants to verify that these 
costs are accurate. This is what is done in the California 
system.
    In summary, the alliance urges the extension of the support 
program and the extension and perhaps expansion of the Dairy 
Export Incentive Program [DEIP] program. In addition, this 
committee should take an active role in the upcoming round of 
trade negotiations. Your involvement will ensure that 
agriculture's interests are not subjugated to the trade 
interests of other industries or other purposes. The ability to 
produce food is a form of security that no country should risk. 
That is why this committee, as well as the House Committee on 
Agriculture, must assure their constituents they represent that 
trade will be fair, not just free.
    Thank you for this opportunity, and I will be happy to 
answer any questions you will have.
    [The prepared statement of Mr. Tillison can be found in the 
appendix on page 306.]
    The Chairman. Well, thank you very much, Mr. Tillison. Let 
me just assure you on the last point, the Committee is 
extremely vigorous pushing our trade negotiators to the 
ultimate. We are disappointed in their results thus far, but, 
nevertheless, we will continue to visit with them right in this 
room because it is of the essence, and I think we all 
understand that.
    Mr. Jensen, would you give your testimony?

STATEMENT OF LARRY J. JENSEN, SENIOR VICE PRESIDENT OF SUPPLY, 
 DISTRIBUTION AND BUSINESS DEVELOPMENT, LEPRINO FOODS, DENVER, 
                            COLORADO

    Mr. Jensen. Mr. Chairman and members of the Committee, 
thank you for the opportunity to appear before you today. I am 
Larry Jensen, senior vice president of Leprino Foods. I also 
serve as secretary and treasurer of the International Dairy 
Foods Association [IDFA] and chairman of the National Cheese 
Institute, one of the constituent organizations of IDFA.
    Leprino Foods is a family-owned company that has grown from 
making small batches of ricotta and mozzarella cheese for local 
delivery to the world's largest producer of mozzarella cheese 
today. We operate eight manufacturing facilities that receive 
milk regulated by the Federal Milk Marketing Order system and 
two manufacturing facilities that are regulated under the 
California State order.
    Federal dairy policy is complex and has far-reaching 
impacts on the structure and competitiveness of the U.S. dairy 
industry. While we do not advocate total deregulation, we 
believe it is critical that Federal dairy policy evolve to be 
less intrusive on dairy markets and the industry. Federal dairy 
policy should allow natural regional and scale efficiencies to 
develop and manifest themselves in the marketplace. This means 
allowing milk production to flourish in highly efficient 
regions and facilitating a conversion to more efficient methods 
in traditional production regions. It is critical that greater 
efficiencies develop throughout the industry in the years to 
come so that trade barriers are not needed to protect our 
domestic markets.
    One of the most complex aspects of Federal dairy policy is 
the Federal Milk Market Order system. The Federal order system 
is a potent tool in that by setting minimum milk prices to be 
paid by proprietary processors, it can greatly influence 
industry structure. As a result of the FAIR Act of 1996, USDA 
attempted to make several significant strides forward in their 
first effort to reform Federal milk pricing policy in the 
context of the new global market realities brought on by the 
WTO.
    These advances included replacing the antiquated Class III 
milk pricing system, so-called Basic formula price [BFP], with 
a broader price measure tied directly to the national finished 
product value of cheese. Additionally, for the first time, all 
milk in major manufacturing markets will be priced on the 
components upon which cheese-making value is derived: protein, 
fat, and other solids.
    Unfortunately, the Federal Milk Marketing Order reforms 
became highly controversial last year and led to several 
provisions in the omnibus budget bill that overturned 
significant portions of the reforms. While the final provisions 
did not directly overturn USDA's Class III price formula, there 
was much discussion regarding one aspect of the formula used to 
calculate the Class III milk price, the so-called make 
allowance.
    The make allowance is one of many factors used in the Class 
III price formula, all of which combine to establish a minimum 
price level for milk based on the raw milk value of both cheese 
and whey. It is important to understand that the make allowance 
is not a payment to cheese makers, and its use in the Class III 
formulate in no way guarantees cheese maker profitability. The 
only function in the make allowance is to translate a finished 
product value of milk into the raw milk equivalent value for 
use in setting a minimum price that proprietary processors must 
pay under Federal orders.
    We believe that the debate in Congress last year over the 
make allowance in the Class III price formula was largely based 
on erroneous preliminary estimates of the price impact of the 
new formula. Current USDA data shows that for the most recent 
16-months ended in December of 1999, the only period during 
which actual data was collected to calculate both the old BFP 
and the new Class III price, the new minimum prices actually 
would have resulted in a slightly higher milk price.
    While we are appreciative that Congress did not legislate 
over USDA's Class III decision, we are concerned with what we 
perceive to have been strong sympathy for increasing the market 
intrusiveness of the milk pricing system.
    Today we have in place a Federal Milk Marketing Order 
system that is complex, still intrusive on the market, and 
highly subject to the tugs and pulls of the legislative 
process. The dairy price support program was extended for this 
year, and USDA just last week announced their support for 
extending it through 2002. One of the last decisions of 
Congress last year was to extend the Northeast Interstate Dairy 
Compact that provides a protected market for a small group of 
farmers to the detriment of other farmers and consumers. All of 
these changes combine to put the dairy industry further behind 
our global competition.
    Mr. Chairman and members of the Committee, the U.S. cheese 
industry is now the largest user of farm milk and is 
experiencing strong growth in market demand year after year. We 
have a great opportunity to grow markets domestically and earn 
a great share of international markets if we keep our focus on 
the market and make sure that our policies pave the way rather 
than impede our progress. As you debate Federal dairy policy, 
we urge you to continue to adopt those policies that will allow 
the industry to flourish in the long term.
    Thank you for the opportunity to appear here today.
    [The prepared statement of Mr. Jensen can be found in the 
appendix on page 312.]
    The Chairman. Well, thank you very much for that testimony, 
Mr. Jensen.
    Mr. Meyer, before I call upon you, let me say that you are 
doubly blessed to have both of your Senators on hand, and I 
want to recognize the distinguished ranking member, first of 
all, because I think he wants to make a comment. And maybe he 
will also make a comment about you in the process.
    [Laughter.]

STATEMENT OF HON. TOM HARKIN, A U.S. SENATOR FROM IOWA, RANKING 
   MEMBER, COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY

    Senator Harkin. Thank you very much, Mr. Chairman. I am 
pleased, along with my colleague Senator Grassley, to introduce 
Dennis Meyer who is with Family Dairies USA. He is--a good, 
capable Iowa dairy farmer, with a good family from near 
Dubuque. They have a great family, three sons. He owns 144-
acres. He rents an additional 240-acres. He has a herd of 92-
Holstein cows, is active in his church, active in his 
community.
    Again, when I think of Dennis Meyer and his family and the 
kind of dairy farmers that we have in that area of Iowa, it 
just seems to me that is what we are talking about. How are we 
going to preserve opportunities and enable these family farmers 
and family dairy farmers to remain in business, not only in 
Iowa but in Wisconsin and other parts of the country? I don't 
mean to be parochial about the Midwest.
    That is one of the reasons why I hope we are here and 
having these hearings: how we are going to keep Dennis and his 
family and thousands of them in Illinois and Wisconsin and 
other places in business. So I am delighted he is here.
    [The prepared statement of Senator Harkin can be found in 
the appendix on page 278.]
    The Chairman. Senator Grassley?
    Senator Grassley. Well, you know, a person only has one 
biography, so there is not much I--------
    [Laughter.]
    Senator Grassley. At least that is true of Iowans.
    [Laughter.]
    Senator Grassley. So I won't add anything, but obviously I 
am glad you are here. When you are done testifying, I am going 
to go to the Budget Committee meeting.
    The Chairman. At least, Mr. Meyer, you have not been 
accused of reinventing yourself. You have just one life, and it 
has been a good one, and we are grateful to have you here 
today. Please proceed.

