[Senate Hearing 107-520]
[From the U.S. Government Publishing Office]
S. Hrg. 107-520
S. 1157, THE DAIRY CONSUMERS AND PRODUCERS PROTECTION ACT OF 2001
=======================================================================
HEARING
before the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
JULY 25, 2001
__________
Serial No. J-107-34
__________
Printed for the use of the Committee on the Judiciary
U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 2002
________________________________________________________________________
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COMMITTEE ON THE JUDICIARY
PATRICK J. LEAHY, Vermont, Chairman
EDWARD M. KENNEDY, Massachusetts ORRIN G. HATCH, Utah
JOSEPH R. BIDEN, Jr., Delaware STROM THURMOND, South Carolina
HERBERT KOHL, Wisconsin CHARLES E. GRASSLEY, Iowa
DIANNE FEINSTEIN, California ARLEN SPECTER, Pennsylvania
RUSSELL D. FEINGOLD, Wisconsin JON KYL, Arizona
CHARLES E. SCHUMER, New York MIKE DeWINE, Ohio
RICHARD J. DURBIN, Illinois JEFF SESSIONS, Alabama
MARIA CANTWELL, Washington SAM BROWNBACK, Kansas
JOHN EDWARDS, North Carolina MITCH McCONNELL, Kentucky
Bruce A. Cohen, Majority Chief Counsel and Staff Director
Sharon Prost, Minority Chief Counsel
Makan Delrahim, Minority Staff Director
C O N T E N T S
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STATEMENTS OF COMMITTEE MEMBERS
Page
Edwards, Hon. John, a U.S. Senator from the State of North
Carolina....................................................... 91
Feingold, Hon. Russell D., a U.S. Senator from the State of
Wisconsin...................................................... 14
Grassley, Hon. Charles E., a U.S. Senator from the State of Iowa. 16
Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah...... 12
Kohl, Hon. Herb, a U.S. Senator from the State of Wisconsin...... 10
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont. 1
Schumer, Hon. Charles E., a U.S. Senator from the State of New
York........................................................... 63
Specter, Hon. Arlen, a U.S. Senator from the State of
Pennsylvania................................................... 8
WITNESSES
Beatty, James F., Economist, Louisiana State University,
Franklinton, Louisiana......................................... 101
Brubaker, Hon. Harold, State Representative, State of North
Carolina, Asheboro, North Carolina............................. 92
Burrington, Stephen H., Vice President and General Counsel,
Conservation Law Foundation, Boston, Massachusetts............. 29
Gorder, Richard, Member, Board of Directors, Wisconsin Farm
Bureau Federation, Mineral Point, Wisconsin.................... 110
Healy, Hon. Jonathan, Commissioner of Agriculture, Commonwealth
of Massachusetts, Boston, Massachusetts........................ 67
Neuborne, Burt, John Norton Pomeroy Professor of Law, New York
University School of Law, New York, New York................... 47
Norquist, Grover, President, Americans for Tax Reform,
Washington, D.C................................................ 26
Pines, Lois G., former Massachusetts State Senator, Newton,
Massachusetts.................................................. 96
Smith, Daniel, Executive Director, Northeast Dairy Compact
Commission, Montpelier, Vermont................................ 18
SUBMISSIONS FOR THE RECORD
Allied Federated Milk Cooperatives, Inc., Judith Aldrich,
Director of Information, Canton, New York, statement........... 116
Governors' Council for Interstate Compacts, Washington, DC,
letter......................................................... 118
S. 1157, THE DAIRY CONSUMERS AND PRODUCERS PROTECTION ACT OF 2001
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WEDNESDAY, JULY 25, 2001
U.S. Senate,
Committee on the Judiciary,
Washington, D.C.
The Committee met, pursuant to notice, at 10:03 a.m., in
room SD-226, Dirksen Senate Office Building, Hon. Patrick J.
Leahy, Chairman of the Committee, presiding.
Present: Senators Leahy, Kohl, Feingold, Schumer, Edwards,
Hatch, Grassley, and Specter.
OPENING STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR FROM
THE STATE OF VERMONT
Chairman Leahy. Good morning. This hearing is an
opportunity for both sides of the debate on interstate dairy
compacts to fully present their cases. This is one of those
issues where every member of this committee can agree on the
goal, but apparently not how we might get there.
We all want to support our dairy farmers and we all believe
that this hard-working segment of our society should be able to
earn a decent living. We all want ample supplies of fresh milk
at reasonable prices for our States' consumers.
Unlike agricultural commodities like wheat, corn and
soybeans, milk is highly perishable. When a dairy farmer brings
the milk to market, that milk has to be sold right away or it
quickly loses its value. You can't set it aside for the winter
in a silo.
For big processors, that is just fine. They can buy milk at
distressed prices and store it away to make cheese or powdered
milk or ice cream. But that setup hurts farmers, who work
incredibly hard just to make a living. It also hurts consumers,
who want farmers around to supply fresh milk for the store
shelves.
As a Nation, we have tried several remedies to cut through
this knot, and the record is proving that regional compacts are
the most sensible and workable answer yet. And unlike other
legislative remedies that come with price tags, and often hefty
ones, compacts cost Federal taxpayers nothing.
We will be talking throughout the summer and into the fall
about numerous farm support programs, all of which will cost in
the aggregate billions of dollars of taxpayers' money. We will
give our speeches on fiscal restraint and balancing the budget
and all the rest as we will vote for these multi-billion-dollar
farm programs. If we really believe in fiscal restraint, if we
really believe in saving the taxpayers' money, if we really
believe in helping the consumer, and if we really believe in
helping farmers, here is an easy program. It helps farmers, it
helps consumers, and costs the taxpayers nothing.
Milk is one of those unusual foods where the spread between
what farmers get paid for their labor and what consumers pay
for the product is huge and increasing throughout the Nation.
In New England, what farmers get paid has been fairly stable
since the Dairy Compact began working in 1997, and that is one
of its great successes.
But what processors and stores charge for milk has greatly
increased since 1997, not just in New England but in the rest
of the Nation. In other words, while farmers are getting about
the same price, the processors and the stores are making a lot
more.
This will show you the difference, and you will see the
farm price and that has stayed pretty stable. But look at the
retail price on the top, how that has shot up. We will show
that consumer prices are lower in New England than in much of
the rest of the country, and that the $10,000 to $20,000 in
added annual income has helped keep New England farmers in
business, farmers who otherwise would have had to leave
farming.
I will demonstrate that the hidden risk right now to
consumers and farmers in New England and the rest of the Nation
is the growing concentration of power of processors in the milk
industry.
In New England, Suiza Foods is rapidly trying to cinch a
stranglehold on milk supplies. In some parts of New England,
they already control 70 to 80 percent of the fluid milk supply.
They have swept in, they have bought processing plants in New
England, and of course they then closed them, an easy way to
get rid of any competition. In fact, the ascent of Suiza is
nothing less than stunning. In a few short years, Suiza has
gained its dominant position in the milk processing business.
Now, here are the early 1990's. Suiza started in Puerto
Rico with three plants, but now look at what it has done just a
decade later; look where they cover in the year 2000. The third
chart shows the areas where Suiza and Dean Foods exert their
massive influence--pretty rapid, but it also explains why a lot
of the lobbyists who are sitting here, and you are always
welcome, of course, are going to be getting large paychecks
from Suiza, directly or indirectly, to block this because they
are far more interested, obviously, in how much money they make
than how much money farmers may take home.
If its purchase of Dean Foods is approved, a strong case
can be made that Suiza is on the verge of becoming a monopoly
in the milk processing business. I have asked the Department of
Justice and its Antitrust Division to closely monitor Suiza's
market dominance, and I again call their attention to the
urgency of doing this.
But equally remarkable is the fact that Suiza is also now
in the process of consolidating a dominant position as the
chief purchaser of milk from farmers. What is happening is
Suiza is now dominating both the purchase and the sale of fluid
milk. They are becoming all at once both a monopolist and a
monopsonist in the fluid dairy marketplace.
Now, you don't often see such a monopsonist in any area,
especially in food, in this country. They are a new type of
market force. I have searched our antitrust case law for a name
for this type of combined market power. You go through all the
antitrust dictionaries and everything else and it is hard to
find anything that even amounts to this it is so pervasive. So
I think I will call these rare market entities ``Suizopolies,''
because that is what they are.
How can suppliers and consumers defend themselves from a
giant firm, this ``Suizopoly,'' that controls both the purchase
of a product from thousands of suppliers who have virtually no
bargaining power and its sale to millions of consumers? Of
course, the best way is the Dairy Compact. It gives the public
some control over access to milk, it assures fresh local
supplies of milk, and it gives farmers some ability to earn a
living income.
Let me respond to the seven myths about the Compact that
the big processors who have spent millions of dollars to
promote through years of lobbying and advertising, and even
campaign contributions. They were trumpeting many of these
myths before the Compact was enacted. They have not changed
their song sheets, even though the Compact has done just what
it was supposed to do, proving their arguments dead wrong.
The first myth is that dairy compacts are milk taxes that
hurt consumers. Well, as you have just heard, concentration is
the major cause of consumer price increases. A recent study
funded by USDA determined that industry profit-taking,
including profit-taking by Suiza, and cost increases not
related to the Compact are responsible for more than 90 percent
of the increases in retail prices in New England.
A recent GAO report requested by Senator Feingold and
myself says it all. It compares the prices of a gallon of 2-
percent milk in Boston and Milwaukee for last year, and you
will see that the wholesale price of milk in Boston, which has
the Compact, was $2.03. In Milwaukee, which doesn't have the
Compact, it was $2.08, 5 cents more. The Compact certainly
isn't causing the difference.
But Suiza controls around 70 percent of the milk supply in
Massachusetts and a greater amount in Boston. The average
retail price listed by GAO is $2.74 in Boston for a gallon of
milk, but only $2.26 in Milwaukee. So the Compact doesn't cause
the difference. The wholesale prices in Boston are lower than
they are in Milwaukee.
Another myth is that the Dairy Compact has harmed
nutritional programs, such as WIC, school lunch and school
breakfast, and food stamps. Having helped write many of those
programs, I would not want to see that. We find that myth is
wrong. In fact, if anything, it has over-compensated the WIC
program, as OMB has shown.
A letter from the Massachusetts WIC director says this:
``The commission has taken strong steps to protect the WIC
Program and the School Lunch program from any impacts due to
the compact...Because of this, our WIC Program was able to
serve approximately 5,875 more participants with fresh
wholesome milk without added costs...'' The New England Compact
Commission has exempted school breakfast and lunch programs
from any pricing impacts.
Commissioner Kassler in Massachusetts tells me in writing
that ``without the Compact, this [regional New England] milk
shed will dwindle and milk would be brought in from greater
distances and at greater costs,'' ranging from 20 to 67 cents
per gallon. So the Compact has helped our WIC programs and our
school lunch programs and those feeding programs.
Then there is the myth that dairy compacts are
unconstitutional price-fixing cartels. Now, this is my favorite
example of the twisted logic that those who oppose it use. I
think their argument goes something like this: interstate
compacts would be unconstitutional if the Constitution didn't
explicitly contain a clause allowing the creation of interstate
compacts with the consent of Congress.
What they are complaining about is that we have done it
constitutionally, and because they can't answer that fact, they
call it unconstitutional. There is the Constitution [referring
to a graphic], and it makes it very clear that we can do this.
Then there is the myth that dairy compacts are barriers to
interstate trade. The fact is, of course, that dairy compacts
encourage greater competition in the marketplace by preserving
more family farms and increasing trade. The OMB concluded that
trade into the Compact region actually increased after
implementation. I would also point out that farmers in non-
Compact States like New York or even Wisconsin are perfectly
free to sell their milk in the Compact region at Compact rates.
In fact, New York, as I understand it, is doing just that.
Then there is the myth that dairy compacts encourage
farmers to over-produce milk and will lead to a flood of milk
in the market. The fact is just the opposite. The Dairy Compact
regulatory process includes a supply management program that
helps to prevent over-production. In 2000, the Northeast Dairy
Compact States produced 4.7 billion pounds of milk, actually a
decline from 1999.
You can see that in the nearly 4 years the Compact has been
in place that Compact region production has risen by just 2.2
percent. Compare that to other States: Wisconsin, 4 percent;
U.S. overall, 7.4 percent; California, almost 17 percent.
Then there is the myth that dairy compacts only help bigger
farms at the expense of smaller ones--an easy myth to knock
down. Like most commodity programs, the Compact benefits all
participants. In fact, 75 percent of the farms in New England
have fewer than 100 cows.
Then there is the seventh myth, the one that really gets
me, that the Dairy Compact has not been successful. We hear
this from the large processors. With all the money they spend,
they are just concerned about these small farmers throughout
New England and I know they lie awake at night just worrying
about them and that it might not be successful. Well, the fact
is it has been successful. Thanks to the Northeast Compact,
farmers receive higher incomes that help them stay in business.
If one is a proponents of States' rights, then the Compact
is for you. The States initiated it, they ratified it, and they
supported it. I will enter into the record a letter that is
being delivered today to all Members of Congress from 22
Governors who are endorsing the Dairy Compact bill because it
would ratify they compacts their States have negotiated among
themselves.
If you support interstate trade, regional compacts are the
answer. If you support a balanced budget, then regional
compacts are the answer. The Northeast Compact has not cost
taxpayers a single cent, unlike most of the other farm programs
we vote on.
If you support farmland protection programs, then regional
compacts are the answer. Major environmental groups have
endorsed it because the know it is going to prevent urban
sprawl and preserve open land.
If you are concerned about prices to consumers, then
regional compacts are the answer because retail milk prices
within the Compact region are lower, on average, than the rest
of the Nation.
So the Compact has done exactly what it was established to
do. It has stabilized wildly fluctuating dairy prices, it has
ensured a fair price for dairy farmers, it has made it possible
for farm families to stay in business, and it has protected
consumer supplies of fresh milk.
So what we have here is a classic case of David against
Goliath. David is the small family farmers. Goliath is mega-
corporations like Suiza Foods and others. They are willing to
spend millions upon millions of dollars to defeat this. The
small dairy farmers are willing to spend their sweat and their
toil to keep their family in business and to supply consumers
with fresh milk, and incidentally do it at no cost to the
taxpayers and a lower cost to the consumers. That is why the
Dairy Compact is so important.
[The prepared statement of Senator Leahy follows:]
Opening Statement of Hon. Patrick J. Leahy, A U.S. Senator from the
State of Vermont
This hearing is an opportunity for both sides of the debate on
interstate dairy compacts to fully present their cases.
This is one of those issues where every member of this committee
can agree on the goal, but not on how to get there. We all want to
support our dairy farmers and we all believe that they should be able
to earn a decent living for their families. We all want ample supplies
of fresh milk, at reasonable prices, for our states' consumers.
Unlike agricultural commodities like wheat, corn and soybeans, milk
is highly perishable. When a dairy farmer brings the milk to market,
that milk has to be sold right away, or it quickly loses its value. It
can't be set aside in a silo. For big processors, that's just fine.
They can buy milk at distress prices and store it away to make cheese
or powdered milk or ice cream. But that setup hurts farmers, who work
incredibly hard just to make a living, and consumers, who want farmers
around to supply fresh milk for the store shelves. As a nation we have
tried several remedies to cut through this knot, and the record is
proving that regional compacts are the most sensible and workable
answer yet. And unlike other legislative remedies that come with price
tags, and often hefty ones, compacts cost federal taxpayers nothing.
Milk is one of those unusual foods where the spread between what
farmers get paid for their labor, and what consumers pay for the
product, is huge and increasing throughout the nation. In New England,
what farmers get paid has been fairly stable since the Dairy Compact
began working in 1997, and that is one of its great successes. But what
processors and stores charge for milk has greatly increased since
1997--not just in New England, but in the rest of the nation.
We will show that consumer prices are lower in New England than in
much of the rest of the country and that the $10,000 to $20,000 in
added annual income has helped keep New England farmers in business who
otherwise would have had to leave farming.
I will demonstrate that the hidden risk right now to consumers and
farmers in New England--and the rest of the nation--is the growing
concentration of processors in the milk industry.
In New England, Suiza Foods is rapidly trying to cinch a
stranglehold on milk supplies. In some parts of New England they
already control 70 to 80 percent of the fluid milk supply. They have
swept in, bought processing plants in New England, and then closed
them--eliminating competition.
The ascent of Suiza is nothing less than stunning. In a few short
years, Suiza has gained its dominant position in the milk processing
business. If its purchase of Dean Foods is approved, a strong case can
be made that Suiza is on the verge of becoming a monopoly in the milk
processing business. I have asked the Department of Justice and its
Antitrust Division to closely monitor Suiza's surging market dominance,
and I again call to their attention the urgency of doing that.
But equally remarkable is the fact that Suiza is also now in the
process of consolidating a dominant position as the chief purchaser of
milk from farmers. Simply put, in many parts of the country, Suiza
Foods is the dominant customer--if it is not the only customer--for
farmers' raw milk to be used for fluid processing. Suiza Foods is now
dominating both the purchase and the sale of fluid milk in this
country. Suiza is becoming--all at once--both a monopolist and a
monopsonist in the fluid dairy marketplace.
Suiza Foods is a new type of market force. I have searched our
antitrust case law for a name for this type of combined market power.
There is no adequate name on the books for what Suiza has become, so
let's call these rare market entities ``Suizopolies.''
How can suppliers and consumers defend themselves from a giant firm
that controls both the purchase of a product--from thousands of
suppliers with little bargaining power--and its sale to millions of
consumers?
The best way is the Dairy Compact--it gives the public some control
over access to milk, it assures fresh, local supplies of milk, and it
gives farmers some ability to earn a living income.
I want to respond to seven myths about the Compact that the big
processors have spent millions of dollars to promote, through years of
lobbying and advertising and campaign contributions. They were
trumpeting many of these myths before the Compact was enacted, and they
have not changed their songsheets, even though the Compact has done
just what it was supposed to do, proving their arguments dead wrong.
1. Myth--Dairy compacts are milk taxes that hurt consumers.
Fact: As you have just heard, concentration is the major cause of
consumer price increases in the milk sector.
And, a recent independent study funded by USDA determined that
industry profit taking--including profit taking by Suiza--and cost
increases not related to the Compact are responsible for more than 90
percent of the increase in retail prices in New England since the
Compact was implemented. This leaves less than three cents of a gallon
of milk attributable to the Compact.\1\
---------------------------------------------------------------------------
\1\ The Public Interest and Public Conomic Power: A Case Study of
the Northeast Dairy Compact: Cotterill and Franklin, Food Marketing
Policy Center, Dept. of Agriculture and Resource Economics, University
of Connecticut, May 2, 2001.
---------------------------------------------------------------------------
A recent GAO report requested by Senator Feingold and myself says
it all: It compares the prices of a gallon of 2 percent milk in Boston
and Milwaukee for last year.
