[Senate Hearing 107-216]
[From the U.S. Government Publishing Office]



.                                                       S. Hrg. 107-216
  CONSIDERATION OF THE COMPLEXITIES INVOLVED IN MILD DISTRIBUTION AND 
                 PRICING FROM THE FARM TO THE CONSUMER

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



                                HEARING

                                before a

                          SUBCOMMITTEE OF THE

                      COMMITTEE ON APPROPRIATIONS
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                            SPECIAL HEARING

                     MAY 14, 2001--PHILADELPHIA, PA

                               __________

         Printed for the use of the Committee on Appropriations



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                     COMMITTEE ON APPROPRIATIONS

                     TED STEVENS, Alaska, Chairman
THAD COCHRAN, Mississippi            ROBERT C. BYRD, West Virginia
ARLEN SPECTER, Pennsylvania          DANIEL K. INOUYE, Hawaii
PETE V. DOMENICI, New Mexico         ERNEST F. HOLLINGS, South Carolina
CHRISTOPHER S. BOND, Missouri        PATRICK J. LEAHY, Vermont
MITCH McCONNELL, Kentucky            TOM HARKIN, Iowa
CONRAD BURNS, Montana                BARBARA A. MIKULSKI, Maryland
RICHARD C. SHELBY, Alabama           HARRY REID, Nevada
JUDD GREGG, New Hampshire            HERB KOHL, Wisconsin
ROBERT F. BENNETT, Utah              PATTY MURRAY, Washington
BEN NIGHTHORSE CAMPBELL, Colorado    BYRON L. DORGAN, North Dakota
LARRY CRAIG, Idaho                   DIANNE FEINSTEIN, California
KAY BAILEY HUTCHISON, Texas          RICHARD J. DURBIN, Illinois
MIKE DeWINE, Ohio                    TIM JOHNSON, South Dakota
                                     MARY L. LANDRIEU, Louisiana
                   Steven J. Cortese, Staff Director
                 Lisa Sutherland, Deputy Staff Director
                 Terry Sauvain, Minority Staff Director

  Subcommittee on Agriculture, Rural Development, and Related Agencies

                  THAD COCHRAN, Mississippi, Chairman
ARLEN SPECTER, Pennsylvania          HERB KOHL, Wisconsin
CHRISTOPHER S. BOND, Missouri        TOM HARKIN, Iowa
MITCH McCONNELL, Kentucky            BYRON L. DORGAN, North Dakota
CONRAD BURNS, Montana                DIANNE FEINSTEIN, California
LARRY CRAIG, Idaho                   RICHARD J. DURBIN, Illinois
                                     TIM JOHNSON, South Dakota
                           Professional Staff

                             Rebecca Davies
                           Martha Poindexter
                               Les Spivey
                           Rachelle Schroeder
                       Galen Fountain (Minority)
                        Jessica Arden (Minority)

                         Administrative Support

                         Angela Lee (Minority)










                            C O N T E N T S

                              ----------                              
                                                                   Page
Statement of Dr. Neilson Conklin, Director of Market and Trade 
  Economics, Economic Research Service, U.S. Department of 
  Agriculture....................................................     1
Opening statement of Senator Arlen Specter.......................     1
Statement of Dr. Conklin.........................................     2
    Prepared statement...........................................     4
Conditions and prospects for the U.S. dairy industry.............     4
Price support program............................................     6
Dairy export incentive program...................................     7
Imported milk proteins...........................................     7
Dairy compacts...................................................     7
Retail prices....................................................     8
Statement of Robert Robinson, Managing Director, Natural 
  Resources and Environment, General Accounting Office...........     8
    Prepared statement...........................................    10
Analysis of farm-to-retail prices................................    11
Relationship between farm and retail milk prices.................    11
Contacts and acknowledgement.....................................    13
Statement of Arden Tewksbury, Northeastern Pennsylvania farmer...    13
Statement of Luke Brubaker, Lancaster County farmer, member, 
  Pennsylvania Marketing Board...................................    15
    Prepared statement...........................................    17
Agricultural activities..........................................    17
Local government activities......................................    17
Community activities.............................................    18
State government activities......................................    18
Position of Brubaker farms.......................................    18
Statement of David McCorkle, President, Pennsylvania Food 
  Merchants Association..........................................    21
    Prepared statement...........................................    22
General comments & introduction..................................    22
The supermarket business model...................................    22
The Pennsylvania Milk Marketing Board............................    22
How the supermarket dollar is spent..............................    32
Statement of Earl Fink, Executive Vice President, Pennsylvania 
           Association of Milk Dealers...............................32

                               (iii)









  CONSIDERATION OF THE COMPLEXITIES INVOLVED IN MILD DISTRIBUTION AND 
                 PRICING FROM THE FARM TO THE CONSUMER

                              ----------                              


                          MONDAY, MAY 14, 2001

                           U.S. Senate,    
         Subcommittee on Agriculture, Rural
                 Development, and Related Agencies,
                               Committee on Appropriations,
                                                  Philadelphia, PA.
    The subcommittee met at 8:50 a.m., in the James Byrne 
Federal Building, Ceremonial Courtroom, 6th and Market Streets, 
Philadelphia, Pennsylvania, Hon. Arlen Specter presiding.
    Present: Senator Specter.
STATEMENT OF DR. NEILSON CONKLIN, DIRECTOR OF MARKET 
            AND TRADE ECONOMICS, ECONOMIC RESEARCH 
            SERVICE, U.S. DEPARTMENT OF AGRICULTURE


               opening statement of senator arlen specter


    Senator Specter. Good morning, ladies and gentlemen. The 
hearing of the Agriculture Subcommittee of the Senate 
Appropriations Committee will now proceed.
    Today we are going to examine the issue of pricing of milk. 
There have been wide fluctuations in the price paid to farmers, 
with the hundredweight price dropping from more than $16 a 
hundred weight to less than $10 a hundredweight. At the same 
time, the price of milk to the consumers has gone up, something 
that I can attest to personally. At a time when the farmers 
were getting much less, I was paying $2.29 for a half gallon, 
instead of $1.95. These questions have led the subcommittee to 
seek this hearing. And we're going to be focusing on these 
pricing arrangements. Senator Thad Cochran, chairman, has 
requested that the hearing record will remain open to timely 
manner--in a timely manner so that additional statements or 
questions can be submitted by other subcommittee members.
    The issue at hand came into sharp focus in January of 1999 
when the price per hundredweight was $16.27, and a month later 
it was slightly above $10. At the approximate same time, from 
March 1999 to April 1999, the farm price fell 48 cents a 
gallon, and the retail price fell only 29 cents a gallon. We 
will have experts here from the United States Department of 
Agriculture, which has noted that the transmission studies show 
that farm prices--when farm prices go up, the transmission 
factor is much more rapid, reflecting those changes in the 
retail price than when the price goes down. In the studies of 
the General Accounting Office have shown that the change at the 
farm levels is not necessarily change at the retail level. The 
price spread has been increasing, because when farm prices are 
trending down, the retail prices are constant or actually 
increase.
    This is obviously a major problem for the Commonwealth of 
Pennsylvania where agriculture is the largest industry and 
dairy is the single largest component of agriculture. 
Pennsylvania is the fourth-largest dairy producer in the 
nation. There are approximately 9,900 dairy farms which produce 
$1.73 billion worth of milk a year. Over the past decade, 
Pennsylvania's lost an average of three to five hundred farms 
per year. And this is a national problem as well, which 
warrants concern by the United States Senate, by the Congress, 
and especially concern by a senator representing the 
Commonwealth of Pennsylvania.
    As I think most of you know at this point, President Bush 
is going to be visiting in Philadelphia today, which has 
required us to advance the hearing and also to condense the 
hearing. I must leave here shortly after 10:00 to be with the 
president, so we're going to call all the witnesses in a single 
panel. If you'd all come forward--Dr. Neil Conklin, Mr. Robert 
Robinson, Mr. Arden Tewksbury, Mr. Luke Brubaker, Mr. David 
McCorkle, and Mr. Earl Fink--and our time alloted for each 
witness is going to be at five minutes, which is in accordance 
with the committee practice. The green light will go at the 
beginning, and the red light will go on at the end.
    Our first witness is Dr. Neil Conklin, who serves as 
director of the market and trade economics division of the 
Department of Agriculture, Economic Research Service. Dr. 
Conklin holds a Masters Degree in agricultural economics from 
the University of Wyoming and a Bachelor of Arts in history 
from Castleton State College in Vermont. Dr. Conklin, thank you 
for joining us. Thank you for the information you have given us 
in advance of this hearing. The floor is yours.


                        statement of dr. conklin


    Dr. Conklin. Good morning, Senator Specter. Thank you. The 
Department of Agriculture appreciates your invitation to 
discuss retail dairy prices. I will make a brief statement 
focusing specifically on the issue of retail prices, but I have 
provided a more complete picture of the current dairy situation 
for the record.
    Farm-level milk prices declined through 1999 and much of 
2000, as you noted. The blend price, on average for the United 
States, fell from almost $17 a hundredweight in January of 1999 
to a low of $11.48 in February 2000. Thanks to strong butter 
and cheese demand, farm milk prices are now rising. The average 
blend price in March was $13.64 per hundredweight compared to a 
price of $11.63 at the same time last year. Blend prices for 
Pennsylvania have shown a similar trend.
    Retail dairy prices do not follow farm-level prices on a 
one-for-one basis. This is a point on which even economists 
agree. There is no reason to expect retail prices to follow 
farm prices exactly since marketing costs, including energy, 
packaging, and labor, also affect retail prices and margins. 
Retail prices for fluid milk as measured by the Bureau of Labor 
Statistics, were at the same level this March, as they were in 
January of 1999. Over the last 2 years, retail prices have 
fluctuated upward and downward, but they have not declined or 
risen in step with farm prices. As a result, the farm-to-retail 
spread has widened.
    The Economic Research Service measures the farm-to-retail 
spread nationally using a market basket of dairy products. 
Between January 1999 and March 2001, this spread rose by almost 
nine percent, a bit faster than the overall rate of inflation 
over this period. Research conducted at USDA and elsewhere has 
examined, in some detail, the behavior of farm-to-retail price 
spreads.
    Let me briefly summarize the findings of studies--these 
studies at USDA and elsewhere. First, retail price changes for 
fluid milk lag behind farm price changes. Second, retail price 
changes are asymmetric. That is, retail prices respond more 
rapidly to an increase in farm prices than they do to a decline 
in farm prices. For example, a 1994 USDA study indicated that a 
$1 per hundredweight increase in farm prices would lead to a 
$1.04 increase in retail prices within two quarters. A 
comparable decline in farm prices would lead to a retail price 
adjustment of only 59 cents during the same two quarter period.
    Senator Specter. The first thing here was what again----
    Dr. Conklin. A dollar and four cents, Senator. Why this 
asymmetry in retail price behavior? Economists have cited 
several factors: one, operation of the Federal price support 
system. Retailers might expect that price declines would be 
temporary if prices fell to a point where the Federal support 
system kicked in. This was hypothesized as an important factor 
several years ago when Federal support prices were higher than 
they are today--other factors include: consumer insensitivity 
to changes in the milk price at retail, retailer resistance to 
price changes, changes in marketing costs, and finally market 
power.
    These factors are undoubtedly all important, but their 
importance varies over time and across markets. While price 
spreads do rise and fall as farm and retail prices change, 
their long-term trend has been upward. This is consistent with 
the observation that price adjustments between farm and retail 
level are asymmetrical. Over the two decades from 1980 to 1999, 
the spread for fluid milk in the United States has doubled, 
rising from about 49 cents per half gallon to $1.03 per half 
gallon.
    Senator Specter. Dr. Conklin, your time has expired. I'm 
sorry.
    Dr. Conklin. That concludes my remarks.


                           prepared statement


    Senator Specter. Your full statement will be made a part of 
the record. If you care to summarize the balance, you're 
welcome to take another minute.
    Dr. Conklin. That did conclude my remarks, Senator. I was 
right at the end.
    Senator Specter. Okay, thank you very much, Dr. Conklin.
    [The statement follows:]