 STATEMENT OF DENNIS MEYER, MEMBER, BOARD OF DIRECTORS, FAMILY 
                  DAIRIES, USA, BERNARD, IOWA

    Mr. Meyer. Thank you, Chairman Lugar. Thank you, Senator 
Harkin, for your kind comments.
    Good day and thank you, Chairman Lugar and members of the 
Committee, for this opportunity to share our members' concerns 
on dairy policy. As Senator Harkin said, I am Dennis Meyer. I 
am a dairy producer from Dubuque County, Iowa, in America's 
traditional ``Dairy Heartland.'' My wife Darlene and I and 3-
sons far 384-acres and milk 92-Holsteins.
    Family Dairies USA is a grassroots organization 
representing over 6,000 small- and medium-size dairy farm 
families in nine Midwestern States.
    The ultimate goal of this cooperative has been a single, 
national milk marketing order that treats all producers 
equitably. During the recent Federal order reform process, we 
sought basic reforms that bring needed equity and simplicity 
and move us toward our ultimate goal. These reforms included 
much flatter Class I differentials, broad order consolidation 
that raises Midwest Class I utilization much closer to the 
national average, a competitive Grade A-B pricing system 
recognizing the full competitive value of farm milk, and the 
inclusion of California in the Federal order system.
    Though Secretary Glickman's reform package made only a 
modest step toward our overall reform goals, we nevertheless 
believed it was an important step toward a better system. 
Therefore, we are deeply disappointed that Congress interfered 
in the reform process by blocking the modest reforms in 
Secretary Glickman's final rule. Now that Congress has derailed 
those modest reforms, we urge Senate and House leaders to work 
with us to bring needed equity and simplicity through other 
means.
    We are strongly opposed to regional dairy compacts. 
Compacts are contrary to our goal of a uniform national dairy 
policy that treats all dairy producers equitably regardless of 
where they live or where their milk is marketed. These unfair 
milk pricing cartels erect new trade barriers to the movement 
of raw milk among regions of the country. Like the Eau Claire-
based Class I differentials, compacts legalize the principle 
that it is okay to maintain pricing rules that discriminate 
against many producers in some regions.
    Since July of 1997, the Northeast Compact has fixed the 
regional price of fluid milk in the New England States. Since 
the compact was to be a transitional step between the outdated 
Federal milk regulation and Federal milk order reform mandated 
by the 1996 farm bill, Congress scheduled it to sunset in April 
of 1999.
    Unfortunately, the opponents of dairy reform inserted 
provisions in the fiscal year 1999 appropriations bill that 
delayed the sunset of the Northeast Compact until October 1st 
of 1999, as part of a broader effort to delay and obstruct the 
reform process. And again at the end of last year, through the 
fiscal year 2000 appropriations bill, we saw the Northeast 
Compact renewed for 2 more years, through yet another backroom 
political deal.
    The extension of the Northeast Compact has emboldened other 
States to pursue these regional dairy compacts in search of a 
quick, easy answer to the complicated problems of dairy policy. 
Many States have enacted or are considering legislation 
allowing them to join the Northeast Compact or form a Southern 
Dairy Compact. If Congress were to authorize the expansion of 
the Northeast Compact or a Southern Company, what was to be a 
temporary crutch in the New England States will engulf over 
half of the States and seriously endanger for the Federal order 
system.
    A 1999 University of Missouri study shows that a majority 
of producers in the Nation would be harmed by the combined 
effects of regional compacts in the Northeast, Mid-Atlantic, 
and Southeastern States. Producers in every region outside of 
the Northeast, Mid-Atlantic, and Southeast stand to lose 
between 17- and 21-cents per hundredweight of milk, according 
to the study.
    Congress should not approve agricultural policies that so 
clearly provide benefits to the producers of one region at the 
direct expense of the consumers of that region and producers 
elsewhere. Instead, there should be an effort to create a more 
rational and uniform national dairy policy. The Secretary of 
Agriculture should have the flexibility and authority to 
maintain a sound and cohesive national milk pricing policy, 
without the regional fragmentation caused by compacts.
    Congress would be making a big mistake to further expand or 
extend the Northeast Compact or authority any new dairy 
compacts. Compacts are inconsistent with the broader Federal 
milk marketing order reform process laid out in the 1996 farm 
bill.
    If we allow regionally biased policies such as compacts and 
high Class I differentials to control dairy policy, we will 
never move beyond the divisions that have plagued this 
industry. Let's work together to find a national solution to 
our national concerns.
    Thank you very much for letting me air my opinion.
    [The prepared statement of Mr. Meyer can be found in the 
appendix on page 317.]
    The Chairman. Thank you very much, Mr. Meyer.
    We will ask Senators now to observe a 5-minute limit on the 
first round of questions to these witnesses.
    Let me ask, first of all, we have had some statistics 
furnished to the Committee in response to my request and others 
as to how profitable the dairy business is. And these are 
fragmentary statistics, but Texas dairy farms, at least in the 
material presented by Texas A&M, representative farms--and they 
differentiate this by large and mid-size and small, with small 
farms being 80-cows--were showing a rate of return of roughly 
20-percent on invested capital, which appears to me to be a 
pretty high figure.
    We had yesterday a dairy farmer from South Dakota, as I 
recall, who said over the years he had gotten about 5-percent 
on invested capital. We had an Indiana farmer who had a good 
year and got 19-percent, but admitted that was an abnormal 
situation.
    Some statistics from Cornell University, presumably of New 
York dairy farmers, indicate a 7-percent return on assets. That 
is a different situation depending upon the debt and the 
leveraging, at least, of the capital that is involved there.
    But the comment was made earlier, I think by Mr. Jaeger, 
that, by and large, these dairy farm results of return on 
invested capital appear to be substantially higher than what 
the Committee has seen in terms of return on, say, corn farms 
or soybean farms or cotton or rice farms. Admittedly, it is 
very hard in these discussions to pin this down. When I asked 
yesterday to the dairy farmers who wanted to modernize what 
return you expect on your capital, the most common answer was, 
well, we really haven't got into that. The question is we 
either modernize or we leave. But the comparison of how you 
might invest the money somewhere else was not a large 
consideration in this, although ultimately it may need to 
become.
    I just want some feel from any of you, Mr. Meyer, for 
instance, and Mr. Vanblarcom, you are dairy farmers out there 
now attempting to make a living on this sort of thing. Does 
return on capital ever enter into your picture? Or is this such 
a traditional thing your family does that you just continue on 
doing it sort of hoping that the income will be sufficient? 
Would you make a comment, Mr. Meyer?
    Mr. Meyer. Yes, return on investment does enter a lot. I am 
a highly leveraged dairy producer. I am, I guess, relatively 
started in the business. I have been doing it for all my life, 
but actually buying my farm and doing some building and so 
forth has been relatively in the last several years. So I am 
highly leveraged dairy farmer, and, yes, it does enter into it. 
When I go to my banker and do my projection for the upcoming 
year, it definitely enters into it.
    It is also a tradition to me--I am a farmer. I have been a 
farmer. My father farms. I have got a brother that is a dairy 
producer. But it most definitely does, and I guess one 
statement I like to make is I am certain that none of you 
people would like to have half of your income taken away, you 
know, from you, and that is exactly what has happened to us in 
the last several months. And we don't know when that is going 
to change. And yet my input costs continue to rise. Right now, 
yes, feed costs are low, and I am in a situation where I 
produce a lot of my own feed. But my other--all my other 
expenses continue to, at best, stay at level or increase. And 
how do you--I know one person made the comment before that you 
must become more efficient. There is only a certain degree of 
efficiency that you can, you know, maintain.
    We have an outstanding market in our country to sell fluid 
milk, to sell processed cheese, and so forth, and we need to 
work on that to try to better that market so that we as 
producers can stay in the business.
    The Chairman. Mr. Vanblarcom, do you have a comment on this 
issue?
    Mr. Vanblarcom. Yes. My return on the dollar, I couldn't 
give you that exact figure right today for this previous year, 
but I can give you some figures that I looked up recently 
concerning the return and the net growth or net gain in value 
for a farm across Pennsylvania. The Pennsylvania Farm Bureau 
has a farm management service that keeps accurate records on a 
large number of dairy farms, and over the last 3-years, their 
net worth went up by 9-percent, but their net--or their total 
debt load went up by 10-percent.
    The Chairman. Senator Harkin, do you have questions of the 
witness?
    Senator Harkin. Thank you, Mr. Chairman. I am sorry I 
wasn't here for all the testimony. I had read it, though, so I 
am familiar with what you had testified to and had in your 
written testimony.
    I just wanted to ask Mr. Furth with AMPI, in your written 
testimony you basically advocate doing away with the compacts 
and the marketing orders and provide a stronger income support 
for all farmers. That is your basic position. And you also in 
your written testimony mentioned a 2-tier pricing program.
    Now, some of us had advocated that 15-years ago, and I am 
just wondering: Is that still valid today or not? How would 
that work?
    Mr. Furth. Well, my vision of how two-tier pricing would 
work for dairy is an extension of the price support program and 
one that would set a better level of support for an adequate 
supply of milk, a lower level of support for milk that is 
potentially surplus.
    Senator Harkin. And that would be a relatively good level 
of support at the first level. Is that what you are saying?
    Mr. Furth. A lower level of support for that marginal 
amount of milk that is potentially surplus.
    What dairy farmers, as most of agriculture, I suppose, is 
prone to do is that when prices get lousy, they are lousy 
because there is too much production. What does the average 
farmer do to react to that? Produce more. It is the only thing 
they can do to control the problem.
    And so when less production is needed, they actually 
produce more, and that is what I meant in my testimony by------
--
    Senator Harkin. Because of all the fixed costs and 
everything like that.
    Mr. Furth. Sure.
    Senator Harkin. Farmers understand.
    Mr. Furth. Precisely. So I think that we need a price 
support program long term that provides some disincentive for 
that. When somebody like USDA is projecting a surplus in the 
coming year and we are already at a surplus, why provide any 
incentive--why not provide a disincentive to further expansion? 
I am not talking about quotas. I am not talking about telling 
each farmer what they can produce. I am talking about providing 
some financial disincentive to expanding into the face of a 
surplus. This could operate only at times when we were 
expecting a surplus. It could be phased back in and out based 
on those kind of projections. It is only on the margin. We are 
only dealing with a couple percent of milk production.
    I am just saying that when a dairy farmer is getting ready 
to double his herd next spring, he ought to pencil into those 
considerations the fact that maybe that milk is going to be 
produced for a world market price of 8-bucks. And maybe he 
would hold off on his expansion for 6-months or a year.
    Nothing to do with size. I am not talking about big 
farmers, small farmers. I am talking all farmers.
    Senator Harkin. I want to come back again to Dennis from 
Iowa. Now, you know as well as I do up in your area we have 
half as many dairy farmers as we did 20-years ago.
    Mr. Meyer. That is right.
    Senator Harkin. A lot of them have gone out of business, 
and some of the smaller ones that were maybe milking a dozen or 
so cows, they are gone. You have got 92. That is a pretty good 
size.
    A lot of people say to me, well, Senator Harkin, you are 
just old-fashioned, you are living in the past. These dairy 
farmers are going to go out of business. We are going to have 
these big dairy operations and milk a lot of cows, like we do 
with pork and poultry now.
    I guess I don't have a real pointed question for you, 
Dennis, on that. But, you know, when you think about Dubuque 
County and your area there where you are from, and Jackson 
County and those nearby areas, I mean, you have good feed 
supplies, you have reasonable input costs, the same way in 
Illinois across the river from you, in Senator Fitzgerald's 
area.
    What I am probing here is just to see how you feel about 
the future and whether you think there is a place for the size 
of operation that you have and to be able to continue that 
family farm size of dairy operation.
    Mr. Meyer. Well, one comment that I would like to share 
with you is my veterinarian in my small community of Cascade--
there are four veterinarians in that veterinary clinic. He made 
the comment to me, he said, If it wasn't for you dairy 
producers, we could shut the doors. I mean, Cascade was a very, 
very large hog-producing area with a lot of very efficient, 
very good hog producers. They are no longer in business.
    I like to do my business locally at my Cascade--my little 
town of Cascade. I can go to Wal-Mart in Dubuque--nothing 
against Wal-Mart. But I can go to Wal-Mart in Dubuque or some 
place like that and maybe buy things cheaper. But I like to 
service the people that I go to church with, that my kids are 
in basketball with, or whatever. I enjoy doing my business 
locally. As these small and medium producers exit the business, 
those businesses begin to also exit the business.
    We had 4-feed stores, four feed businesses in Cascade. We 
now have 1. We had two veterinary clinics. We now have 1. We 
had 3 implement dealers. We now have one.
    Consequently, from a producer's standpoint or from the 
other side of the situation, a consumer of machinery, feed, and 
so forth, that eliminates my ability for shopping around. You 
have one price. You have one implement dealer to go to, and 
that is it. They quote you a price and that is what you have to 
live with.
    So, yes, I certainly think that not only is there a place 
for them, but I think it not only is important for the small-
and medium-size dairy producer, hog producer, or whatever, but 
it is also very important for urban America. These small towns 
will dry up and go away if we don't help with the proper 
marketing programs that we are talking about to keep us in 
business so that we can, you know, in turn keep the small 
communities in business.
    Senator Harkin. I share that. Thank you.
    Mr. Meyer. Thank you.
    Senator Harkin. Thank you, Mr. Chairman.
    The Chairman. Senator Santorum?
    Senator Santorum. I would yield to Senator Fitzgerald.
    The Chairman. Very well. Senator Fitzgerald?
    Senator Fitzgerald. Thank you, Mr. Chairman. And I would 
like to thank all the panelists for making their presentations 
today, and I want to compliment our two dairy farmers here from 
the different parts of the country, Mr. Meyer from Iowa and Mr. 
Vanblarcom from Pennsylvania. And I guess I have a question for 
you, Mr. Vanblarcom.
    I have no doubt that what you testified to is correct, that 
you would probably be a little bit better off if you were in, 
if Pennsylvania were in that Northeast Dairy Compact. I think 
you are generally correct on that. But at the same time, I have 
no doubt in my mind that Mr. Meyer would be a little bit worse 
off if that Dairy Compact were expanded. And, in fact, you 
would probably be better off at the expense of folks like Mr. 
Meyer in Iowa and in my State of Illinois and Wisconsin and the 
like.
    And I guess my question would be: Why should Congress come 
in and prefer you to Mr. Meyer? You are both good people. You 
are both hard-working farmers. You are the backbone of our 
country. But why should we pick you as a winner and him as a 
loser?
    Mr. Vanblarcom. That is tough.
    Senator Harkin. That is a tough one.
    Mr. Vanblarcom. Land O'Lakes has saw fit to support the 
compact situation, and also, when you asked should the 
Government pick one person over another, at present, under the 
present situation, the Far West is being picked over the Middle 
West, Northwest--or North and Northeast. So it is taking place 
right now. And it is not going to be easy to find an equitable 
program, but as Mr. Meyer says, he is watching out for his 
interest, I am watching out for my interest.
    We all care about the dairy industry as a whole. My concern 
is the Northeast consumer. If we lose our Northeast dairymen--
and a lot of my area, the only thing we can grow profitably is 
forage. We harvest the win and the rain and the sun and put it 
through a cow, and we produce a product that the consumer can 
use readily. And it needs to be local.
    My concern is not just myself, but it is the consumer also.
    Senator Fitzgerald. Well, let me just say that I think that 
on other farm programs where we have one commodity that 
Congress wants to help, say, all soybean farmers or corn 
growers, there is a lot of support in Congress to do that, and 
we normally step up to the plate.
    I think the reason these compacts are so divisive around 
Congress is because really we are being asked to prefer farmers 
in a certain region of the country, dairy farmers in a certain 
region of the country, over the others. And I guess I am real 
uncomfortable doing that, and obviously, my farmers are being 
hurt in Illinois, and so I am going to fight that.
    But on a broader policy issue, we are one country, and 
balkanizing farmers by regions and breaking up their interests 
over these compacts is just not a good idea. If we started 
these compacts in corn farming or soybean growing or any other 
area, I think it would just be a horrible precedent. And I hate 
to see this kind of balkanization of the country and Congress 
being asked to pick out some winners by region. I think that is 
why compacts between States were looked with skepticism upon by 
our Founding Fathers, and they required congressional approval. 
They didn't allow States to enter compacts unless Congress 
approved it. And this is really the only one that I am aware of 
that allows trade barriers between States.
    So I would hope that you and other dairy farmers would 
think about what the effect of these compacts is on farmers in 
other parts of the country that are not in the compact. If we 
put everybody in the compact, then the compact wouldn't be any 
good. The reason it is good for the Northeast is because they 
are benefiting at the expense of the ones who are left out of 
the compact.
    But, with that, thank you all very much for appearing 
before us today.
    The Chairman. Thank you, Senator.
    Senator Santorum.