The wholesale price of milk in Boston was $2.03. The wholesale
price in Milwaukee was $2.08--five cents MORE than in Boston.
So you would expect retail prices to be about the same for Boston,
or slightly less, than for Milwaukee.
However, Suiza controls around 70 percent of the milk supply in
Massachusetts, and a greater amount in Boston. The average retail price
listed by GAO is $2.74 in Boston for a gallon of milk, but only $2.26
in Milwaukee.
Obviously, the Compact does not cause the difference--the wholesale
prices for Boston are lower than in Milwaukee, as the GAO makes clear.
The GAO report also shows that for most of the cites they examined,
the consumer prices in the compact region were lower.
2. Myth--The Dairy Compact has harmed nutritional programs such as
WIC, school lunch, school breakfast and food stamps.
Wrong again. The fact is that the Compact Commission requires
compensation to state WIC and school lunch programs for any potential
impacts. In fact, if anything it has over-compensated the WIC program,
as noted in the 1998 OMB study. A letter from the Massachusetts WIC
Director says this:
The commission has taken strong steps to protect the WIC Program
and the School Lunch program from any impacts due to the compact. . . .
Because of this, our WIC Program was able to serve approximately 5,875
more participants with fresh wholesome milk without added costs . . . .
The New England Compact Commission has exempted school breakfast
and lunch programs from any pricing impacts due to milk price
regulation.
Commissioner Kassler of Massachusetts tells me in writing that
``without the Compact, this [regional New England] milk shed will
dwindle and milk would be brought in from greater distances and at
greater costs.'' Those greater costs have been estimated in the range
of from 20 to 67 cents per gallon.
3. Myth--Dairy compacts are unconstitutional price-fixing cartels.
Fact: This is my favorite example of twisted logic. I believe my
opponents' argument goes something like this: ``Interstate compacts
would be unconstitutional if the Constitution didn't explicitly contain
a clause allowing the creation of interstate compacts with the consent
of Congress.''
By operation of the Compact Clause, states explicitly have the
opportunity to solve regional problems in this constitutionally
permitted way. United States federal courts have continuously
recognized the Northeast Dairy Compact as a constitutionally exercise
of Congressional authority under the Commerce and Compact clauses of
the U.S. Constitution (See: Art. 1, Sec. 10).
4. Myth--Dairy compacts are barriers to interstate trade.
Fact: Dairy compacts encourage greater competition in the
marketplace by preserving more family farms and increasing trade. An
OMB study concluded that trade into the compact region actually
increased after implementation. And I would also point out that farmers
in non-Compact states, like New York, or even Wisconsin, are perfectly
free to sell their milk in the Compact region at Compact rates. New
York dairy producers are benefitting today by doing just that.
5. Myth: Dairy compacts encourage farmers to over-produce milk and
will lead to a flood of milk in the market.
Fact: The Dairy Compact regulatory process includes a supply
management program that helps to prevent over-production. In 2000, the
Northeast Dairy Compact states produced 4.7 billion pounds of milk, a
0.6 percent decline from 1999.
In the nearly four years that the Compact has been in effect, milk
production in the Compact region has risen by just 2.2 percent.
Nationally during this same period, milk production rose 7.4 percent.
6. Myth: Dairy compacts only help bigger farms at the expense of
smaller ones.
Fact: Just like most commodity programs, the Compact benefits all
participants. Also, 75 percent of the farms in New England have fewer
than 100 cows.
And the seventh myth: The dairy compact has not been successful.
Fact: The success of the Northeast Dairy Compact is undeniable.
Thanks to the Northeast Compact, farmers receive higher income
which helps then stay in business.
If you are a proponent of states' rights, regional compacts are the
answer. Compacts are state-initiated, state-ratified and state-
supported programs that assure a safe supply of milk for consumers. I
will enter into the record a letter, that is being delivered today to
all members of Congress, from 22 governors who are endorsing the dairy
compact bill because it would ratify the compacts that their states
have negotiated among themselves.
If you support interstate trade, regional compacts are the answer.
The Northeast Dairy Compact has prompted an increase in sales of milk
into the Compact region from neighboring states.
If you support a balanced budget, regional compacts are the answer.
The Northeast Compact does not cost taxpayers a single cent. This is
different from the costliness of many farm programs.
If you support farmland protection programs, regional compacts are
the answer. Major environmental groups have endorsed the Northeast
Dairy Compact because they know it helps preserve farmland and prevent
urban sprawl. I will enter into the record a list of 33 environmental,
conservation and public interest membership organizations that as a
group today are announcing their support of the dairy compact bill.
And if you are concerned about the impact of prices on consumers,
regional compacts are the answer. Retail milk prices within the compact
region are lower on average than in the rest of the nation.
The Dairy Compact has done exactly what it was established to do:
It has stabilized wildly fluctuating dairy prices, it has ensured a
fair price for dairy farmers, it has made it possible for farm families
to stay in business, and it has protected consumers' supplies of fresh
milk.
This is a policy debate that pits some of the nation's most
powerful corporations against the interests of farmers, of consumers
and of communities that treasure the open space and quality of life
that local dairy farming offers.
Congress should not stand in the way of these state initiatives
that protect farmers and consumers without costing taxpayers a penny.
Chairman Leahy. I yield to the Senator from Utah.
Senator Hatch. Mr. Chairman, I think that Senator Specter--
--
Chairman Leahy. Senator Specter was here right at the
beginning.
Senator Hatch. He needs to leave, so I will defer to him
and then maybe you can come back to me.
Chairman Leahy. He was the first one in the room, so he
should get a chance.
Senator Hatch. Maybe you can come back to me after Senator
Specter.
Chairman Leahy. I will do whatever you want.
STATEMENT OF HON. ARLEN SPECTER, A U.S. SENATOR FROM THE STATE
OF PENNSYLVANIA
Senator Specter. Well, thank you very much, Mr. Chairman,
and thank you, Senator Hatch, for yielding. I commend you,
Senator Leahy, for convening this very important hearing.
After you have explored the seven myths about dairy
compacts, there isn't really much more to say, but that seldom
stops a Senator from saying substantially more in any event and
I do have a few things to add.
Earlier this year, I introduced the Dairy Consumers and
Producers Protection Act of 2001 because the Dairy Compact is
about to expire in the northeastern part of the United States.
The legislation which I have introduced, which now has 39
cosponsors, would reauthorize the Northeast Dairy Compact, to
include Pennsylvania, New York, Ohio, Maryland, Delaware, and
New Jersey, and authorize a Southern Dairy Compact and a
Pacific Northwest Dairy Compact within 3 years, and an Inter-
Mountain Compact within 3 years.
Some 25 States have enacted legislation calling for a dairy
compact because of the importance to consumers as well as dairy
farmers. Admittedly, a Pennsylvania Senator has a very strong
parochial interest in this subject, since my State is the
fourth largest producer of milk in the United States.
But beyond the interests of the farmers is the interest of
the consumer, and that has long been recognized to require
legislative action. This goes back to the New Deal days, when
minimum prices were set for milk. Some of the earliest work I
did in the practice of law was the representation that my firm
had of Sealtest National Products and appearances before the
Pennsylvania Milk Control Commission.
Since coming to the Senate and working on the Agriculture
Subcommittee of Appropriations, as well as this committee, I
have seen the importance of governmental action in this field.
The fact is that there is such a broad fluctuation of pricing
that the dairy farmer, really the small dairy farmer, is at the
mercy of irrational forces. I think they are irrational because
I have studied them extensively and I can't figure them out.
I recently had an in-State hearing in Pennsylvania to take
a look at why, when the prices for the farmers go from $17 per
hundredweight to less than $10 per hundredweight, the price
goes up at the store. I know the prices are going down for the
dairy farmers because I hear a resounding sound when I travel
through Pennsylvania's upstate counties, and I know the prices
are going up for consumers because I buy milk at the
convenience store, and it went up from $1.80 to $1.85 and then
to $1.95 at precisely the time that I am hearing the complaints
from the farmers.
So if we are to retain the small dairy farmer--and I
believe that is indispensable to maintain a supply of milk in
America, and a safe supply of milk in America--we have to have
some stability, and that is provided by the Dairy Compact.
As Senator Leahy has pointed out, there is no cost to the
Government and there is no increase in prices to the consumers.
So this is one of the unique features where it is win-win-win,
except for one important consideration and that involves the
regional differences, and we have two very vigorous and very
able Senators from Wisconsin who will present a somewhat
different perspective on the matter. It is my expectation,
beyond my hope, that we will have this Dairy Compact on the
legislation on dairies which will be considered yet before the
recess.
In conclusion, just one short story.
Before doing that, I want to recognize Mr. Arden Tewsbury,
who is here today, who is--there you are, Arden--about as
strong and tough an advocate for the dairy farmer as you can
find. Usually, when I see Arden, he is bending my ear very,
very hard, and the part about it that I admire is that he is
right.
One short story. A professor of constitutional law at my
law school named Walter Hale Hamilton would go around and visit
the participants in major constitutional cases. There was a
celebrated case called Nebia v. New York, where the Supreme
Court of the United States upheld minimum pricing when a man
named Leo Nebia sold milk below the minimum price by adding a
loaf of bread without charge.
So Professor Walter Hale Hamilton found out where Leo Nebia
was long after the case was decided and walked into his store 1
day and bought a quart of milk. He was paying for it and he
said, oh, by the way, Mr. Nebia, would you throw in a loaf of
bread. And Professor Hamilton got kicked out of the store
promptly.
I reminisce about that story when I think about this issue
and the long, tortured history that milk pricing and milk
control has had. I believe it would be a benefit to the country
and to the consumer, as well as to the dairy farmer, if this
compact legislation was approved.
Thank you, Mr. Chairman.
Chairman Leahy. I thank the Senator from Pennsylvania. I
know he has spent time throughout his State, one of the most
significant agricultural States in the country, on this issue.
While you have those who make sure you know about this from
your dairy farmers, I see Harold Harrigan, who is a dear friend
of mine from Franklin County, Vermont. Every time I am home, he
will make sure I hear about it. If not, his brothers will, and
I appreciate it because it has been very helpful.
Senator Specter. Mr. Chairman, may I just add that I have
other commitments, but I will be following the hearings closely
and expect to be able to return later this morning.
Chairman Leahy. I appreciate that. The Senator from
Pennsylvania has spent a great deal of time in preparing for
this, so I appreciate that, too.
Now, the Senator from Wisconsin, who probably will not have
exactly the same position that the Senator from Pennsylvania
and I have had on this.
STATEMENT OF HON. HERBERT KOHL, A U.S. SENATOR FROM THE STATE
OF WISCONSIN
Senator Kohl. Well, I thank you very much, Mr. Chairman,
for holding this hearing this morning. We also thank our
witnesses for agreeing to testify today.
No one can deny that the United States has a great
772economic system that allows anybody with any product or
service the unfettered opportunity in all 50 States to market
that product or service. This is the way it has always been in
our great country. The success of the American economy depends
on open markets and open competition, and the beauty of the
American economy is that it provides a bounty of business
success stories, fair prices, and consumer choices.
The American free market did not evolve by accident. For a
brief period following the American Revolution, our Nation
operated without a Constitution. Rather, the Articles of
Confederation set up a loose association of States, each acting
in economic isolation. It was during that brief and troubled
time that we witnessed States waging economic warfare on each
other, using tariffs and other mechanisms to favor home State
products and to disfavor products from other States.
Our Forefathers saw how our Nation could unravel under such
conditions, and James Madison, along with others, called for a
Constitutional Convention. A central tenet of the new
Constitution that evolved was a unified national economy, with
States freely trading with one another.
The Northeast Dairy Compact runs counter to our
Forefathers' design of a unified national economy. There is
nothing American about the dairy cartel in place in the
Northeast. The Compact sets an artificially high price for milk
that is marketed in the Northeast and it insulates that price
through tariff-like mechanisms that prohibit price competition.
Compact supporters like to argue that there is something
unique about milk--the fact that it is perishable--that
justifies the creation of this dairy cartel. They argue they
need the Compact to ensure that the region has access to fresh
milk. Well, I can assure you that consumers in the Southeast, a
region without a compact, have access to fresh milk everyday,
as do consumers in every one of the 44 States not in a compact
region.
Here in Washington, D.C., a grocery store called Fresh
Fields sells milk that is guaranteed fresh--milk that comes
from Boulder, Colorado; Austin, Texas; and Franklin,
Massachusetts. I am sure New England consumers would get
nothing less from the market. Milk is and always will be sold
fresh both intrastate and interstate.
Further, if we have a compact for dairy, then why shouldn't
we have one for corn or any other perishable good? We all know
that locally grown fresh corn is the best. I can get in my car
in Milwaukee and drive out to the suburb of Menomonee Falls and
stop at a roadside farmer's market, where I can buy corn
harvested that same day. Those farmers compete for my dollar by
providing the freshest corn.
However, there is no restriction on corn from Iowa being
shipped in to compete with the local product. Competition
grants me, the consumer, the opportunity to choose the product
that best suits my needs. That is the beauty of our economy.
Consumer demand, not government, drives the market. If
consumers want locally produced fresh milk, the market will
allow for it to be there. It is when we begin to interfere and
distort market conditions that we run the risk of harming
consumers, limiting their choices, and raising their prices.
That is exactly what the Northeast Dairy Compact has done for
millions of milk drinkers in the Northeast.
Since its inception in 1997, the Northeast Compact has cost
consumers in that region an extra $140 million for milk. Worse
yet, if the Senate were to approve the legislation introduced
by Senator Specter which allows for compacts in 35 States,
consumers in our country would be forced to pay an estimated
extra $2 billion a year for their milk. The brunt of that price
increase will fall on those least able to bear it--low-income
families and children.
And to what end have we imposed this regressive milk tax on
the consumers of the Northeast? What end do the sponsors of
compact expansion hope to achieve by expanding that tax to
consumers in 35 States? They will argue it is to preserve the
family dairy farm, and that is an end I certainly do support.
But the hard evidence from the Northeast Dairy Compact
shows that it has done nothing--I emphasize nothing--to slow
the loss of dairy farms in the region. In fact, the Northeast
is losing dairy farmers at a rate faster today than they were
prior to the Compact. And if it were not for the emergency
dairy payments that we worked together on last year, I am sure
even more dairy producers would have gone out of business by
now.
I have also worked over the last year with Senator
Santorum, of Pennsylvania, on the National Dairy Farmer
Fairness Act. I am confident that this safety net is a viable
alternative to regional cartels, and I would hope we could all
agree to work together on establishing a national program to
help all dairy producers.
So I ask again, to what end have we violated the spirit of
our Constitution, turned our free economy on its head, and
asked millions of consumers to pay more for their milk? There
is no good answer, and that is why when the Dairy Compact
expires at the end of September it should not be renewed.
As the chairman of the Antitrust Subcommittee, I have
worked to ensure that open and fair competition in our
marketplace thrives. Mr. Chairman, you and I have worked on
issues related to concentration and consolidation in the dairy
industry throughout our time in the Senate. I very much want to
continue to investigate the increased consolidation that is
taking place in the dairy industry at the processing level. But
I can assure you, Mr. Chairman, if we want to solve that
problem, dairy compacts are not the answer.
Finally, I would like to ask this committee to consider the
dangerous precedent set by this Compact. We have witnessed as a
result of the creation of the existing Compact how other
regions now seek to create their own cartel. If we approve an
expanded compact for dairy, then what is to stop us from
approving price-fixing cartels anywhere else in our economy?
I would argue that all of us in this room understand the
benefits that result from open and free trade. If we want to
continue to enjoy the best economy in the world, then we should
stop moving down the path of price-fixing cartels. Only then
can we work toward a national dairy program that benefits all
producers, regardless of location, and put to rest once and for
all this very dangerous policy that takes us back to the days
of the Articles of Confederation.
Thank you, Mr. Chairman.
Chairman Leahy. Thank you.
Senator Hatch?
STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM THE STATE
OF UTAH
Senator Hatch. Well, thank you, Mr. Chairman.
I want to thank the chairman for calling this hearing to
discuss the policy issues raised by S. 1157, the Dairy
Consumers and Producers Protection Act of 2001. This bill would
extend the Northeast Interstate Dairy Compact. It also would
authorize three new regional dairy compacts. Although I am
sympathetic to some of the arguments in favor of regional dairy
compacts, I am not convinced that such compacts are the optimal
solution for consumer welfare.
Many have criticized regional dairy compacts because they
harm consumers, dairy processors, and dairy farmers located
outside the region. The facts appear to support these
criticisms, but I would like to focus my remarks today instead
on a more fundamental question: Are regional dairy compacts a
form of economic protectionism which is antithetical to the
national common market the Framers of the U.S. Constitution
sought to create?
To answer this question, it is useful to take a step back
in history. During the time that our Nation operated under the
Articles of Confederation, States often formed coalitions with
the sole purpose of promoting one area of the Nation at the
expense of another.
One of the main reasons that the States decided to hold the
Constitutional Convention was to bring a halt to the
``commercial warfare between the States.'' The Framers sought
``to change this state of affairs, and to encourage a free and
open economy in which states could not halt the national flow
of goods and trade through economic barriers.''
The Framers established a national common market through
the Commerce Clause of the U.S. Constitution. In the words of
the Supreme Court in the H.P. Hood case, the Framers envisioned
that ``our system, fostered by the Commerce Clause, is that
every farmer and every craftsman shall be encouraged to produce
by the certainty that he will have free access to every market
in the Nation...Likewise, every consumer may look to free
competition from every producing area in the Nation to protect
him from exploitation.''
To make this vision a reality, the Commerce Clause, as the
Court more recently noted in the New Energy Co. case, prohibits
``economic protectionism--that is, regulatory measures designed
to benefit in-state economic interests by burdening out-of-
state competitors.'' That is in the New Energy Co. v. Limbach
case, a 1988 case.
For more than two centuries, our Nation has prospered
because producers and consumers have received the benefits of
the free flow of goods and services in a national common
market, with limited market regulation and with vigorous
competition. The fundamental question is whether we should give
our imprimatur under the Compact Clause to regional dairy
compacts and similar forms of economic protectionism.
In my opinion, before we do that, a very high threshold
must be met in light of the effects such compacts will have on
consumers. The Framers did not intend that the Congress would
use its power under the Compact Clause to approve agreements
between States which undermine our national common market.
History proves the point. Congress has approved nearly 300
interstate compacts in the more than two centuries since our
Nation was founded. Interstate compacts have been limited to
agreements which serve to facilitate important national
interests, such as improving transportation, allocating water
rights, establishing boundary lines, and protecting against
forest fires. Only one interstate compact, the Northeast
Interstate Dairy Compact, has involved Congress blessing an
agreement among a group of States to engage in what many
believe to be economic protectionism.
We should learn from and follow the wisdom of the past. The
Compact Clause should not be used to bless agreements which
undermine competition in our national common market, especially
given that such agreements may be at cross-purposes with other
laws, like the antitrust laws, which are designed to promote
competition.