               Prepared Statement of Dr. Neilson Conklin

    Mr. Chairman and Members of the Committee, the Department of 
Agriculture appreciates your invitation to discuss the impact of dairy 
policy and programs on producers, processors, and consumers. I will 
start with a brief overview of the economic situation in dairy markets. 
This description provides the context in which dairy policy will 
operate in the future. I will then review the performance of the major 
Federal programs operating today: the milk price support program, 
emergency market loss assistance programs, and the Dairy Export 
Incentive Program (DEIP). Three issues of current interest: dairy 
compacts, concentrated milk proteins, and retail prices are then 
discussed.
          conditions and prospects for the u.s. dairy industry
    The Federal Agriculture Improvement and Reform Act of 1996 was 
passed during a year when farm milk prices were much higher than in the 
early 1990's. Since then, milk prices have been quite volatile but also 
rather strong most of the time. Demand, fueled by strong economic 
expansion, has grown rapidly, particularly during 1998-2000. When milk 
production grew particularly fast (like 1997 or 2000), prices fell to 
levels similar to the early 1990's, as production growth out-stripped 
demand increases. However, when milk output slowed or slipped, prices 
quickly shot to very high levels (like 1998,1999, and probably 2001).
    In 1996 and 1997, milk-feed price ratios did not favor normal 
increases in concentrate feeding and milk per cow. However, the 
incentive to boost milk per cow since then has been strong, sometimes 
very strong, and milk per cow has generally grown rapidly. When milk 
per cow has faltered (like recently), weakness was generally caused by 
forage or weather problems. Modern dairy feeding has become 
increasingly dependent on top quality forage, and such supplies were 
very tight in 1997, 1998, and recently.
    Changes in milk cow numbers represent a tug-of-war between the 
dairy farmers who are expanding their farms or building new ones 
(mostly large farms with highly specialized division of 
responsibilities) and dairy farmers who are quitting dairying because 
they cannot generate an acceptable family income. Once either group 
builds up momentum, swings in milk cow numbers may persist long after 
prices have reversed their original course. For example, the sizable 
decreases in cow numbers in the mid-1990's were caused by the 
relatively low returns of the early 1990's. These declines did not slow 
much until 1999, despite the strong returns of 1996 and 1998. 
Similarly, the strong returns of 1996, 1998, and most of 1999 unleashed 
such a surge of herd expansions that the low prices of 2000 did not 
even result in typical decreases in cow numbers until early this year.
    In 2001, milk cow numbers are expected to decline about 1 percent. 
Dairy farm exits in late 2000 and early 2001 increased as a result of 
the low returns of 2000. Meanwhile, expansion by stronger farms has 
slowed, partially because of lower returns and partially as an 
inevitable pause after the rapid growth of 1999-2000. Milk per cow in 
early 2001 fell well below a year earlier, the result of forage quality 
problems, stressful winter weather, and less use of bovine 
somatotropin. Milk per cow is expected to recover in coming months but 
may increase only fractionally for the year. Milk production is 
projected to slip slightly for the year, with increases from a year 
earlier not coming until late 2001. A large increase is expected in 
2002, as brisk recovery in milk per cow easily outweighs a decline in 
cow numbers.
    Demand growth during the 1998-2000 period was extraordinary. The 
booming economy resulted in consumers boosting their spending in 
restaurants and treating themselves at home. Commercial use of cheese, 
butter, and fluid cream grew rapidly in the face of relatively high 
consumer prices during most of the period. Overall sales of milkfat 
rose at an annual rate of almost 3 percent. Not all dairy products had 
as strong demand, however. Use of fluid milk and most perishable 
manufactured products were stagnant, while use of skim solids in 
processed foods fell. Sales of many nonfat or lowfat foods, that had 
used larger amounts of skim solids in the mid-1990's, fell sharply, and 
imported concentrated milk proteins may have been substituted in some 
uses. Even so, commercial use of skim solids rose faster than did 
population during this period.
    Demand for dairy products continues to increase in 2001, although 
growth may not be as strong as it was. The economy has developed a 
number of weaknesses, and consumer confidence has slipped. But, 
economic growth is expected to continue, and consumers are likely to 
want more dairy products. Demand in 2002 is a bit more uncertain but a 
sharp slowdown is not expected.
    With 1998 production increasing only slightly, strong demand shot 
average 1998 farm milk prices up about $2 per cwt to a record $15.50. 
Although production grew sharply in 1999, milk prices did not really 
catch up with demand and decreased only about $1 per cwt. Milk prices 
ultimately collapsed in late 1999 and 2000--but only after increases in 
milk output over a 2-year span reached 6-7 percent. Because of the 
large increases in wholesale butter and cheese prices since the start 
of the year, milk prices in 2001 are now projected to rise almost $3 
per cwt, back above the 1999 level. If milk production grows as 
expected in 2002, milk prices probably will decline, maybe $1 or a bit 
more.
    Prices of nonfat dry milk have been the glaring exception to the 
general pattern of volatile but mostly strong prices. Powder prices 
have stayed close to the support purchase price since late 1998. While 
government removals of butter and cheese have been minimal, the surplus 
of nonfat dry milk was large. Removals of nonfat dry milk during the 
current marketing year are projected at about 500 million pounds, down 
from the almost 700 million a year earlier but still quite large. The 
surplus of skim solids this year will be 3-4 percent of production, 
compared with almost no removals of milkfat. Commodity Credit 
Corporation's (CCC) uncommitted inventories of nonfat dry milk in early 
May had reached 552 million pounds and were still growing.
    Retail dairy prices rose relatively rapidly during 1998-99, 
reflecting soaring wholesale and farm prices during 1998 and only 
slight moderation in 1999. Retail prices increased almost 4 percent in 
1998, followed by a boost of almost 6 percent in 1999. The farm-to-
retail spread fell about 2 percent in 1998, as retail price increases 
lagged farm prices. However, the spread then jumped about 12 percent 
with the softer farm prices of 1999. The spread rose about 5 percent in 
2000, as retail prices were about steady in the strong economy, while 
farm prices were low. In early 2001, retail dairy prices were about 2 
percent higher than a year earlier even though the farm-to-retail 
spread was lower. Further price rises during the rest of the year. For 
the year, retail prices are projected lift average 2001 dairy prices 3-
4 percent, even though the farm-to-retail spread is expected to 
continue somewhat below a year earlier.
    Although concentrate feed prices and forage costs have varied 
significantly and many other costs have risen steadily, milk prices 
have been responsible for most of the swings in net returns to dairy 
farming in recent years. Returns in 1996 were well above those of the 
early 1990's. Lower 1997 milk prices reduced returns considerably, but 
they stayed above the early 1990's. The higher milk prices and lower 
feed costs in 1998 and 1999 boosted dairy returns sharply. However, the 
low milk prices of 2000 reversed the pattern sharply, probably dropping 
returns to levels below those of the early 1990's. In 2001, concentrate 
feed prices are projected to be about the same as 2000's modest levels. 
Although forage costs will be higher, stronger expected milk prices 
will increase net returns considerably, probably back to near those of 
1999. Net returns in 2002 probably will not match those of this year 
but are expected to be moderately favorable.
    Dairy farmers have been cautious about debt since the 1980's. Debt 
loads have remained fairly low relative to debt capacity, possibly a 
response to the volatility of prices and returns in recent years. The 
1999-2000 expansions by stronger producers were funded to a significant 
degree by the 1998-99 returns. These moneys probably were also used to 
reduce earlier debt. Dairy farm debt may have risen some in 2000 
because of all the new or expanded operations, but the increase 
probably was not large.
    Since 1996, both the number of operations with milk cows as 
estimated by the National Agricultural Statistics Service, USDA and the 
number of farms selling dairy products as estimated by the American 
Farm Bureau Federation have fallen about 6 percent per year, similar to 
or slightly slower than the declines of the early 1990's. This 
continuing long-term decline represents a mix of individual farms 
combining into multi-operator farms, purchase of dairy farms by 
neighbors, and the exit of facilities from dairying.
    During the next 10 years, milk production is expected to grow 
slowly, about 1 percent or a little more per year. Although it is no 
longer as easy to boost milk per cow by simply feeding more grain, 
advances in management, nutrition knowledge, and genetic potential of 
the cows imply that strong increases in milk per cow are likely to 
continue, probably at trend rates similar to the past. Growth in milk 
per cow may not be as steady as the past, however. Milk cows are more 
geographically concentrated than in the past. Although these 
concentrations are widely scattered, local weather conditions may have 
more effect on the national average than in the past. In addition, 
modern feeding may have made milk per cow more sensitive to variations 
in forage quality than it was during most of the post-World War II 
period.
    Milk cow numbers are expected to decline slowly, representing the 
net effects of diverging patterns by different groups of dairy farmers. 
The split between the large, industrially organized farms and the 
generally smaller traditional farms probably is the widest seen in the 
dairy industry since larger, more heavily capitalized and specialized 
dairy farms replaced small dairy enterprises on general farms in the 
1950's and early 1960's. Most traditional operations will stay viable 
for the foreseeable future, but they will be challenged to reduce costs 
enough to generate an adequate family income.
    Growth in the western dairy industry probably will be more 
constrained than in the past by urban pressures, environmental 
restrictions, fewer places to develop totally new dairy industries, and 
(most importantly) availability of top-quality alfalfa hay. These 
factors will not keep the West from producing more milk, but expansion 
may be somewhat slower. However, development of ``new style'' dairy 
farms east of the Rockies may accelerate. Dairying is moving back to 
parts of the Great Plains, and new large farms have proven quite 
competitive in northern dairy areas.
    Demand for dairy products is expected to continue to increase 
slowly. A growing population will demand more dairy products, 
particularly with Hispanics contributing a significant share of the 
population growth. Cheese demand shows no sign of slowing and will 
continue to be the main source of strength in total dairy product 
demand. Demand for butter and other milkfat products undoubtedly will 
not maintain its extraordinary strength of recent years, but is 
expected to stay fairly good. Milkfat and skim solids can provide 
significantly improved quality to a wide variety of processed foods 
with only a very modest impact on ingredient costs. On the other hand, 
demand for fluid milk seems likely to stay stagnant unless its slipping 
status in the beverage market can somehow be reversed.
    Growth in commercial use of dairy products is projected to keep 
pace with the increases in milk production only if farm milk prices 
rise somewhat more slowly than the general inflation rate. However, 
this price erosion is not expected to be large, nothing like the 
decreases that occurred in the 1980's and early 1990's. It seems likely 
that prices probably will continue to be more variable than in the 
past, in part because growth in output is unlikely to be synchronized 
with growth in demand and in part because a much larger and a growing 
share of dairy products is traded under contract or some other standing 
arrangement. Spot markets are not likely to regain the liquidity that 
they enjoyed as recently as the 1970's.
                         price support program
    The price support purchase program has been largely unchanged since 
1949, offering to buy as much butter, cheese, and nonfat dry milk as 
anyone wishes to sell to CCC at announced prices. These prices are set 
so as to allow plants of average efficiency to pay at least the support 
price for manufacturing grade milk during the year. Since butter and 
nonfat dry milk are joint products of milk, any pair of support 
purchase prices for the two products that will return the combined 
value needed to support milk prices. In the past, relative prices of 
butter and nonfat dry milk prices generally were adjusted in an attempt 
to equalize the relative size of the milkfat and skim solids surpluses.
    The 1996 Act specified that the support price for milk would remain 
at $9.90 per cwt, but only through 1999. At the end of 1999, the 
purchase program would be eliminated, and a recourse loan program would 
begin at prices equivalent to the former support price. At that time, 
it was projected that market prices would only occasionally be close to 
the support price and that purchases would not be large. In general, 
those projections have proven accurate.
    Since enactment of the 1996 Act, subsequent legislation modified it 
significantly. The support purchase program was extended and the loan 
program delayed, first until the end of 2000 and then until the end of 
2001. In addition, there have been three Market Loss Assistance 
Programs. These programs differed slightly, but basically made cash 
payments to producers based on their historic milk production. Payments 
totaled $200 million in 1998, $125 million in 1999, and an estimated 
$675 million in 2001. In 1998 and 1999, payment was limited to the 
first 2.6 million pounds of milk produced on a farm, while the latest 
program limit was set at 3.9 million pounds.
    The very large surplus of nonfat dry milk in recent years, while 
butter markets have been very tight with market prices reaching as much 
as four times the support purchase price, would seem to argue for a 
decrease in the support purchase price for nonfat dry milk and a 
corresponding increase in the support purchase price for butter. 
Relative support prices remain little changed since the early 1990's, 
when a series of shifts were implemented to correct what had been a 
large butter surplus. A lower price of nonfat dry milk would stimulate 
use of skim solids in all products, reduce the incentive to import such 
products as concentrated milk proteins, and possibly stimulate 
commercial exports of nonfat dry milk. It would also help address the 
continuing imbalance between the price of milk for cheese (Class III) 
and the price of milk for butter-nonfat dry milk (Class IV) in Federal 
order markets. Class III and Class IV pricing remains under review 
within the Department, looking at such matters as make allowances, 
determining product prices, and pricing of components among other 
questions.
    The National Milk Producers Federation, among other organizations 
representing dairy farmers, has proposed extending the support purchase 
program, at least through the remainder of the 1996 Act. The impacts of 
such an extension would vary considerably, depending on market 
conditions, adjustments to relative purchase prices of nonfat dry milk 
and butter, and the level of support price specified.
                     dairy export incentive program
    Since July 1, 2000, we have had to comply with the full World Trade 
Organization (WTO) commitments to limit subsidized exports. This holds 
our exports under the Dairy Export Incentive Program (DEIP), plus any 
Government export sales, to 68,201 metric tons of nonfat dry milk, 
3,030 metric tons of cheese, 21,097 metric tons of butter or its 
equivalent in milkfat, and no dry whole milk. During the negotiations, 
we told other WTO members that we intended to apply these limits to the 
quantities covered by contracts accepted during the year. By not being 
very rigid about the timing of actual shipments, we increased the 
flexibility of exporters in meeting the needs of importing countries as 
well as simplifying enforcement. In recent years, we have almost fully 
contracted for the allowed exports of all products except butter, where 
very tight domestic markets have made domestic manufacturers 
uninterested in committing to DEIP sales.
    Before July 2000, we allowed certain amounts of unused commitments 
from earlier years to be ``rolled over'' into new allocations, similar 
to actions taken by the European Union. However, we did not roll over 
quantities of products that were contracted but not actually shipped 
for whatever reason. This would have been a change in the understood 
commitment to other WTO members, and it was not clear that these 
quantities would have been shipped if additional allocations had been 
available.
    With the continuing large surplus of domestic skim solids, part of 
the dairy industry have asked if new allocations representing these 
unfilled contracts could be made. In addition to the earlier 
objections, we interpret the agreement to say that roll-over was 
allowed only during the completed transition period.
                         imported milk proteins
    A wide variety of concentrated milk products are imported into the 
United States, ranging from casein and caseinates to total milk protein 
to milk protein concentrate (MPC). Casein and total milk protein are 
precipitated from skim milk, while MPC's are produced, in a variety of 
protein contents, by membrane filtration of skim milk. In recent years, 
total imports of these products have grown somewhat as declines in 
casein imports have been outweighed by rapid increases in MPC imports. 
MPC's evidently have substituted for casein in some uses, as well as 
benefited from a growing market for sport and nutritional drinks. 
However, they probably have also substituted for domestic skim milk 
solids in some uses. In addition, there is concern that they are being 
used to produce standard varieties of cheese, a technical violation of 
Food and Drug Administration standards of identity.
    Concentrated milk proteins have never been covered by import 
restrictions. In part, this was because casein and caseinates, unlike 
milk powders, were declared not to be primary agricultural products 
under the General Agreement on Tariffs and Trade and were therefore 
subject to more stringent restrictions on limiting import access and a 
ban on export subsidies. The status of milk protein concentrates is 
unclear since they share some of the characteristics of both casein and 
milk powders.
    The tariff-rate quotas (TRQ's) that resulted from the Uruguay Round 
Agreements were clear WTO market access commitments of the kind we 
expect other countries to adhere to closely. Any change in the 
application of those TRQ's might involve intricate negotiations with 
other countries. Together with the U.S. dairy industry, we are 
considering remedies, consistent with our international trading 
obligations, to see what can be done about increased MPC imports.
                             dairy compacts
    The Northeast Interstate Dairy Compact (the Compact) was authorized 
by the 1996 Act to include the six New England states: Connecticut, 
Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont. Under 
certain conditions, up to 6 additional States could be added with 
Congressional approval. Authority for the Compact was to terminate with 
the implementation of Federal Milk Marketing Order reform. Legislation 
passed by Congress in 1999 extended the duration of the Compact to 
September 30, 2001, but did not add states to the existing Compact. 
Also introduced in 1999 was legislation to allow establishment of a 
southern compact but no action was taken. May 2001 sees legislation to 
extend and expand the Compact and also to establish a compact of 14 
States in the South. The States to be included in the southern compact 
area are Alabama, Arkansas, Georgia, Kansas, Kentucky, Louisiana, 
Mississippi, Missouri, North Carolina, Oklahoma, South Carolina, 
Tennessee, Virginia, and West Virginia.
    Economic effects of the existing Compact and other possible compact 
areas have been estimated and reported in several studies. The Office 
of Management and Budget (OMB), the University of Missouri, the 
University of Vermont, the University of Massachusetts, the 
Pennsylvania State University, and most recently, the University of 
Connecticut have conducted studies since 1998. The general conclusions 
of these studies are similar:
  --Milk producers in the compact areas, and those outside that supply 
        milk into the areas, receive a higher farm milk price and 
        respond by increasing production.
  --Higher retail prices in the compact areas reduce consumption of 
        fluid milk so that more milk is available for manufacture into 
        products such as butter and cheese.
  --Farm milk prices outside compact areas are reduced.
                             retail prices
    Since 1996, retail prices for all dairy products (as measured by 
the Bureau of Labor Statistics) increased an average of 3.1 percent, 
with fluid milk prices rising 2.8 percent and other dairy product 
prices rising 5.3 percent. In comparison, the annual average increase 
for all food at retail was 2.5 percent. General inflation, measured by 
the Consumer Price Index, has increased 2.4 percent per year over the 
period.
    Year-to-year increases in retail prices varied considerably, from a 
high of 6.0 percent in 1999 to a low of 0.6 percent in 2000. Similarly, 
rises in fluid milk prices ranged from 6.2 percent to 0.2 percent. 
Prices of other dairy products rose at a faster pace, ranging from 9.2 
percent in 1998 to 2.1 percent in 2000. In contrast, retail price 
increases for all foods have been relatively steady at 2.1-2.6 percent.
    Retailers, and processors to a lesser extent, tend to resist price 
changes, partly because of the direct costs and partly from fear of 
adverse consumer reaction. Retail prices lag farm prices, whether 
prices are rising or falling. These lags help to explain the erratic 
changes in farm-to-retail spreads in recent years. Over the long run, 
the spread has risen just slightly less than the general inflation 
rate.
    Mr. Chairman, that completes my review of the current market 
situation for milk and the immediate issues facing the principal 
Federal dairy programs. I note that the programs reviewed here are 
supplemented by many other Federal programs that affect milk producers 
and the dairy market, including risk management programs, food 
assistance programs, trade programs other than DEIP, promotion programs 
and research and extension programs. I would be pleased to respond to 
questions.