     STATEMENT OF HON. RICK SANTORUM, A U.S. SENATOR FROM 
                          PENNSYLVANIA

    Senator Santorum. Well, I guess to comment on Senator 
Fitzgerald's comments about the Northeast Dairy Compact, there 
are many of us in the northeastern part of the country who 
believe that we have had balkanization of agriculture for a 
long time. In fact, we just saw it during this drought 
assistance--I mean, excuse me, this emergency assistance for 
America's farmers. We went through the worst drought in 100 
years in my State and in the Northeast and the Mid-Atlantic 
States. We passed an emergency supplemental for--something akin 
to an emergency supplemental for agriculture for $7.4 billion, 
of which $7 billion basically went to people who had produced 
too much and were having bumper crops. So we gave them $7 
billion, and we gave $400 million to folks who didn't produce 
anything because of the drought.
    Now, to me, I don't know about, you know, the average 
American out there, but, you know, those of us who have been 
sitting up in the Northeast doing our agriculture, not asking 
the Government for a handout, also sort of look at the 
balkanization saying, you know, we have been dumping a lot of 
our money into the Midwest and Southeast and all these program 
crops for decades, and we haven't asked for much of anything.
    We are now at a point where agriculture in the Northeast is 
being threatened by a variety of factors, and we are coming 
forward and saying, hey, you know, it is our turn, we would 
like a little bit of help up our way.
    Again, $7 billion goes to basically farmers in the 
Southeast and Midwest, upper Midwest, double AMTA payments. 
Less than 20-percent of my farmers get AMTA payments, and that 
is not true in Iowa. It is not true in many other areas across 
the country.
    Again, the reason we rushed out there is because we had low 
prices. My folks would love to have just had a problem with low 
prices. They had low prices and nothing to sell. And we got 
nothing. My folks are showing up at the Farm Service Agency 
[FSA] office and getting 30-cents on the dollar for their 
drought relief. And we have folks up in other areas of the 
country getting double AMTA payments plus bumper crops.
    Then you wonder why my folks come here and wonder, hey, how 
about us this time? We have been doing this for decades. 
Decades we have been dumping money. And farm programs have been 
written on this committee and other committees to benefit those 
who come to this committee and, arguably, fight for their 
people. God bless you. You went out here and did a good job, 
and folks in that area of the country did well.
    But, you know, northeastern agriculture is important, too, 
and I think we have every right to come forward and say, you 
know, well, we are hurting. When you were hurting, we came and 
supported you, and now we are going through a very difficult 
time in our area of the country. And we want some support too. 
And whether it is with dairy--and I understand the problems 
with dairy. Mr. Vanblarcom and I have--I have been up to 
northeastern Pennsylvania and Bradford County and other areas 
to talk to farmers up there, and it is very difficult up there 
in the northeastern part of my State. And there are a lot of 
dairy farmers hurting bad, even worse than in other areas of my 
State.
    As many of you know, I have had some concerns about the 
Northeast Dairy Compact because I find myself out here, as you 
just heard, not favoring the kind of agriculture policy that we 
have dictated about preferring one region over the other. And I 
think we have done that, and we may be in the process of doing 
that again when it comes to crop insurance. But we are going to 
work against that, too.
    I hesitate to sort of say, well, since you guys have done 
it, we need to do some of it, too. I would rather have it to 
where we support folks who are out there doing a good job and 
not prefer one region over the other. So far we have not done 
that in this Congress. We have not done that in previous 
Congresses. And so I object a little bit to my friend from 
Illinois saying, well, it is--picking out one program and 
saying we are balkanizing and ignoring 99-other programs when 
we have done the very same thing to benefit his farmers.
    And so I would just--Mr. Vanblarcom, you didn't say that, 
but I thought I would answer the question for you. And if you 
would like to expound on that at all, feel free to do so.
    Thank you.
    The Chairman. Well, thank you very much to Senator 
Santorum.
    We have been joined by Senator Leahy. Do you have questions 
for the witnesses?
    Senator Leahy. Like he said.
    [Laughter.]
    Senator Leahy. I would just reiterate what I said 
yesterday. In the areas where we have used the compact, 
consumers are paying less for their milk. It was interesting to 
note that in a couple of the States that are speaking so much 
against the compact, saying, of course, that they are only 
interested in the consumer, in their States consumers pay more 
for milk.
    I was impressed with lobbyists who get paid hundreds upon 
hundreds upon hundreds of thousands of dollars who come up here 
in their very nice automobiles to say that they only influence 
for fellow dairy farmers. Well, dairy farmers in Vermont or 
Pennsylvania don't make this kind of money. They work very, 
very hard--harder than most people do. All they want is a fair 
return. The compact does it. And it doesn't cost the taxpayers 
anything. This is the most important thing. We are always asked 
in this committee to give huge amounts of money for corn 
farmers, for soybean farmers, for wheat farmers, for this type 
of producer or that type of producer. We are asking the 
Northeast, let's just run a program ourselves that won't cost 
the taxpayers anything.
    By God, you would think that we had suggested the ending of 
all farming in America. Every one of these interests that rely 
on huge Government subsidies come in to attack the program, it 
gets nulled. No taxpayers' money.
    I think it is a bad mistake. I am not suggesting it is the 
testimony of anybody here, but I am just saying it as a general 
statement. Group after group, region after region that rely 
upon billions of dollars of Government subsidies are opposed to 
a program that farmers have set up that has no Government 
subsidy. For the life of me, I think that it expands 
parochialism and hypocrisy beyond any level I have seen in 25-
years here, and I have seen some levels.
    So, anyway, that is just my thought, and I would suggest it 
is not balkanization. If some of these areas are so concerned 
about the Dairy Compact would show the same kind of initiative 
and the same kind of intelligence and the same kind of effort 
that the Northeast did, then do their own. And tell the 
taxpayers we will get out of their pocket and just do it 
ourselves.
    Thank you. Thank you, Mr. Chairman.
    The Chairman. Well, thank you very much, Senator Leahy.
    I just would comment, I am sure the witnesses can observe 
as Senators to testify that we have some disagreements of our 
own. And some of the echoes from your advocacy are heard here 
and even repeated in your presence. But we appreciate the rich 
variety of thoughts which you have brought in your oral 
testimony today and in your prepared papers. And we will take 
these seriously. They have been made part of the record, and we 
thank you very much for coming.
    The Chairman. I would like to now call an additional panel 
to be composed of: Clark Hinsdale, president of the Vermont 
Farm Bureau, on behalf of the American Farm Bureau Federation; 
John Neal Scarlett, South East Dairy Farmers Association of 
Tennessee; John Frydenlund, director of the Center for 
International Food and Agriculture Policy of the Council for 
Citizens Against Government Waste; Will Hughes, Wisconsin 
Federation of Cooperatives; Gene Paul, past president of the 
National Farmers Organization of Minnesota, and Bill Brey, 
president of the Wisconsin Farmers Union on behalf of the 
National Farmers Union.
    [Pause.]
    The Chairman. May we have order again in the hearing room 
so that we can all hear the witnesses clearly?
    Before Mr. Hinsdale is recognized, I want to recognize 
Senator Leahy.

STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR FROM VERMONT

    Senator Leahy. Thank you, Mr. Chairman. I came down and, as 
you know, I am in another hearing, but I wanted to introduce 
Clark Hinsdale. He is a friend of mine and my family, has been 
for years. He is also president of the Vermont Farm Bureau. In 
fact, he is testifying before this committee on behalf of the 
American Farm Bureau Federation, a very significant testimony. 
And he hails from a multi-generation Vermont farm family. He 
runs a diversified dairy farm, and he has done a lot in 
Vermont. He has been president of the Vermont Farm Bureau for 7 
years, and, in fact, after he became president, you saw a great 
revitalization in the Vermont Farm Bureau, a great expansion, 
and one that became very involved in a bipartisan fashion in 
our State. So he is chairman of that. He is chairman of the 
board of the Farm Family Insurance, a member of the board at 
Yankee Farm Credit, as well as what he does on his farm.
    I will put my whole statement in the record, but I would 
suggest that if we listen to people like Clark Hinsdale, I 
think we can find a solution out of here. He has had to bring a 
lot of differing people, differing parties together to make it 
work, and he has done that, and thank you for having him here.
    The Chairman. Thank you very much, Senator Leahy.
    Let me just comment personally, in recognition of what you 
have said, that 4-years ago when I was running for a different 
office than the one I am now involved in, I visited with 
Senator Leahy and the Vermont Legislature and, likewise, the 
Farm Bureau leaders and dairymen in Vermont, and Mr. Hinsdale 
was a leader then. He has become an even more prominent leader 
on behalf of the Farm Bureau of his State subsequently. It is 
good to have you again in the Committee room, and please 
proceed with your testimony.