Approving the Northeast Dairy Compact has already spawned a
request that we approve at least three more regional dairy
compacts, with these compacts together covering about 80
percent of American consumers. To preserve the national common
market which the Framers of the Constitution created and which
has been a source of our great prosperity, very compelling
reasons would have to be demonstrated before I would be willing
to support these compacts. But I am going to keep an open mind,
pay attention to the testimony given here today and other
authorities, listen to my colleagues, and hopefully make the
right decision in the end.
Thank you, Mr. Chairman.
Chairman Leahy. Thank you.
[The prepared statement of Senator Hatch follows:]
Statement of Hon. Orrin G. Hatch, a U.S. Senator from the State of Utah
I want to thank the Chairman for calling this hearing to discuss
the policy issued raised by S. 1157, the Dairy Consumers and Producers
Protection Act of 2001. The bill would extend and expand the Northeast
Interstate Dairy Compact. It also would authorize three new regional
dairy compacts. Although I am sympathetic to some of the arguments in
favor of regional dairy compacts, I am not convinced that they are the
optimal solution for consumer welfare.
Many have criticized regional dairy compacts because they harm
consumers, dairy processors, and dairy farmers located outside the
region. The facts appear to support these criticisms. But I want to
focus my remarks today instead on a more fundamental question:
Are regional dairy compacts a form of economic protectionism
which is antithetical to the national common market the Framers
of the U.S. Constitution sought to create?
To answer this question, it is useful to take a step back in
history. During the time that our nation operated under the Articles of
Confederation, ``states often formed coalitions, with the sole purpose
of promoting one area of the Nation at the expense of another.'' [A.
McLaughlin, A Constitutional History of the United States 137-47
(1936).] One of the main reasons that the States decided to hold the
Constitutional Convention was to bring a halt to the ``commercial
warfare between the states.'' [H.P. Hood v. DuMond, 336 U.S. 525, 533
(1949).] The Framers sought ``to change this state of affairs, and to
encourage a free and open economy in which states could not halt the
national flows of goods and trade through economic barriers.''
[Federalist Paper No. 42 at 267-69 (Clinton Rossiter ed. 1961).].
The Framers established a national common market through the
Commerce Clause of the U.S. Constitution. In the words of the Supreme
Court in the H.P. Hood case, the Framers envisioned that:
our system, fostered by the Commerce Clause, is that every farmer
and every craftsman shall be encouraged to produce by the certainty
that he will have free access to every market in the Nation. .
.Likewise, every consumer may look to free competition from every
producing area in the Nation to protect him from exploitation.
To make this vision a reality, the Commerce Clause, as the Court
more recently noted in the New Energy Co. case, prohibits ``economic
protectionism--that is, regulatory measures designed to benefit in-
state economic interests by burdening out-of-state competitors.'' [New
Energy Co. v. Limbach, 486 U.S. 269, 273-74 (1988).] For more than two
centuries, our nation has prospered because producers and consumers
have received the benefits of the free flow of goods and services in a
national common market, with limited market regulation and vigorous
competition. The fundamental question is whether we should give our
imprimatur under the Compact Clause to regional dairy compacts and
similar forms of economic protectionism.
In my opinion, before we do that, a very high threshold must be met
in light of the effects of such compacts on consumers. The Framers did
not intend that the Congress would use its power under the Compact
Clause to approve agreements between states which undermine our
national common market. History proves the point. Congress has approved
nearly 300 interstate compacts in the more than two centuries since our
nation was founded. Interstate compacts have been limited to agreements
which serve to facilitate important national interests, such as
improving transportation, allocating water rights, establishing
boundary lines, and protecting against forest fires. Only one
interstate compact--the Northeast Interstate Dairy Compact--has
involved Congress blessing an agreement among a group of states to
engage in economic protectionism.
We should learn from and follow the wisdom of the past--the Compact
Clause should not be used to bless agreements which undermine
competition in our national common market, especially given that such
agreements may be at cross purposes with other laws, like the antitrust
laws, which are designed to promote competition in our national common
market. Approving the Northeast Dairy Compact has already spawned a
request that we approve at least three more regional dairy compacts,
with these compacts together covering about 80% of American consumers.
To preserve the national common market which the Framers of the
Constitution created and which has been a source of our great
prosperity, very compelling reasons would have to be demonstrated
before I would be willing to support anti-competitive compacts. But I
will keep an open mind and listen to all arguments before I make my
mind up on this matter.
Chairman Leahy. Senator Feingold.
STATEMENT OF HON. RUSSELL D. FEINGOLD, A U.S. SENATOR FROM THE
STATE OF WISCONSIN
Senator Feingold. Thank you, Mr. Chairman, and I would like
to first express my thanks to you for the even-handed style
that you have used during the scheduling of these hearings. I
commend you and your able staff, who have been fair in the
make-up of the panels of witnesses and the structure of the
hearing, and I thank all the witnesses for being here.
While the chairman and I fundamentally disagree on this
issue of the expansion and extension of the Northeast Dairy
Compact, I have always respected and admired his ability to
hear both sides of every issue.
Everyone in this room is concerned about the decline in the
number of dairy farms in the United States in the past 30
years. I was astounded when I realized that in 1950 Wisconsin
had over 143,000 dairy farms. After nearly 50 years of the
current dairy policy, Wisconsin is left with under 20,000 dairy
operations. Let me repeat that, less than 20,000 dairy farms,
after we had 143,000. That is a decline of about 86 percent
since 1950.
There are certainly a number of different challenges facing
dairy farmers across America, and I have worked with many
members of this committee to enact dairy policies that will
help all of our Nation's dairy farmers. Unfortunately, those
who are advocating dairy compacts have chosen to focus much of
Congress' attention on what can only be called regional price-
fixing schemes rather than a unified national dairy policy that
can help all of America's dairy farmers fairly compete in the
modern marketplace.
Instead of focusing on regional dairy policies, I think
Congress has to turn its attention to enacting a national dairy
policy that helps all farmers get a fair price for their milk.
Congress needs to follow the lead of people like my senior
Senator and colleague Senator Kohl, who has demonstrated that
if we work together, we can provide meaningful assistance to
America's dairy farmers. I believe Congress should enact a
national dairy policy such as the one envisioned by Senator
Kohl and Senator Santorum. This legislation brings a national,
unified approach to a national problem.
While the Northeast Dairy Compact has been effective, or in
my view at least partly responsible for raising prices for the
consumer, compacts have not been able to keep farmers in
business. According to the American Farm Bureau Federation's
data, New England has lost more dairy farms in the 3 years
under the Compact, 465, than in the 3 years prior to the
Compact.
So when the chairman talks about one of his myths that
production has not increased in New England, he might look to
the fact that that is because a lot of farms aren't making it
even under the Compact. That might have something to do with
the production issue.
I also want to note here that I do share the chairman's
concern about the increased disparity between what dairy
farmers receive for their milk and what consumers pay. However,
I have to take issue with his conclusion that our GAO report
supported the idea that the Compact helps lower this disparity.
If we look at what is actually on page 26, we see that, in
fact, in the Boston and Milwaukee markets dairy farmers receive
roughly the same share of the retail dollar, between 46 and 47
cents. But I do want to say that I truly want to work with the
chairman on this issue. That is why I asked him to work with me
on this GAO report, but I respectfully disagree with his
conclusions about what the report means.
The Northeast Dairy Compact also aggravates the inequities
of the Federal milk marketing order system by allowing the
Compact Commission to act as a price-fixing entity that walls
off the market in a specific region, and it does hurt producers
outside the region. The Northeast Interstate Dairy Compact
Commission is empowered to set minimum prices for fluid milk
higher than those established under Federal milk marketing
orders. Never mind that farmers in the Northeast already
receive higher minimum prices for their milk under the
antiquated milk pricing system.
The Compact not only allows these six States to set
artificially high prices for specific regions; it permits them
to block entry of lower-price milk from producers in competing
States. So how can this really be defended? This Compact
amounts to nothing short of government-sponsored price-fixing
that hurts producers outside the region. It is outrageously
unfair, and it is also bad policy.
I am especially pleased to have one of our real experts
here, Richard Gorder, a Wisconsin dairy farmer who will testify
before this committee. I have met with Mr. Gorder on many
occasions, and I cannot think of many Wisconsinites who can
articulate the perspective of the Wisconsin agriculture
community on dairy compacts better than Mr. Gorder.
I hope that Congress will turn its attention away from
dairy compacts, which ultimately hurt both consumers and
farmers. It is high time to begin to focus on enacting
legislation that helps all dairy farmers. America's dairy
farmers deserve a fair and truly national dairy policy, one
that puts them all on a level playing field from coast to
coast.
Thank you, Mr. Chairman.
Chairman Leahy. Thank you, Senator Feingold.
Senator Grassley?
STATEMENT OF HON. CHARLES E. GRASSLEY, A U.S. SENATOR FROM THE
STATE OF IOWA
Senator Grassley. I would like to put a longer statement in
the record and highlight.
Mr. Chairman, first of all, you are defender of American
agriculture and farming, and very seldom do I find myself in
dispute with you. I do in this instance because the Northeast
Dairy Compact establishes what amounts to domestic trade
barriers that will detrimentally impact producers in my home
State of Iowa.
The Dairy Compact's purpose is to raise the price of milk
above the Federal milk marketing order price in a specific
region. This domestic tariff on milk prevents the market from
reacting to supply and demand.
If I wasn't an advocate of free trade and increasing profit
for family farmers by lowering trade barriers, I might be able
to accept the idea of artificial prices if it didn't impact
Iowa's dairy producers. But the problem is that compacts will
hurt Iowa dairy producers. In addition, I am a free trader and
I do think that my producers are best served by lowering trade
barriers, foreign as well as domestic.
Milk production in the Northeast doesn't follow the rules
of supply and demand; it is just supply and more supply. The
Northeast exports these subsidized products to other States,
where the products compete against non-subsidized dairy
products. If this was an international issue, there would
probably be a letter circulating in the Senate asking for a
dumping inquiry within the context of the World Trade
Organization.
Studies conducted by economists at the University of
Massachusetts and Penn State demonstrate that at least a
substantial portion of the artificially high milk price is
passed through to consumers in the former of higher retail milk
prices. It has been estimated that between July 1997 and
December 2000, New England consumers paid up to $135 million in
higher milk prices generated by the Compact.
I want to refer to a Wall Street Journal article: ``It is
hard to see how anyone justifies dairy compacts with a straight
face. They are basically a highly regressive tax on milk
drinkers, starting with school-age children. Creating them is a
tacit endorsement of the OPEC cartel model. Claims that it
doesn't gouge consumers are preposterous.'' Is it helping dairy
farmers in New England? More New England dairy farmers have
closed down in the 3 years since the Compact began than in the
3 years prior to the Compact.
In conclusion, I would say that I understand the desire of
northeasterners to help their dairy producers, but there ought
to be some way that we can help dairy producers in the
Northeast without hurting farmers elsewhere. As a family
farmer, I know that it is very difficult to make ends meet on
the farm, but an approach that attempts to prop up some
producers at the expense of others is not acceptable.
Thank you.
[The prepared statement of Senator Grassley follows:]
Statement of Hon. Charles E. Grassley, a U.S. Senator from the State of
Iowa
Mr. Chairman, I appreciate this opportunity to discuss the issue of
dairy compacts. You are a champion of the Northeast Dairy Compact, and
while I admire your dedication to what you believe in, I am
disappointed that your agenda establishes what amounts to domestic
trade barriers that will detrimentally impact producers in my home
state of Iowa.
The Northeast Dairy Compact is a coalition of states working
together to serve one purpose, that purpose is to fix prices. The dairy
compact's purpose is to raise the price of Class I (Beverage) milk
above the federal milk marketing order price in a specific region.
Dairy producers outside the compact region can ship milk into the
compact, but only at the compact's premium price, not at a competitive
rate. This domestic tariff on milk prevents the market from reacting to
supply and demand.
If I wasn't an advocate of free trade and increasing profit for
family farmers by lowering trade barriers, I might be able to accept
the idea of artificial prices, if it didn't impact Iowa's dairy
producers. But the problem is that compacts will hurt Iowa's dairy
producers. In addition I am a free trader and I do think that my
producers are best served by lowering trade barriers, foreign and
domestic.
Artificially high compact prices stimulate milk production. It's
really a simply concept, if the worth of a penny is one cent everywhere
else in the country, but the northeast decides pennies are worth three
cents, guess where I'm going to take my pennies.
Milk production in the Northeast doesn't follow the rules of supply
and demand, it's just supply and more supply. The surplus is being
converted into storable dairy products such as butter and cheese. The
excessive amounts of butter and cheese in the marketplace drive down
prices and cause the Northeast to export these subsidized products into
other states where the products compete against non-subsidized dairy
products.
If this was an international issue there would probably be a letter
circulating in the Senate asking for a ``dumping'' inquiry within the
context of the WTO. But since we don't have a similar enforcement
mechanism domestically, everyone but the compact suffers.
Since I brought up suffering, let me be clear, it's not just my
dairy producers that are going to suffer. Taxpayers, consumers and
small dairy producers in the northeast are suffering as well due to
this poorly constructed federal policy.
Studies conducted by economists at the University of Massachusetts
and Penn State University demonstrate that at least a substantial
portion of the artificially high milk price is passed through to
consumers in the form of higher retail milk prices. It has been
estimated that between July 1997 and December 2000, new England
consumers paid up to $135 million in higher milk prices generated by
the compact.
A recent editorial in the Wall Street Journal entitled ``The OPEC
of Milk'' explained, ``It's hard to see how anyone justifies dairy
compacts with a straight face. They are basically a highly regressive
tax on milk drinkers, starting with school-age children. Creating them
is a tacit endorsement of the OPEC cartel model. Claims that it doesn't
gouge consumers are preposterous.''
New England's 700,000 food stamp recipients are exposed to the
artificial price increase, as well as Meals on Wheels and the Child and
Adult Care Food Program. Shouldn't this fact alone be enough of a
reason to not renew the compact?
The compact is also evidently promoting the demise of dairy farms.
More New England dairy farms have closed down in the three years since
the compact began than in the three years prior to the Compact. This is
likely due to the fact small dairy producers receive little income from
the compact since the allocation is paid based on the amount of milk
produced. The Compact's artificial price has led to increased land
prices and placed smaller producers at a competitive disadvantage.
A 1998 Rutgers University study on the effects of development
pressures concluded that in Pennsylvania, New York, and New Jersey, the
``major reason for the loss of dairy. . .is rising land values.''
Larger producers have increased their volume to take advantage of the
artificial price, and family operations which did not have the ability
to compete in a quantity driven market have closed down.
The fact that I find amazing though is that states which contain
consumers who are hurt by the Compact force their citizens to pay tax
dollars to support the Compact. Vermont and other pro-compact states
are providing more than $100,000 from each state's treasury to pay
lobbyists and reimburse expenses related to the advocacy of Compacts to
Congress.
Let me conclude by stating that I understand the desire of the
Northeasterners to help their dairy producers. I'm the only working
family farmer in the Senate and I know how hard it is to make ends met
on the farm, but an approach that attempts to prop up some producers at
the expense of other producers is not acceptable.
Attempting to maintain this defective compact by expanding the
authority to create new defective and detrimental compacts is not the
answer. It would be my hope that we could work together to explore
other options that would not impede interstate commerce while
sustaining your producers.
Thank you for providing us the opportunity to discuss this issue
Mr. Chairman.
Chairman Leahy. There are some in the Northeast who would
say we spend an enormous amount of our tax dollars to help the
farmers of the Midwest and we really would like some support
for something that costs the taxpayers nothing in the
Northeast.
With that editorial comment, we will have a series of
witnesses--Daniel Smith, Grover Norquist, Stephen Burrington,
and Burt Neuborne--all of whom have statements for the record.
Unlike those on this side of the room, the chairman included,
who tend to go over their time, I would ask each of you to
stick within 5 minutes each because we would like to go to the
questions.
We will begin with Daniel Smith, the Executive Director of
the Northeast Interstate Dairy Compact Commission.
Mr. Smith, we are always glad to have you here and always
glad to have a fellow Vermonter here.
STATEMENT OF DANIEL SMITH, EXECUTIVE DIRECTOR, NORTHEAST DAIRY
COMPACT COMMISSION, MONTPELIER, VERMONT
Mr. Smith. Thank you, Mr. Chairman. Good morning, Mr.
Chairman and members of the committee. Thank you for this
opportunity to speak with regard to Senate bill 1157 relating
to dairy compacts.
I have been involved with dairy compacts since the
inception of the first Northeast Dairy Compact in 1987. My
travels and work on the Compact have taken me to now over 20
State houses and two Federal circuit courts of appeals and now
before Congress.
Compacts are properly before this committee as an
interstate initiative, duly authorized by the Interstate
Compact Clause of the Constitution. Compacts have been passed
by the State legislatures, as has been indicated, in a number
of States now, in addition to the New England States. The six
New England States, distinct from the other States, have both
adopted their Compact and had it approved by Congress as part
of the 1996 farm bill.
My purpose today is to put before the committee as many
facts and figures as I can glean from operation of the Dairy
Compact since Congress approved it so that your deliberations
can be based on as full and complete a record of one compact's
actual operation as a pilot project approved by Congress as you
decide whether to authorize the other compacts, as well as
reauthorize the Northeast Compact.
I would summarize my extended statement which I will be
presenting for the record with a number of bullet points.
No. 1, the Compact, despite the eloquent descriptions by
the Senators from Wisconsin and Mr. Hatch, has been determined
by the courts not to be a protectionist device, but in fact to
be a proper exercise of regulatory authorized by the Interstate
Commerce Clause and Compact Clause of the Constitution.
The courts have spent much time assessing the concerns
raised by the Senators and by Professor Neuborne in his
testimony. Certainly, all of us who have been to law school
understand that protectionism is neither favored nor allowed by
the Interstate Commerce Clause of the Constitution, and the
courts, working from that essential legal premise, have
reviewed the Compact and determined that the Compact is not a
protectionist device.
I would point you to the attachment to my summary statement
showing the volume of milk that comes into the Compact region
from New York State. Approximately 30 percent of the milk
produced for consumption in the New England market actually
comes from New York State. That amount, as Senator Leahy
indicated, has increased over time rather than decreased with
the operation of the Compact.
As Senator Leahy indicated, the payment under the Compact
follows the supply of milk. The money tracking the supply of
milk from New York goes back to the New York farms, so there is
no discriminatory policy with regard to operation of the
Compact. Senator Grassley's farmers, if they supplied the
market, would receive the benefit of the Compact on equal
footing with farmers from Vermont, Massachusetts and Rhode
Island.