    Senator Specter. We turn now to Mr. Robert Robinson, 
managing director of the National Resources for the Environment 
at the U.S. General Accounting Office, graduated Phi Beta Kappa 
from the University of Maryland in 1973. Thank you for joining 
us, Mr. Robinson. The floor is yours.
STATEMENT OF ROBERT ROBINSON, MANAGING DIRECTOR, 
            NATURAL RESOURCES AND ENVIRONMENT, GENERAL 
            ACCOUNTING OFFICE
    Mr. Robinson. Thank you, Mr. Chairman. In my remarks today, 
I'd just like to make just a few key points. At the outset, it 
is important to understand the price consumers and the price 
farmers receive for milk in this country is the result of an 
extraordinarily complex interaction of government program 
rules, price classes, a multitude of private-sector entities, 
and variations in milk markets; and hard data to discern 
exactly what is happening in this complex mix, including what 
costs are being incurred and what profits are being made, is 
very limited. In this context, during the course of our work, 
we cobbled together the best information available from many 
different sources to lay out as clear a picture as we could on 
milk prices across the country, including Philadelphia.
    Although our report was nearly 200 pages long and contains 
a vast amount of detail, a few basic observations jumped out. 
First, nationwide and in the Philadelphia market, farmers 
receive about 42 percent of the price consumers pay for milk at 
the store. At the time of our analysis--again, two-percent milk 
cost about $2.50 at the store, and, therefore, the farmer's 
share of that was about a dollar. Second, we found, in most of 
the milk markets we examined, the difference or spread between 
what the farmer received for milk and the retail increased over 
the 26-month period governed by our analysis. In some markets, 
such as New Orleans and Denver, the price spread increased 
dramatically, by about 47 cents. In other markets, such as 
Philadelphia, the increase in the price spread was less 
pronounced, but still increased by about 13 cents. The increase 
in the price spread resulted largely from farm prices trending 
down over the period while retail prices either stayed constant 
or trended higher. Third, at any given point in time----
    Senator Specter. Would you repeat that last statement, Mr. 
Robinson?
    Mr. Robinson. The increase in the price spread resulted 
largely from farm prices trending down over the period while 
retail prices either stayed constant or trended higher.
    Third, at any given point in time, we found that changes in 
farm prices were not always mirrored by similar price changes 
at the retail level. By that, I mean reductions in prices 
received by farmers, for example, generally did not translate 
into lower prices paid by consumers. As milk moved farther from 
the farm, the relationship between changes in what the farmer 
received and changes at other levels in the marketing chain 
weakened. Other factors began to more prominently influence the 
price.
    This marketing chain for milk is composed of four basic 
parts: the farmer, the dairy cooperative, the wholesaler, and 
the retailer. As the milk leaves the farm, each entity performs 
certain functions for which they, of course, receive a payment. 
Collectively, these links in the chain beyond the farmer 
received about one and a half times what the farmer received 
for a typical gallon of milk.
    In our study period, again, while the farmer received about 
a dollar of the $2.50 final price, the other entities 
collectively received about a dollar and a half. The breakdown 
of this dollar-fifty was as follows: cooperatives such as Land 
O' Lakes, on average received about 25 cents; wholesalers such 
as Suiza Foods received about 75 cents; and finally, retailers 
such as Acme and Pathmark on average added about 50 cents to 
the price, bringing the price of that original dollar gallon of 
raw milk provided by the farmer to $2.50.

                           Prepared Statement

    To recap, Mr. Chairman, our work showed two basic things: 
the price spread between farm and retail prices increased 
during our 2 year study period, and reductions in prices 
received by farmers did not always translate into lower prices 
to consumers. While changes in the farm price have some 
influence on the retail price of milk, in comparison to other 
factors this influence has proved to be limited. Thank you.
    [The statement follows:]

                Prepared Statement of Robert A. Robinson

    Mr. Chairman and Members of the Subcommittee: Thank you for the 
opportunity to discuss our work on fluid milk prices. Our statement 
today is based primarily on our October 8, 1998, report entitled Dairy 
Industry: Information on Prices for Fluid Milk and the Factors That 
Influence Them (GAO/RCED-99-4).\1\ As you know, the process by which 
milk prices are set is a very complex one. This is because milk prices 
are influenced by a variety of Federal and State programs that regulate 
the production and sale of milk and because several entities are 
involved in the process of moving milk from the farm to the consumer. 
Each of these entities--dairy farmers, cooperatives, wholesale milk 
processors, and retailers--perform distinct functions relating to the 
processing and marketing of milk, and each receives a portion of the 
price of milk. At your request, our comments today will focus on the 
relationship between farm-level and retail-level milk prices and the 
factors that influence the price of milk as it moves from the farm to 
the consumer.
---------------------------------------------------------------------------
    \1\ We are currently updating the information included in the 
October 1998 report, at the request of Senators Feingold and Leahy, and 
expect to issue our updated report in June 2001.
---------------------------------------------------------------------------
    In summary, for the period January 1996 through February 1998, we 
found the following:
  --On average, farmers received about 42 percent of the retail price 
        of a gallon of 2-percent milk (the most frequently purchased 
        milk), and retailers received about 17 percent; the spread 
        between farm and retail prices increased in most of the markets 
        we reviewed.
  --Changes in fluid milk prices at the farm level generally did not 
        mirror similar price changes at the retail level in most 
        markets. This is because as milk passes through various 
        processing, packaging, and distribution stages after it leaves 
        the farm, a variety of other factors begin to influence its 
        price. For example, at the wholesale level, the costs of 
        pasteurization, packaging, and transportation, have a major 
        influence on milk prices, and at the retail level the pricing 
        strategies used by other retailers may have a significant 
        influence on the prices that consumers pay for milk at the 
        grocery store. Consequently, as milk moves farther from the 
        farm, farm prices may have less of an impact on prices than 
        these other factors.
                               background
    U.S. dairy farmers produce about 20 billion gallons of raw milk 
every year. The top four milk-producing States in the United States are 
California, Wisconsin, New York, and Pennsylvania. About 7 billion 
gallons of the nation's milk is used to produce fluid milk products 
such as the four kinds of milk--whole, 2-percent, 1-percent, and skim 
milk--as well as buttermilk and flavored milk, yielding about $22 
billion in retail sales annually. Sales of 2-percent milk sold in 
gallon containers account for the largest volume of retail fluid milk 
sales in the United States.
    Fluid milk reaches the consumer by a variety of pathways. Dairy 
farmers who produce the raw milk used in fluid products can (1) market 
it through dairy cooperatives, (2) sell it directly to wholesale milk 
processors, or (3) process it into fluid milk for direct sale to 
consumers. Most milk produced by dairy farmers in the United States is 
marketed through dairy cooperatives. Dairy cooperatives, in turn, can 
either sell, or arrange the sale of, raw milk purchased from farmers to 
wholesale milk processors, or they can process it into fluid milk and 
distribute the fluid milk to retail outlets themselves. Wholesale milk 
processors process and package the raw milk into fluid milk, which they 
then distribute to retail outlets. Wholesale milk processors include 
independent bottling plants or retail food chains that own bottling 
plants. Retail outlets purchase fluid milk from processor for direct 
sale to consumers.
    Most milk produced in the United States is regulated under either 
Federal or State programs. These programs ensure that farm prices do 
not fall below a minimum level and provide a safety net for individual 
farmers who lack market power compared with other entities, such as 
wholesale milk processors and retailers. The primary Federal programs 
include the milk marketing order and dairy price support programs. 
Currently, about 70 percent of the milk produced in the United States 
is regulated under the Federal milk marketing order program. The 
Federal program sets minimum prices that can be paid to farmers for 
unprocessed, fluid-grade milk in specified marketing order areas.
    These prices vary by the class of product for which the milk is 
used, and, for some classes, the minimum price also varies by 
location.\2\ Some areas, such as California, which are not under the 
Federal milk marketing order program, are covered by State programs. In 
these areas, dairy farmers are paid the minimum milk prices that are 
established by the state government. These minimum prices may be higher 
than Federal minimum prices.\3\
---------------------------------------------------------------------------
    \2\ The four usage classes are Class I for fluid milk; Class II for 
soft manufactured dairy products such as yogurt and ice cream; Class 
III for hard cheese; and Class IV for butter and powdered milk.
    \3\ In addition to Federal and State regulatory programs that set 
minimum milk prices, in 1996, the Congress approved the creation of the 
Northeast Interstate Dairy Compact for six New England States. The 
Compact supplements Federal and State programs by setting the minimum 
price to be paid to farmers for fluid milk marketed in the six-state 
area. The Compact is scheduled to terminate, unless reauthorized, by 
September 30, 2001.
---------------------------------------------------------------------------
    Dairy farmers selling milk within a Federal milk marketing order 
receive an average price, or blend price, that is based on the weighted 
average of the four usage classes for all the raw milk sold in that 
marketing order. The average price of milk they receive depends, in 
part, on the extent to which the total milk supply in a specific area 
is being used for fluid or manufacturing purposes. Buyers of milk 
regulated by Federal and State programs are permitted to pay farmers 
prices in excess of the established minimums--known as over order 
premiums. Any such excess payments are determined by market forces.
                   analysis of farm-to-retail prices
    In our 1998 report, we analyzed milk prices for the period January 
1996 through February 1998, for 31 selected markets across the country, 
including the Philadelphia, Pennsylvania, market. We found that on 
average, farmers received 42 percent of the retail price for a gallon 
of 2-percent milk, cooperatives received 10 percent, wholesale milk 
processors received 31 percent, and retailers received 17 percent.\4\ 
However, the portion received by those in various stages of the milk 
marketing chain varied substantially among the markets. For example, 
the portion of the average retail price that farmers received ranged 
from about 31 to 54 percent, and the portion that retailers received 
varied between about 4 and 31 percent.\5\ For the Philadelphia market, 
we found that farmers, on average, received 42 percent of the retail 
price of a gallon of 2-percent milk and retailers received 20 percent.
---------------------------------------------------------------------------
    \4\ For the 1998 report, our detailed analysis focused on data for 
2-percent milk; consequently our results may not reflect pricing 
patterns and trends for whole, 1-percent, and skim milk.
    \5\ Except for one market where retailers received a negative 
return because milk was being used as a loss leader.
---------------------------------------------------------------------------
    Furthermore, we found that retail prices for a gallon of 2-percent 
milk remained constant or increased in 27 markets and decreased in 4 
markets during the review period. In contrast, farm prices decreased in 
27 markets and remained constant in 4 markets. As a result of these 
price changes, the spread between farm and retail prices had increased 
in 27 of the 31 markets over the 26-month period we reviewed. In the 
Philadelphia market, we found that between January 1996 and February 
1998 the farm-level price had decreased by about 13 cents while retail 
prices had remained constant. As a result, the difference between farm 
and retail prices had increased by about 13 cents per gallon.
    In addition, retail prices for the four kinds of milk--whole, 2-
percent, 1-percent, and skim--varied significantly in the 31 markets we 
reviewed. For example, in some markets, 1-percent milk was the lowest-
priced milk sold at the retail level; in other markets, skim milk was 
the lowest-priced milk; and in still other markets, the lowest-priced 
milk sold in retail stores shifted among 2-percent, 1-percent, and skim 
milk. For the period we reviewed, in the Philadelphia market, skim milk 
was the lowest-priced milk sold, averaging about $2.31 per gallon and 
whole milk was the highest-priced, averaging about $2.58 per gallon.
            relationship between farm and retail milk prices
    In 1998, we reported that for the period January 1996 through 
February 1998, changes in prices at any given stage in the milk 
marketing chain were most often reflected in changes in prices at the 
next stage. For example, in most of the markets we analyzed, there was 
a strong correlation between changes in farm prices and changes in 
cooperative prices--the next stage in the milk distribution process. 
Similarly, changes in wholesale prices generally correlated with 
changes in retail prices. In contrast, changes in prices received by 
farmers less frequently correlated with changes in retail prices. This 
is because as milk moves from the dairy farm to the consumer it passes 
through various processing, packaging, and distribution stages, and 
many factors other than the farm-level price begin to influence fluid 
milk prices at each subsequent stage. In particular, we found that 
supply and demand forces influence milk prices at all stages of the 
milk marketing process; however, the following factors influence milk 
prices at each particular stage:
  --Federal and State dairy programs have a major influence on farm-
        level prices for raw milk used in fluid products. These 
        programs provide farmers with the assurance that milk prices 
        will not fall below the government-set minimums and therefore 
        may play a significant role in the production decisions of 
        dairy farmers.
  --The price that cooperatives charge wholesale milk processors for 
        fluid milk is influenced not only by the minimum price 
        established by Federal and State milk marketing order programs 
        but also by the services that the cooperatives provide to the 
        wholesale milk processors. Cooperatives generally sell raw milk 
        that will be used for fluid purposes to wholesale milk 
        processors at prices above the Federal or State minimums. This 
        higher price, in part, compensates cooperatives for the 
        services they provide to wholesalers. These services include 
        (1) transporting milk from different milk-producing areas, (2) 
        scheduling milk deliveries to coincide with demand, and (3) 
        standardizing the component content of milk deliveries. In 
        addition, cooperatives may be able to sell milk to wholesale 
        milk processors for a price higher than the government-set 
        minimum price because they have greater market power compared 
        with the wholesalers. One of the primary reasons dairy farmers 
        become members of cooperatives is to benefit from the 
        cooperative's greater bargaining power.
  --Processing, packaging, and distributing costs have a significant 
        influence on the wholesale price of fluid milk, in addition to 
        the wholesaler's need to earn a normal return on investment. 
        Processing services provided by wholesale milk processors 
        include pasteurization, homogenization, and the standardization 
        of butterfat and nonfat solids in flavored milks, buttermilk, 
        whole, 2-percent, 1-percent, and skim milk. Wholesalers also 
        incur costs for packaging these products into a variety of 
        types and sizes of containers and arranging for their 
        distribution to retail outlets for sale to consumers. Costs of 
        distribution may be significantly higher in rural markets 
        compared with urban markets because smaller quantities of milk 
        have to be transported over longer distances. Some wholesalers 
        also provide different levels of in-store service in addition 
        to shipping the products to retailers--such as unloading the 
        milk at the store dock, restocking the dairy case, and removing 
        outdated and/or leaking containers. Differences in any or all 
        of these factors will be reflected in differences in wholesale-
        level prices.
  --Retail prices for fluid milk are influenced not only by certain 
        factors that generally apply to all retailers but also by 
        specific considerations at individual retail outlets. The 
        retail-level factors that generally influence price include the 
        wholesale cost of the product; retailers' operating costs, such 
        as labor, rent, and utilities; and their need to earn a normal 
        return on investment. In addition, the size, age, tastes, and 
        income levels of the population in the marketing area and the 
        prices of substitutes will influence how retailers set prices 
        for milk. For individual retail outlets, other considerations 
        may influence the manner in which retail prices for milk are 
        set. To meet their stores' goals, such as profit maximization 
        and increased market share, individual retailers may use a 
        number of strategies for pricing fluid milk. In developing 
        these pricing strategies, retailers consider a variety of 
        factors beyond their operating costs, such as the prices 
        charged by their competitors, the role that milk prices play in 
        attracting customers to their stores, the convenience offered 
        by their store compared with other stores, and their desire to 
        build an image of quality or low prices for their stores. Those 
        retail pricing strategies that are primarily based on a 
        retailer's operating costs are generally referred to as 
        vertical pricing strategies, whereas those strategies that are 
        based on responding to prices charged by competitors are 
        referred to as horizontal pricing strategies. Retailers 
        generally use a combination of horizontal and vertical pricing 
        strategies when setting prices for fluid milk.
    In conclusion, Mr. Chairman, our work shows that while the farm 
price of milk has some influence on the retail price, other factors may 
ultimately have a greater influence on the retail price. Given that 
farm prices account only for about 40 percent of the retail price, 
there is adequate opportunity for other factors, such as wholesale 
processing costs and retail pricing strategies, to significantly 
influence the other 60 percent of the retail price.
    That concludes our prepared statement. If you or other Members of 
the Subcommittee have any questions we will be pleased to respond to 
them.
                      contacts and acknowledgement
    For future contacts regarding this testimony, please contact 
Lawrence J. Dyckman or Anu Mittal on (202) 512-5138. Individuals making 
key contributions to this testimony and/or the report on which it was 
based include Jay Cherlow, James Dishmon, and Jay Scott.