 STATEMENT OF CLARK W. HINSDALE, III, PRESIDENT, VERMONT FARM 
BUREAU, INC., ON BEHALF OF THE AMERICAN FARM BUREAU FEDERATION, 
                       RICHMOND, VERMONT

    Mr. Hinsdale. Thank you, Mr. Chairman. My name is Clark 
Hinsdale, as has been already said, and I am fortunate here to 
be presenting testimony on behalf of the American Farm Bureau 
Federation concerning national dairy policy. Our membership 
does include the majority of our Nation's farmers, and we seek 
to promote their interests in all regions of this country.
    My message to you is, first and foremost, one of profound 
gratitude for what you have already done for us in the 
extension of the price support program, Option 1A, and many 
other things that have been mentioned here today, not the least 
of which is the extension of the Northeast Compact. These 
efforts have provided some measure of income stability and a 
greater measure of hope to our Nation's dairy farmers.
    I want to personally thank you, Mr. Chairman, for visiting 
dairy farms in Vermont. You have not only entered our barns and 
our kitchens, but our hearts as well. Together with your 
predecessor, who has dairy literacy in his job description, we 
believe you can tackle some of the great issues of the day, 
from opening up world markets to ending our use of food, 
medicine, and land mines as weapons against innocent people who 
find themselves citizens of hostile regimes.
    I might come back to our Northeast Dairy Compact. At a time 
when so much attention is focused on the need to improve 
agricultural risk management tools and to create an effective 
counter-cyclical safety net for farmers to facilitate our 
transition to a more market-oriented agriculture, the genius 
and efficiency of the compact should be apparent. Simply put, 
the compact extracts revenue from the marketplace, not the 
Government, operates only when prices are low, and doubly 
depends on the good will of consumers, both through their 
economic and political decisions.
    In January, the voting delegates of the American Farm 
Bureau Federation reaffirmed their support for compacts by 
saying, ``We support State and regional initiatives, or 
compacts, which are consistent with our overall goals of 
Federal market order reform and a market-oriented dairy 
program.''
    New language was also added to our dairy policy, stating, 
``We support modifications in the Federal marketing order that 
will enhance the price of milk received by producers, 
including, but not limited to, Option 1A price differentials 
for Class I milk, adjusting USDA formula for make-allowances on 
Class III milk, and regional dairy compacts.''
    With a track record of returning an estimated $40 million 
to dairy farmers both within and outside the compact region, 
the bushel is off the light. Twenty-five States have passed 
legislation authorizing regional compacts. We support 
legislation that would extend the current Northeast Dairy 
Compact to include Maryland, New York, New Jersey, Delaware, 
and Pennsylvania. The Farm Bureau supports the authorization of 
a Southeast Dairy Compact, extending westward to include 
Missouri, Oklahoma, Kansas, and the rising star of the Lone 
Star State of Texas. We encourage you to continue to allow 
producers and the industry to work together through such 
efforts as the Northeast and Southeast Dairy Compacts to 
stabilize producer income.
    We appreciate the opportunity to visit with you on American 
Farm Bureau's perspective on dairy policy. We truly appreciate 
the progress that has been achieved and look forward to 
continuing to work with you toward agricultural policies that 
provide nourishment for the world, opportunity for our farmers, 
and security for our country.
    I might also add that it is--in our problem-solving role in 
the Farm Bureau, it is of great value and benefit for me to be 
able to join you in hearing the very diverse testimony as we 
seek to find opportunities to guarantee in this country that 
our farmers have an opportunity to succeed.
    Thank you.
    [The prepared statement of Mr. Hinsdale can be found in the 
appendix on page 323.]
    The Chairman. Thank you very much, Mr. Hinsdale.
    Mr. Scarlett?

 STATEMENT OF JOHN NEAL SCARLETT, ON BEHALF OF THE SOUTH EAST 
        DAIRY FARMERS ASSOCIATION NEW MARKET, TENNESSEE

    Mr. Scarlett. Thank you, Mr. Chairman.
    First, let me say I am glad to see that you all are going 
to enter the testimony into the record because, as slow as I 
talk, I might not get all mine in.
    I would also like to thank the other members of the 
Agriculture Committee for holding these hearings and giving a 
dairy farmer from east Tennessee the chance to come up here and 
be heard.
    My family and I run a 200-plus-cow dairy which was started 
by my grandfather in 1930. We market our milk as independent 
producers through an organization called Piedmont Milk Sales, a 
marketing organization which has about 260-producers in 5 
Southern States.
    I would like to begin my testimony by thanking the Members 
of the Senate who made sure that the flawed attempt to redo the 
Federal order regulatory system last year was corrected. I am 
all for making the system work better, and I think that is what 
Congress did. There are a couple more changes to make, but 
those will work their way through the regulatory process at 
USDA this year.
    My purpose this morning is to let you know how important 
the Federal Milk Marketing Program is to the dairy industry in 
my part of the country. The main purpose of the Federal Order 
Program is to provide an orderly flow of fresh milk for the 
consumer. And in the Southeast, that is a real challenge in 
some months.
    As most of you are aware, the Southeastern United States is 
a rapidly growing population center. That rapid growth makes it 
more difficult to have adequate supplies. But the added 
transportation cost of moving milk from areas of the country 
where there is more than enough to drink makes it more cost-
efficient to maintain a healthy local supply of milk.
    For instance, hauling milk from northeastern Wisconsin to 
east Tennessee adds $3.39 a hundredweight, which means that 
adds 29-cents a gallon, much more than the 4-cents a gallon 
they were talking about a while ago being added. And hauling 
from upstate New York adds 27-cents a gallon. Now, those are 
not figures that we just pulled out of the air. I called 
Piedmont before I left, and that is what they gave me when they 
had to have extra milk besides our local supply. The two charts 
attached to my testimony bear those out to other destinations 
in the South.
    I want you all to know right up front I have no malice 
whatsoever in my heart for any of the folks that are dairy 
farmers in Wisconsin or New York or Iowa or anywhere else. But 
I have got many friends up there, and I want to stay friends 
with him. But you just simply cannot pay those farmers a fair 
return, pay the plant a give-up charge, load that on a truck 
and haul it to east Tennessee and put it on the shelf cheaper 
than what the consumers can buy my milk, irregardless of the 
program. Federal order minimum pricing, in the interest of 
farmers and consumers, provides a great financial incentive for 
keeping milk production low.
    On that note, the local impact, which has been stated 
earlier by the dairymen from Iowa about what it does to the 
areas out there, is an extremely important point. There is 
about $6 million in milk checks that come back to our county 
where I live. Now, if you believe what the economist says, the 
multiplier effect, multiply that by six, that is $36 million 
that is spent there in our local economy. In Tennessee, we are 
a sales-tax-based State. That is how we build our schools, pave 
our roads, educate our children. And if you take that away, the 
only sales tax we get is off the milk that is hauled in, would 
be what comes out of the store. It doesn't provide any 
infrastructure money as the money that comes back in the milk 
checks does to be spent locally.
    A local supply of milk is much more also than just cheaper. 
It is almost more dependable. Those of you here in the DC. area 
remember just a few days ago--it was on the news--of how bad it 
was to get to the office in the snowstorm. If it was hard for 
you to get to work, imagine if you were driving a milk truck or 
trying to pick up milk and get it to the plant and the stores 
within the Southeast.
    The bottling plants in our area were begging for milk 2-
weeks ago, and milk was readily available. Now, imagine what it 
would be like if all the milk supply you had, had to be trucked 
in.
    The Federal Order Program also provides financial functions 
that are important in the entire marketing chain. It ensures 
Class I producers are paid the prices if milk is sold as 
beverage, Class II is used in cheese and yogurt, Class III for 
manufacturing, Class IV for milk for butter. Producers also 
assure that they are paid for the components.
    An entirely understandable question by this committee then 
is: Does the market still work? I can tell you from recent 
experience it certainly does. The parts of 1998 and 1999 
weather-related difficulties in areas of the country kept milk 
supplies tight, and we had record-high prices. Now the 
situation is reversed, and they are at low prices as we have 
seen in the last 20-years.
    To put that in context for all the non-farmers in the room, 
imagine trying to feed your family, pay your mortgage, educate 
your children by having your paycheck cut 40-percent.
    The position I am, a dairy farmer every day, if the milk 
produced on my farm doesn't move that day, I do not have a 
product to sell by the next day. That is one of the most 
critical features of the Federal Dairy Program. It keeps dairy 
farmers on an equal basis from being pitted against each other.
    We have heard a lot of talk about deregulation. First, let 
me say the current farm bill does not authorize deregulation, 
it does not require changing Class I differentials, and it 
certainly did not want to lower the income of the average dairy 
farmer. That is why it is so important for Congress to 
intervene to repair the flaws in the marketing order. Without 
those changes last year, entire investments in facilities would 
have been very dramatically affected.
    Another aspect of the price regulation I would like to 
finish up with is on compacts. I would like to say the Southern 
Dairy Compact would be a great help to the industry in our area 
to keep the fast-growing market in the Southeast adequately 
supplied with reasonably priced fresh milk. Compacts also allow 
everyone in the milk marketing chain to have a say in how milk 
is priced.
    On the subject of compacts, I would like to call for a 
higher level of honesty in the debate of this issue. For 
instance, calling compacts undemocratic simply isn't true. Over 
5,000 legislators in 25-States have voted in favor, and an 
amendment last year with dairy compact language in it in the 
Senate here received 53-votes. Still, we do not have a compact 
in the South, therefore denying the people and their 
legislators that spoke of having the benefit of local dairy 
farmers retain them in their communities.
    Another reason I wanted to be here today is to have the 
opportunity to remind this body and the American people that 
there is one group that is clearly not sharing in the economic 
boom of the country right now. As I said before, milk prices 
are the lowest level in 20-years, and the Federal Milk 
Marketing Order provides at least a small degree of stability, 
although more is needed.
    I urge the U.S. Senate to continue looking for ways to keep 
farming economically vibrant and American farmers and rural 
communities having that opportunity for economic gain.
    Again, I thank you for the opportunity.
    [The prepared statement of Mr. Scarlett can be found in the 
appendix on page 326.]
    The Chairman. Thank you, Mr. Scarlett, for your testimony.
    Mr. Frydenlund.

     STATEMENT OF JOHN E. FRYDENLUND, DIRECTOR, CENTER FOR 
  INTERNATIONAL FOOD AND AGRICULTURE POLICY, CITIZENS AGAINST 
               GOVERNMENT WASTE, WASHINGTON, DC.