The Compact--again, I would respectfully disagree with the
Senator's statement--has had a proven and substantial impact on
farm viability in New England. In this regard, I would point
you to my third attachment, which is an analysis conducted by
the Farm Credit Service, which is the Federal lending authority
for dairy farms, which indicates that for 2000, one studied
year, the degree of financial stress confronting dairy farms
was cut almost in half, from 50 percent to just under 30
percent. By any measure, this is a tangible, positive impact on
farm viability.
The net loss of farm numbers will be addressed by
Commissioner Healy following my presentation in the second
panel, and perhaps you might inquire of him with regard to your
statement.
I will also address the consumer issue. Again, I have to
take issue with the statements that have been made. The Compact
has certainly in this regard had a less certain record to
present to the Congress. I have put together a graph for the
Senators' consideration which graphs the comparison between the
procurement cost, which is the Compact price and the Federal
price, and the retail price. Clearly, the retail price has gone
up over time. However, for a period of time during the
Compact's operation, the retail price actually dropped a dime.
So the record is quite mixed in this regard.
My testimony would be that here the Compact as a pilot
project is of most vital concern. Certainly, something is going
on in the dynamic between farm prices and retail prices which
needs to be reviewed as a matter of public policy. Congress has
given the Compact Commission the authority to address this
issue, to intervene in the dynamic that occurs and see if it
can be resolved favorably both for farmers and for consumers.
And I would urge that Congress consider how the Compact
price regulation has been designed with this in mind.
Certainly, changes can be made; it can be adjusted, and that is
the benefit that the public in New England, as well as the
Federal Government gets through the pilot project of the
Compact.
I would close with a statement of similar import with
regard to the pilot project, which is the Commission has
adopted a supply management program over the past year to
address the issue of price and supply, a question that has been
debated at length in the Congress.
Chairman Leahy. Excuse me. Somebody has what must be an
important phone call. Why don't we just wait and let the person
with the phone call step out and take it? I could have sworn I
heard a cell phone.
Mr. Smith. I will take that as the----
Chairman Leahy. No, no. I just wanted to give the
opportunity because I know nobody would have a cell phone
ringing in here unless it was extremely important and I wanted
them to have the opportunity to get up and leave to take the
phone call.
Would the person like to step out and take their phone
call?
Apparently, it wasn't as important as the person who was
receiving it thought it was.
Go ahead, Mr. Smith.
Mr. Smith. I will close by suggesting that the Compact has
been working as a pilot project for the past 5 years. I believe
its record is very positive. I would urge the committee to
approve the extension of this Compact and the authorization of
the other compacts.
I thank you for your time.
[The prepared statement of Mr. Smith follows:]
Statement of Daniel Smith, Executive Director, Northeast Dairy Compact
Commission
Summary of Testimony
Mr. Chair, Members of the Senate Judiciary Committee. I am Daniel
Smith, founding and current Executive Director of the Northeast Dairy
Compact Commission. I am testifying in favor of S.1157, an act relating
to reauthorization and expansion of the Northeast Interstate Dairy
Compact and authorization of the Southern, Northwest and Intermountain
Dairy Compacts. I have been involved with Dairy Compacts in various
capacities since inception of the first, Northeast Dairy Compact in
1987.
My testimony is intended as a follow-up of Congress' action to
authorize operation of the Northeast Dairy Compact as pilot project in
the 1996 Farm Bill. My testimony provides a comprehensive report on the
Compact's legal, economic and administrative operation since Congress
approved it in 1996. This report is intended to provide this Committee
with as many facts and figures as I can assemble, so that the Committee
may assess the propriety of further congressional authorization of
Dairy Compacts based upon the actual record of the Northeast's
operation as a pilot project.
By way of introduction, as the Committee is aware, the Northeast
Dairy Compact is a federalist initiative, being the function of both
state and federal sovereign action. The Compact was established under
law by the six New England states in the early 1990s. With
congressional and federal executive authorization, the Compact assumed
the power of federal law. Consistent with its federalist design,
though, the Compact still remains the states' prerogative and
responsibility to administer.
In summary:
``The Compact has proven to be the legal solution to
the vexing problem of how best to restore the two-part federal/
state system of milk market regulation. The Compact has
successfully reinvigorated the legal ability of states to
exercise regulatory authority in the public interest over a
regional dairy market without running afoul of the
constitution. The Compact has been tested twice in Court, with
two federal circuits of appeal finding resoundingly in its
favor. Most specifically, the First Circuit affirmed the
Congressional grant of authority to the New England states for
the uniform regulation of the interstate New England market.
``The Compact has accomplished the states' intended
economic and social purpose of stabilizing the New England
milkshed. The Compact Commission's price regulation has
provided income stability as well as enhancement to producers,
with a net positive impact on farm viability and
sustainability. As presented in my extended statement, there is
strong evidence from a variety of sources that the attrition
rate among New England and New York farms subject to the price
regulation has been slowed considerably.
``The Compact has accomplished the further economic
and social purpose of not unduly burdening consumers. The price
regulation's precise impact on retail prices remains an open
question and the subject of vigorous debate. In absolute terms,
the data presented in my report indicates that, however
calculated, the impact can only be described as marginal.
Moreover, the record indicates that the public interest is
served by regulatory intervention into the procurement cost
pricing dynamic for beverage milk, in the manner of the Compact
price regulation.
``Consistent with its design, the Compact has been
administered without discrimination among market participants.
The price regulation is being successfully administered without
discriminatory burden on either farmers or processors located
outside the New England region. New York farmers benefit
uniformly with their counterpart New England farmers; the
regulation is equally competitive-neutral in its effect on
processors located outside of New England. The price regulation
has been particularly effective in its uniform treatment of
packaged milk brought in from outside the region, and in this
regard represents a significant advance in milk market
regulation.
``The Compact has accomplished the objective of
effectively incorporating the concerns of all market
participants -from farmers to consumers--in the regulatory
process. The Compact Commission contains twenty-six members
covering the whole spectrum of interested concerns in the
marketplace. This diverse, potentially divergent, group has
proven most able to work together in the common, public
interest.
``Consistent with its design and statutory
requirement, the Compact Commission has instituted a ground-
breaking initiative in supply management. As intended, the
Commission is ensuring that the causal relationship between pay
price and milk production is cemented and made a vital part of
its regulatory program. The Commission has taken the first,
concrete steps toward real progress in this truly difficult
task.
Mr. Chair and Members of the Committee. I strongly believe that
your review of the record I am presenting today will convince you that
the Northeast Dairy Compact has functioned successfully and as intended
by your authorizing action of 1996. I believe that the record supports
reauthorization, so that the Commission may continue its work on behalf
of the New England public interest.
Mr. Chair, Members of the Senate Judiciary Committee:
Thank you for this opportunity to testify today about the function
and operation of the Northeast Dairy Compact Commission.
I am Daniel Smith, founding Executive Director of the Northeast
Dairy Compact Commission. I have been involved with the Northeast
Interstate Dairy Compact, in various capacities, since its inception in
1987. Looking around these august surroundings, perhaps it is enough to
say by way of introduction that the Dairy Compact has indeed come a
long way since that first, informal late night meeting with
Representative Starr, Chair of the Vermont House Agriculture Committee,
about the need to restore Vermont's sovereign ability to regulate its
dairy marketplace. My extended written testimony presents a
comprehensive legal, administrative and economic impact report on the
operation of the Dairy Compact since Congress first ratified the
Compact pilot project as part of the 1996 Farm Bill.\1\ As set forth in
my summary, I strongly believe the record presented provides a tangible
basis for the Committee's review and a solid foundation of support for
Congressional action to reauthorize the Compact.
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\1\ As an appendix to my testimony, I am presenting a detailed
analysis in three parts; 1) A summary legal history, describing the
state and congressional legislative actions resulting in the
establishment of the compact, the administrative rulemaking conducted
by the Compact Commission to adopt and administer the market-wide price
regulation and the litigation involving the Compact and the price
regulation; 2) an economic analysis of the price regulation's impact,
from farm-gate to consumer outlet, for the period of its operation,
July 1997--present; and 3) a compendium of the record for the meetings
the Commission has held throughout the New England Compact region,
during which the Commission has heard from state representatives and
interested citizens about the Compact's impact in each state.
---------------------------------------------------------------------------
My presentation today will primarily provide a summary economic
impact review of the Commission's price regulation since its
implementation in July, 1997. Presented as attachments to this
statement are summary data about the price regulation's impact on New
England and New York dairy farmers and on New England consumers. The
information includes data on net farm pay prices, farm profitability,
farm viability and milk production. Also set forth is information about
the price regulation's impact on the procurement cost of raw milk and
on retail consumer milk prices. I have also provided data on the net
relative impact on consumer spending for milk and for all food
products, based on income.
Attachment I provides summary data for the price regulation's
operation from July, 1997 to present, by year and in total. It sets
forth the $159.2 million total compact over-order obligation imposed on
the New England Class I or beverage milk market, and the $146.4 million
total payment made to New England and New York farmers who supply the
market.
The annual obligation amounts ranged from $19.9 million to $64.4
million, with a annual average of The total annual producer payments
ranged from $16.7 million to $59.7 million, with an annual average
total payment of--. These producer payment figures begin to describe
the regulation's combined function of producer price stability and
enhancement.
Attachment II identifies an average total of 4217 New England and
New York farms supplying the market. These producers received total
annual payments ranging from $3,900 to $14,700 per farm, with an
average payment of $9812.
As can be seen from this and subsequent attachments, of the 4217
total farms, approximately 1300 are located in New York State. New York
farms in this proportion have historically supplied the New England
market. The attachments treat New England and New York farms, uniformly
as milk shedfarms historically supply the New England Market.
As also indicated, the average annual total pool volume of 6.6
billion pounds of raw milk produced and processed for all purposes in
the New England marketplace yielded an average net payment of $0.57
payment per hundredweight on all raw milk produced.\2\ The average
annual amounts of the producer payments are also set forth per
hundredweight, ranging from $0.25 to $0.91. These amounts are also
shown in combination with the federal minimum producer, or blend, price
paid for federal Milk Market Order #1.
---------------------------------------------------------------------------
\2\ The total New England pool volume of 6.6 billion all milk is
approximately 4.1 percent of the total, approximate 160 billion pounds
of raw milk produced nationally. (FAPRI data)
---------------------------------------------------------------------------
These per farm and per hundredweight producer payment figures
display quite concretely the regulation's combined function of producer
price enhancement and stability. Attachment I also identifies the net,
annual over-order obligation of 11.6 cents per gallon imposed under the
price regulation on Class I milk in the New England market, for the
period. The Attachment places the over-order obligation in context with
operation of the federal Milk Market Order Class I price, which
establishes the underlying regulated minimum procurement price for
beverage milk in the New England market. The two regulated minimum
pricing mechanisms in combination establish the net, overall increase
of 11.6 cents in the regulated procurement cost of the raw, Class I
milk. The amount is established monthly as the difference for the given
month between the federally established amount and the compact price
regulation minimum amount of $1.46 per gallon.\3\
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\3\ The average annual pool volume of approximately 3 billion
pounds of Class I milk regulated under the Compact and consumer in New
Negland is approximately 5.3 percent of the total, approximately 57
billion pounds of Class I or beverage milk consumed nationally. (FAPRI
data)
---------------------------------------------------------------------------
Attachment I also identifies the price regulation's total exemption
payments made to the six New England state WIC programs and the total
reimbursement payments made to the region's school districts for school
milk purchases. Also itemized are the two payments made to the
Commodity Credit Corporation, pursuant to the Congressional condition
of consent. Attachment I accounts also for the funding for the price
regulation's initial Supply Management Program, which the Commission is
just now in process of administering.
Finally, Attachment I accounts for the administrative assessment
that finances operation of the Commission and the price regulation. As
can be seen, the Administrative Assessment on average was just under 2
percent of the total obligation collected for the period to present. It
can also be seen that the assessment was reduced by a half cent
beginning in 2001.
Attachment II provides comprehensive data on farm numbers and
production for the New England milkshed. Attachment I shows the average
annual distribution of supplying New England and New York farms by herd
size and the total, annual average production by herd size. Total
producer payments by herd size through 2000 are also identified.
It can be seen that almost three-quarters of the supplying New
England and New York farms have fewer than 100 cows in their herds. It
can also be seen that of the remaining 1000 farms, about 20 percent
have fewer than 200 cows. This means that, of the farms regulated under
the Compact, 400 farms or have herds in excess of 200 cows, with only
about 80 farms having herds larger than 400 cows. The farms subject to
the Compact price regulation remain on balance, overwhelmingly small
family farm operations.
It can also be seen that the farms under 100 cows, or about 72
percent of total farms of the total about provide only 35 percent of
the total milk supply. On the other end, the farms over 200 cows, or
about 28 percent of total farms, supply about 35 percent of the milk
supply. It is thus the middle group of farms, between 50 and 100 cows,
that is the essential anchor of the milkshed for both production and
milk supply. (Contrary to common understanding, this grouping rather
than the larger operations also shows the greatest increase over time
in New England.)
Attachment III provides data about the price regulation's impact on
farm profitability. The data establishes that the producer payments
stabilized farm cash flow positions, and enhanced net income so as to
allow many farms to operate in the black instead of the red, for
extended periods of time. This is apparent over time, and particularly
for the year 2000.
The impact for the typical farm in 2000 is particularly striking.
For 2000, without operation of the price regulation, the typical farm
showed net farm earnings of $23,000, with fully two-thirds of the
income derived from the price regulation.
When family living expenses and taxes are factored in, the picture
changes quite dramatically, with the farm showing net earnings still in
the black but in the amount of only $400. Viewed from this perspective,
therefore, without operation of the price regulation, the typical farm
would have slipped deeply into the red for 2000 in the amount of
approximately $15,000.
The analysis of the typical farm operation for 1997 provided by
Attachment III indicates a similar, if less substantial impact
attributable to the price regulation. (The price regulation was only in
effect for one half of the year, moderating its impact by definition.)
The final piece of Attachment III, an assessment of the
regulation's impact on the most credit worthy 200 plus operations in
New England indicates that, even for the most successful operations,
the Compact had a substantial, positive impact on farm profitability.
This data also describes the positive benefit over time of price
stability, as well as that of price enhancement.
Attachment IV provides an assessment of the price regulation's
impact on farm viability. This farm viability assessment considers both
the relative degree of financial stress confronting a farming operation
and the absolute degree of financial stress resulting in a farmer's
decision to cease operating the farm. The latter is of course a
function of the former--the less financial stress confronting a farm,
the less likely the farmer will be compelled to cease operation.
The assessment presented in Attachment IV indicates that the price
regulation has had a substantial, positive impact on the viability of
the New England and New York farms comprising the New England milkshed.
By identifying the regulation's impact on profitability, the data
presented in Attachment III serves also to describe the price
regulation's effect on the relative financial stress confronting these
dairy operations.
Stabilized cash flow positions, enhanced net income and return on
assets and equity serve most directly to reduce the financial stress
experienced by a farming operation. As also indicated, and perhaps most
importantly, the producer payments allowed farmers to pay a significant
portion of their living expenses for the period with a much greater
degree of certainty than they would have been possible without
operation of the price regulation.
According to the analysis presented in Attachment IV, this overall
reduction in financial stress resulted in a significant reduction in
the likely net loss of dairy operations in the New England milkshed.
According to the analysis presented, this effect of the price
regulation may well have cut the attrition rate by more than half of
what might have occurred without operation of the price regulation.
According to the first part of Attachment IV, the price regulation
had two striking impacts on farm viability in 2000: 1) the number of
the most stable farms, or those experiencing no financial stress was
increased from thirty to fifty percent; and 2) the most vulnerable
farms, or those experiencing severe stress, was reduced in half, from
thirty-four to seventeen percent.
The second part of Attachment IV, which assesses the likely impact
on farm attrition, follows from the above analysis. According to this
assessment, the price regulation may well have reduced the number of
farm losses by as much as two and one half times. This translates to
approximately 400 farms remaining on the land, and remaining as vital
participants of the New England milkshed.
The analysis presented in Attachment IV probably understates the
case according to the data presented in the individual assessments of
the price regulation's impact on farm loss provided by each of the New
England State commissioners of agriculture. (These assessments were
prepared in response to a request made by Senator Snowe and Senator
Collins of Maine. I have attached their letters to my statement). For
example, Commissioner Steve Taylor of New Hampshire indicates that
``Since the Compact's inception in July 1997 the number of
farms producing milk for the commercial market in this state
has declined from 187 to 176. . .If there had been no Compact I
would expect that by now we would be down to 130 or even fewer
farms.''
The remainder of my presentation provides some assessment of the
impact of the price regulation on consumer retail milk prices and
consumer spending on milk. This portion of the analysis is much more
difficult to present in concrete terms. At the least it can be said
that the literature is extensive with regard to the impact on retail
milk prices of the price regulation's 11.6 cent increase in the
regulated minimum procurement cost.
Yet the literature is most inconclusive. One study finds only a
marginal impact; another finds somewhat similarly that some but not
all, though still more than a marginal amount, was passed through; yet
a third finds a substantial, marked-up impact well in excess of the
actual amount of the price regulation.
These studies are presently all the subject of a raging academic
debate on methodologies. The Commission has yet to make its own
determination, given the stark disagreement in this still developing
literature. My purpose today is not to contribute further to the array
of opinions, but instead to provide some context.\4\
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\4\ At the same time, thought speaking only for myself and not on
behalf of the Commission, I do not find the third study to be at all
credible for its description of the retail mark-up pattern for milk and
its resulting conclusion of a substantial retail mark-up attributable
to the price regulation. For this reason, I have not provided any
illustration of this study, as presented for the others.
---------------------------------------------------------------------------
Attachments V and VI identify possible per capita and per family
cost, annually, of the price regulation. Tracking the first two studies
cited above, an analysis premised on a pass through of half the
increase is also presented. For purposes of illustration, a complete
pass through of the price regulation's increase in the regulated
minimum procurement cost is also presented.
According to Attachment V, a pass-through of half of the regulated
assessment, or 6 cents, would have yielded an annual per capita average
increase in spending on milk in the amount of about $1.40, with a range
of $0.75 to $2.35. A pass-through of the entire11.6 cents would have
yielded twice these totals, or about $2.75 on average. By household,
assuming a pass-through of half the amount, the annual impact on
average would have been about $3.50, with a range of $1.90 to $5.80 for
the period. Again, a pass-through of the entire amount would double
these impacts.
Attachment VI provides a further context for assessing the annual
household net impact of the price regulation. This assessment considers
milk purchases and total food purchases, by income group. As can be
seen, assuming a complete pass-through, the impact again ranges on
average between $5 and $10, with the higher impact occurring for the
higher income groups. With regard to all food purchases, this increase
appears as a one to two tenths of one percent increase for all food
purchases; it does not appear at all statistically with regard to all
purchases. The attachment also provides some further context with
regard to all food purchases.