    Senator Specter. Would you repeat that last sentence again, 
please?
    Mr. Robinson. While changes in the farm price have some 
influence on the retail price of milk, in comparison to other 
factors, this influence has proved to be limited.
    Senator Specter. Limited?
    Mr. Robinson. Yes, sir.
    Senator Specter. Our next witness is Mr. Arden Tewksbury, 
who serves as president of Progressive Agriculture and operates 
a dairy farm in northeastern Pennsylvania. Mr. Tewksbury is an 
extraordinarily active advocate for farm interests. And it's 
about time he came to Philadelphia to see me, because I've been 
to his farm on many, many occasions in my travels around 
Pennsylvania. And I regret the early hour but, in self-defense, 
let me say that there are many mornings when I leave my house 
at 6:00 or shortly before to get to Northeastern Pennsylvania. 
We welcome you here, Arden, and look forward to your testimony.
STATEMENT OF ARDEN TEWKSBURY, NORTHEASTERN PENNSYLVANIA 
            FARMER
    Mr. Tewksbury. The only difference, Senator, is when you 
leave Philadelphia to come to Northeastern Pennsylvania, you 
usually know where you're going to end up at when you get 
there. When I came in to Philadelphia for the first time in 25 
years, I ended up in Camden, New Jersey.
    Senator Specter. Then I compliment you doubly, because 
you're right here and on the spot and--you're early, as a 
matter of fact.
    Mr. Tewksbury. I left at 4 o'clock this morning to be here, 
but that's beside the point.
    Senator Specter. However, 4 o'clock is late for you, Arden.
    Mr. Tewksbury. We appreciate the opportunity to appear 
before you, Senator, and we don't have written testimony. We 
are going to submit to you and your committee several 
suggestions that we have on this overall problem. And I think 
the comments we've heard so far from your two previous speakers 
certainly speaks very clear as to a lot of the problems we 
have, but not all of the problems, and I'm going to relate to 
some of the other problems, if I may be permitted to do so.
    And as you said, we've been in advocacy. We have talked to 
120,000 consumers in the last 26 months. And outside of six of 
them, they all agreed they would pay a higher price for milk if 
they knew it was going to go to the dairy farmers. They don't 
say what that price should be, except a higher price if it 
would go to the dairy farmers. I think they have the feeling--
and it's not necessarily that true in Pennsylvania because of 
the marketing board establishing prices here--but I think they 
have the feeling--and we talked to a lot of consumers in 
Brooklyn and Staten Island and New Jersey, and they have the 
feeling that the farmers are not definitely getting their fair 
share of the price of milk that they buy at the stores. And 
something has to be done.
    And the fact that now, in the northeast corridor here, that 
production is down 5.2 percent, Senator, from a year ago, 
indicates that there's a real problem surfacing in their dairy 
industry. So we think the time has come for senators, like 
Senator Specter and others, to reintroduce legislation, like 
you did a couple of years ago, to bring in the dairy farmer's 
cost of production into a new pricing formula that would allow 
our dairy farmers to get a fair price, not only for milk used 
as fluid, but also manufactured. And at the same time, it could 
create a more level pricing to our consumers. They are just 
torn apart as to why the price goes up and down and up and 
down, and mainly down. And farmers, they say, are not getting 
their share, then why didn't they leave the price up there so 
we can get a fair share? Well, we don't have the mechanism to 
do it. The only way we can do it is by having a new and 
different type of national pricing formula. So that certainly 
is our biggest concern.
    As far as the retailing, you know, I have--I don't have a 
problem with retailers. We need them just as bad as they need 
us. But I have a problem when I walked into some of--into a 
supermarket in Berry, Pennsylvania two days ago and found Land 
O' Lakes butter selling for $3.35 a pound and other butters 
selling for $2.45. I don't know which is right, but it really 
confuses consumers when they see this.
    In November of last year, the price that our cheese makers 
paid the farmers for milk used for cheese all across the United 
States, I think, was about $9.37 a hundredweight, the lowest 
price since November 1977, 24 years ago. How in the devil do we 
expect our dairy farmers to stay in business when they're 
receiving prices like this? Yeah, they are rebounding now. Are 
they going to stay there? Are they going to collapse again? We 
think it is time, you know, to have this pricing formula that 
would reflect a fair price on all classes of milk and not 
allow, ever again, to have prices drop to where they were 24 
years ago to our dairy farmers.
    And I have consumers tell me--again, we talked to 120,000, 
and, as you know, we've handed in 25,000 names to your staff of 
consumers that support our position. And up in Meshauken where 
I come from, I can go into Marty's store and buy a five-pound 
block of cheese for $8, $8.50--good American cheese. Consumers 
tell me some of the markets, they have to pay $14, $15 for a 
five-pound block. And sure, it's their option whether they buy 
it or don't buy it, but these things all bother me, as a dairy 
farmer.
    When I hear the gentleman tell me that the change in the 
prices is very limited to what it costs at the dairy farmer 
level, that tells us there is certainly a problem. I commend 
the Pennsylvania Milk Marketing Board here in Pennsylvania for 
what they've done since 1987 on trying to give some better 
prices on fluid milk. But as everybody knows, that price only 
stays with the milk that is bottled and stays here in 
Pennsylvania. They do not have the authority to establish the 
pricing for milk that leaves the State. For instance, my milk 
goes into New Jersey. We've appeared here several times since 
1987 in defense of higher premiums on milk, but it does not 
directly affect my milk and many other thousands of dairy 
farmers in Pennsylvania, and that's where the Northeast Dairy 
Compact would come into play. If we can't do anything else, at 
least we could give a better price to all of our dairy farmers 
for fluid milk. That's not the total answer, but it would help.
    There are some things, Senator, that can be done, and 
there's no use of us pointing our fingers at our Pennsylvania 
Milk Marketing Board or the Pennsylvania legislature. They've 
done all they can. It's up to the national people to step in 
and do something, as you tried a couple of years ago when you 
and 16 other senators introduced legislation on pricing milk 
differently. That's where we've got to go.
    We're very concerned about milk protein concentrate coming 
into the United States now that's displacing domestic milk and 
our cheese fats. Is it even legally coming into the United 
States? Has FDA even said it's legal to be in as cheese fats? 
There's a lot of questions out there. Are these milk protein 
concentrates coming in from countries that have the foot-and-
mouth disease? We think there should be no dairy products 
coming into the United States from any country that has the 
possibility of foot-and-mouth disease or the mad-cow disease. 
Why do we want to take the possibility of having these products 
blending into our problem in the United States?
    I think with the fact that production is down 5.2 percent, 
the fact that most of Pennsylvania now appears to be heading 
for a possible good drought if we don't get some rain soon, 
we're looking at some real serious problems here in the United 
States and in Pennsylvania. And I think we have got to shore up 
the price to our dairy farmers, not only to give them a fair 
price, but also to guarantee a supply of milk for our 
consumers.
    Senator Specter. Thank you very much. We will come back in 
the question-and-answer session.
    Our next witness is Mr. Luke Brubaker, a member of the 
Pennsylvania Milk Marketing Board and manages a 1,000 acre 
dairy agribusiness partnership in Lancaster County. Mr. 
Brubaker has served as an ambassador for dairy management, 
nutrition, and marketing, and overall expertise for the 
Citizens Network for Foreign Affairs. Thank you for joining us, 
Mr. Brubaker. The floor is yours.
STATEMENT OF LUKE BRUBAKER, LANCASTER COUNTY FARMER, 
            MEMBER, PENNSYLVANIA MARKETING BOARD
    Mr. Brubaker. Thank you, Senator. My speech here was about 
10 minutes long. I'm going to have to do some real cutting 
here, so--but could somebody pass these out here, maybe, 
while----
    Senator Specter. Yes, John our staff will be glad to do 
that for you.
    Mr. Brubaker. Anybody that wants a copy--I would like the 
Senator----
    Senator Specter. Your full statement will made a part of 
the record.
    Mr. Brubaker (continuing). I would like the Senator to have 
that. And anybody that wants a copy, well you can pass them 
out, please.
    Thank you, Senator for inviting me here this morning. I 
appreciate your holding this hearing on farm to retail and 
retail price--milk prices. I'm going to go fast here, and I'm 
going to do some skipping because I--that green light bothers 
me.
    I'm Luke Brubaker from Mount Joy, Lancaster County, and a 
member of the Pennsylvania Milk Marketing Board. I would like 
to tell you a little bit about our operation, the dairy 
industry in Pennsylvania, and how the milk marketing board 
benefits, not only the producer, but the consumer, as well.
    You can look down across my professional experience and 
qualifications there when you have time. I will page on here 
and get to some of the meat of what we're going to talk about 
and look at the positions at Brubaker Farm. We think we have a 
positive attitude toward the future of the dairy industry in 
Pennsylvania and America, and we have developed a progressive 
dairy enterprise that's centered on a family partnership and a 
business philosophy that employs the latest technology to 
enhance the economic viability of the dairy operation and the 
dairy for the future.
    I'm going to skip on. I started out in 1950 with about 18 
cows. Today we're up to about 600 cows--started out with about 
a 13,000 herd average and now about 24,000-plus. As a member of 
the Pennsylvania Milk Marketing Board, I'm very sensitive to 
the challenges confronting today's dairy producer without 
losing sight of the need to be understanding of the consumer's 
need for safe and nutritious and affordable dairy products. 
Most recent indications of the monthly production of 
Pennsylvania indicated that the Agriculture Statistics Service 
and Milk Production Report released April 2000 shows that milk 
production and cow numbers are declining over a year ago. The 
primary report of the Pennsylvania production in the first 
quarter of 2001 indicates milk production in the State is down 
4.3 percent over last year's quarter, about 14,000 cows. The 
report would seem to reflect that lower milk prices received by 
Pennsylvania dairy producers over the past year, combined with 
reported feed-quality concerns, have taken their toll on milk 
production in the State.
    Recent and projected milk prices increases combined with 
the opportunity to harvest higher quality forages this spring 
may bring back some production. However, with cow numbers in 
dramatic decline, it seems likely that milk supply will not be 
returning to last year's levels anytime soon.
    Another factor is the health of the United States economy. 
If it moderately strong, I believe the consumer will continue 
to buy. Overall, the current market outlook is calling for 
Pennsylvania milk prices to be about $2.32 over the 2000 
levels. This is based on a 2001 annual forecast of uniform milk 
prices for the Northeast Federal Order compared to $13.04 in 
2000.
    The recent increase in producer prices experienced in the 
Federal order--marketing order's projection of higher milk 
price levels for the second half of this year will give the 
average Pennsylvania dairy producer a much-needed boost in 
meeting its total cost of production. However, recent declines 
in the Pennsylvania milk production will adversely affect 
producer's ability to benefit from the higher levels that they 
are expected to receive and justify the need for a continuation 
of additional income incentives that the Pennsylvania Milk 
Marketing Board can provide through the mandated over-order 
premium. Even with the higher prices that the Pennsylvania 
dairy farmers have experienced and are expected to experience 
in 2001, producers will continue to be faced with unrelated 
competitive challenges. I believe that after--that the positive 
trend in milk prices, the Pennsylvania Milk Marketing Board 
must do everything feasible to provide producers with the best 
possible price that the market conditions warrant to help the 
dairy industry stay viable in Pennsylvania. Continuation of the 
board's over-order premium at a reasonable level will 
contribute to the recent--contributes to the recent positive 
trend in milk prices, will help ensure that Pennsylvania and 
surrounding State producers will receive a price that best 
ensures their future viability without disadvantaging their 
market share.
    Senator Specter. Mr. Brubaker, your time has expired. Your 
full statement will be made a part of the record. You can take 
another minute or so to summarize.
    Mr. Brubaker. Okay, I would like to do that. If you will go 
to the last two charts on the back of my statement, you will 
see that this is--the source was the International Association 
of Milk Control, Retail Price Survey August 2000. You'll take 
notice the Pennsylvania farmer receives 52.2 percent of the 
share of the dollar. He receives more share of the dollar in 
Pennsylvania than you can see in these here States that are on 
this list. And then if you turn over the page to the last--the 
percentage of the retail fluid price received by the farmers in 
Pennsylvania is 52.2 percent compared to the national average 
of 39.4.