    Mr. Frydenlund. Mr. Chairman and members of the Committee, 
on behalf of Citizens Against Government Waste, I want to thank 
you for this opportunity to testify on the subject of whether 
there is a need for a Federal dairy policy.
    CAGW is a 600,000-member, nonprofit, nonpartisan 
organization, which grew out of President Reagan's Private 
Sector Survey on Cost Control, better known as the Grace 
Commission. The organization's mission is to work for the 
elimination of waste, mismanagement, and inefficiency in the 
Federal Government, with the goal of creating a Government that 
manages its programs with the same eye to innovation, 
productivity, and economy that is dictated by the private 
sector.
    The Center for International Food and Agriculture Policy 
institutionalized CAGW's long-standing goal of dismantling 
Depression-era agricultural price supports and regulations. In 
addition to a belief that Congress should build on the 
accomplishments of the 1996 freedom to farm bill and achieve a 
truly free market for agriculture, the center advances the 
philosophy that the best way to wean America's farmers off the 
Federal dole and assure them a prosperous and secure future is 
to promote a more open global food economy by dismantling 
barriers to free trade.
    CAGW applauds you, Mr. Chairman, for holding this hearing, 
particularly for asking the right question: Is there a need for 
a Federal dairy policy? It is appropriate to begin a discussion 
of dairy policy with such an examination, rather than the 
traditional assumption that there should be a dairy program, 
which then simply moves into a debate of what that program 
should be and how much money should be allocated on its behalf.
    It is now well past 60-years since the Federal Government 
first determined that it needed to be involved in milk pricing. 
The result was the creation of a dairy price support program 
and the Federal Milk Market Order system. There may arguably 
have been some justification for Federal subsidies and 
management of dairy production way back then before vast 
technological progress, modern production techniques to 
maximize output, efficiency, and quality, and advancements in 
the Nation's infrastructure made these policies obsolete.
    During seven decades of modernization and change outside of 
Washington, the Federal Government's stranglehold on milk-
pricing structure has remained constant.
    Just as is the case in every other industry, technological 
innovations have allowed some dairy farmers to become more 
cost-efficient. It should come as no surprise, then, that this 
country has experienced significant reductions in both the 
number of dairy farms and milk cows. The time has come for 
leaders to acknowledge that these trends represent progress 
rather than a cause for hand-wringing.
    Until relatively recently, the cost of Federal meddling has 
been most blatantly demonstrated by the excesses of the dairy 
price support program, which laid out huge sums of Federal 
taxpayer money to dairy farmers. Now, however, the Federal 
dairy program is a tangled web of mind-numbing pricing schemes 
that have metastasized into a more layered, incomprehensible, 
intrusive labyrinth increasingly divorced from economic 
realities. Rather than allowing the marketplace to determine 
the price of milk, dairy prices are controlled by behind-the-
scenes maneuvering in Washington, bureaucratic log-rolling, and 
regional political favoritism that we have heard so much about 
already today.
    I have brought along a chart that truly illustrates how 
mind-boggling the system is that has been built over the last 
60-years.
    As with many other Government programs gone haywire, 
intervention in the dairy industry was designed to be 
temporary. And as I said, until recently, the dairy price 
support program had been the cornerstone of the Federal 
Government's involvement in the dairy industry. In the late 
1970s and early 1980s, price supports were driven to 
unprecedented heights as a result of regional politics and 
election-year payoffs which ultimately ended up costing the 
taxpayers $17 billion during that decade and led to the 
voluntary diversion program and whole-herd buyouts.
    These experiences have led to less congressional enthusiasm 
for raising dairy price supports, but as this developed, the 
milk marketing orders have become the most important bulwark of 
Federal involvement in milk pricing.
    Within the milk marketing orders' logic-free zone, the most 
illogical of all provisions is the differential pricing. These 
additional premiums are charged to the manufacturers of fluid 
milk based in part on how far the manufacturing plants are from 
Eau Claire, Wisconsin.
    Perversely, the differential system penalizes dairy farmers 
in the regions best suited to dairy farming and rewards dairy 
farmers operating in high-cost, inefficient areas far from Eau 
Claire. This makes about as much sense as the Federal 
Government requiring computers manufactured in Maine to be sold 
at higher prices than those manufactured in the Silicon Valley.
    It is equally ludicrous that the Federal Government 
established minimum prices for milk or sets different prices 
for milk based upon what it is used for. I would also like to 
point out that the extensive and time-consuming effort 
initiated in the 1996 farm bill to provide modest reforms of 
the system, which was scuttled by Congress last year in the 
extension of the Northeast Dairy Compact, was a serious setback 
for reform of the entire industry.
    Interstate dairy compacts represent a threat to the long-
term viability of the dairy industry, and without going too 
much into detail about all of our objections to this sort of 
milk cartel system and providing what really is a milk tax on 
consumers, I would like to point out that what we need to do is 
really look at dairy policy, get outside of the box of just 
debating between the different regions and deciding who are 
winners and losers. This unbelievable system that has been 
developed over the years is only getting more complicated every 
time Congress decides that they are going to try to equalize 
things or intervene to try and make the system more fair.
    It has been demonstrated by the producers that have 
testified here today that there is no system that this Federal 
Government can put together that is ever going to be fair for 
every dairy farmer in the country. If we are going to try to 
have a social engineering policy that must determine that we 
never lose another farmer from the land, then this is not the 
way to do it because you cannot even do this fairly. The only 
way, then, if that is going to be the goal that the Congress 
decides on, a social engineering policy to make sure that every 
farmer has a fair income, then Congress needs to get rid of the 
milk marketing order system, get rid of the dairy price support 
program, and come up with a farm income assistance program, 
some sort of supplemental assistance that is directed to the 
farmers in need. And it is really the only logical scheme left.
    [The prepared statement of Mr. Frydenlund can be found in 
the appendix on page 331.]
    The Chairman. Thank you very much for your testimony.
    Mr. Hughes?

 STATEMENT OF WILL HUGHES, UNIVERSITY OF WISCONSIN, CENTER FOR 
                COOPERATIVES, MADISON, WISCONSIN

    Mr. Hughes. Thank you, Chairman Lugar and Senator Harkin, 
for having me to testify today. I don't know if it is an 
advantage or a disadvantage, but I am only representing myself 
today, and I am speaking as a staff economist for the 
University of Wisconsin Center for Cooperatives.
    I have also had the honor to grow up on a dairy farm in the 
Northeast and now reside in the Midwest. And I haven't tried 
the West out yet, but if looks like if you want to do dairy, 
you should be looking at that area as well.
    I think my first point today is that there is a tendency to 
exaggerate how important Federal orders are in the marketplace 
today. There is also a tendency perhaps to over exaggerate how 
bad they are. But what I want to address is the question of 
whether the playing field is level, this equitability question, 
after all these reforms have taken place and we spent a lot of 
dollars and time in the last 10 years working on it, and that 
is, I think, why I was invited here today.
    The answer to the question ``Is there a level playing 
field?'' is a resounding no. You, Mr. Chairman, used the word 
``de minimis,'' and I like that word and will now put that into 
my portfolio.
    In my written testimony, there is an Appendix a. It is near 
the last part of the testimony, and it is a chart, a bar chart 
that shows the distribution of Federal order benefits in the 
new system versus the old system distributed across regions. 
And these benefits range from a low of 37 cents a hundredweight 
to a high of $3.63 a hundredweight. It is a crude measurement. 
I can give you sophisticated analysis that I have reference in 
my written testimony that would show you about the same thing 
on a slightly different scale.
    With respect to Class I milk, Federal orders have not been 
reformed, and I am showing that in my Appendix b's that are 
attached in the testimony.
    If you look at Appendix b1, that chart shows a plot of 
Class I differentials in Federal orders east of the Rocky 
Mountains by distance from Eau Claire, and the large black dot 
represents USDA's final rule. And as you can see, it moved the 
system slightly to the more equitable plane.
    FAPRI, which is a group that does forecasting and analysis 
on policy, worked with USDA and came up with a consensus 
forecast, and I would hope that this committee would look at 
that forecast. It was really underutilized in the debates in 
Congress this last session and other information was abused to 
show worse results. But that shows that 60 percent of the dairy 
farmers in the States were benefited under the final rule 
proposal, and I would like you to look at that.
    Appendix b on the opposite page shows what we have with the 
new 1A differentials, and it hardly looks like reform at all.
    There are some other technical details that suggest that we 
could have even raised the Class I price surface more than we 
thought, and it relates to the Class I mover and changing the 
Basic formula price [BFP].
    Ask yourself the question: Do Federal orders increase milk 
production? Our analysis at the University of Wisconsin 
suggests they do so by about a billion pounds. A billion pounds 
in the pipeline has quite a price effect. They also decrease 
cheese prices by about 4-cents per pound, according to our 
analysis. And they also, therefore, affect the cheese milk, or 
the milk used in cheese, by about 40-cents.
    Compacts do the same thing as Federal orders, only in a 
more dramatic way. Our studies at the University of Wisconsin 
suggest that compacts create many more losing farmers than they 
do benefiting farmers. For example, in my testimony, I refer to 
analysis that the Northeast Compact, if you included New York 
and Pennsylvania, would add $237 million on about 12 percent of 
the farms in the country versus taking away $146 million spread 
off a larger number of farmers and, therefore, per 
hundredweight a lesser amount of a loss.
    So I am here to tell you that the world without regulation 
would be pretty flat. I know there was a little discussion 
yesterday, but Cornell did some analysis for USDA as to what 
would the price surface look like, relative prices amongst 
areas, and they found it to be--and they were looking at this 
in the aspect of without regulation. And they would say that 
there would be quite a narrowing in the range from how we are 
regulating prices. And that work was used to formulate Option 
1B, the final rule, and so on.
    Our history of trying good intentions has caused vicious 
cycles of surpluses and low milk prices, the high supports in 
the 1980s, the 1985 increase in the differentials, we had to 
come up with buyouts and diversion programs and so on. This is 
the law of unintended consequences.
    Building a national dairy program that treats farmers 
equitably is essential, and that is what should preoccupy this 
committee until the job is adequately done, and I am confident 
and hopeful, knowing the interests that sat at the table these 
2-days, that can be done. I think it is going to take a little 
trick, which I will get to in a minute.
    This is going to be complex because, as you have heard, 
there are low-cost areas, high-cost areas, high-cost producers, 
low-cost producers. There are manufacturing areas, then there 
are fluid areas. And the bottom line is, in trying to come up 
with balancing a system that works for all those players in 
equitable ways, I think we are going to have to back off, as 
Mr. Jaeger said here, and be more simple and basic in our 
approach. That ought to run on the principle that less 
regulation is superior to more regulation, and we ought to 
focus on helping the industry manage this downside price-risk 
problem that we see repeatedly in recent years.
    So what should we do? Short term, 1- to 2-years until we 
get to the farm bill, say no to more or extensions to compacts. 
I have a chart in my testimony that speaks to that. You have 
heard about the price support program and the DEIP program. I 
do think that is an important part of the safety net. At 
current levels, they do not distort markets and work as a 
reasonable safety net.
    I think Congress should consider additional direct 
payments, assuming prices will remain low for the next year or 
so. Direct payments at the levels and distributions that are 
possible will not distort markets, and they are the most 
effective means of supporting.
    Farmers don't like them that I have talked to because they 
are perceived as a handout, but if they are tied to price 
levels and they are truly needed and targeted, I think they can 
be effective.
    The farm bill, congressional leadership. Steve Gunderson 
tried this several years ago and it didn't work. But if there 
was more broad-based congressional leadership that laid down 
the hammer that you will deregulate all regional programs 
unless the dairy industry and USDA develop a new national 
program, I think it can be done, and it will require that 
hammer be put in place.
    I believe if we don't move to replacing Federal orders in 
the future through these other kinds of programs or, 
alternatively, adopting a California-style system, we can see 
the system self-destruct over time. And I see time and time 
again that farmers value these programs.
    The problem is they become an entitlement, and lawyers 
would say a property right, as you see this inequitable 
distribution of benefits, and that has to change.
    Finally, keep developing tools that help dairy farmers 
manage price risks and revenues by encouraging forward 
contracting options, maybe some support on premiums for that, 
and I agree with an earlier gentleman, look at that revenue 
assurance as another vehicle.
    Is there a need for a Federal dairy policy? Yes. Will 
consumers go without milk without one? No. Would the size and 
structure of dairy farming be different without dairy policy? 
Yes, it would be. Do we need to ensure a local supply of milk 
via Federal policy? No, we should not do that. There will 
always be local milk production. Promote fair competition, and 
farmers and the industry will find ways to produce milk where 
it is needed. Be careful of protecting the past without 
hindering the future.
    Thank you.
    [The prepared statement of Mr. Hughes can be found in the 
appendix on page 339.]
    The Chairman. Thank you very much, Mr. Hughes.
    Mr. Paul.