A final note on consumer impacts with regard to the Women, Infants,
and Children Nutrition Program (WIC) and School Lunch Programs. The
price regulation contains provisions exempting the WIC program and
providing reimbursement to the School Lunch programs. The purpose of
the first is to ensure the WIC program is held harmless; the attached
letter from Mary Kelligrew Kassler, Director of the Massachusetts WIC
Program indicates that this purpose has been served. (A letter from
Peter Petrone letter, Compact Commission member-designee of the Rhode
Island WIC Program, describing a similar outcome, is also being
submitted for the Record.
The School Lunch reimbursement procedure was intended to ensure the
same result, while at the same time allowing for the possibility that
milk processors might choose to compete over the potential impact of
the over-obligation on the margin for school lunch milk. The total
amount of the reimbursements provided has been substantially less than
originally provided for. This indicates at least that the program has
been held harmless.
Finally, I have provided data in graph form that illustrates the
interrelationship between the regulated procurement cost for Class I or
beverage milk and the retail price for the same milk in the New England
market (Boston). As noted earlier, the procurement cost for raw milk is
a combined function of the federally established Class I minimum price
and the Compact price regulation. In combination, the bottom two lines
of the graph identify the combined minimum procurement cost.\5\
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\5\ As also described earlier, their combination also defines the
price regulation's net, overall invrease of 11.6 cents in the rgulated
procurement cost of the raw, Class I milk. This amount is established
monthly by the combined operation of the federal price regulation and
the compact price regulation minimum amount of $1.46 per gallon.
---------------------------------------------------------------------------
Adding the top line for retail prices defines the margin between
this combined regulated minimum procurement cost and the retail price.
As can be seen, this graphed illustration is presented in two formats.
The first is a single, continuous graph for the entire Compact period,
(Attachment VIIa). The second shows the Compact period divided in two
parts (Attachment VIIb).
Attachment 7b indicates that the pattern of the margin between the
regulated procurement cost and the retail price was dramatically
different between the first and second of these two defined periods.
The first shows a period of stable cost and even declining price, while
the second shows combined stability and fluctuation in cost accompanied
by a substantial increase in price. For the moment, I can only let the
graph speak for itself. On behalf of the Commission, I will be
attempting to reconcile these two periods as our assessment moves
forward. I can only hope that the analysis in the literature will move
in that direction, as well.
This concludes my testimony. I thank the Committee for its
considerate attention.
Chairman Leahy. Thank you very much.
Mr. Norquist, you are no stranger to the Congress and we
are delighted to have you here, sir. Go ahead.
STATEMENT OF GROVER NORQUIST, PRESIDENT, AMERICANS FOR TAX
REFORM, WASHINGTON, D.C.
Mr. Norquist. Thank you. I serve as President of Americans
for Tax Reform. I am submitting my testimony in writing. I
speak to support allowing the Northeast Compact to lapse and in
opposition to any extension of it.
There was recently a book and a movie called ``The Perfect
Storm'' and it described the perform storm. The Dairy Compact
is the perfect bad law. There are lots of laws that have good
points and bad points, but the Dairy Compact is absolutely
perfect in its wretchedness and it has nothing to recommend it.
It is price-fixing by the Government.
We have somewhere between 4 and 20,000 years of history on
price-fixing being a bad idea. It creates a cartel. If
anything, the Government should be trying to move away from
monopolies and cartels. We know that monopolies and cartels
give us higher prices and less good quality. The Government
ought not to be interfering in capitalist acts between
consenting adults.
Third, it has hidden costs. I mean, one of the things that
we would like to have from Government is more transparency, but
here it is not even sort of an honest tax where you say the
Government is going to come and take 10 cents from me or 20
cents from me every time you buy a--at least the sales tax one
can see, and consumers and taxpayers can say, well, this sales
tax is too high or it is a reasonable cost. But when you hide
costs, that is a particular problem.
It hurts poor people. Obviously, for lower-income people,
milk of a larger percentage of their income than for other
people. When we sent people over to the former Soviet empire
and found things like this, we told them don't do this. This is
exactly the kind of government program that we told people that
they should move away from.
It also has a false promise. It promises to help small
farmers. Small farmers have continued to go out of business. It
sends money to large farmers. When you go to college, they
explain to you how corruption happens in government, that you
have diffused costs and concentrated benefits and if you just
sort of nick everybody a little bit, somebody can walk away
with a lot of money. This is the structure of nicking everybody
who buys milk.
Then, seventh, it moves away from where I think the country
and the world is trying to get to, which is expanding markets.
We want to trade not just between the 50 States, but with
Canadians and Mexicans, and hopefully with the entire
hemisphere and with the entire world. We should be knocking
down markets and insisting the Europeans move away from their
subsidies and cartels, and this makes it more difficult to do
that. The United States can compete successfully in the world,
but we ought to be competing rather than hiding behind cartels
and moving in the wrong direction.
Now, it has been said that no one's life is ever a complete
waste; some people serve as bad examples. And this law serves
as a bad example, but we don't need it. There are others. High
school, the Department of Motor Vehicles and the post office
have inoculated America against socialism because people decide
they don't want more of that.
When I am asked as a taxpayer advocate, what Government
services would you give up if you had less taxes, the first one
I always point to is the milk cartel. That is a Government
service that I would like to give up, and I never get an
argument from people who then want to tell me that this is a
useful project.
That said, I hope this will be allowed to lapse. I
certainly hope it will not be extended.
Chairman Leahy. And that would save you how much in taxes
if you gave up the Dairy Compact, Mr. Norquist? I want to make
sure I follow your testimony.
Mr. Norquist. No, no. The interesting conversation, of
course, is politicians are put in the very difficult position
of explaining that they are giving lots of money to dairy
farmers, but somehow it isn't coming from anybody. Obviously,
it comes in higher consumer costs because the money is not
printed; it actually comes from somewhere.
It does not run through the central Government. It is a
mandated price-fixing by the Government, and therefore it is a
Government service, these laws, that we would like to pass on.
But it does not show up on the tax records, which I would argue
makes it a less honest transfer of wealth from some to others.
[The prepared statement of Mr. Norquist follows:]
Statement of Grover Norquist, President, Americans for Tax Reform,
Washington, D.C.
Americans for Tax Reform (ATR) has steadfastly opposed the
Northeast Dairy Compact since its inception for reasons based initially
on principle and further strengthened over the course of years by
mounting evidence of its disappointing performance. Therefore, we find
S1157 to be a very troubling proposal, for it would give dairy compacts
everlasting life, and would take a bad idea from one corner of the
country and spread it virtually nationwide.
The Northeast Compact has been an expensive boondoggle not worth
continuing, and this experience has ably shown that establishing even
more regional compacts would be a very ill advised choice for Congress
to make.
ATR's opposition to the extension of the current dairy compact and
the creation of new compacts can be categorized into four basic themes.
First, it's bad economics. Second, the Northeast Dairy Compact has
completely failed in its mission to rescue the small farmer, as would
new compacts. Third, the entire approach is so anachronistic it should
be forever consigned to a museum. Finally, the Northeast Dairy
Compact's persistence has demonstrated Milton Friedman's cautionary
adage that ``There is nothing so permanent as a temporary government
program.''
Dairy compact advocates have insisted all along that in order to
prevent the collapse of smaller farms (especially those owned by
families) and ensure an adequate supply of milk and related dairy
products, a higher floor on regional dairy prices needs to be set than
the one imposed by Washington every month.
The problem with this approach is that it does not correct the
underlying flaw; it simply relocates it. A pricing decision imposed by
bureaucrats at the local level is no better than a pricing decision
imposed by bureaucrats in Washington, DC.
Whenever any government brusquely interferes with the pricing
mechanism of the free market, untenable economic distortions inevitable
follow. These deliberate alterations are intended to confer direct
benefits to the rest, and the schemes are alleged to somehow come at no
real expense on the part of the whole.
As with any attempt at command and control economics, such an
unrealistic outcome is the rosiest of rosy scenarios. It has certainly
not been the case with dairy compacts. Indeed, it would appear that no
one has benefited, and nearly everyone has borne a very real cost for
keeping the program intact.
The average price per gallon of milk in the Compact has generally
increased 10 to 15 cents. This artificially induced price hike is, for
all intents and purposes a tax on milk, and has worked much like any
other excise tax in that it serves to reduce the maximized consumption
of milk. (Think of the excise taxes slapped on alcohol and tobacco.
Milk has now joined their ranks as guilty pleasures discouraged by
government.)
Such a tax, of course, penalizes milk drinkers. But it also hurts
milk producers. The flattened consumption levels have tended to obviate
any potential profit gains dairy farmers would have otherwise expected.
And consequently, many of those farmers find it impossible to continue
operating and decide to quit the industry, which leads us to the
aforementioned second bone of contention: The Northeast Dairy Compact
hasn't prevented the implosion of small farms.
The Massachusetts Department of Food and Agriculture recently
reported that while dairy farmers in that state receive an additional
$7,000 every year on average from participating in the Northeast
Compact, which is in accordance with the compact boosters' design, the
rate of annual dairy farm closure defied their wishes and leapt from 6%
to 10% after the Compact was established.
Unfortunately, this sorry phenomenon is not exclusive to
Massachusetts. It applies throughout the Compact zone. And it's largely
attributable to the ``less you need, more you'll get'' nature of
agricultural subsidies.
As a recent GAO report confirmed (GAO-01-606), the bigger and more
efficient farms have been receiving the lion's share of federal
agricultural assistance payments for years, and that share has been
steadily increasing. In 1999, large farms, which constitute only 7
percent of all farms, received around 45 percent of the payments.
Medium-sized farms, which constitute 17 percent of all farms, took 41
percent of the payments. The remaining 14 percent was divided among the
76 percent of farms that are small--they very same farms the
agricultural support programs are meant to assist.
And milk is no exception. Since the total amount of price support
any one farm can claim is determined by the amount of milk it produces,
larger farms automatically qualify for far more in subsidies simply
because they have higher production capacities. And since the program
doesn't heap its benefits on small farms, as its supporters would
assert, the program doesn't help to keep small farms in business.
Instead, it provides huge incentives for farms to grow larger in order
to soak up more subsidies, which often entails consolidating with the
smaller farms previously driven out of the industry.
Allow me to clarify: Large farms are not be feared. They will
obviously be a major component in the future of farming, which is
entirely desirable. They produce a greater yield with less space and at
lower prices. But our regulatory framework does not accurately reflect
this ongoing development, and scarce resources are getting showered
upon already efficient and thriving farms. What was designed to prop up
family farms during the Great Depression is now hopelessly
anachronistic in this prosperous age, the third point ATR would hasten
to make.
The current outdated approach has resulted in millions upon
millions of taxpayer's dollars going to meet needs that by any
objective criteria simply do not need to be met by the government for
the simple reason that the advance of agricultural technology as well
as agricultural economics has shown that government interference is
unnecessary and costly.
Clearly, a new approach is needed. The production, distribution,
and sale of milk and other dairy products have entered the 21st
Century. But the laws governing the dairy industry need to follow.
Dairy compacts will keep us in the past. Congress should keep pace with
the modernization of farming, not cling tenaciously to a bygone era.
In that same spirit, Congress should regard the issue of dairy
compacts as a failed experiment that is destined for the history books.
Doubtlessly, the entire matter of dairy compacts was meant to be
jettisoned by now, but that brings us to ATR's fourth concern: the
permanence of ``temporary'' government programs.
The Northeast Dairy Compact, in effect since July 1997, was
supposed to be a short-term measure to help the region adjust to the
aftermath of years of lower dairy price supports and the sale of
government-held dairy stocks. Concurrent with the Federal Milk
Marketing Order reform called for in 1999, the Compact was supposed to
expire, hence the automatic sunset provision in its original
legislation. The Marketing System was reformed as promised, but the
Compact remains. So the Compact is living on borrowed time, and it
deserves the fate ordained by the Federal Agriculture Improvement and
Reform Act, i.e. oblivion.
Much of the Northeast Dairy Compact's surplus milk and dairy
products have spilled out into non-compact states and applied downward
pressure on prices in those states, which would explain to a great
degree why many states want in on this deal. ATR believes it would be
far better to simply end the entire misadventure before things get out
of hand.
Moreover, ATR believes that all attempts to fix food prices are
misguided and counterproductive. Not only should regional compacts get
out of the business of fiddling with the price of milk, the USDA should
get out of it as well. Governments at all levels should allow the
marketplace to determine the price of all food, as it does so
effectively and equitable with every good and service.
In closing, I would like to acknowledge the tireless efforts of
grassroots organizations like Citizens Against Government Waste and the
superb research of scholars such as Professor Kevin McNew of Montana
State University. (Were I to present a more comprehensive list of the
people exasperated by dairy compacts and doing something about it, this
testimony would have filled volumes.)
Chairman Leahy. Mr. Burrington?
STATEMENT OF STEPHEN H. BURRINGTON, VICE PRESIDENT AND GENERAL
COUNSEL, CONSERVATION LAW FOUNDATION, BOSTON, MASSACHUSETTS
Mr. Burrington. Thank you, Mr. Chairman and members of the
committee. I am Vice President and General Counsel of the
Conservation Law Foundation. We are widely regarded as New
England's leading public interest environmental advocacy
organization. Many people know us as the group that brought the
lawsuit that led to the cleanup of Boston Harbor. For many
years, we have tackled pressing environmental challenges in New
England, in many, many different areas.
I am here because providing a living wage to our region's
dairy farmers is as high an environmental priority today as
cleaning up Boston Harbor was 20 years ago, and it is clear to
us that the Compact is working and the Compact is the way to
achieve that goal.
The list of New England public interest organizations who
join my organization in supporting the Dairy Compact is long.
For example, the entire Massachusetts environmental community,
ranging from small, grass-roots groups to the State's major
organizations, and Massachusetts' leading consumer and historic
preservation groups all vigorously support the Dairy Compact
and its reauthorization.
On the ground, in New England, to put it simply,
reauthorization of the Dairy Compact is a no-brainer. Why, from
an environmental perspective? Because sprawl is our foremost
environmental challenge and we simply have no hope of winning
the war against sprawl if farmers can't make ends meet.
Sprawl is an open-space problem, it is a biodiversity
problem, and it is a quality of life problem. But it is even
more than that. Sprawl is the worst threat to air quality and
to water quality that we face today. For example, Lake
Champlain has a severe eutrophication problem. Farms produce
some of the phosphorous pollution that is causing the
eutrophication in Lake Champlain, but the mere 4 percent of the
land around Lake Champlain that is developed produces one-fifth
or more of the phosphorous that is going into Lake Champlain.
So sprawl pollutes on a per-acre basis much more than farms do
and farms are an important bulwark against sprawl. The
environmental and consumer interests here are perfectly
aligned, we believe.
Milk is heavy and bulky and expensive to transport over
long distances. There are freshness issues which have been
alluded to, but there is no way around the fact that unless you
reduce it to concentrate, milk costs a lot to transport a long
distance. The milk that arrives in Washington, D.C., from
Boulder has a hefty transportation component to its retail
price.
Under the Dairy Compact, New England consumers are paying
regional farmers a few cents per gallon to avoid paying
literally ten times that amount to get milk from 500 or more
miles away. Whether it be the very farthest part of western New
York State or Ohio or Michigan, there is no way around the fact
that it would cost our consumers more to bring milk such a long
distance than it costs them to keep our regional dairy farmers
in business.
Time doesn't allow me to go into all the issues that have
been raised up to this point in the hearing, but I would like
to take on just a couple of them. First, the question of
whether the Dairy Compact has been effective in protecting our
dairy farms, and I would make five points in response to that.
First, the appropriate question is are we doing better than
we would without the Compact, and I think clearly the answer is
yes, we are doing better than we would without the Compact.
Second, the focus should be on farm acreage, not farm
numbers. Farm acreage has remained stable under the Dairy
Compact.
Third, the trends in dairy farming need to be looked at in
historical context. We are still experiencing the after-effects
of decades when it was impossible to make ends meet in farming
in New England and when nobody could see a future in farming.
The median age of farmers in our region rose to 64. We are
still suffering that effect.
It is easy to get out of farming. Many people have been
looking to get out farming for years prior to the time when you
could make ends meet under the Compact. It is very difficult to
get into farming because we have extraordinarily high land
prices in our region.
Fourth, the Compact, due to its governance structure,
provides no dairy farmer a guarantee. The Compact price is
based on a balancing of public interest considerations. It is
not a cartel controlled by the dairy farmers; it is governed by
a commission that consists of representatives of farmers,
processors, consumers and others. It may be that if we
absolutely wanted to provide assurance that we would lose no
dairy farmers, we would set a higher price, but that has not
been done and should not be done.
Finally, the anecdotal evidence that there are many farmers
in business in New England today who would not be without the
Compact is simply overwhelming to anyone who is on the ground
in New England.
In conclusion, I would say giving the States authority to
protect the economic viability of their dairy farms and keep
milk supplies local is critical to protecting consumers and the
environment. We think this is a matter that is handled well by
the States. It has been handled well in our region and we and
our many allies in New England's environmental community urge
you in the strongest possible terms to give the States the
authority that they have requested.
Thank you. I would be glad, by the way, to answer questions
on a wide range of subjects.
[The prepared statement of Mr. Burrington follows:]
Statement of Stephen H. Burrington, Vice President and General Counsel,
Conservation Law Foundation
Mr. Chairman and Members of the Committee:
I appreciate the opportunity to appear today and express the strong
support of the Conservation Law Foundation (CLF) for the Dairy
Consumers and Producers Protection Act of 2001. CLF is a non-profit,
member-supported organization that works to solve the environmental
problems which, threaten the people, natural resources and communities
of New England. CLF is widely recognized as New England's leading
environmental advocacy organization.
The Dairy Consumers and Producers Protection Act is one of the most
important pieces of consumer and environmental protection legislation
Congress will take up in the, near future. The availability of fresh,
affordable milk, and the future of millions of acres of rural and
suburban land across the nation, both hang in the balance. New
England's experience since the Northeast Interstate Dairy Compact
(Dairy Compact) took effect in 1997 has shown that empowering the
states to provide dairy farmers a living wage is good for consumers and
the environment. The Dairy Compact has enabled consumers to avoid the
high cost of shipping milk over long distances while simultaneously
protecting; the landscape from sprawl.
The Dairy Compact enjoys broad support in New Enghand. Many of the
region's environmental, consumer, land conservation and historic
preservation groups join the Conservation Law Foundation in strongly
supporting its reauthorization. A partial list of New England public
interest organizations supporting reauthorization is attached as
Exhibit A. In Massachusetts, which accounts for nearly half of New
England's population and a corresponding share of its milk consumption,
every major environmental organization and the state's leading consumer
protection and historic preservation groups, as well as many smaller
community-based organizations, support reauthorization of the Dairy
Compact.
My testimony will explain the importance of the Dairy Compact to
the environment and to consumers and then briefly address criticisms
that have been leveled at the Dairy Compact by representatives of the
national dairy processing industry and their allies.