                           Prepared Statement

    So I think we're pretty proud of that there, and we just 
wanted to make sure that you had a copy of that. Thank you, Mr. 
Senator, for giving me the opportunity to speak here this 
morning.
    [The statement follows:]

                 Prepared Statement of Luke F. Brubaker

    Senator Specter, other invited guests, and members of the audience, 
good morning. I would like to thank you, Senator, for holding this 
hearing on farm to retail milk prices.
    I am Luke F. Brubaker from Mt. Joy, Lancaster County, Pennsylvania, 
and a member of the Pennsylvania Milk Marketing Board. I would like to 
tell you a little bit about our operation, the dairy industry in 
Pennsylvania and how the Milk Marketing Board benefits not only the 
producer, but the consumer as well.
    As you look at my professional experience and qualifications:
                        agricultural activities
  --Overall experience of 30 years in the dairy industry.
  --Owner and operator of a 600 cow dairy farm.
  --Manager of a 1,000 acre Dairy Agri-Business Partnership.
  --Member of the Pennsylvania Farm Bureau since 1970.
  --Pennsylvania Chairman of the American Farm Bureau Federation, 
        Poultry and Meat Advisory Committee: 1992-1996.
  --President of the Lancaster County Farm & Home Foundation: 1999-2001
  --Member of the Mount Joy Farmers Co-Op since 1990.
  --Past President of Donegal Local Milk Producers.
  --Member of Interstate Milk Producers for 23 years.
  --Participating farmer in the Chesapeake Bay Program.
  --Chairman of Farm Service Agency: 1996-2001.
                      local government activities
  --Chairman of the East Donegal Township Board of Supervisors: 1993-
        1998.
  --Vice-Chairman of the East Donegal Township Board of Supervisors: 
        1992.
  --Member of the East Donegal Planning Commission: 1986-1992.
                          community activities
  --Board of Trustees of Lancaster County Farmland Trust: 2001-2003.
  --Chairman of Environmental Resources Coordinators for Lancaster, 
        Lebanon, York, Dauphin, and Berks Counties, in conjunction with 
        the Pennsylvania Farm Bureau and the Department of 
        Environmental Protection.
  --Ambassador to Russian Republic for dairy management, nutrition, 
        marketing, and overall expertise--Citizen Network for Foreign 
        Affairs, Washington, D.C.: March 1997 and 1998.
  --Member of an Economic Development team which visited Bolivia to 
        assist in the development of small business. Active member of 
        the Mount Joy Mennonite Church. Exchange visit to German dairy 
        farm: July 2000.
                      state government activities
  --Nominated by Governor Ridge to the Pennsylvania Milk Marketing 
        Board for a six year term: 1998-2004.
                                 awards
  --Recipient of the Pennsylvania Dairy of Distinction Award.
  --Winner of the 2001 Dairy Stakeholder Pacesetter Award of 
        Pennsylvania.
  --Nominated for ``Innovative Dairy Farmer of the Year'' Award of the 
        United States by the Pennsylvania Secretary of Agriculture: 
        2000.
  --Brubaker Farms awarded the National Environmental Stewardship Award 
        in recognition of production practices and concern for 
        community: 1999.
    Now, I would like to summarize the primary reasons I am here to 
speak and what we look at on our farm and the future of the dairy 
industry.
                       position of brubaker farms
  --Positive attitude about future of dairy industry in Pennsylvania 
        and America.
  --Development of a progressive farm enterprise that is centered on a 
        family partnership and a business philosophy that employs the 
        latest technology to enhance the economic viability of the 
        dairy operation.
  --Commitment to environmental stewardship, public education, and 
        production of high quality consumer dairy products.
  --A recognition that we are producing an excellent product--not just 
        agricultural commodities.
    A summary of production innovations, marketing innovations, and the 
management innovations follow.
    Brubaker Farms wants to represent the future of Pennsylvania 
agriculture and the dairy industry. We have demonstrated our commitment 
to operating a dairy facility 4 which was designed for cow comfort, 
employee performance, and environmental stewardship. Beginning with 
just 18 cows in 1950 and a 13,000 pound herd average, we expanded to 
meet the challenges of a modern dairy business with 600 cows and a 
24,000 plus pound herd average. We built our new facility to 
accommodate future expansion and to capitalize on the benefits of 
producing large quantities of quality fluid milk. We have aggressively 
pursued good markets that recognize the value of our milk production, 
volume, and quality management practices.
    With the partnership, which includes my two sons, Mike and Tony, 
and families, we have devised a business management plan, which 
capitalizes on the talents of our family members. One of the strategic 
goals of Brubaker Farms is to build the human capacity of the family to 
adapt and manage in a very competitive business environment.
    As a member of the Pennsylvania Milk Marketing Board, I am very 
sensitive to the challenges confronting today's dairy producer without 
losing sight of the need to be understanding of the consumer's need for 
safe, nutritious, affordable dairy products.
    Most recent indications of monthly milk production for Pennsylvania 
indicated in the National Agricultural Statistics Service Milk 
Production Report released April 17, 2000 shows that milk production 
and cow numbers are declining over year-ago levels. The preliminary 
report of Pennsylvania production in the first quarter of 2001 
indicates milk production in the State is down 4.3 percent over last 
year's first quarter with about 14,000 fewer cows. This report would 
seem to reflect that lower milk prices received by Pennsylvania dairy 
producers over the past year combined with reported feed quality 
concerns have taken their toll on milk production in the State. Recent 
and projected milk price increases combined with the opportunity to 
harvest higher quality forages this spring may bring back some 
production. However, with cow numbers in dramatic decline, it seems 
likely that the milk supply will not be returning to last year's levels 
anytime soon.
    Another factor is the health of the United States economy. If it is 
moderately strong, I believe the consumer will continue to buy.
    Overall the current market outlook is calling for Pennsylvania milk 
prices to be about $2.32 per cwt above 2000 levels. This is based on a 
2001 annual average forecast of uniform milk prices for the Northeast 
Federal Order (Boston) of about $15.36 in 2001 compared to $13.04 in 
2000. To adjust this price forecast to Pennsylvania (Lancaster) reduce 
the Boston price by $0.35 per cwt.
                               conclusion
    The recent increases in producer prices experienced in local 
Federal milk marketing orders and incentives that the Pennsylvania Milk 
Marketing Board can provide through the mandated over-order premium.
    Even with the higher prices that Pennsylvania's dairy producers 
have experienced and are expected to experience in 2001, producers will 
continue to be faced with unrelenting competitive challenges. I believe 
that despite the positive trend in milk prices, the Milk Marketing 
Board must do everything feasible to provide producers with the best 
possible price that market conditions warrant to help keep the dairy 
industry viable in Pennsylvania. Continuation of the Board's over-order 
premium at reasonable levels which contributes to the recent positive 
trend in milk prices will help ensure that Pennsylvania and surrounding 
State producers will receive a price that best ensures their future 
viability without disadvantaging their market share.
    The Pennsylvania Milk Marketing Board is authorized by it's 
Pennsylvania statute to regulate the entire dairy industry including, 
wholesale and retail pricing.
    In Pennsylvania, prices paid to dairy farmers and resale prices 
move in lock step unison with one another. It is vital, therefore, to 
ensure that resale minimum prices established by the agency, are 
adhered to by both milk dealers and retailers. Our auditors perform 
wholesale audits to verify that milk dealers are selling milk at or 
above minimum prices established by the agency. Enforcement of the 
minimum wholesale price provides a stable economic environment free 
from destructive competition in the form of below cost sales. It 
follows then that enforcement of 10 minimum retail prices by the agency 
is equally important. Minimum retail prices for milk ensure that 
retailers are not using milk in a price war that eventually may be 
funded by the supplying dealer. The supplying dealer may then reduce 
payments to their dairy farmers. With this direct correlation between 
the prices paid by consumers and the price received by dairy farmers, 
the agency guarantees, through the enforcement of minimum resale 
prices, that our dairy farmers are receiving their fair share of the 
money spent on milk by consumers.
    Our auditors also collect and review financial data supplied by the 
milk dealers. This information is combined with information that is 
submitted monthly regarding the utilization of milk and is used to 
establish the dealer's cost for processing, packaging, and delivering 
milk. It is from 11 this audited historical cost information that the 
agency establishes the minimum wholesale price.
    For your information, on Wednesday, May 16, 2001 at 9:30 a.m. in 
Room 202 of the Agriculture Building, 2301 North Cameron Street, 
Harrisburg, the Pennsylvania Milk Marketing Board will be holding a 
hearing to establish the level of the over-order premium for third and 
fourth quarters of this year. We, as a Board, are proud of our ability 
to respond quickly to the consumer, farmer, and market needs.
    Senator, thank you for allowing me to speak today. 
    