  STATEMENT OF EUGENE PAUL, LEGISLATIVE COORDINATOR, NATIONAL 
                FARMERS ORGANIZATION, AMES, IOWA

    Mr. Paul. Mr. Chairman, on behalf of the National Farmers 
Organization, we want to express our appreciation to you and 
Senator Harkin for holding these hearings today.
    Our organization represents independent producers 
nationwide in negotiating contracts and other terms of trade 
for grain, livestock, and dairy. And our purpose is to help 
independent farmers extract the dollars they need to cash flow 
their operations.
    Dairy farmers today are facing some devastating situations. 
The current dairy policies have brought extreme price 
volatility to the dairy industry. Since September, the basic 
formula price has decreased by about 40-percent.
    The milk price today is far below the milk production costs 
experienced by dairy producers in this country.
    We can see the turmoil this has caused by looking at the 
exodus of dairy operations over the past years. Since 1992, 
approximately 30-percent of our dairy farmers have gone out of 
business. With that, it has had a negative impact on the rural 
businesses and infrastructure as well.
    USDA's dairy pricing reform leveled the field of milk 
pricing to the lowest level found for milk in the country. The 
dairy pricing reform was designed to function like California's 
State order pricing system. The gains from being competitive 
with California's milk pricing system cannot be worth the 
further demise of this Nation's dairy industry.
    The majority of America's milk production is being utilized 
for the production of dairy products. A great deal of focus has 
been placed on Class I milk. However, Class I differentials are 
important, but most of the milk is used for the manufacturing 
of cheese priced in Class III.
    USDA's new dairy pricing system and the California State 
order milk prices are set using end product pricing formulas to 
establish the value of milk to be used for the manufacturing of 
cheese, butter, and powdered milk. End product pricing formulas 
alone do not find the true value of raw milk. Raw milk has a 
value before it is processed into a dairy product. Raw milk's 
value is the cost to produce the milk, such as the hay, grain, 
equipment, utilities, and labor.
    Another major issue with end product pricing is the setting 
of a make allowance level. Make allowances assist the milk 
processors in covering the production costs of the plants; 
whereas, the milk-producing segment of the industry receives no 
production cost consideration at all.
    It has been said that the dairy industry can export or 
trade its way to a healthier condition. This idea has been the 
fix-all, save-all remedy for what ails the dairy industry. 
However, a recent economic report on this issue from the 
University of Wisconsin shows the fallacy in export salvation 
for America's dairy industry. The report predicts the direction 
and amount of milk price change for America's dairy producers 
as a result of free trade to be a negative 0.4-percent. 
Basically, chasing freer trade for the dairy industry will 
result in lower milk prices for America's dairy producers.
    Some have looked at the Canadian market as a market to be 
opened and conquered by this country's dairy industry. All this 
would do would be to lower the Canadian dairy producers' milk 
price to an inequitable level. The gain to America's dairy 
producers by ruining Canada's current dairy system would be 
minimal, if any gain at all.
    The situation we are facing today is the issue of price, 
and I fail to see how lowering price in one area will benefit 
another. Why not raise the price in the lower-priced areas to 
those areas which are receiving a higher price? To this end, to 
provide some stability in milk prices, the National Farmers 
Organization supports the Northeast Dairy Compact Commission 
and the expansion of the compact and the creation of similar 
entities to help producers extract more dollars from the 
market.
    In addition, a dairy industry milk management program has 
some benefits and should be given an opportunity in the United 
States. We encourage a mandatory system; however, a voluntary 
system could be established with the cooperation of dairy 
producers and dairy cooperatives using a coordinated and 
systematic culling of producing cows.
    To deal with the situation facing us today, the National 
Farmers Organization is requesting emergency action to be taken 
by USDA to establish a floor price for the price of milk in all 
Federal Milk Marketing Orders. We are calling on USDA to 
initiate emergency rulemaking proceedings to institute a milk 
floor price of $13.50 per hundredweight for Class III milk.
    The economic situation facing America's dairy producers 
today must be addressed. Without quick action in the form of 
price relief, which National Farmers Organization has 
requested, financial disaster will plague America's dairy 
producers causing many more to exit the industry.
    Thank you for the opportunity to speak to you today?
    [The prepared statement of Mr. Paul can be found in the 
appendix on page 355.]
    The Chairman. Thank you very much, Mr. Paul, for your 
testimony.
    Mr. Brey.

  STATEMENT OF BILL BREY, PRESIDENT, WISCONSIN FARMERS UNION, 
  STURGEON BAY, WISCONSIN, ON BEHALF OF THE NATIONAL FARMERS 
                             UNION