Keeping Dairy Farms Viable Protects the Environment
Farms are important environmental assets. They provide a bulwark
against sprawl. Throughout New England and many other parts of the
country, if farmers cannot make a living in agriculture, public and
private land protection efforts will never be able to save more than a
fraction of the rural landscape from low-density development. Hundreds
of millions of dollars in land protection spending could not compensate
for the effect of public policies that allowed farmers supplying milk
and other basic commodities to be driven out of business. When farmers
can earn a living in agriculture, government and private land
conservation organizations can spend, scarce dollars elsewhere. In the
coming years, pressure on land will likely be even greater than it has
been in the past. Development pressure is spreading to more of the
rural Northeast as more people work at home and the retirement-age
population grows and becomes free to locate far from employment centers
and schools.
In New England alone--a small, densely populated region--there are
roughly 1.3 million acres of land in dairy farming, most-of which would
be lost to agriculture if Congress did not reauthorize the Dairy
Compact. For decades before the Dairy Compact took effect, federal
price floors failed to reflect the cost of producing milk or to serve
their intended purpose of keeping dairy farms economically viable in
this and other regions. In 1995, there were 1,919,535 acres of dairy
farmland in New England. In 1995, just a decade later, there were only
1,320,507 acres of dairy farmland. In other words, about 600,000 acres
of dairy farmland--almost ore-third of the dairy farmland in the
region--were lost.to other uses during a few short years. According to
Yankee Farm Credit, a leading regional agricultural lender, as of 1995
a full 54% of New England dairy farms were under moderate or severe
financial stress. Only 38% were in healthy financial condition.
Protecting the working agriculturai landscape from sprawl has
fiscal as well as environmental value. Farms have positive revenue-cost
ratios for municipalities. For example, for each dollar of local tax
revenue a Massachusetts farm produces, the Farm requires an average of
only 40 in costs for local services. Residential
development, by contrast, does not pay its way: each $1.00 in tax
revenue it yieldsis more than offset by $1.09 in costs for local
services. Protecting farms also helps state government avoid
infrastructure expansion costs, Massachusetts, New Hampshire, and other
New England states have been spending hundreds of millions of dollars
on cuter-suburban highway, expansion projects in recent years. They
will spend much more in the future if sprawl development eats up farms
on the suburban fringe and in rural areas.
From an environmental perspective, more than open space is at
stake. The water quality and air quality impacts of sprawl are among
today's most intractable environmental problems. For example, Lake
Champlain has a severe eutrophication problem due to phosphorus
pollution, and dairy farms are one significant source of that
pollution. Yet studies carried out in recent years show that on a per-
acre basis, the four percent of land in the Lake Champlain basin that
is developed produces one-fifth or more of the phosphorus pollution.
Similarly, the lion's share of the pollution causing acid precipitation
acid smog in New England originates with burgeoning motor, vehicle
traffic volumes resulting from sprawl. On a per-acre basis, sprawl
development produces far more pollution than dairy farms do.
CLF would not support the Dairy Compact simplx as a means of
keeping land open if preserving local milk supplies were not important
in its own right. But preserving local milk supplies is a critically
important public objective, and Congress should recognize the enormous
environmental value of the Dairy Compact when considering the proposed
legislation
Consumers Need Local Milk Supplies
The dairy Compact has enabled New England consumers to avoid
becoming dependent on distant sources of milk and paying the high cost
of shipping milk for hundreds of miles. Milk is heavy and bulky and
expensive to transport. Even with fuel prices below current levels,
trucking milk to Rhode Island from Michigan or Wisconsin would cost 50-
70 per gallon. (See Exhibit B.) In Florida, where the dairy
industry has collapsed, consumers pay nearly that much for shipping and
get milk from as far away as New Mexico. In contrast, it costs less
than a dime per gallon to ship milk within New England. While economies
of scale on massive dairy farms in certain regions yield lower
wholesale milk prices, they offset only about half the cost of long-
distance transport. Since the Compact took effect, New England
consumers have paid dairy farmers a few additional cents per gallon.
Those pennies have enabled regional farmers to stay in business and
provide milk at a lower overall cost to consumers.Recent unprecedented
consolidation in dairy processing gives consumers an even greater stake
in the Dairy Compact. Dallas-based Suiza Foods now controls three-
quarters of fluid milk processing in New England. There is strong
evidence that Suiza has used its market power to gouge conswners. Suiza
Foods doesn't need New England dairy farms, but the regional processors
who represent its remaining competition do. If the Dairy Compact goes,
they will succumb as well.
It is important to note that the Dairy Compact has Shielded
programs benefiting children, particularly low-income children. The
Dairy Compact legislation exempts milk sold to low-income people under
the Women, Infants, and Children (WIC) Program. The Dairy Compact
Commission has approved an exemption for school meals, programs.
Neither of these programs would be exempt from the higher costs
associated with long-distance shipping and with the reduced competition
in dairy processing that would be abetted by the demise of dairy
farming in New England send other regions. I note that, when the New,
York Public Interest Group (NYPIRG) testified in opposition to the
Dairy Compact before the New York legislature several years ago, it
cited as two of its three reasons anticipated impacts on the two
programs just mentioned--impacts which, the Compact was subsequently
crafted and administered to avoid.
Nationwide consolidation, of milk production in a small handful of
states would mean not only higher costs but diminished product,
quality. Consumers would increasingly be presented with milk that had
been ``ultra-pasteurized,'' a process that enables milk to be stored
for weeks longer than conventionally processed milk but that also
leaves it tasting like liquid cardboard. With transportation accounting
for a large share of costs, processors would have a strong incentive to
reduce milk to concentrate for shipment Fresh-tasting local milk would
remain available for consumers in higher income brackets. But the days
when dairy farms remained in all regions and children of all income
levels drank the same milk would become a memory.
Criticisms of the Dairy Compact Have Not Withstood Scrutiny
The Dairy Compact has been under constant attack by
representatives.of major national dairy processors. Their multiple
court challenges have failed. And despite, heavy spending on
advertising and lobbying in Massachusetts--a populous state with a
comparatively modest agricultural presence that industry opponents
hoped would provide fertile ground for their arguments--the opponents
have won no popular support. Indeed, support for the Dairy Compact in
Massachusetts is broad, as mentioned above, and popular opposition
imperceptible or nonexistent. The result of drawing more attention to
the Dairy Compact has been to draw more legislators and others into the
ranks of Compact supporters.
Some of the Compact opponents' recurring criticisms were aired at
an oversight hearing of the Joint Committee on Natural Resources and
Agriculture of the Massachusetts legislature on February 10, 1998. At
that time, the chairs of the committee were Representative Douglas W:
Petersen and Senator Lois G. Pines. The hearing followed one of the
opponents' concerted attempts to turn opinion against the Compact. In
its report on the hearing (Exhibit C), the committee rejected the
arguments against the Compact.
An underlying reason for Compact opponents' failure to persuade is
that the Compact has brought management of an important agricultural,
resource closer to the people and placed it in the hands of a body
that, by design and in practice, protects the broad public interest.
The Dairy Compact legislation has given back to the states authority
that does not belong in the hands of the federal government. For
decades prior, to 1997, the federal government presided over the
decline of New England's dairy farms. Federal price floors failed to
serve their intended purpose of keeping dairy farms economically viable
in our region and many others. In contrast, the commission that
administers the Dairy Compact on behalf of the states has proven to be
an, effective guardian of the public interest. The Dairy Consumers and
Producers Protection Act would give other regions the same badly needed
mechanism for addressing threats to their food supplies.
Opponents malign the Dairy Compact as a ``cartel,'' but it is
nothing of the sort. A cartel is a combination of businesses that
regulates prices to suit itself. In contrast, the Compact has a broadly
representative and accountable governance structure. The Dairy Compact
Commission is a publicly appointed body that includes representatives
of consumers, processors, the general public and others. Dairy farmers
are in the minority on the commission.
After years of debate, Compact opponents have failed to explain how
consumers would be better off paying far more to ship milk from 500-
1,000 miles away than they would be paying a few pennies per gallon to
enable dairy farmers to stay in business and produce milk within their
region.
Compact opponents have also failed to produce evidence in support
of their claim that the Dairy Compact is promoting consolidation in
dairy farming in New England. The Dairy Compact took effect after many
years when dairy farmers could not make ends meet or see a future in
dairy farming, when very few people went into dairy farming, and when
the median age of the region's dairy farmers climbed to 64. New England
has some of the highest agricultural land values in the country--
Massachusetts, for example, ranks fourth among the states in farmland
value, at $5,597 per acre--making it difficult for new farmers to get
started. With many dairy farmers reaching retirement age, neighboring
farmers, who now find, dairy farming to be a viable proposition,
sometimes buy or rent retiring farmers' assets. At the same time, more
people have been going into, dairy farming since the Dairy Compact took
effect. Dairy farms in New England remain modest in size. For example,
the average dairy herd size in Massachusetts is 70 cows, up from 67 a
few years ago. A typical New England dairy farm is run by an overworked
couple with kids and at least one off-farm job, a large farm by two
overworked couples with kids and off farm jobsFinally, when Compact
opponent, assert that they embrace the goal of protecting local milk
supplies but that interstate compacts are not the best means of
attaining that goal, they disregard the fact that the Dairy Compact
emerged from years of debate and experimentation with other mechanisms
that proved less satisfactory. Other witnesses are better qualified
than I am to discuss that pre-Compact history. What I can attest to is
that the historical record since 1997 shows that the Compact is a
response to the dairy farm crisis that, viewed from any perspective,
does work.
The Daily Compact has not eliminated all challenges for dairy
farming in New England. It was not intended to do that. It has,
however, provided a mechanism through which the people of our region
can address the challenges and find solutions that benefit consumers,
farmers, processors, and the environment alike. After four years of
experience with the Dairy Compact, it is clear that this mechanism
should be preserved and expanded in the Northeast and made available to
other regions of the nation as well.
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Chairman Leahy. I suspect you are going to get a number of
them, Mr. Burrington, but I do appreciate in your testimony
that you mentioned strong evidence that Suiza has used its
market power to gouge consumers, and we will go into that.
Mr. Neuborne, it is good to have you here with us, sir.
STATEMENT OF BURT NEUBORNE, JOHN NORTON POMEROY PROFESSOR OF
LAW, NEW YORK UNIVERSITY SCHOOL OF LAW, NEW YORK, NEW YORK
Mr. Neuborne. Thank you, Senator Leahy. I am a Professor of
Law at New York University, and thank you for the opportunity
to appear before you this morning. This is a rare occasion for
me to disagree with Senator Leahy, whom I admire very much.
Chairman Leahy. Don't feel badly. I have constituents who
do it all the time and they still somehow find their way to
vote for me, so I don't mind a bit, Professor.
Mr. Neuborne. I appear on behalf of the International Dairy
Foods Association to express my concern over the effort to use
the Compact Clause to permit certain States to fix the price of
milk at artificially high levels in order to shield high-cost
local milk producers from competition from lower-cost producers
elsewhere in the Nation.
I want to make clear I do not oppose aid to local dairy
farmers. Powerful arguments that have been made this morning,
sounding in really three Cs, sounding in culture, the desire to
protect the culture of the family farm, which is a part of the
American ideology; conservation, the importance of preserving
farms in the modern era; and compassion, the notion that these
are people who work very hard and should be protected, argue in
favor of subsidizing dairy farmers. But regional price-fixing
compacts are the worst way to subsidize dairy farmers, the
worst way from fairness and the worst way, I believe, from
American constitutional law.
First of all, there is no getting around the fact that a
regional price-fixing compact is a regressive tax on low-income
consumers. There is no free lunch and there is no free milk,
and if the price that goes to dairy farmers is to be increased,
it has to come from either one of two places. It has to either
come from recovering some of the gouging that the processors
and retailers appear to be engaging in, and I would support
that unreservedly, or it has to come out of the pockets of
consumers.
The way the Compact operates, it is going to come out of
the pockets of consumers. So this is, in fact, a transfer of
wealth from the poor consumers to the dairy farmers to achieve
important social goals. It is just unfair to advance those
social goals by forcing low-income consumers to bear the
principal economic cost.
There is a way to do it, and the way to do it would be for
regional tax legislation aimed at providing subsidies to New
England's milk farmers, which would enable them to compete, but
they would be subsidized competitors. The market price would be
the true market price and the people of the area would pass
democratically on whether they wished to have tax subsidies
that go to these farmers.
But the milk Compact doesn't allow that type of democratic
judgment to enter into the process. It essentially takes it out
of politics and allows this subsidy to be imposed without the
people who bear the cost of the subsidy ever having a chance to
express themselves democratically about whether the subsidy is
a good idea.
But moving to an area that I have some expertise with, and
that is the Constitution, I think in addition to being an
unfair regressive tax, the milk Compact places serious tension
with the Constitution on four levels.
First, it is unquestionably inconsistent with the ethos of
the document. As a number of you have said, the ethos of the
document is an effort to move from the kind of regional price
wars that characterized the Articles of Confederation to a
national common market. And that national common market is
important not just for efficiency. It has allowed us to be the
most efficient economic engine the world has ever seen, but it
is also important because it has forged the national
consciousness which underlies the psychological notion that we
are the citizens of a single Nation.
If we begin to divide ourselves into regional economic
blocks through the use of the Compact Clause, people begin to
think of themselves as citizens of the region, not citizens of
the Nation. And we would erode not only our economic
efficiency, but the psychology that makes us the strongest
exercise in democratic governance the world has ever seen.
I think everybody on this panel agrees, everybody who has
been to law school agrees that if a single State tried to do
this, it would be unconstitutional. It would be clearly treated
as a violation of the negative Commerce Clause. So the question
is can the negative Commerce Clause be lifted by the use of the
Compact Clause.
I would argue that the Compact Clause is exactly the wrong
way to do this. First of all, it has never been done before. In
the 200 years of the Nation, we have never used the Compact
Clause to lift the bar of the negative Commerce Clause, and for
good reason, because it takes the issue out of politics, and
this is an issue that should be in politics.
But more importantly, it is inherently unequal. Even if
Congress had the power to use the Compact Clause to lift the
negative Commerce Clause, that power would still have to be
measured by the other substantive provisions of the
Constitution, by the Equal Protection Clause, the Privileges
and Immunities Clause, and by the Privileges or Immunity
Clause. All three of those clauses insist that Congress treat
everybody equally when it raises the negative Commerce Clause.
How can one say that you treat everybody equally by
creating a compact that gives some States the power to set milk
prices and leaves other States subject to the restrictions of
the negative Commerce Clause? This is a regime of two separate
laws governing the economic marketplace. Entirely apart from
its economic merits and its political merits, it is a classic
exercise in inequality and, in my opinion, raises the most
serious questions of constitutionality.
I would just leave you with a hypothetical. Suppose 26
States decided they were going to get together and create one
of these compacts maybe to control energy, maybe to control
some other very important economic entity. All political
controls would be stripped away because they would have a
majority in Congress. They would then be in a position to wage
economic warfare on one or other of the other States with no
restrictions. So I am going to suggest to you the Founders
would never have thought that a Compact Clause was a way to
deal with economic regulations.
Thank you, Senator Leahy.
[The prepared statement of Mr. Neuborne follows:]
Statement of Professor Burt Neuborne, John Norton Pomeroy Professor of
Law at New York University School of Law, New York, New York
Introductory Statement
I am the John Norton Pomeroy Professor of Law at New York
University School of Law, where I have taught Constitutional Law for
twenty-five years. For the past thirty-five years, I have been an
active constitutional lawyer, serving as National Legal Director of the
American Civil Liberties Union from 1982-1986, and as a member of the
New York City Commission on Human Rights from 1988-1992. In addition to
my teaching responsibilities, I currently serve as Legal Director of
the Brennan Center for Justice at NYU, a partnership between and among
Justice William Brennan, Jr.'s family, many of the law clerks who
served Justice Brennan during his historic tenure on the Supreme Court,
and the faculty of NYU Law School, dedicated to honoring the Justice's
extraordinary contribution to American law.
I have written widely in the area of constitutional law and policy.
A partial listing of my publications is annexed as an appendix to this
statement. In May, 2001, I was elected to the American Academy of Arts
and Sciences.
I have prepared this statement at the request of the International
Dairy Foods Association (IDFA),\1\ an umbrella organization consisting
of the Milk Industry Foundation, the National Cheese Institute, and the
International Ice Cream Association, but the opinions I express are my
own. I make this statement to express my opposition to efforts to
secure Congressional approval of interstate compacts designed to fix
regional milk prices at artificially high levels in order to aid high-
cost local producers at the expense of the consuming public and lower
cost producers elsewhere in the nation.
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\1\The several member companies of IDFA represent 80% of the dairy
products consumed in the United States. Dairy foods are a $70 billion
industry.
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I will leave to better qualified observers a discussion of the
adverse economic and social consequences of artificially increasing the
regional price of milk, especially the adverse impact on low-income
parents who ultimately bear the bulk of the real costs associated with
artificially inflated milk prices. Suffice it to say that whenever the
price of a necessity like milk is artificially raised by law, the net
effect is a substantial wealth transfer from the poorest segment of
society to the powerful political interests that are able to use
government power to set an artificially high price for a necessity of
life.
I will also leave to others a discussion of the alternative means
of assisting local dairy farmers to confront vigorous competition from
lower-cost producers, ranging from government assistance in the
modernization of facilities, to direct farm subsidies financed from
general tax revenues. Once again, suffice it to say that a government-
imposed artificially inflated price level is not the only--indeed, it
is not even the most effective--way to foster the survival of a local
dairy industry.
Executive Summary
It is a profound mistake, both as a matter of constitutional law
and constitutional policy, to use the device of the interstate compact
to create a regime of regional economic protectionism that flies in the
face of the national free market in goods and services established by
the Founders. The primary impetus for the Founders' decision to abandon
the Articles of Confederation in favor of the United States
Constitution was the desire to foster a national free market in goods
and services throughout the United States. The Founders understood that
rampant state and regional protectionism under the Articles of
Confederation was the single greatest threat to the American
experiment. See infra, Point I.
Consistent with the intent of the Founders, efforts by states to
impose price controls in order to benefit local high-cost producers at
the expense of lower-cost producers elsewhere, have been uniformly
condemned as unconstitutional by the Supreme Court as violations of the
negative Commerce Clause, the Privileges and Immunities clause, and the
Equal Protection clause. Our sense of community as citizens of a single
nation has stemmed, in large part, from the Supreme Court's consistent
enforcement of the Founders' incisive perception that local or regional
economic protectionism is not only economically inefficient, it is
politically corrosive of the bonds of unity that bind us together as
the world's most successful exercise in democratic governance. See
infra, Point II.
Whatever Congress's doubtful power to itself authorize and
implement discriminatory, hard core protectionism at the state or
regional level, the use of interstate compacts to exercise such power
is extremely unwise, and in my opinion, potentially unconstitutional.