    

    
    
    Senator Specter. Thank you very much, Mr. Brubaker. We now 
turn to Mr. David McCorkle, president and CEO of the 
Pennsylvania Food Merchants Association. He has served on the 
board of trustees of the Food Marketing Institute and the 
National Grocers Association and was chair of the Food 
Industry's Association of Executives, a bachelor of science 
from Bucknell, master of arts from John Carroll University. 
Thank you for joining us, Mr. McCorkle. The floor is yours.
STATEMENT OF DAVID McCORKLE, PRESIDENT, PENNSYLVANIA 
            FOOD MERCHANTS ASSOCIATION
    Mr. McCorkle. Senator, thank you very much. It's a pleasure 
to be here today. As you mentioned, I represent the 
Pennsylvania Food Merchants Association and the Convenience 
Store Council, about 1,700 corporations in Pennsylvania that 
own and operate 6,500 retail stores, all of them proud to sell 
milk from the farmers at this table and from the dairies that 
process that milk in Pennsylvania.
    I would begin by saying that our 6,500 stores selling to 
Pennsylvania consumers certainly support the dairy farmers, 
large and small, where the challenge is defining ``dairy 
farmer, and understanding just what that term means, because we 
have many ranges here, but very many efficient operations. It's 
really an extraordinary enterprise in the State of 
Pennsylvania.
    Our association, as I mentioned, supports the dairy 
farmers. At this time, we oppose any Federal legislation that 
would have unknown effects on what is understood to be a very 
complex and difficult and challenging business. I will say 
there are a couple of exhibits that I'd like to share with you, 
Senator, if you don't mind.
    Senator Specter. Fine. We will be glad to receive them.
    Mr. McCorkle. They are a part of my testimony, and that--
they point to a couple of issues that I think bear importantly 
in this discussion. First of all, the dairy department makes up 
about nine percent of the average supermarket sales. That nine 
percent-plus in sales is one of the most hotly competitive. 
Speaking of beverage, milk is competing with other beverage 
products; and beverage products are the fastest growing segment 
of the supermarket and the manufacturing industry. Milk is 
competing with an array of beverages, from bottled water to 
fruit drinks of all types. It is a very, very competitive 
department.
    Consumers are buying more and more beverages in the 
supermarket. Margins on those beverages are shrinking, 
generally. And the margin overall, as you know, in the grocery 
store, is 1 percent of sales. That is net profit for the 
supermarket is a penny on the dollar, after all expenses are 
paid and all costs of the product is paid. So the dairy part is 
9 percent of total sales. The supermarket margin is a very 
slim--it's a hotly competitive business. The supermarket owner 
and operator gets a penny on a dollar profit after taxes and 
expenses are paid. In that competitive marketplace the 
challenges are immense.
    And I shared with you one other piece of information, that 
being a graph that tracks the comparison of farm prices paid 
for dairy products as presented by the Pennsylvania Milk 
Marketing Board to the minimum retail price charged by stores 
in Pennsylvania. If you look at that graph, you will note that 
the spread between those two costs has actually decreased from 
January of 2000, I believe it is, to February of 2001, from 
$1.25 to $1.10.

                           Prepared Statement

    In Pennsylvania, we have the unique situation of having a 
milk marketing board that considers cost of production of the 
product to the consumer, cost of processing for the dairies, 
and cost of operation for the retailer. And because of our 
unique situation here, Senator, I think it is possibly a model 
State for the Senate to study in regard to cost and expenses 
and product prices paid by consumers. So I commend Mr. Brubaker 
who was--this was noted earlier, is a member of the commission, 
and to the staff of that commission for presenting a full 
picture in Pennsylvania that might be a little harder to get 
into focus as you look at the national picture for the 
production and processing of the price of dairy products, which 
is very, very complicated and confusing for a number of reasons 
that were noted by earlier persons testifying today.
    Thank you for the opportunity to be here. Our members are 
happy to share with you any in-depth additional information 
that you would like to have concerning this very complex 
process.
    [The statement follows:]

                Prepared Statement of David L. McCorkle

                    general comments & introduction
    I am David McCorkle, President of the PA Food Merchants Association 
and the PA Convenience Store Council. Thank you Senator Specter, 
members and staff of the Agriculture Appropriations Subcommittee for 
allowing me to provide information on behalf of the members of the 
association. The membership includes over 1,700 companies operating 
6,500 retail locations in the Commonwealth of Pennsylvania and 
surrounding States. The directors of the association have asked me to 
make it clear that we will support any program that will ensure the 
stability and safety of Pennsylvania's milk supply and enhance the 
business viability of dairy farmers, milk processors and retailers in 
the Commonwealth. The family farmer is important to the economic and 
cultural future of the Pennsylvania. Moreover, the product produced by 
dairy farmers is vitally important to the well being of every 
Pennsylvanian.
    As I understand it, we are here today to discuss farm to retail 
milk prices and the translation of increases or decreases in the 
payments made to farmers for class 1 product that is ultimately sold to 
consumers in retail stores. I am pleased to initiate dialogue on that 
and other topics that emerge from today's discussion and look forward 
to providing the members of the committee with any information that you 
desire concerning retail pricing policies followed by Pennsylvania-
based companies.
                     the supermarket business model
    The Food Marketing Institute publishes an annual financial review 
for the supermarket industry. Many of you know that supermarkets are 
known as a penny business. That is, to earn a dollar, supermarkets rely 
on a low mark-up to stimulate volume sales. Simply, the net profit 
margin is the net income as a percentage of sales that remains after 
paying all expenses, including product cost and the realization of any 
gains or losses. Over the past decade, the average supermarket industry 
profit has been 0.89 percent annually. Competition is extraordinary as 
the percentage of disposable income spent on food at home for the year 
1999/2000 (6.2 percent) is not much higher than the percentage of 
disposable income spent on food away from home (4.2 percent). For the 
fiscal year 1999/2000, the average net supermarket profit after taxes 
was 1.18 percent.
                 the pennsylvania milk marketing board
    The milk pricing system in the Commonwealth of Pennsylvania will be 
interesting for subcommittee members and staff to review. Act 37 of 
1934 and Act 43 of 1935 organized the Pennsylvania Milk Marketing Board 
in a temporary basis. Regulations were made permanent under Act 105, 
Public Law 417, in April 1937. In 1968, the Milk Control Commission 
became the PA Milk Marketing Board. The Board supervises and regulates 
the entire milk industry of the Commonwealth, including production, 
manufacture, processing, storage, transportation, disposal, 
distribution and the sale of milk and milk products for the protection 
of the health and welfare of the inhabitants. The appointed three-
member board and staff review each of the above areas in six separate 
regions of the Commonwealth and establish prices to be paid at each 
level of the production and distribution system, including establishing 
a minimum retail price.
    The Bureau of Consumer Affairs consults with representatives of 
consumer groups, disseminates information relative to activity of the 
Board, and acts as a liaison to Federal, State and local agencies 
involved in the dairy industry and milk marketing. The Bureau has 
provided a consumer update, which is attached to my testimony, dated 
January 2001. A chart from that testimony is provided on ``Milk Price 
Comparisons Pennsylvania State, January 2000-February 2001,'' and it 
contains a graph comparing the whole milk average minimum retail price 
and producer price at the gallon level.
    The numbers speak for themselves and generally indicate a direct 
and immediate movement of retail prices with the fluctuation of 
producer prices.
    The above fact is not surprising in that milk is generally sold at 
the minimum retail price in supermarkets due to the highly competitive 
marketplace.
    Pennsylvania's milk pricing structure is unique in the nation. 
Pennsylvania's consumers can be assured of purchasing quality and 
competitively-priced dairy products that fairly reimburse producers, 
dairies and retailers for their efforts.
                               conclusion
    I look forward to reviewing the specific problems identified by 
this committee. Once we better understand the problems expressed by 
dairy farmers in the nation, industry experts at Penn State University 
and other research facilities will be able to work with industry 
representatives, appointed and elected officials to resolve the 
problems.
    It is the belief of our association members that marketplace 
solutions will work best. However, we are in the process of reviewing 
legislation introduced in February by Senator Rick Santorum and Senator 
Herb Kohl. A national safety net for dairy farmers may a viable 
solution.
    Industry experts have challenged recent economic studies on the 
N.E. Dairy Compact. The President of the Food Marketing Institute, Tim 
Hammonds, noted that ``the bill extending the N.E. Dairy Compact is 
being introduced in Congress. Votes for that bill will disappear if the 
proponents are forced to admit the uncomfortable truth that it is the 
Dairy Compact that pushed up prices for consumers.''
    The dairy industry is working diligently with retailers and 
marketing experts to develop new dairy products that will increase 
consumption of milk in America. Value-added products are the single 
most important growth area for milk. I know that Earl Fink will provide 
you with an update on new products being introduced in the marketplace 
by the quality dairies operated by Pennsylvania-based companies. 
Finally, product development and marketing translates into increased 
investment by dairies and retailers.
    In addition, groups like the PA Dairy Stakeholders are working with 
dairy farmers to improve on-the-farm practices and efficiencies, which 
will help farmers improve their bottom line and succeed in today's very 
competitive marketplace.
    I look forward to working with you so that together we can create a 
better understanding of the milk production, processing and 
distribution system.
                              attachment i
















                             attachment ii
                  how the supermarket dollar is spent



    Senator Specter. Thank you very much, Mr. McCorkle. We turn 
now to Mr. Earl Fink, executive vice president of the 
Pennsylvania Association of Milk Dealers representing 35 
dairies which produce 85 percent of the milk sold in 
Pennsylvania, a graduate of Penn State University with a degree 
in accounting. Thank you coming in, Mr. Fink. We look forward 
to your testimony.
STATEMENT OF EARL FINK, EXECUTIVE VICE PRESIDENT, 
            PENNSYLVANIA ASSOCIATION OF MILK DEALERS
    Mr. Fink. Thank you very much, Senator Specter, for 
affording us the opportunity to be here. Much of what I was 
going to cover has already been covered by Mr. Brubaker and Mr. 
McCorkle, so in the interest of time, I will make my brief 
remarks even briefer.
    I've brought with me sample copies of the International 
Association of Milk Control Agencies Price Surveys. I have been 
monitoring these surveys for the past 20 years, and basically 
what they show is that in Pennsylvania, the minimum retail 
price established by the Pennsylvania Milk Marketing Board 
tends to be the prevailing price. So, in effect, our prices to 
consumers move in lockstep with prices paid to farmers. And, in 
other words, each month, the Federal Government announces what 
the class-one or beverage milk price will be for the following 
month. The PNMB posts its reports, and then our price moves up 
and down in lockstep with that.
    I have these reports available. We find that the minimum 
price tends to be the prevailing price in every market in 
Pennsylvania except the Philadelphia area, which tends to move 
in step with southern New Jersey; and their prices tend to be 
slightly above minimum. But in all fairness to stores in 
Philadelphia, when you look at them compared with the national 
prices in other markets, they're very much in line. Penn State 
used this information to do a study some years ago, and their 
bottom-line finding was that, on average, Pennsylvania farmers 
received more for their milk than farmers around the country 
and, on average, our consumers pay less. I think that is very 
compelling evidence and is a credit to the work that the milk 
marketing board.
    Mr. Tewksbury indicated that the Milk Board has been 
setting a premium--I think it was since 1988, Arden, not 1987--
and I would like to point out that our association, which 
represents processors, has always supported that premium, not 
always at the same levels as the farmers, but we have supported 
their premiums since its inception in 1988. I would like to 
point out that this Wednesday, the Milk Marketing Board will be 
holding a hearing to consider the level of premium beyond July 
1, and at that hearing we will be supporting a higher premium, 
$1.65 where we've been for the last 6 months, the same as a few 
other farm organizations. But a couple of the farm groups are 
actually supporting a price lower than $1.65. So as processors, 
we're supporting a higher level than some farm groups.
    I think that's all I have. Thank you very much.
    Senator Specter. Thank you very much, Mr. Fink. Mr. 
Tewksbury, you talked about Federal legislation. What Federal 
legislation would you like to see introduced?
    Mr. Tewksbury. Senator Specter, last fall former 
Congressman Ron Clink introduced a bill in Washington that we 
helped put together. And my understanding is that Congressman 
Tim Holden either has or will be introducing a similar bill. 
And in addition to that, we have put together a bill somewhat 
like Congressman Clink's bill which basically brings the 
average cost of producing milk across the United States, as 
determined by USDA, into a pricing mechanism. It also allows 
dairy farmers to produce milk for the needs of the market 
without being penalized. And I think, to me, it is the answer 
to this pricing problem.
    I realize not everybody is going to agree with that, but, 
you know, a confusing thing is that a branch of the USDA has 
been establishing prices on the cost of production for all 
commodities or major commodities for many, many years through 
the act of Congress, I guess, demanding that our market 
administrator's report every month what that cost is by certain 
sections of the country and the national average. This is being 
surveyed all across the country, and farmers and dairy farmers 
now themselves realize as what USDA says the average cost is by 
the northeast, the southeast, the far west, and the national 
average.
    And we've heard today that--and I have been at hearings of 
the marketing board over the past years when they do bring in 
the cost factors of our processors and so on--and their 
container costs and so on in establishing the price-per-gallon 
of milk, but they pattern their prices after the Federal 
orders. So as the Federal order pricing collapses, so does the 
price in Pennsylvania on the beverage milk, except for the 
premium established by the marketing board.
    So while the board does--as best I can recollect, does 
bring in the cost of other elements into a gallon in--into 
Pennsylvania, and they bring in the farm price established by 
the Federal orders, but that Federal order does not bring in 
what the farmer's cost of operation is.
    Senator Specter. So essentially, Mr. Tewksbury, you would 
like to see legislation which took into account the cost of 
production and a reasonable profit.
    Mr. Tewksbury. Yeah, and these figures are established by 
the Department of Agriculture, and we have tried to bring them 
into an advocacy meeting sometime, and they don't want to be 
any real part of it; but they said if there is a bill 
introduced and there are hearings held on it, they will come 
into the committee hearings in front of you people and discuss 
their cost of production records and how they get there and how 
they can defend them. I understand there's people in USDA at 
other levels who don't even support the USDA's cost of 
production figures, yet these figures are put all across the 
United States as,'' Here's what it costs.'' I've got them right 
here, the latest ones for the northeast and so on, and it is 
substantially higher than what farmers are receiving. And if 
you put total economic costs in there, it shoots way up.
    Our policy is that we need a pricing formula that doesn't 
go up and down all the time and cause all of this confusion to 
consumers and causes a lot of problem for our stores to make 
these changes. And that's why I've heard them say, you know, 
about milk selling higher in other States--I watch it in 
southern--here in New York--and what I've noticed is when--
when, in Pennsylvania, if the prices go up for our dairy 
farmers, and the price of a gallon of milk does go up, okay, it 
does go up as dictated by the board, but in New York State, 
they also are raised, because they're cost is going up. But now 
when the price comes down in Pennsylvania, what I find in 
Horsehead and Elmira and Corning, New York, and those places, 
they hang onto that price that was up here higher than what it 
is here in Pennsylvania.
    Senator Specter. Well, Mr. Tewksbury, they hang onto the 
price which is higher, too, according to what Bob Conklin and 
Mr. Robinson said.
    Mr. Tewksbury. I've seen many times 30, 35, 40 cents a 
gallon higher than what you can buy it up in the Athens area. 
And I'm sure that's what goes on across the country. So I think 
the way to get away from this, Senator, would be to have a 
pricing formula that reflects what the cost is at the farm and 
has stabilized the prices.
    Senator Specter. Dr. Conklin, let me turn to you for a 
response to what Mr. Tewksbury has had to say. When the first 
changes were made in milk prices, going back into the 1930s, 
there was a concern about the sanity of milk, the adequacy of 
production--I see you nodding in the affirmative--and there 
were minimum prices set in order to deal with the problem of an 
adequate supply of milk. It was really done for the consumers, 
and it took into account what the farmers were facing.
    One of the first jobs I had as a younger lawyer--I'm still 
a young lawyer--but when I was a younger lawyer working with 
Barsdeck, Price, Meyers, and Rhodes was representing Sealtest 
National Dairy Products, we had many hearings before the Milk 
Control Commission, and that was still the dominant theme, to 
provide an adequate price to the farmer to guarantee adequate 
supply and sanitary conditions. So why not figure in the cost 
of production to the milk producer as a cost of production plus 
a reasonable profit?
    Dr. Conklin. Senator Specter, let me begin by noting that--
as Mr. Robinson also mentioned, the structure of pricing milk 
in this country has been built on over a half a century of very 
complicated policy structures, both at the Federal level and at 
the State level. We've heard here a little bit about the role 
of the board here in Pennsylvania. There are some other States 
that also have similar institutions, or ones that play a 
slightly different role.
    Developing policies that use the cost of production to help 
set prices, requires caution, because there is no very good way 
to measure cost at the farm level. Costs vary widely--we can 
compute average costs, but there is a wide variance around the 
average.
    Senator Specter. Well, Dr. Conklin, I understand that 
you're looking for competition. But where you have this very 
complicated structure which you've testified about, is there 
any way to simplify this so-called, quote, ``complicated 
structure,'' or are we really heading to a situation where 
there are not going to be anymore small farmers? Where you lose 
300 to 500 farms a year, and you have some 9,900, that is a 
pretty heavy attrition rate. Do we want to find a situation 
where we're relying only on the giant corporations and milk 
producers in far-distant places, or is there some value to 
society and to the consumer in maintaining the family farm?
    Dr. Conklin. The judgment, Senator--the judgment about the 
value of maintaining the family farm is certainly not one that 
I am in a position to make, but I think that is a statement 
that many other people here have spoken to today, and that 
that's a judgment that society has to make through the 
political process and through the policy process.
    Senator Specter. Well, you're the economist--a key 
economist for the United States Department of Agriculture, and 
if you find some other way to handle it, you have to consider 
the impact of the elimination of the family farm or this sharp 
reduction. A question which comes to my mind--and maybe we'll 
turn to you, Mr. Brubaker--you cite the statistics that 
Pennsylvania farmers receive a larger supply--a larger 
percentage of profits than farmers from other States. What is 
happening in the other States? Are they losing more family 
farms? You cite here that the Oregon farmer gets only 35.7 
percent of the retail price of milk, compared to 53.2 percent 
in Pennsylvania. Is Oregon losing more of its family farms--
milk producers?
    Mr. Brubaker. Senator, I can't answer that question. But 
one thing I can answer is some places where they have had a 
board similar to Pennsylvania, what I was told is that when 
they lose the board, the price usually goes up to the consumer, 
and the prices goes down to the farmer. And that is what I 
consistently have heard from where States--and I think I'm 
referring to--maybe someone can help me out what State that 
was----
    Senator Specter. Well, Mr. Brubaker, that generalization 
isn't too helpful, even if it is so. But from the point of view 
of the Senate Agriculture Subcommittee appropriations, we're 
concerned about what is happening nationally. And this hearing 
obviously focuses on Pennsylvania. But if the Pennsylvania 
farmers are better off, say, than the Oregon farmers or the New 
Jersey farmers, who get only 40.5 percent of the retail price 
of milk, I would like to have a finding, Dr. Conklin, perhaps 
the Department of Agriculture can give it to us, whether 
there's other States--New Jersey and Oregon, illustratively, 
are losing more of their farms than Pennsylvania. Can you 
provide that to us?
    Dr. Conklin. Senator, that is not a question that I can 
answer right now. Certainly, I can go back and check the data 
that we have to see if we can give you an answer to that 
question.
    Senator Specter. I understand you can't answer on the spur 
of the moment, but I would like to see if you could go back and 
answer the question.
    I'm very much concerned with the testimony we have here 
today--Mr. Robinson testifying about farm prices going down and 
retail costs are constant or higher so that when the farmer 
gets less money for his milk, the retail prices are constant or 
higher. Now, how can we account for that? Dr. Conklin has 
testified that there is retail resistance to lowering prices 
and the market power--when prices go up, there is a faster 
accommodation--you're nodding in the affirmative--on retail 
prices rising, when prices go down to the farmer, they retain 
constant or even go up among the retailers. What can be done 
about that to provide greater fairness to the system?
    [The information follows:]