    Mr. Brey. Thank you, Mr. Chairman, Senator Harkin.
    On behalf of 300,00 farm and ranch families of the National 
Farmers Union, I would like to thank you for the opportunity to 
testify. I am Bill Brey, the president of the Wisconsin Farmers 
Union. I have been a full-time dairy farmer from Sturgeon Bay, 
Wisconsin, in northeast Wisconsin, and I farm there with my 
wife and family. We milk 95-cows and run 600-acres of alfalfa, 
corn, barley, canning peas, and soybeans.
    Many people would say that Wisconsin is ideally suited to 
produce milk. Yet, nowhere is the economic devastation brought 
on by low prices more evident. My State has dropped from over 
40,000-dairy farmers in the 1980s to 21,000 as of January 1st. 
With prices hovering around $9, farmers will continue to be put 
out of business.
    National Dairy policy has become very contentious with one 
region pitted against another. However, it is the strong belief 
of the members of National Farmers Union that only by working 
together can we move forward to a national solution.
    I have worked to implement this strategy in my home State. 
When we made plans for our 69th annual Wisconsin Farmers Union 
convention held in Eau Claire, Wisconsin, on February 4th and 
5th, I invited producers from all regions of the country to 
participate on a national dairy producer panel. Our panel 
included dairy farmers from Vermont, Alabama, Texas, Minnesota, 
California, and Wisconsin.
    My testimony today will include two sections: National 
Farmers Union support for continuation of dairy policy at the 
Federal level, and the principles of agreement reached by panel 
participants.
    National Farmers Union [NFU] believes there is a strong 
need for Federal dairy policy. NFU supports continuation of the 
Federal Milk Marketing Order system, the dairy price support 
system, dairy nutritional programs, and dairy export programs.
    Federal Milk Marketing Order system. While the Federal Milk 
Marketing Order system is not perfect, it provides important 
protection for both producers and consumers. The system 
provides testing and standards and helps ensure the orderly 
marketing of dairy products throughout the United States. It 
ensures producers are paid for the products they deliver and 
provides consumers with a safe and healthful supply of dairy 
products wherever they live.
    We believe that some changes are needed. The National 
Farmers Union supports reform of the Federal Milk Marketing 
Order system on Class III and IV, as directed by Congress. In 
particular, we are concerned that the new, higher processor 
manufacturing allowances set by USDA will result in less 
producer income. Farmers are questioning why processors should 
receive a guaranteed cost of production for manufacturing, even 
while farmers are left at the mercy of the market. We are 
considering the benefits of a variable manufacturing allowance 
that would adjust in the relationship to the producers' milk 
price.
    Dairy price support program. The dairy support price sets a 
floor on the price received by all producers, regardless of 
region and regardless of how each producer's milk is used. 
National Farmers Union favors a dairy price support program 
that is set at a level sufficient to curve market volatility. 
The current level of $9.90 per hundredweight is too low to act 
as a stabilizer. And I would like you to make reference to page 
5, a chart which shows the support price was an effective price 
stabilizer until the late 1980s, when it was reduced too far 
below the average market level.
    The 5-year average base price for milk, the basic formulate 
price, is $12.78. Therefore, our members believe a support 
price of $12.50 would protect against the huge drops producers 
have experienced in the past few years. Commodity Credit 
Corporation purchases may need to be capped to limit Government 
costs and avoid surplus product.
    A stable supply benefits processors by keeping plants 
operating at capacity. Decreased volatility would also benefit 
consumers who pay more when farm prices increase, but seldom 
see a corresponding decrease when farm prices go back down.
    Immediate relief. In the short term, we believe that the 
Commodity Credit Corporation should continue to provide 
emergency assistance to farmers, for example, the $125 million 
appropriated by Congress in last fall's emergency funding. 
However, assuming that funding is distributed in the same 
manner as 1999, these payments are likely to be in range of 14 
cents per hundredweight, with a maximum of $3,600 for any 
producer. This would be a payment of approximately $1,400 for 
the average Wisconsin producer. The feed alone for that same 
size producer would be about $7,000 for just 1 month. Since 
USDA is projecting significant drops to dairy producers' income 
for 2000, emergency assistance will be more important than 
ever.
    Dairy compacts. Our members have called for a nationwide 
solution that will ensure opportunities for all dairy farmers, 
regardless of region. National Farmers Union will support dairy 
compacts to the extent they are coupled with a support price 
that is high enough to stabilize price and enable producers to 
earn a fair return from the market.
    National dairy trade policies. There is often discussion 
about whether various U.S. dairy programs are allowable under 
the World Trade Organization and how our programs will affect 
the United States' ability to negotiate further agreements. We 
would point out that U.S. farmers produce 160-billion pounds of 
milk per year and export only 3-billion. Since the lion's share 
of our milk, 98.2-percent, is sold in the United States, it is 
imperative that the United States maintain an ability to 
operate domestic programs for food security. There is no 
financial advantage in supporting policies that lower the 
market price to producers on 98.2-percent of the milk just to 
increase exports.
    In addition, since the world market is heavily subsidized, 
we support maintaining the DEIP.
    Food and Drug Administration standards. We believe that the 
standards for a hearing by FDA to change the definition of 
natural cheese that thereby allows the use of imported milk 
protein concentrate would displace domestic milk used for 
manufacturing, resulting in great program costs and lower 
prices to dairy farmers.
    Regional disagreements have caused some people to ask 
whether total deregulation would be preferable to maintaining 
national policy. However, we believe the benefits provided by a 
Federal dairy program far outweigh the items of contention.
    In conclusion, I would urge Congress to try the same 
strategy. Thank you, Mr. Chairman.
    [The prepared statement of Mr. Brey can be found in the 
appendix on page 362.]
    The Chairman. Well, thank you very much, Mr. Brey.
    Let me just begin the questioning by commenting that in the 
panel today and, likewise, yesterday, the trade policy question 
arose in testimony of many witnesses. Essentially, yesterday 
the testimony was that American dairy producers, by and large, 
are not competitive with imports from New Zealand and Australia 
that are not subsidized, not very competitive against the 
European situation, which is heavily subsidized and almost 
overwhelming. And, therefore, the solution was essentially 
barriers to imports, both to protect against those who were 
more efficient as well as to level the playing field against 
the preponderance of the subsidy of Europeans that might come 
in. This is with regard simply to the producer side.
    Now, on the consumer side, consumers would argue that 
imports might lower the price of milk, however it came, 
subsidized by the Europeans or free market by the Australians 
or New Zealanders, and, therefore, the quality of life for most 
Americans, but not for dairy producers, would increase.
    I don't know whether a fortress-America situation is 
tenable indefinitely. It probably is temporarily because 
agriculture negotiations have broken down very badly. There is 
a glimmer of hope that something might start at the WTO. It 
happened in Geneva this week. But that has prospects for months 
and years of talking about anything. And so as a result, this 
is probably not going to change.
    What I ask all of you, however, is during the course of 
this interim period, is it likely that American dairy producers 
will become more efficient, costs will come down, so that if we 
ever do get into a situation of world trade--which I suspect we 
will at some point; I don't know how you maintain immunity to 
all of this indefinitely--that we will be competitive?
    If not, I suspect that we are in for some difficulty, but 
do any of you have any feeling about this? Most of you have 
said--in fact, all of us are calling for efficiency and lower 
cost, but we don't understand the dairy business. You can't 
lower cost at some point. You just simply are there, and it is 
a tough business. Therefore, if you can't produce efficiently, 
you protect what you have got, in essence, in a fairly mature 
market where the amount of demand does not increase much year 
by year, maybe a 1 percent increase per year, very modest over 
the last decade.
    Does anybody have any comment about do we become more 
efficient? Does it make any difference? Or is the trade policy 
you are advocating--namely, keep the imports out and don't get 
really mixed up in this WTO business--is that the best we can 
do? Yes, Sir?
    Mr. Hinsdale. Well, of course, we focused here, since this 
is a dairy hearing, on trying to balance the equities within 
dairy, and then, of course, we can slide into the larger, more 
challenging question of balancing equities across commodity 
lines. And it is, of course, interesting and unique that over 
98 percent of dairy production is for use here in the country 
as opposed to the picture in other commodities where it is 
upwards in the 50-percent range or something, like wheat.
    You know, as we have seen the consolidation in U.S. 
agriculture, essentially you get the consumer consolidation in 
supermarkets, you know, driving everything all the way back to 
the chain, and we have seen the consolidation in poultry and 
consolidation in hogs. And dairy is the other bookend because 
it is so capital-intensive and so strongly geographically 
rooted that it is probably one of the most difficult forms of 
agriculture to achieve the concentration and efficiencies that 
have taken place elsewhere.
    Certainly from the American Farm Bureau's point of view, we 
need to continue to move in the direction of freer and fairer 
trade and simply recognize that a bulky, capita-intensive 
product like milk is kind of the bookend over here.
    But certainly in the American Farm Bureau, we recognize 
that the collective interest of agriculture is served by 
continuing to try to move ahead with world trade.
    The Chairman. Well, certainly that appears to be the 
testimony of the American Farm Bureau here in the Committee. In 
other words, essentially the testimony, as I understand it, is 
that the dynamics of American agriculture, the expansion of our 
income, the potential for American farm families to do a whole 
lot better comes from, as you suggest, exporting half of our 
soybeans, a third of our corn, maybe a quarter of our wheat 
every year. The failure to do that almost is bound to depress 
prices, depress income, make things miserable for most of the 
farmers that the American Farm Bureau represents.
    So the dairy thing comes as a very distinct difference from 
this situation. In other words, is the American Farm Bureau 
position with regard to dairy that, despite the open business, 
all the delegations, the Farm Bureau, going to Geneva all the 
time and so forth, that here we sort of draw a line around 
America for this situation--which is not a very dynamically 
growing situation. You know, in essence, you gentlemen are 
talking about something that is very, very stable.
    Now, if we were to talk about increasing demand for dairy, 
it is going to have to be with some other customers somewhere 
else in the world. But what I am suggesting is, if our costs 
are much higher than some other people who are also competing 
in the rest of the world, our chances of making those sales are 
not very good without DEIP, which means we then subsidize 
exports to try to improve our position.
    You know, now, maybe this is just the way that it is, that 
we have a cost structure here that is not very competitive, a 
very mature market, and, therefore, we are constantly dividing 
up the pie, either by region or by classes of milk or however 
many tiers you want to look into the pricing. If so, that is a 
serious problem all by itself, plus the fact that, as we heard 
yesterday, there appear to be large differentials of return 
from large cow operations as opposed to medium as oppose to 
small.
    And I would just say anecdotally from my own experience in 
Indiana, each time that I visit with dairy people, typically 
confidential meetings we want to have, and inevitably it is the 
30-cow operation, a 65-year-old man and a 40-year-old son, and 
the 65-year-old man would like to figure out how to retire, how 
to get some equity from this situation and how to entice the 
40-year-old son to keep going. And the 40-year-old is not sure 
he wants to do this for 25 more years.
    They come to me and they want a magic solution: What can 
the Federal Government do to help our situation? Well, lots of 
things, but typically these people the next time around in that 
county are not in business. They are among those that are being 
described today as the casualties of the process.
    Now, I think, Mr. Frydenlund, you mentioned--or maybe Mr. 
Hughes, if our policy is the retention of every one of these 
farmers, then we really will have to have a very different 
policy altogether, very targeted at the 30-cow people, or the 
40 or 50 or so forth, because these are really hurting. They 
are on the margin, and when the price goes down, it really 
becomes tough. Or the reinvestment question, how do you get 
more competitive, or how do you refurbish the infrastructure of 
what you got?
    Do any of you have any broad thoughts? Some of you have 
expressed those, and I don't mean to diminish that, but sort of 
help us in this situation because we are discussing now why in 
this panel we have a policy, why we have programs, why we are 
doing any of this, as opposed to something, a distributional 
chart of how we divvy it up regionally.
    Mr. Brey. Mr. Chairman, I would like to get back and kind 
of couple the whole--there were many questions you asked, and I 
would like to lay it a little bit from some experiences that I 
had.
    One is that us as dairymen in the United States, when we 
look at the dynamics of what world trade is and we see that the 
Chairman is from New Zealand and we see also--I have been on 
some dairy panels around the world, and the Chairman is also 
representing dairy, the vice chairman on the dairy committee 
side of it. That lets--and when we look at production costs and 
efficiencies, I think we have to look at--in our United States, 
if I have a 26,000-pound herd average, which I have achieved, I 
am probably most efficient as far as pounds per cow. If I 
change that--if I look at that, and my cost of that has been 
hovering around the $14, $15 hundredweight like everyone else.
    If I lay that over and I say to the New Zealander, who has 
grass-fed cattle and no concentrates, no dry matter intake, no 
machinery, no grains, especially none imported from Indiana, 
from that standpoint, I am using up the efficiency that I am 
comparing it as.
    So when you look at New Zealand that exports 95 percent of 
their product and has to put it on the world market, that is 
their agriculture, they have to force it someplace. And from 
our standpoint, why should the United States be importing and 
force our domestic price to compete with the unrealistic 
benchmark of inefficiencies or efficiencies of that $7 versus 
what it costs me to produce my milk?
    The Chairman. It is a very important piece of testimony. 
You know, correspondingly, when I talk to friends from New 
Zealand, they would say you folks in Indiana have ideal 
conditions for production of corn. God has given you 39 inches 
of rainfall fairly steadily almost every year, and without 
irrigation, without other cost factors that enter into other 
situations, you have got a very low-cost product which you send 
everywhere. And we certainly try to do that. Delegations go 
from Indiana all over the world trying to sell corn on the 
basis that we are low-cost and do have enormous geographical 
weather advantages. Some would say the same thing for wheat in 
wheat country and what have you.
    This is the problem. Now, it may be that we decide that 
dairy is distinctly different, and that really, I suspect, has 
been the decision of the Congress without distilling it quite 
this way, that we have something here that is very different 
from corn or beans or even pork, which now you have a surplus 
production and we export and do so competitively where once we 
didn't maybe 3 or 4 years ago.
    Do you have a thought, Mr. Hughes?
    Mr. Hughes. Yes. I am not a trade expert, so with that as a 
caveat, you can find data around the country that can show you 
different results, but I believe--like looking at Cornell 
summarizes financial information on New York dairy farms, and 
we have some in Wisconsin that show that productivity is 
increasing on a 1-to 2-percent-a-year basis.
    The Chairman. In dairy?
    Mr. Hughes. In dairy. Costs are going down. But USDA 
statistics are not showing that.
    The Chairman. Well, why are they different? Why are your 
figures different?
    Mr. Hughes. That is a good question. Can't answer that for 
you. It is a methodological issue.
    The Chairman. I see.
    Mr. Hughes. But the incentives in Europe, where they have 
production controls, they manage very intensively to lower 
costs. And so particularly in the UK, Denmark, and the 
Netherlands, they can compete with the U.S. pretty well. Some 
of the other countries are not competitive with the U.S.
    New Zealand and Australia, you know the story there. They 
can run forage very efficiently through cattle.
    The analysis that I have seen that I respect somewhat is 
that if you could get to free trade, fair, free trade--that 
means eliminating European subsidies and opening up access to 
markets--you could see the gains to New Zealand and the losses 
to the European, with about a wash for the U.S. So the problem 
is how to get there. And you have heard Mr. Tillison testify 
about people cheating and there are all kinds of institutional 
arrangements, and it is that how do you get there. And I am 
quite skeptical that you can leap to that situation without 
considerable shock to dairy producers in the country.
    The Chairman. Well, I would be skeptical, too, you know, 
for the reasons that all of you have given, namely, we have an 
impossible predicament with the Europeans.
    I am just trying to think down the trail. There may come a 
day when we have a different group of Senators sitting around 
here, a different feeling in the country, and people will say, 
well, this dairy business has gone on long enough. There will 