Using Article I, section 10 (the Compact Clause) as the vehicle for
authorizing regional protectionism invites the Nation to divide into
competing regional economic blocs in flat betrayal of the Founders'
vision, and virtually assures that regions of the country will organize
politically in order to secure economic advantage at the expense of one
another. While efforts by single states (or by all of the states
equally) to obtain such power from Congress can be dealt with
effectively because they are subject to inherent political checks,
groupings of states acting as regional protectionists will inevitably
erode the normal political checks on parochialism. For example, what
happens when an interstate compact between and among twenty-six states
seeks to wage economic warfare on a few low-cost producing states? Such
a formal political combination of 26 states would evade all political
checks because it would command a Congressional majority, and would
plunge the Nation into precisely the type of destructive trade war that
caused the Founders to abandon the Articles of Confederation in favor
of the Constitution.
Moreover, deciding whether to favor high-cost local producers at
the expense of local consumers is an issue that should be decided at
the local political level. Unlike the boundary disputes and regional
resource situations where interstate compacts are routinely used to
insulate certain types of regional decisionmaking from parochial state
political interference, the decision whether to impose hard core
economic protectionism on a necessity of life should never be shielded
from open political discussion and ultimate political control by the
people who must, ultimately, bear its economic cost. The decision to
fix milk prices at an artificially high level is, in effect, a
regressive tax levied on the poorest populations of the compact clause
states; a tax that shifts money from the pockets of low income
consumers to the local dairy industry. Perhaps such a tax is justified.
But the decision about whether such a wealth transfer is or is not a
good idea should be made by the voters of each state (or by the voters
of all the states in the case of national legislation),\2\ not by
sheltered bureaucrats operating under the cover of a politically-
insulated interstate compact. An interstate compact is designed to
operate in the political shadows. No official in any state is
politically accountable for its decisions. In effect, it is a decision
to take the subject of the interstate compact out of day-to-day
politics.
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\2\ Minimum wage legislation is the converse, a transfer of wealth
from employers who could hire at a lower wage under unregulated market
conditions to low-income workers. I believe that minimum wages are an
important constraint on the unregulated labor market. But I believe
that the decision about minimum wage must be made by a politically
accountable body. It would be a terrible idea to shift the decision
about minimum wages to a politically insulated body acting pursuant to
an interstate compact.
---------------------------------------------------------------------------
Taking interstate boundary disputes out of day-to-day politics is
an excellent idea. Taking the day-to-day regulation of shared natural
resources out of politics is an excellent idea. That is why interstate
compacts have worked so well in those areas. But insulating decisions
about whether the price of milk should be set at an artificially high
level to protect high-cost dairy farmers against low-cost competition
from local political scrutiny by the persons who must bear the costs is
a terrible idea.
The fact is that the Compact Clause was never intended, and, except
for the milk price-fixing controversy currently before Congress, has
never been used, as a vehicle for regional economic protectionism. I
believe that it would be a serious mistake, and, quite possibly, a
constitutional violation, to unleash the Compact Clause as a potent
engine of regional protectionism more than 200 years into our national
history. See infra, Point III.
Finally, whatever technique Congress uses, Congress's power to
trump the presumption of a national free market established by the
Constitution is subject to significant constitutional limits imposed by
the Equal Protection Clause, the Privileges and Immunities Clause, and
the Commerce Clause itself. Since Congress lacks power to enact (or to
authorize others to enact), legislation that discriminates in violation
of the 14th Amendment's Equal Protection Clause, or the
Privileges and Immunities Clause of Article IV, section 2, Congress may
not impose (or authorize others to impose) domestic protective tariffs
that discriminate against out-of-state or out-of-region producers.
Moreover, since regional price fixing mechanisms are constitutionally
indistinguishable from protective tariffs, Congress may not establish
(or authorize others to establish) such overtly discriminatory hard
core protectionist regimes, whether it does so pursuant to legislation,
or the approval of an interstate compact. See infra, Point IV.
I. THE PRINCIPAL IMPETUS FOR THE FOUNDERS' DECISION TO ABANDON THE
ARTICLES OF CONFEDERATION IN FAVOR OF THE UNITED STATES CONSTITUTION
WAS THE FOUNDERS' DESIRE TO FOSTER A FREE MARKET IN GOODS AND SERVICES
THROUGHOUT THE UNITED STATES
At the close of the Revolution, the thirteen original states
experimented with a loose confederation that delegated power over
foreign affairs to a national government, but retained power over
virtually everything else at the state and local level. The lack of a
national power to regulate interstate Commerce led to the eruption of a
series of trade wars, pitting states and regions against one another in
a mutually destructive spiral. Justice Jackson expressed the consensus
judgment of history best in H. P. Hood and Sons v. DuMond, Inc, 336
U.S. 525 (1949), when he stated:
When victory relieved the Colonies from the pressure for
solidarity that war had exerted, a drift toward anarchy and
commercial warfare between the states began. `[E]ach state
would legislate according to its estimate of its own interests,
the importance of its own products, and the local advantages or
disadvantages of its position in a political or commercial
view'. This came `to threaten at once the peace and safety of
the Union'. The sole purpose for which Virginia initiated the
movement which ultimately produced the Constitution was `to
take into consideration the trade of the United States; to
examine the relative situations of trade of said States; to
consider how far a uniform system in their commercial
regulations may be necessary to their common interest and their
permanent harmony' and for that purpose the General Assembly of
Virginia in January of 1786 named commissioners and proposed
their meeting with those from other states. The desire of the
Forefathers to federalize regulation of foreign and interstate
commerce stands in sharp contrast to their jealous preservation
of the state's power over its internal affairs. No other
federal power was so universally assumed to be necessary, no
other state power was so readily relinquished. [As Madison]
indicated, `want of a general power over Commerce led to an
exercise of this power separately, by the states, which [sic]
not only proved abortive, but engendered rival, conflicting,
and angry regulations.' 336 U.S. at 534.
Indeed, James Madison noted that the single most important
achievement of the Constitutional Convention was to rescue the nation
from a continuation of the parochial trade wars that had marred the
first ten years of its existence and threatened its future ``permanent
harmony''.
Before taking steps that might encourage the modern-day recurrence
of those trade wars (this time through the agency of protectionist
interstate compacts), Congress should reflect on the fact that
Madison's understanding of the relationship between economic
protectionism and the erosion of political unity was brilliantly
prescient. One of the Founders' enduring insights was that regional
economic protectionism is ultimately corrosive of national political
unity. To prevent economic regionalism, the Founders imposed a
constitutional prohibition on state and regional efforts to
discriminate against goods and services produced elsewhere in the
nation. To tamper with that constitutional prohibition is to tamper
with the mainspring of the nation's political and economic fabric.
II. EFFORTS BY STATES TO IMPOSE PRICE CONTROLS IN AN EFFORT TO AID
HIGH-COST LOCAL PRODUCERS AT THE EXPENSE OF LOWER COST OUT-OF-STATE
PRODUCERS HAVE UNIFORMLY BEEN HELD TO VIOLATE THE NATION'S COMMITMENT
TO A NATIONAL FREE MARKET IN GOODS AND SERVICES
Consistent with the Founders' intentions, the Supreme Court has
repeatedly ruled that the grant of power in Article I, Section 8, to
Congress to regulate interstate commerce carries with it a negative
pregnant precluding the states from engaging in economic protectionism
aimed at favoring local economic interests at the expense of outsiders.
E.g., Camps Newfound/Owatonna Inc. v. Town of Harrison, 520 U.S. 564
(1997); Fulton Corp. v. Faulkner, 516 U.S. 325 (1996).
The paradigm of forbidden economic protectionism is the imposition
of a protective tariff by one state designed to raise the price of
goods imported from another state in an effort to shield high-cost
local producers from national competition. Given the Founders' clear
commitment to a national ``common market,'' no state has attempted
openly to establish a system of domestic protective tariffs. Instead,
they have experimented with devices designed to achieve the identical
effect of neutralizing the competitive advantage of out-of-state lower
cost producers. The most obvious hard core protective technique has
involved the setting of minimum prices designed to prevent out-of-state
competitors from underselling local producers. In Baldwin v. G.A.F.
Seelig, Inc., 294 U.S. 511 (1935), New York attempted to set minimum
prices for milk. New York's scheme was to forbid the sale of milk in
New York unless a dealer had paid the minimum price to a producer, no
matter where the transaction took place. The effect of New York's plan
was to prevent low cost milk from entering the New York market.
Justice Cardozo, writing for a unanimous Court, held that New
York's price fixing scheme:
. . .set a barrier to traffic between one state and another as
effective as if customs duties equal to the price differential
had been laid upon the [milk]. Nice distinctions have been made
at times between direct and indirect burdens. They are
irrelevant when the avowed purpose of the obstruction, as well
as its necessary tendency, is to suppress or mitigate the
consequences of competition between the states. Such an
obstruction is direct by the very terms of the hypothesis. We
are reminded in the opinion below that a chief occasion of the
commerce clause was `the mutual jealousies and aggressions of
the States, taking form in customs barriers and other economic
retaliation.' [If] New York, in order to promote the economic
welfare of her farmers, may guard them against competition with
the cheaper prices of Vermont, the door has been opened to
rivalries and reprisals that were meant to be averted by
subjecting commerce between the states to the power of the
nation. 294 U.S. at 521-22.
More complex efforts to stifle interstate competition by fixing
milk prices have also been invalidated. For example, in West Lynn
Creamery v. Healy, Inc., 512 U.S. 186 (1994), the Court invalidated an
effort to tax milk dealers on the quantity of milk sold in
Massachusetts, and to rebate the tax to Massachusetts dairy farmers. In
effect, the plan taxed all milk, but rebated the tax to Massachusetts
dairy farmers, rendering the tax discriminatory because its burden fell
solely on out-of-state milk. The West Lynn Court noted that the tax
plan was a minimum pricing scheme in disguise, and that a minimum price
regulation has the same unconstitutional effect as a tariff or customs
duty--``neutralizing the advantage possessed by lower cost out-of-state
producers''.\3\ Id. at 194.
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\3\ The West Lynn Court noted that attempts to protect local dairy
farmers had provoked numerous Supreme Court challenges. Schollenberger
v. Pennsylvania, 171 U.S. 1 (1898); Baldwin v. G.A.F. Seelig, Inc., 294
U.S. 511 (1935); H.P. Hood & Sons. Inc. v. DuMond, 336 U.S. 525 (1949);
Dean Milk Co. v. Madison 340 U.S. 349 (1951); Polar Ice Cream &
Creamery Co. v. Andrews, 375 U.S. 361 (1964); Great Atlantic & Pacific
Tea Co. v. Cottrell, 424 U.S. 366 (1976); West Lynn Creamery, Inc. v.
Healy, 512 U.S. 186 (1994).
---------------------------------------------------------------------------
Thus, if any state attempted to set minimum prices for milk in an
effort to protect its dairy farmers from low cost competition from out-
of-state producers, the plan would be blatantly unconstitutional as a
violation of the so-called negative Commerce Clause.
III. CONGRESS SHOULD NOT USE ITS POWER UNDER THE COMPACT CLAUSE TO
AUTHORIZE STATES TO FORM HARD CORE REGIONAL PROTECTIONIST BLOCS
I will suggest in Point IV that Congress lacks power to authorize
hard core protectionism by the states no matter what techniques are
used. But, whether or not such substantive power exists, regional price
fixing compacts are not an appropriate vehicle for the exercise of
Congress's power. It is, I believe, a profound mistake, both as a
matter of constitutional law and constitutional policy, to use the
device of the interstate compact to create a regime of regional
economic protectionism that flies in the face of the national free
market in goods and services established by the Founders.
Congress is, of course, far from powerless if it finds it necessary
to relax the rigors of an uncontrolled national free market. For
example, in an effort to prevent the proverbial race to the bottom,
Congress may enact national minimum standards that avoid destructive
state and regional competition. The establishment of a national minimum
wage, maximum hours legislation, and uniform safety standards are
classic examples of the exercise of Congress's power. Moreover, in
connection with the enactment of national standards, Congress may
authorize federal regulatory officials to establish regional variations
from national standards to reflect local conditions. Indeed, in the
case of milk, Congress has done precisely that under the Agricultural
Marketing Agreement Act of 1937, which authorizes the Secretary of
Agriculture to regulate minimum prices paid to milk producers by
issuing marketing orders for particular geographical areas. See 7 CFR
section 1000, et seg. (2000) (setting regional prices for raw milk).
The use of such federal legislation to regulate interstate
commerce, precisely because it is the expression of the entire nation,
contains an important built-in political safeguard against unfair local
protectionism, since it is unlikely that a national legislature would
enact legislation that permits one state or region to protect its high-
cost producers unfairly at the expense of the national majority.\4\ As
an alternative to direct federal legislation, Congress may encourage
regulation of the national free market by delegating additional
regulatory authority to the states. Congress's decision to delegate the
power to regulate the insurance industry to the states pursuant to the
McCarran Act is the classic example. Prudential Insurance Co. v.
Benjamin, 328 U.S. 408 (1946). Congressional delegation of uniform
regulatory authority to each of the states, as in the McCarran Act,
permits careful tailoring to local conditions, while simultaneously
retaining important internal political checks against irresponsible
protectionism.\5\ Since any Congressional delegation of regulatory
authority to the states must treat each state equally, each state is
limited in its temptation to engage in irresponsible protectionism by
the knowledge that sister states are similarly empowered to retaliate.
Moreover, since any delegation of regulatory authority to the states
must be approved by Congress, irresponsible behavior by one or, even,
several states risks a withdrawal of the regulatory authority by the
rest of the nation.\6\
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\4\ Despite the internal political safeguard, if Congress agrees to
such a regime of hard core protectionism, perhaps because of complex
political trade-offs, the Constitution imposes substantive checks on
the power to enact protectionist legislation. See Metropolitan Life
Insurance Co. v. Ward, 470 U.S. 869 (1985); Saenz v. Roe, 526 U.S. 489
(1999). See infra, Point IV.
\5\ Once again, the states' power to regulate pursuant to
Congressional waiver of the negative Commerce Clause is limited by the
equality provisions of the Constitution. Metropolitan Life Insurance
Co. v. Ward, 470 U.S. 869 (1985) (invalidating discriminatory tax
despite waiver of negative Commerce Clause); United Bldg. & Constr.
Trades v. Camden 465 U.S. 208 (1984) (invalidating residential quota
for public works jobs); Hicklin v. Orbeck, 437 U.S. 518 (1978)
(invalidating Alaska hire law requiring employment preferences for
Alaska residents in certain jobs); Supreme Court of New Hampshire v.
Piper, 470 U.S. 274 (1985)(invalidating ban on nonresident practice of
law). See infra, Point IV.
\6\ Irresponsible behavior by a majority of the states acting
individually is unlikely, first, because self-interest will rarely
persuade a majority of the states to act in a protectionist manner when
the option of national regulation is present; and, second, because the
equality provisions of the Constitution place limits on state
protectionism. See infra, Point IV.
---------------------------------------------------------------------------
Supporters of the regional milk price-fixing compact have eschewed
the two usual avenues of Congressional action. They are dissatisfied
with existing Congressional legislation regulating national milk prices
because federal officials, acting in the national as well as the
regional interest, have refused to provide them enough protectionism
for high-cost Northeast regional milk producers. Moreover, they are
unwilling to seek a delegation of uniform authority to all the states
to regulate interstate commerce in milk, recognizing that such a
Balkanization of the milk industry will never be approved in the
national interest, and would provoke bitter political struggles in the
various states.
Instead, for the first time in the nation's history, they seek to
erode the constitutionally mandated national free market by asking
Congress to grant authority to several states to form an interstate
compact pursuant to Article I, section 10 of the Constitution designed
to carve out an island of regional protectionism from the national free
market for milk.\7\ Multi-state compacts are, however, wholly unsuited
to act as vehicles for Congressional regulatory judgments under the
Commerce Clause. Most importantly, interstate compacts lack the
internal political safeguards that render direct Congressional
regulation, or uniform Congressional delegation to the states,
appropriate vehicles for the exercise of Congressional power under
Article I, section 8. For one thing, requests for Congressional
approval of interstate compacts emanate from multiple states acting as
a pre-established unit, inherently increasing the political power of a
protectionist faction. Taken to an extreme, if twenty-six states
formally united as a bloc to establish an interstate compact designed
to engage in economic warfare against a disfavored state or region, the
coordinated political power of the twenty six states acting as a formal
bloc would overwhelm any political checks that would, ordinarily, make
it difficult to persuade the national majority to acquiesce in local
protectionism.
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\7\ When coordinated state action does not infringe on federal
sovereignty, states may enact cooperative legislation without
Congressional consent. See United States Steel Corp. v. Multistate Tax
Commission 434 U.S. 452 (1978) (reciprocal legislation designed to
enhance tax administration not an interstate compact); Bode v. Barrett,
344 U.S. 583 (1953) (reciprocal exemptions on non-resident motorists
from highway use tax not an interstate compact). Since the hard core
protectionism contemplated by the Northeast Regional Dairy Compact
strikes at the core of the constitutionally protected national free
market, it unquestionably requires formal Congressional approval. As
with other forms of Congressional action, the authorization of a
protectionist interstate compact must be measured against the limits on
Congressional action imposed by the equality and privileges and
immunities provisions of the Constitution. See Point IV, supra
---------------------------------------------------------------------------
Of course, the twenty-six states could pursue their protectionist
aims through ordinary legislation. But the absence of a pre-established
formal bloc created by the compact would leave the coalition vulnerable
to the ordinary process of political erosion, as members joined or left
in accordance with individual judgments of self-interest. The existence
of a formal compact places barriers to exit that simply do not exist in
an ordinary political coalition. Moreover, the requirement that
ordinary legislation grant uniform regulatory power to all the states
permitting effective retaliation if necessary would pose a significant
check on irresponsible action by any ordinary political coalition of
states. Interstate compacts are, however, non uniform by definition.
Member states would operate under one legal regime freed from the
constraints of the negative Commerce Clause, while non-member states
would remain subject to the constraints of the negative Commerce
Clause. Thus, unlike a delegation of uniform regulatory authority to
the individual states, an interstate compact vests power in some states
to ignore the constraints of the negative Commerce Clause, while
continuing to impose those constraints on the remainder of the states.
In that sense, an interstate compact designed to permit hard core
protectionism is the formal antithesis of the Equal Protection of the
laws and the Privileges and Immunities clause.