    Farmers' share of retail prices for Class I milk varies widely 
across States. Because this share is based on retail prices within an 
individual State, milk is shipped across State lines, there is no 
reason to expect these shares to be consistent across States. Dairy 
farm numbers have declined across the nation. At a first glance it 
appears that the percentage decline in the number of commercial dairy 
farms is higher in States where the farmers' share is lower. Of the six 
States we examined at your request, Pennsylvania, New York and Maine 
had the highest farm shares of retail fluid milk prices and the 
smallest percent decline in the number of dairy farms between 1995 and 
2000. However, it is worth noting that the three States with the 
largest percentage decline in dairy farm numbers, Colorado, Oregon and 
New Jersey, were all States with a relatively small number of farms at 
the beginning of the period so that the absolute decline in farm 
numbers in these States was quite small even if the percentage decline 
was high. A complex set of factors drive dairy farm entry and exit 
decisions. In addition to milk prices, these include operator 
demographics, real estate prices and urbanization. Because these 
factors vary widely across the United States it is not possible to 
conclude from these numbers that there is a causal relationship between 
farmers' share of retail milk prices and the changes in the number of 
dairy farms.

                               CHANGE IN THE NUMBER OF COMMERCIAL DAIRY FARMS \1\
----------------------------------------------------------------------------------------------------------------
                                                                     Share of       Number of dairy
                                                                   retain price          farms         Change in
                                                                    received by  --------------------  number of
                                                                    farmers in                           dairy
                                                                   Class I milk                          farms
                                                                   \2\ (percent)  \3\ 2000  \4\ 1999  since 1995
                                                                                                       (percent)
----------------------------------------------------------------------------------------------------------------
Maine...........................................................            47.9       458       592      (22.6)
New Jersey......................................................            40.5       158       242      (34.7)
New York........................................................            51.1     7,238     8,913      (18.8)
Pennsylvania....................................................            53.2     9,837    12,000      (18.0)
Colorado........................................................            33.9       195       300      (35.0)
Oregon..........................................................            35.7       364       522      (30.3)
----------------------------------------------------------------------------------------------------------------
\1\ Commercial farms are those actually selling milk as defined in a survey by the American Farm Bureau
  Federation carried out annually since 1992.
\2\ Data from testimony given May 14, 2001 in Philadelphia, PA.
\3\ Data from July 1 survey of farms within each State actually selling milk published in ``Hoards's Dairyman'',
  October 25, 2000.
\4\ Data from July 1 surveys of farms within each State actually selling milk published in ``The Western
  Dairyman,'' February 1998.