be a reforming spirit coming through here, and people will say 
consumers ought to benefit, all the rest of us. And, by golly, 
if we want milk for 20-percent less, the dairy farmers will 
say, well, that is totally unfair. It is a cheap food policy, 
and these people are unreasonable, and we are all going out of 
business and so forth. But consumers may say, well, that is one 
of those problems. We all have problems. And looking out after 
number one, namely, my family, as a consumer I would like to 
have cheaper milk.
    At that point we better have a cost structure, and I am 
heartened by what you are saying, Mr. Hughes, that while all 
this argument is going on somewhere else, somehow productivity 
is going up, the cost structure is improving, and, you know, 
that is the most heartening evidence because, you are right, 
USDA doesn't show that. Now, they may not be polling the same 
farmers or looking at the same data, but we are trying to look 
for some good news here, even while the fortress is holding and 
the political support for it.
    For the moment, there is political support in the Congress 
for roughly the programs that we have; otherwise, they would 
have been dispensed with a while back. But they have not been. 
But I think in part it is because the public doesn't understand 
how milk is priced. Most Congressmen don't understand how milk 
is priced. This is such a byzantine argument that, by and 
large, there is sympathy for dairy farmers and for other 
farmers. So, by and large, money is voted to help them out.
    Now, what some of you are saying is, even as we are voting 
it, have we thought through who it is we want to help. Now, I 
think, Mr. Paul, you have suggested that essentially--or maybe 
Mr. Brey, that small farmers, when we had these general 
distributions, don't do particularly well because it is on a 
per-pound basis or whatever. The big get more money. That is 
true of all Government programs unless we have a very targeted 
cap sort of thing.
    One of you suggested, well, do a $12.50 general support, 
but cap it off. Now, you could work that one to a point, I 
suppose, where you has a pretty heavy cap. I mean, it came way 
down so that only very small dairy herds were benefited. That 
would be a more direct way of keeping all those folks in 
business so long as they could make it on other grounds. And 
people think about those things from time to time. Then other 
people come in and say, well, after all, we have got a herd 
that is 80 cows, sort of a good, average herd, or a couple of 
hundred, why are we being discriminated against?
    Now, you can go around and around, but to the extent that 
anyone wants to address this, what about a policy in which we 
have no compacts, we have no marketing orders, but we do have a 
support price and it is higher, with the thought that some of 
you are suggesting that it needs to be, because our costs are 
way up, well above $12.50, you are saying, I think, in most 
farms. So this is well below cost. It is sort of a safety net, 
and we have a national policy. What would be wrong, just 
hypothetically say $12.50, and eliminate compacts and eliminate 
marketing orders and just say $12.50? Then, if so, what kind of 
a cap? Is this for everybody? Does it offer incentives for 
overproduction? Some of you were suggesting we want 
disincentives for overproduction.
    Does anybody have a thought about this? Yes, Mr. 
Frydenlund?
    Mr. Frydenlund. Mr. Chairman, I would just caution that any 
sort of artificial increase in the support price gets us down 
the same road that we went in the 1970s and 1980s where the 
artificially high support prices led to increased production 
and--------
    The Chairman. To another whole-herd buyout or something of 
that sort.
    Mr. Frydenlund. Yes, it is a dangerous way to go. Now, I 
don't--if the assistance is somehow managed with some sort of 
targeting, that might have less of an impact. But I am not 
really sure how that would work.
    I do want to just say that I think that the efforts of 
members like yourself in Congress that have been pushing for a 
global marketplace, or at least pushing for the World Trade 
Organization to level that playing field, in the long run I 
think that is going to be of more potential benefit for the 
entire dairy industry than probably anything else. In fact, I 
would argue, without sounding too critical of the entire dairy 
industry, that the time and effort that the dairy industry has 
spent debating over which way to go on marketing orders and 
which way to go on support prices has all been focused upon a 
very small--just the domestic market. And I think that the 
dairy industry itself has failed to look at opportunities out 
in the rest of the world, and that is a much bigger market than 
our very limited static number of people here; whereas--and I 
know that there are difficulties. For instance, bulk milk is 
not probably something that is going to be easily exported, but 
even in other commodities, you know, wheat, feed grains, etc., 
the growth opportunities there are more and more becoming in 
value-added products, in processed products, than just in the 
bulk commodities.
    So the same dynamic could exist for dairy, and I think if 
we didn't have these programs that basically just keep us 
looking inward, there would be a greater incentive to produce 
for the world market.
    The Chairman. Mr. Brey?
    Mr. Brey. Mr. Chairman, what I tried to illustrate in the 
example is that the 5-year average per hundredweight is $12.50. 
As of this time, we have very little surplus, certainly not in 
cheese. And if we would raise that price and keep the $12.50 
rather than the $10.10 that we are--why we are here today 
talking about the big picture of it, the Northeast Compact in a 
sense would not call for itself because it would be coming 
from--it would be non-regionalism because we would all be 
receiving that $12.50.
    We said that wouldn't be on all--I think it should be 
capped for the like the family or farm unit--------
    The Chairman. Well, how many cows?
    Mr. Brey. Probably 2-million pounds, 2- to 5-million pounds 
per farm. I take that out of the Minnesota publication, the 
university, average--the profit per cow ranges anywhere in 
between 50- and 100-cows. Those are the top graphs as far as 
income return per cow.
    Well, if that is the case, then at a 20,000-pound herd 
average, you are at 2- to 3-million pounds per cow. So that is 
kind of what that economic unit would be. Then the rest could 
be left to--if there is--an export market or something of that 
nature. But in order to keep this exodus from losing in our 
State alone 20,000 families--and the projection is it will cut 
another 10,000 out probably in the next 5-years, just not only 
because of age but because of this downward pressure.
    The other question that--------
    The Chairman. Just let me stop you for a second. Without 
putting too fine a point on it, you would say give the $12.50 
to farmers that have 100-cows or less, in essence, using the 
20,000 times 100-cows or so.
    Mr. Brey. Or up to 100-cows.
    The Chairman. Up to 100-cows.
    Mr. Brey. For everyone.
    The Chairman. Now, then everybody else gets whatever the 
market price is. In other words, there is no support there. So 
at that point, you are on your own. Is that essentially right?
    Mr. Brey. Pretty much so.
    The Chairman. OK. Please continue.
    Mr. Brey. You know, we talk about supply and demand. USDA 
projects the projection in 1999 and 2000 will reach 164-billion 
pounds. Meanwhile, the commercial use forecast has also been 
increased. Commercial use on milk equivalent, milk-fat basis, 
including commercial exports, is forecast at 167-billion 
pounds, up from last month's forecast.
    Well, why are we in such a downward pressure if we are 
asked--if the projection is 165-billion and the need is called 
for 167-billion? This signal from USDA should say that there is 
a demand for milk, bringing this price up, not to where it is 
being depressed.
    The Chairman. Well, the USDA I think testified yesterday 
that the price will go up. It always is lower in January. And 
by June or July, if we had the hearing, it would be a more 
cheerful group.
    But, nevertheless, you know, you have to average these 
things over a year. You have these cycles, but maybe not that 
much. Likewise, we heard yesterday there is quite a new demand 
for cheese. Now, the cheese price, as opposed to the whole-milk 
price, is pretty favorable. So, in essence, consumer demand 
seems to be increasing for cheese, whereas it is very stable 
for whole milk at these prices.
    I don't know how that factors into the 164/167, but it is 
an important figure. As you say, there may be a little more 
demand there.
    Yes, Sir?
    Mr. Scarlett. Mr. Chairman, I would like to go back to the 
purpose of the orders when you are talking about doing away 
with orders and only having the price support. The purpose of 
the orders there, be ever how many they are, the 31 or now the 
11, the purpose of those orders is to provide--make sure there 
is a supply for the consumers of milk or dairy products in 
those areas and to make sure that is a stable thing.
    So I would question highly about going only to a support 
price and doing away with the orders because you have different 
needs in different parts of the country as far as the consumer 
needs. And also, as far as--------
    The Chairman. Well, Mr. Scarlett, on that point, some have 
testified that even though--you make a good point, and that is 
one reason we have had these marketing orders--that milk can be 
supplied from other regions fairly rapidly, in other words, 
that consumers in Tennessee will not be without milk if 
marketing orders don't exist that are that narrow. The 31, 
maybe the 11 still gets you there, maybe zero.
    I think Mr. Hughes is testifying--and I think you answered 
your own question. Would consumers get milk? You said yes. But, 
in essence, you are saying not necessarily, as I understand it.
    Mr. Scarlett. Well, Mr. Chairman, not necessarily, because 
we have talked about the policy of keeping the farms and--of 
course, I guess being my size of dairy, I would tend to 
disagree with Mr. Brey over there.
    The Chairman. His cap is too low?
    Mr. Scarlett. The cap. A nice fellow down home, they milk 
about 400-head, and he said he never had a cold cookie until he 
got married. He didn't know what it was. He didn't get a cookie 
when it is hot. He has got give other brothers, and they are 
all there. Do you penalize them for all staying on the farm and 
saying because they milk more, do you divide it out per person? 
I mean, I guess it would raise in my mind some serious 
questions about that.
    But we have also talked about market policy and what the 
consumer wants and what we--you said yourself the consumer 
wanted maybe the dairy at X-number of price or 20-percent less 
or whatever it happened to be. But as in my testimony, we have 
got--another issue to consider is the effect on the rural 
communities and the effect on the economies within each State, 
and there are many variables to that, that if you eliminate 
those, we would have to bring into consideration of does the 
consumer--would they rather pay--would they rather have that 
milk check coming back to the community and being spent in 
there, or would they rather have to pay more for their schools 
and pave their roads and direct taxes, or how do we handle some 
problems like that?
    The Chairman. That is a very important set of questions. 
This committee wrestles, if we are on a different subject, on 
community development, with just that idea. How do we get more 
vitality back in hometown America and get more banks and more 
jobs and everything else? A lot of farm families need those 
jobs in order to supplement income they have on the farm.
    Yes, Mr. Hughes?
    Mr. Hughes. Well, I can't answer all of your questions. 
They are too heavy . But the idea of having a policy that is 
going to keep X-number or all farmers in business is probably 
unrealistic, in my opinion. Farmers enter and exit farming for 
lots of different reasons. Part of it is the price horizon. 
What do they expect their price and income capabilities?
    But the experiment in Vermont and in the New England States 
with, you know, who has been exiting and what size farms they 
are, where they have stabilized and increases prices, looks to 
me, based on at least anecdotal evidence, that the smaller-herd 
size exit faster in Vermont relative to the U.S. and their 
larger herds grow more. So there you are providing that 
umbrella for the expansion. Well, why do farmers expand? Well, 
they want to have more income units to cover more families, and 
you are not going to be able to stand in the way of that 
process. And you shouldn't, in my opinion.
    The Chairman. Well, it is an interesting question.
    Mr. Hughes. On capping, unless, you know, we are going to 
get this country to full supply control, which--------
    The Chairman. It sort of oversimplifies the question, but 
Mr. Scarlett's point on this, if we cap this off at 100-cows at 
$12.50 and you have a market price, conceivably consumers would 
be happy. The price of milk generally in the country would be 
much lower. All the Government money would be going essentially 
to one group of people, but not to 300 more cows Mr. Scarlett 
has, and so he would be selling a lot of milk very 
competitively. That might or might not fit the community 
development idea of the checks coming back to Tennessee or 
other situations, but it does rationalize the question.
    Now, this is one of these things in which there is no 
theological answer. Pragmatically, these decisions happen 
because Members of Congress push and poll and broker the 
situation on behalf of their constituents, as has happened 
before. But, nevertheless, as a preface why we are having these 
hearings, we came to an impasse last November in which some 
people won and other people lost.
    Now, people who lost said in order to stop the train of our 
filibuster, you are going to have to re-examine this. And many 
people are very skeptical about these hearings. I heard some 
comment yesterday that we were going through the motions and 
that, in essence, nothing is going to happen. Well, maybe so, 
maybe not.
    As I said at the beginning of the hearing, we will sort of 
poll our members, having heard all this testimony and as they 
read it and so forth, and see which way they want to move. But 
I appreciate very much your candor, a variety of points of 
view, the honesty from your own experience that you have 
expressed, because, without that, why, we are simply flying 
blind. This is a group around this table who want to do good, 
but they really need information, and they need facts from 
people who are on the firing line.
    Does anyone else have a comment? Yes, Sir?
    Mr. Paul. I just wanted to make one other comment, Senator. 
When we talk about this free trade idea, I don't believe we can 
ever expect that the European Union is going to absolutely give 
up their subsidies.
    The Chairman. Maybe not.
    Mr. Paul. They are going to protect their farmers. And I 
think the point that was raised by the witness from Tennessee, 
this local supply has a great deal of truth to it because you 
are not only looking at a local supply of milk, you are dealing 
with the people that are involved in those areas and the impact 
those people have on that rural economy. As you said yourself, 
we are dealing with this rural development. What are we trying 
to do? We are trying to put dollars and people back in rural 
areas. There are people out there right now, and if we need to 
do something with the price of milk so that they can stay there 
and keep those local businesses, schools, and so on going, I 
think that is--we have got to look at a broader picture than 
just simply the price of milk.
    The Chairman. Yes, Mr. Hinsdale?
    Mr. Hinsdale. Just two brief things. One is I do believe 
that many of the services and functions that have been provided 
by milk marketing orders in that system will be taken over as 
the continued growth and development and consolidation and 
expansion of farmer-owned cooperatives. I think farmer-owned 
cooperatives are a very important mechanism in the dairy 
industry that will continue to become more important and make a 
lot of the Government program stuff less relevant.
    The second observation in terms of the question of 
measuring equality or fairness and what that means, recognizing 
the geographical, environmental, and cultural diversities of 
our regions, I happen to come from the State that has the most 
dairy-dependent economy in the United States of America. 
Vermont is more dependent on the milk check than Kansas on 
wheat, Florida on citrus, or Indiana on corn. And all the 
value-added, whether it is your Ben and Jerry's or your Cabot 
cheese and the culture that works in companionship with that, 
our average community is less than 3,000 people and our average 
community has seven dairy farms. That is how intimate the 
relationship is.
    So as we move forward with agricultural policy, there will 
be regional forms of agriculture, whether it is ethanol 
production or dairy production in the Northeast, where there 
are certain forms of agriculture that make a disproportionate 
contribution to the economy and the culture of the area, which 
is why people fight so hard for it. And what we need to find is 
to be able to allow in this United States of America different 
regions that have different industries that are key to their 
regions, to have the opportunity to have initiatives to develop 
those resources.
    And I think that we need to do that, and I appreciate the 
opportunity to be here today.
    The Chairman. Thank you.
    You had your hand up, Mr. Brey.
    Mr. Brey. Just as I don't come to Washington, DC., very 
often, and you ask a question and in my quick response 
sometimes I do have a slip of the tongue, and I did mean that 
the price support should be on all milk and should be capped. 
Whenever we go over 3-percent of domestic use, well, then it 
should be into the free market sense. And I base that on the 
fact that I did mention that milk in the previous 5-years was 
at $12.78, and we have cleared the market basically except for 
some small powder purchases. So why should we, when we are 
projected to be 3.5-billion pounds below domestic production 
because of need, why should we be sacrificing a $10 price for 
our milk?
    Thank you.
    The Chairman. Well, I appreciate that point. Obviously, we 
were in a hypothetical discussion of targeting. Now, you can't 
have it both ways. Either you target or you say all milk. And 
so you take Mr. Scarlett into your tent. Whereas, you had it a 
little bit excluded earlier on.
    Well, I appreciate very much each of you for coming, some 
from very long distance and great inconvenience, but you have 
added immeasurably to our understanding and I think to our 
other colleagues.
    So saying, the hearing is adjourned.
    [Whereupon, at 12:29 p.m., the Committee was adjourned.]
      
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                            A P P E N D I X

                            February 9, 2000

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