    Mr. Robinson. Well, our work--again, I want to say--
confirms, through empirical information that kind of price 
behavior and price relationships.
    Senator Specter. You say you do confirm that from the 
empirical data?
    Mr. Robinson. The empirical data shows that again--as I 
mentioned earlier, that there's a pretty weak price 
relationship between what happens on the farm nationally--that 
is the prices farmers received and what the retail price is in 
a given market. I might say, in confirming some of the 
observations made here earlier, that among the nationwide 
picture that we put together, the price relationship was 
stronger in Philadelphia, Pennsylvania than it was in the vast 
majority, if not all, the other markets in the country--so 
there may be things going on in Philadelphia, Pennsylvania to 
strengthen that relationship, which I can't say with certainty. 
All I can say is that there is a stronger relationship in 
Philadephia, Pennsylvania than most, if not all, the other 
locations.
    Senator Specter. You say a stronger relationship, but did 
prices in the retail stores in Pennsylvania go down as fast 
when farm prices were reduced as they went up when farm prices 
were increased?
    Mr. Robinson. No, the price relationship is still not 
extremely strong. In technical terms, I think it is a 
correlation coefficient of about point-six. A perfect 
relationship would be one.
    Senator Specter. So you're saying that although 
Pennsylvania--the disparity is not as great in Pennsylvania, 
there still is a significant disparity that when farm prices go 
up, the prices reflect at the retail level, much faster than 
when prices go down--the prices--the farmers prices at the 
retail level go down.
    Mr. Robinson. Certainly in the end result, there was not a 
perfect flow. That is correct. The speed with which these 
things happen is a little difficult to discern. All I can say 
is that at the beginning of the period and the end of the 
period, there was not a perfect match, and that during the 
course of the period there may be lags.
    Senator Specter. Just to be sure I understand you, your 
conclusion is that when prices go up to the farmer, they go up 
faster in the retail stores than when prices go down to the 
farmer, that they are reduced in the retail stores.
    Mr. Robinson. When prices go down to farmers, it does not 
translate into prices going down for consumers. They, in fact, 
have gone up for the most part.
    Senator Specter. That is true in Pennsylvania, even though 
there is less disparity?
    Mr. Robinson. That is correct.
    Senator Specter. Okay, Mr. Tewksbury?
    Mr. Fink. Mr. Chairman, I beg to differ.
    Senator Specter. We'll give you a chance in a minute, Mr. 
Fink, but Mr. Tewksbury will get recognition first. In the 
Senate, it's the first senator on to speak who gets 
recognition.
    Go ahead, ``Senator'' Tewksbury.
    Mr. Tewksbury. I watch the retail prices very closely in 
probably 25 stores, maybe more than that, in northeastern 
Pennsylvania. Number one, when the dairy farmer prices go up on 
beverage milk, and that's good terminology, beverage milk, the 
prices have to go up because the marketing board establishes 
higher minimum prices at that point. Okay?
    Now, when the prices come down to our dairy farmers on 
beverage milk, the stores that I survey all the time, they come 
down the same day, the first of the month. I see it over and 
over and over again. So I don't know about the whole State, but 
at least one-third of the State that I observe, when the prices 
come down to the dairy farmers, on the first of April, say, the 
prices--the minimum price comes down, established by the 
marketing board, and at most supermarkets, the minimum price 
becomes the selling price and it comes right down the same 
identical time.
    Now, the problem that I have, as a dairy farmer, is, while 
I'm listening to these statistics as to the better relationship 
between what the dairy farmers in Pennsylvania receive and the 
correlation to what the consumers pay, but I don't think those 
figures take into consideration the dairy farmers in 
Pennsylvania whose milk goes into New Jersey and New York where 
that isn't necessarily true. So while some Pennsylvania dairy 
farmers, the correlation between their price and the consumer 
price is better, overall many of our dairy farmers in 
Pennsylvania would not fall into that category, in my opinion, 
and for the dairy farmers in New Jersey, I don't think they 
have even 200 dairy farmers left in New Jersey to supply almost 
8 or 9 million people. So the attrition rate in New Jersey for 
many years has been extremely bad, and they can't lose many 
more or they won't have any at all. But I think my observation 
is that there is a relationship between the dairy farmers 
prices going down and going up with the retail prices in most 
cases.
    Senator Specter. So you think the attrition of the New 
Jersey dairy farmers is accountable to the fact that they 
receive a smaller portion of the retail price of milk, getting 
40\1/2\ percent, compared to Pennsylvania, 53.2 percent?
    Mr. Tewksbury. I think that's part of it, and the fact that 
they're not getting a realistic fair price overall, and the 
terrible exposure of the real estate problems in New Jersey has 
just eaten up our farms in New Jersey. And if we're not 
careful, that same thing could happen in Pennsylvania and other 
States, as well.
    Senator Specter. Mr. Tewksbury, let me see if I understand 
your testimony correctly. Do you disagree with Mr. Robinson, 
and do you believe that when milk prices go down to the farmer, 
that the farmer gets less money, that those are reflected in 
retail prices going down?
    Mr. Tewksbury. I find that true in northeastern and north-
central Pennsylvania. But about a half an hour ago, I also said 
that I watch the prices in the southern tier of New York, that 
when the prices in these stores in Pennsylvania go down, as 
established by the marketing board, I find the stores in 
Corning and Horsehead and Elmira keeping their prices up there, 
which would indicate to the testimony of--that one of the 
speakers gave that the relationship of what the farmers get is 
less than the retail price.
    Senator Specter. So what you find in the southern tier of 
New York, you think there is a closer correlation between the 
retail prices in northeastern and central Pennsylvania because 
those retailers are more attuned to what their customers, who 
are significantly farmers, know, that the farmers who go into 
their stores know that the price is going down on the price 
paid to the farmers, so they expect the prices to go down in 
the stores that are in their area?
    Mr. Tewksbury. I don't know how much it relates back to the 
farmers to the prices going down and so on. I think it is the 
relationship that's been established between the Pennsylvania 
milk marketing board and our retail stores across Pennsylvania, 
which I think is extremely good. And I agree that the overall 
picture in Pennsylvania is probably better than many States. We 
also do surveys in California, which I'm sure is in Mr. 
Robinson's surveys in my lands. The prices that the farmers 
receive in California and what the consumers pay, I would like 
to see if he has a breakdown of that, because that is alarming, 
not only on beverage milk, but on manufactured products, as 
well. If he has that, I think it would be very good for you 
people on the committee to study that, because you're going to 
get some amazing statistics.
    Senator Specter. Mr. Fink, we'll come to you. And--wait 
just a second. I haven't formulated my question yet. You wanted 
to reply to Mr. Robinson. In your testimony, you said that the 
farmers get more, and the consumers pay less, and you referred 
to a stack of papers which you have in front of you as being a 
study from Penn State. Can you----
    Mr. Fink. No, no. This is not the Penn State study. This is 
a study that is made every month, Senator, and it is published 
by the International Association of Milk Control Agencies. It's 
available on the Milk Marketing Board's Web site since January 
of 2000. It goes back 20 years.
    Senator Specter. Will you point to the source of that study 
to back up your statement that Pennsylvania, the farmers are 
getting more and the consumers are paying less----
    Mr. Fink. That was a Penn State study done some years ago 
by the committee, a copy of it.
    Senator Specter. Well, that is what I was referring to.
    Mr. Fink. Okay.
    Senator Specter. You referred to a Penn State study, which 
is what I had just said, and I thought you had gestured toward 
that stack of papers.
    Mr. Fink. No, I'm sorry I misled you, Senator. This is 
simply the price surveys that are done monthly. And in 
Pennsylvania----
    Senator Specter. Well, if you would provide the Penn State 
study to the subcommittee, I would appreciate it.
    Mr. Fink. I will do that.
    Senator Specter. Go ahead with your testimony in which you 
think--which you represent contradicts what Mr. Robinson said.
    Mr. Fink. I know Mr. Robinson has a massive job trying to 
study retail milk prices throughout the country, but in 
Pennsylvania we have hard data, back probably 20 years, where 
employees of the milk marketing board actually go into 
supermarkets, and record the prices. And then those prices are 
published and compared with their minimum prices. And we found 
over the last 20 years that in all areas of the State except 
Philadelphia, in supermarkets, the price to the consumer moves 
in lockstep with the price to the farmer.
    Senator Specter. Well, would you show where in those 
studies that conclusion appears?
    Mr. Fink. You have to go through--and I'm stating my 
conclusion. I would like the committee to make your own study 
of these reports. And I'm sure you will arrive at the same 
conclusion.
    Senator Specter. We will make our own study. But when you 
make that representation, if you are able to back it up, I 
would like you to. If you can't at the spur of the moment, I 
would like you to provide it to the subcommittee.
    Mr. Fink. Okay. Well, if you want to take one report--I 
will walk through one report, if you would like, Senator.
    Senator Specter. Go ahead.
    Mr. Fink. Okay. This is for February of this year, February 
2001. Unfortunately, the pages aren't numbered, but the----
    Senator Specter. Excuse me. If you have a report for 
February 2001, let me take a look at it please. Do you have a 
second copy?
    Mr. Fink. I probably gave it to you. If I can take one 
second--there's the minimum retail store prices for six milk 
marketing areas for a gallon of whole, low-fat, and skim--and 
then you move on back to the supermarket prices in 
Pennsylvania, and you will see they have a high, a low, and an 
average.
    Senator Specter. Well, are you saying there's something you 
want to compare? And you say there is something you want to 
compare?
    Mr. Fink. Yeah, compare the minimum prices with the various 
areas with what the observed prices were at the supermarkets.
    Senator Specter. Go ahead.
    Mr. Fink. Okay. In area two, for whole milk, the low was 
$2.63; the high was $2.89, the average was $2.63. I would say 
the minimum was $2.62 for whole milk, correct?
    Senator Specter. What is your point here, Mr. Fink?
    Mr. Fink. That the prevailing minimum price established by 
the Pennsylvania Milk Marketing Board, which are these numbers, 
tend to be the prevailing prices to consumers in all areas of 
the State except area one, which is the Philadelphia area.
    Senator Specter. Well, how does that correlate with the 
prices which are being paid to the producers at this time----
    Mr. Fink. Because these minimum prices move up and down in 
lockstep with the changes in the prices to the farmers. In 
other words----
    Senator Specter. Where does that appear?
    Mr. Fink. That is on another page, and you have to use some 
math to get that. Here are the prices paid to the farmers. 
Excuse me, that's not it.
    Senator Specter. Let me ask you to do this, Mr. Fink, in 
the interest of time. Would you submit to the subcommittee the 
analysis, and if you have to do some math, make the 
computations. If you think that these statistics support a 
conclusion that the prices which are paid to the producers and 
dairy farmers match the prices paid by the consumers?
    Mr. Fink. I'd be happy to do that.
    Senator Specter. It would be very interesting to see what 
the General Accounting Office and the Department of Agriculture 
say.
    Mr. Fink. If Arden and I agree, it must be correct.
    Senator Specter. If you and Arden agree, it must be 
correct? The subcommittee is not quite ready to delegate the 
conclusory responsibilities to you, Mr. Fink.
    Senator Specter. Mr. McCorkle, you wanted to make a comment 
here?
    Mr. McCorkle. Yes, Senator, thank you. I just wanted to say 
that what I've heard today has been very interesting, but I 
believe what I've heard from Mr. Brubaker, over to this side of 
the table, which happens to be the left side of the table, 
agree that farm prices are fairly reflected at retail prices 
for whole milk products purchased by consumers in the State of 
Pennsylvania, which fits with my testimony that says that in 
Pennsylvania we have protected the safety of the milk supply 
and the production of the supply and providing consumers with a 
quality product at a low price compared to prices in the 
region. And I think that is what Mr. Brubaker and Mr. Tewksbury 
and Mr. Fink and I testified today. And the testimony, I 
believe, including this one-page chart, I believe backs that up 
in Pennsylvania.
    The situation is more complicated as we look to the other 
States. I think it was testified earlier, those differences 
between farm costs and retail costs are explained to some 
extent by energy costs, by packaging costs, by labor costs, by 
marketing costs, and by broader factors in the economic----
    Senator Specter. Well, Mr. McCorkle, you're saying that 
there could be some reflection of this differential, as Mr. 
Tewksbury says, if you go to New Jersey; that in New Jersey, 
the prices which the consumers are paying go up faster than the 
prices which are paid, say, to the Pennsylvania farmers, who 
are apparently shipping milk into New Jersey. When the amounts 
of money paid to the Pennsylvania farmers go down, that that is 
not reflected as much in a reduction in cost to New Jersey 
consumers?
    Mr. McCorkle. Sir, I'm not sure. I think it's very 
complicated. What you've stated is probably true, but the 
reverse of that is probably also true, that there are benefits 
that come from shipping to other Federal districts that 
probably can't be explained very clearly or justified by an 
economist.
    Senator Specter. Well, what are the benefits? If the costs 
are higher, what are the benefits?
    Mr. McCorkle. The payment is higher. The costs stay the 
same, but the payment may be higher. And I'm not an expert in 
any of those areas, and don't pretend to be. What I can testify 
to is to what's happening in the retail marketplace in 
Pennsylvania and to the positive effect that the milk marketing 
board has had on the structure of the dairy production and 
distribution system in the State.
    Senator Specter. Mr. McCorkle, what is your opinion of the 
breakdown in the cost of the milk which was testified to about 
$2.50? And you are representing the retailers. The farmers get 
$1, and the costs are 25 cents, and the wholesalers get 75 
cents, and the retailer gets 50 cents. Does that breakdown seem 
about right to you?
    Mr. McCorkle. I would have to compare that with the 
breakdown for other products sold in the stores. The average 
markup in the supermarket is somewhere in the low-20 percent 
area. So again, I would have to take a close look at that. But 
there are extraordinary costs to operating a retail store.
    Senator Specter. Mr. Fink, 75 percent goes to the 
wholesalers, almost as much as the farmer gets. Is that fair?
    Mr. Fink. To the wholesalers?
    Senator Specter. You're representing the wholesalers here 
today.
    Mr. Fink. I don't think 75 cents is almost as much as $1, 
Senator.
    Senator Specter. You get 75 cents out of $2.50, the farmer 
gets $1, the coop gets 25 cents, the wholesaler gets 75 cents, 
and the retailer gets 50 cents. Is it fair that the wholesaler 
gets three quarters as much as the farmer, that produces the 
milk?
    Mr. Fink. I think it is fair, at least in Pennsylvania. Our 
pricing is very fair. The pricing is based on the cost of the 
milk and the value of the container and the cost of processing 
the milk in the plant and delivering it to the store. We don't 
do this for nothing. I think in Pennsylvania at least----
    Senator Specter. Well, the farmers don't do all of what 
they do for nothing either.
    Mr. Fink. Mr. Brubaker's testimony shows in Pennsylvania, 
the farmer gets 53 percent of the retail price, which is higher 
than the national figures presented by Mr. Robinson.
    Senator Specter. Mr. Tewksbury, do you think that's a fair 
allocation?
    Mr. Tewksbury. It's a fair allocation.
    Senator Specter. Take the microphone, or Pennsylvania Cable 
Network is not going to get your pearls of wisdom, and you have 
to get the other one, too.
    Mr. Tewksbury. I'm not going to dispute any of these 
figures. I don't really know exactly what they are, but I still 
say that it does hold true probably for the milk in the State 
of Pennsylvania, but it does not hold true for the milk that 
leaves the State, like most of the milk in northeastern 
Pennsylvania. It goes into Brooklyn and Long Pond, New Jersey. 
And I think if those prices were segregated out, you would find 
it would not be 52 or 53 percent; it would be down in the 40-
percent bracket, and that's because of the premium structure in 
Pennsylvania, which is good in Pennsylvania, but it doesn't 
help the milk that leaves the State. So I think that 53 or 52 
percent would be lower on your producers in Pennsylvania whose 
milk leaves the State. And, of course, that does not reflect 
anything on the milk that is used for manufacturing purposes.
    Senator Specter. So the Senate has to consider whether the 
national average and the national picture.
    Mr. Tewksbury. Yes, sir.
    Senator Specter. Ms. Mittal, you've sat through this entire 
hearing without saying anything. Would you like to speak?
    Ms. Mittal. No, thank you, Senator. I agree with most 
everything that's been said so far.
    Senator Specter. Well, the subcommittee--the Agriculture 
Subcommittee of the appropriations is going to pursue this 
matter further. I will be interested to get the analysis from--
that Mr. Fink is talking about, and I would like for you, Mr. 
Robinson, and Dr. Conklin to take a look at the point which Mr. 
Tewksbury is making here about the impact on the Pennsylvania 
farmer on milk which is sold out of State, as he cites what has 
happened in New Jersey, the southern tier of New York, 
Brooklyn.
    I remain very much concerned about the basic statistics of 
the farm prices falling 48 cents a gallon in the period between 
March and April of 1999 and the retail price going down only 29 
cents a gallon--a big differential. I'm also concerned about 
the wide fluctuations in what the farmer gets--$16.27 in 
January of 1999, down to $10.27, a month later--as to how we 
might approach this issue on milk pricing. It is obviously a 
very complicated matter.
    But from a national perspective, I'm concerned about what 
is happening to the loss of farms in New Jersey, perhaps in 
Oregon. We will see what those figures show. So I'm certainly 
concerned about what is happening in Pennsylvania where, in my 
travels among--through Pennsylvania, 67 counties, I hear 
repeated complaints about the squeeze of the dairy farmer, the 
squeeze of the dairy farmer. And my purchases are not 
scientific, but I haven't found the price of milk going down, 
ever, on the milk that I buy. And the repeat of the specific 
time that prices were going down to the farmer, where I bought 
milk, it went from $1.95 to $2.29. And when we talk about 
economic power in the retailers and the ability to hold onto 
more of the profits at a time when the prices go down to 
reflect that change in a slower price contrasted with when the 
prices go up to the farmer and up to the retailer, the prices 
go up much faster.
    Milk is very important to the consumers, especially to the 
children of America, so we intend to pursue the matter further. 
We will be looking for the follow-up from Mr. Fink and from Dr. 
Conklin and Mr. Robinson. If anybody would like to say anything 
further before we conclude the hearing--Mr. Brubaker?
    Mr. Brubaker. Mr. Senator, thank you for this opportunity. 
Again, just to try--and I don't have this down on paper, but it 
would be for the record, just to simplify the situation a 
little bit--would be that I can testify to the same thing that 
was said here. In our area, when the milk price goes up to the 
farmer, the store price goes up about 9 to 10 cents a gallon, 
and that doesn't take into account the percent of fats. But I'm 
saying on average about 9 to 10 cents per gallon. The price of 
a gallon will go up if it goes up $1 to the farmer. If it goes 
down a $1 to the farmer, that will follow itself right through, 
as they stated. I can go into a Mini-Mart or the super chains--
and our store, and that will basically, on the day of the first 
of the month, that milk will be back down following the 
farmer's reduction in price. It is just like step-by-step. If 
the price goes down to the farmer, the price comes down to the 
store at about 9 to 10 cents a gallon as $1 relates to the 
dollar to the farmer.
    Senator Specter. Mr. Conklin, Mr. Robinson, would you be in 
a position to extend this study to that precise point? I would 
like to see just exactly how that works now.
    Mr. Robinson. We'd be happy to look at any figures anybody 
can provide. I can only tell you the price spread in 
Philadelphia got larger. And the only way it gets larger is if 
farm and retail prices are not tracking with one another.
    Senator Specter. What I'm asking you--would you be in a 
position to track the representation just made by Mr. Brubaker?
    Mr. Robinson. We'd be happy to try. Yes, sir.

                         Conclusion of Hearing

    Senator Specter. Okay, thank you all very much.
    [Whereupon, at 10:05 a.m., Monday, May 14, the hearing was 
concluded, and the subcommittee was recessed, to reconvene 
subject to the call of the Chair.]

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