The obvious potential for friction among the states, abuse and
unequal treatment inherent in using interstate compacts to create
islands of protectionism explains why the Founders did not intend
interstate compacts to operate as techniques for regulating interstate
commerce. Rather, the Founders envisioned interstate compacts as
mechanisms to permit state governments to form hybrid political
entities needed to perform traditional police power functions in
settings where a single state government would lack the capacity to act
effectively. Cuyler v. Adams, 449 U.S. 433 (1981). Not surprisingly,
the early use of the interstate compact was almost entirely confined to
the resolution of boundary disputes between the states. The boundaries
fixed by the Colonial Charters were notoriously ambiguous, leading to
sustained conflict. Indeed, at the time of the Revolution, no fewer
that eleven formal boundary disputes existed between and among the
thirteen colonies. Once the Constitution came into being, two obvious
mechanisms for resolving boundary disputes were possible: (1) time
consuming and bitter litigation in the Supreme Court; and (2)
negotiated settlements. The litigation route usually resulted in all-
or-nothing decisions that often embittered relations between the
contesting parties. But negotiated settlements were often impossible
because they required simultaneous and binding political acceptance in
both contending states. The interstate compact was the technique
designed by the Founders to permit the contending states to create a
hybrid political entity empowered to take the necessary steps to
resolve a boundary dispute that would bind each state without the
necessity of assembling political support in each state for a
particular settlement.
As the 19th century progressed, states used the interstate compact
to create hybrid political entities designed to exercise coordinated
police power over natural resources that could not be effectively
regulated by a single state, either because geography rendered the
resource inherently regional in nature (as in compacts governing
interstate rivers and harbors), or because the effective regulation of
a natural resource risked being bogged down in parochial state
political efforts to extract maximum local advantage from a shared
resource. As with the boundary compact, the police power compacts were
designed to insulate the judgments of the compact from day-to-day
political control by the state electorates.
Prior to the Northeast Regional Dairy Compact, my research has not
uncovered a single instance of Congress's use of its power under
Article I, section 10 to license blocs of states to engage in economic
protectionism. The first interstate compact was approved by Congress in
1789 to enable Virginia and Kentucky to resolve a boundary dispute.\8\
In the ensuing 212 years, Congress has approved approximately 300
additional interstate compacts. It is no coincidence that, except for
the Northeast Interstate Dairy Compact, none of these interstate
compacts have sought to enable a combination of states to engage in
precisely the protectionist behavior that led the Founders to abandon
the Articles of Confederation and to embrace a constitutionally
mandated national free market in goods and services.
---------------------------------------------------------------------------
\8\ Peaceful resolution of the numerous boundary disputes that
existed between the original states has been deemed the principal
reason for the Compact Clause. See Felix Frankfurter & James M. Landis,
The Compact Clause of the Constitution--A Study in Interstate
Adjustment, 34 Yale L. J. 685 (1925). Neither the Farr and notes on the
debates at the Constitutional Convention, nor the Federalist Papers
discuss the Compact Clause.
---------------------------------------------------------------------------
In addition to the lack of internal political checks discussed
above, an obvious reason explains why interstate compacts have never
been used to impose hard core protectionist regimes on the national
free market. Unlike the boundary and police power situations where
interstate compacts are routinely used to insulate certain types of
decision making from parochial state political interference, the
decision whether to impose hard core protectionism should never be
shielded from open political discussion and ultimate political control
by the people who must, ultimately, bear its economic cost. The
decision to fix milk prices at an artificially high level is, in
effect, a regressive tax levied on the poorest populations of the
compact clause states that shifts money from the pockets of low income
consumers to the dairy industry. Perhaps such a tax is justified. But
the decision about whether such a wealth transfer is or is not a good
idea should be made by the voters of each state (or by the voters of
all the states in the case of national legislation), not by sheltered
bureaucrats operating under the cover of a politically insulated
interstate compact. Indeed, the reason why proponents of the milk price
fixing scheme are seeking to proceed by compact, rather than by
national legislation, or Congressional delegation of regulatory
authority to the states, is that both of those techniques permit the
affected members of the electorate to pass political judgment on the
wisdom and fairness of the scheme. An interstate compact, on the other
hand, operates in the political shadows. No official in any state is
politically accountable for its decisions. In effect, it is a decision
to take milk price-fixing out of day-to-day politics.
Taking interstate boundary disputes out of day-to-day politics is
an excellent idea. Taking the day-to-day regulation of shared natural
resources out of politics is an excellent idea. That is why interstate
compacts have worked so well in those areas. But insulating decisions
about whether the price of milk should be set at an artificially high
level to protect high-cost dairy farmers against low-cost competition
from intense democratic scrutiny is a terrible idea. It is bad enough
that we must pay taxes. It is particularly sensitive when those taxes
shift wealth from one segment of the population to another. It would
compound the problem though, to develop a technique that allows
powerful local interests to impose massive wealth transfer taxes
without having to face the democratic judgment of the affected voters.
But that is exactly what will happen if Congress uses the Compact
Clause to delegate hard core protectionist power to an interstate
compact to fix the price of milk.
IV. CONGRESS'S LIMITED POWER TO ALTER THE CONSTITUTIONALLY MANDATED
EXISTENCE OF A NATIONAL FREE MARKET IN GOODS AND SERVICES DOES NOT
INCLUDE THE POWER TO ENACT OR TO AUTHORIZE DISCRIMINATORY PRICE-FIXING
SCHEMES DESIGNED TO PROTECT CERTAIN HIGH-COST LOCAL PRODUCERS AGAINST
COMPETITION FROM THE REMAINDER OF THE NATION
Supporters of the scheme to fix regional milk prices acknowledge
that,standing alone, the price-fixing scheme would violate the
Constitution as a blatant interference with the national free market
mandated by the negative Commerce Clause. They argue, however, that
Congress has the power to cure the constitutional violation by
authorizing blocks of states to engage on the discriminatory practice,
either directly, or through the device of regional price fixing
compacts. But Congress's power to lift the bar of the so-called
``negative'' Commerce Clause is not unlimited. Congress, legislating
pursuant to the Commerce Clause, lacks the power to authorize blatant
interferences with a national free market motivated by an obvious
desire to protect local producers from national competition.\9\ More
importantly, whatever its power to lift the ban of the negative
Commerce Clause, Congress may neither enact, nor authorize the states
to enact, discriminatory restrictions that violate the Equal Protection
Clause of the 14th Amendment, the Privileges or Immunities
Clause of the 14th Amendment, and/or the Privileges and
Immunities Clause of Article IV, section 2 by vesting certain favored
states with authority to ignore the negative Commerce Clause, while
requiring the remaining states to abide by its strictures.
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\9\ Since commitment to a national free market is at the core of
the Commerce Clause, I believe that Congress would lack power under the
Commerce Clause to establish a program of state customs duties aimed at
the produce of sister-states.
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a. congress's limited power to lift the bar of the negative commerce
clause
Chief Justice Marshall believed that the grant of power to Congress
under Article I, section 8 to regulate interstate commerce was
exclusive. According to Chief Justice Marshall, while the states
retained the ability to act under the police power, states were denied
the power to regulate interstate commerce. Compare Gibbons v. Ogden, 9
Wheat. (22 U.S.) 1 (1824) (suggesting that Congress's power over
interstate commerce is exclusive), with Wilson v. Black Bird Creek
Marsh Co., 2 Pet. (27 U.S.) 245 (1829) (recognizing state police power
to regulate, even when the regulation affects interstate commerce).
Throughout the 19th century, the Supreme Court struggled to
chart the uncertain line between legitimate exercise of state police
power, and illegitimate efforts to regulate interstate commerce. See
Cooley v. Board of Wardens, 12 How. (53 U.S.) 299 (1851); Wabash, St.
Louis & P. Ry. Co. v. Illinois, 118 U.S. 557 (1886); Smith v. Alabama,
124 U.S. 465 (1888). It was from these 19th century cases
that the flat ban on state efforts to engage in interstate milk price-
fixing announced in Baldwin v. G. A. F. Seelig, Inc. emerged. See also
Dean Milk Co. v. Madison, 340 U.S. 349 (1951) (invalidating milk
regulation); A & P Tea Co. v. Cottrell, 424 U.S. 366 (1976)
(invalidating milk regulation).
Moreover, for much of the 19th century, it was assumed
that Congress could not validate an otherwise illegitimate state effort
to regulate interstate commerce. See Cooley v. Board of Wardens, 12
How. (53 U.S.) 299 (1851). In Leisy v. Hardin, 135 U.S. 100 (1890),
however, the Supreme Court was confronted with efforts by ``dry''
states to enforce prohibitions on the importation of beverages
containing alcohol. Confronted by a clear state police power issue
(regulation of alcohol), the Court suggested for the first time that
Congress could authorize states to engage in certain forms of local
regulation that might otherwise be in violation of the negative
Commerce Clause. In response, Congress promptly enacted uniform
legislation authorizing each of the states to ban the importation of
beverages containing alcohol, even though they were items of interstate
commerce. The Court upheld the authorization in In re Rahrer, 140 U.S.
545 (1891).
Leisy and Rahrer hold that, under certain limited circumstances,
Congress may reinforce the police power of the states by uniformly
lifting the constitutional check on its exercise imposed by the
negative Commerce Clause. But the core of the state regulation must be
a genuine effort to exercise the police power, not adisguised exercise
in local economic protectionism. There is, of course, an almost
complete overlap between the states' traditional police power to
preserve the health, safety, and morals of the citizenry, and a
decision to regulate alcohol. Thus, the enhanced state regulation
permitted in Leisy v. Hardin and In re Rahrer was an effort to sustain
a flat ban on alcohol rooted in the police power, not an exercise in
economic protectionism designed to protect high-cost local producers.
Indeed, nothing in either case suggests that Congress could approve
blatantly discriminatory legislation designed to protect in-state
producers from interstate competition.\10\ Moreover, the decision to
lift the negative Commerce Clause in connection with the regulation of
alcohol in Leisy v. Hardin and In re Rahrer took the form of
legislation vesting uniform authority in each state.
---------------------------------------------------------------------------
\10\ A similar restriction limits Congress's affirmative power
under the Commerce Clause. When Congressional legislation ostensibly
designed to regulate interstate commerce is more accurately described
as an effort to exercise a forbidden national police power, the Supreme
Court has invalidated the Congressional statute as violative of the
10th Amendment. See United States v. Lope 514 U.S. 549
(1995); Printz v. United States, 117 S.Ct. 2365 (1997).
---------------------------------------------------------------------------
Congress's power to lift the bar of the negative Commerce Clause
was expanded in Prudential Insurance Co. v. Benjamin, 328 U.S. 408
(1946). Two years earlier, in United States v. South-Eastern
Underwriters Assn, 322 U.S. 533 (1944), the Court had reversed a series
of cases holding that insurance was not commerce, thereby disturbing
the historic pattern of ceding insurance regulation to the states.
Congress responded in 1945 by enacting the McCarran Act, which provided
that ``silence on the part of the Congress shall not be construed to
impose any barrier to the regulation or taxation of [insurance] by the
several States.'' In Benjamin, the Court was confronted by a South
Carolina tax on out-of-state insurance companies that exempted South
Carolina companies. In the absence of the McCarran Act, the South
Carolina tax would almost certainly have been invalid as a
discriminatory treatment of interstate commerce. See Welton v.
Missouri, 91 U.S. 275 (1876). In view of the McCarran Act, however, the
Court sustained the discriminatory tax, reasoning that Congress had
affirmatively decided to permit states to regulate insurance companies
free from the constitutional barriers imposed by the negative Commerce
Clause. See also Western & Southern Life Insurance Company v. State
Board of Equalization, 451 U.S. 648 (1981).
Benjamin undoubtedly represents a significant increase in
Congress's power to lift the constitutional barriers to state economic
regulation imposed by the negative commerce clause. But nothing in
Benjamin suggests that Congress can authorize overtly protectionist
legislation that violates the core understanding of the Founders about
the importance of a national free market. In one sense, the McCarran
Act was an attempt to restore a long-time regulatory status quo that
had been disturbed by the Court's decision to expand the definition of
interstate commerce to include insurance. Alternatively, the South
Carolina tax scheme can be viewed a rough effort to tax large out-of-
state insurance companies, while exempting the smaller in-state
companies. In any event, I do not believe that the case should be read
as an open invitation to Congress to dismantle the national free market
structure that was the basis for the Constitution itself. Most
importantly, the Congressional action at stake was the McCarran Act,
which delegated uniform regulatory authority to each state.
I believe that, whatever the ultimate extent of Congress's power to
lift the bar of the negative Commerce Clause, the state regulation at
issue must be rooted in a traditional exercise of the state's police
power, and not a protectionist desire to cut off interstate
competition. Thus, I believe that Congress lacks power under Article I,
section 8 to sanction overtly protectionist local legislation.
b. restrictions on congressional power imposed by the equality
provisions of the constitution
Whatever power Congress may possess under the Commerce Clause to
enact uniform legislation granting each state equal power to regulate a
particular area of interstate commerce, Congress clearly lacks power to
authorize the states to engage in behavior that violates substantive
provisions of the Constitution. Mississippi University for Women v.
Hogan, 458 U.S. 718 (1982). Indeed, the very type of discriminatory tax
that had been upheld under the Commerce Clause in Benjamin was
invalidated by the Supreme Court in Metropolitan Life Insurance Co. v.
Ward, 470 U.S. 869 (1985), as violative of the Equal Protection Clause.
In Ward, a California tax (enacted pursuant to the authorization of the
McCarran Act) imposing a higher tax rate on out-of-state insurance
companies was struck down as a violation of the Equal Protection Clause
of the 14th Amendment. In words that are directly applicable
to the regional milk price-fixing scheme currently before Congress, the
Ward Court noted that ``promotion of domestic business within a State,
by discriminating against foreign corporations that wish to compete by
doing business there, is not a legitimate state purpose.'' \11\ Id. at
880.
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\11\ The issue is somewhat complicated by the Court's action in
Northeast Bancorp, Inc. v. Bd. of Governors, 472 U.S. 159 (1985). In
Northeast Bancorp, Congress had imposed a general ban on interstate
bank acquisitions under the Bank Holding Company Act of 1956, subject
to a state power to waive the federal prohibition. When several New
England states enacted legislation conditionally waiving the federal
ban, but only vis a vis states that granted reciprocal waivers, the
legislation was challenged under the Equal Protection Clause. The Court
upheld the state statutes, reasoning that they were motivated by a
legitimate desire to foster local ownership of banks, and did not
unreasonably discriminate since they were keyed to reciprocity.
---------------------------------------------------------------------------
Congress's power to authorize economic protectionism is also
limited by the Privileges and Immunities Clause of Article I, section 2
of the Constitution.\12\ In Hicklin v. Orbeck, 437 U.S. 518 (1978), the
Court noted that there is a ``mutually reinforcing relationship between
the Privileges and Immunities Clause of Article IV, section 2, and the
Commerce Clause--a relationship that stems [in part from] their shared
vision of federalism''. Thus, local efforts to reserve employment
opportunities for residents at the expense of out-of-state residents
have been deemed violative of the Privileges and Immunities Clause,
even though they may satisfy the negative Commerce Clause. See United
Bldg. & Constr. Trades v. Camden, 465 U.S. 208 (1984) (invalidating
residential quota for public works jobs).
---------------------------------------------------------------------------
\12\ The clause states: ``The Citizens of each State shall be
entitled to all Privileges and Immunities of Citizens in the several
States''.
---------------------------------------------------------------------------
The functional link between the Commerce Clause and the Privileges
and Immunities Clause is illustrated by the line of Supreme Court cases
enforcing a national free market in services as well as goods by
preventing state-imposed employment discrimination against out-of-state
residents. See United Bldg. & Constr. Trades v. Camden, 465 U.S. 208
(1984) (invalidating residential quota for public works jobs); Hicklin
v. Orbeck, 437 U.S. 518 (1978) (invalidating Alaska hire law requiring
employment preferences for Alaska residents in certain jobs); Supreme
Court of New Hampshire v. Piper, 470 U.S. 274 (1985)(invahdating ban on
non-resident practice of law). Similarly, both the Commerce Clause and
the Privileges and Immunities Clause are recognized as the source of a
constitutional right to migrate from one state to another in search of
a better life, see Crandall v. Nevada, 6 Wall. (73 U.S.) 35 (1867)
(invalidating tax for leaving state); Edwards v. California, 314 U.S.
160 (1941) (invalidating restrictions on entering state), a substantive
constitutional right that Congress may not abrogate. Shapiro v.
Thompson, 394 U.S. 618 (1969)(Congress may not authorize state
interference with right to interstate migration); Saenz v. Roe, 526
U.S. 489 (1999) (Congress may not authorize state interference with
right to travel).
Finally, Congress's power to authorize hard core economic
protectionism is limited by the Privileges or Immunities Clause of the
14th Amendment.\13\ In Saenz v. Roe, 526 U.S. 489 (1999),
Congress purported to authorize California to set differential
standards for welfare payments based on duration of residency.
Recognizing that interstate migration is a pre-condition for a free
market in labor, the Supreme Court invalidated the effort to
discriminate against out-of-state persons wishing to migrate to
California under both the Privileges and Immunities Clause of Article
IV, and the Privileges or Immunities Clause of the 14th Amendment.
Surely, if Congress in Saenz could not authorize California to favor
in-state persons at the expense of recent migrants from other states,
Congress cannot authorize a bloc of states to discriminate in favor of
in-state high-cost regional milk producers at the expense of milk
producers residing in other states.
---------------------------------------------------------------------------
\13\ The opening words of the 14th Amendment provide:
All persons born or naturalized in the United States. . .are
citizens of the United States and of the State wherein they reside. No
State shall make or enforce any law which shall abridge the privileges
or immunities of Citizens of the United States. . . .''
---------------------------------------------------------------------------
Thus, whether one views the price-fixing scheme from the
perspective of the Commerce Clause, the Equal Protection Clause, or the
Privileges and Immunities Clauses, serious doubts exist concerning
Congress's power to authorize a favored bloc of states to engage in the
very hard core protectionist activities that the Founders viewed as
utterly inconsistent with the nations' political unity and economic
well-being, while leaving the rest of the Nation bound by the
strictures of the negative Commerce Clause.
conclusion
The decision to tamper with the national common market envisioned
by the Framers is among the most momentous that Congress can face. The
Founders understood that a common economic market is critical to a
common political identity. The pending scheme to fix regional milk
prices in an effort to shield high-cost regional producers from low-
cost national competition strikes at the heart of the Founders' vision.
Indeed, given the powerful guaranties of equality contained in the
Commerce Clause, the Equal Protection Clause, and the Privileges and
Immunities Clauses, I believe that Congress lacks power to usher in a
regime of hard core economic protectionism that is as inherently
discriminatory as the price fixing scheme currently before Congress.
Finally, whatever Congress's substantive power, I believe that it is a
terrible mistake (and quite possibly unconstitutional) for Congress to
use consent to an interstate compact as a vehicle to authorize hard
core protectionism. Such a device lacks internal political checks
against irresponsible behavior, is historically unprecedented, and
shields a crucial political judgment from democratic review.
Chairman Leahy. Thank you, Professor.
We will take a 3-minute break and let everybody stretch and
then we will come back and start questions of the panel.
[The committee stood in recess from 11:12 a.m. to 11:22
a.m.]
Chairman Leahy. Other Senators will be coming in now during
this hearing. As the witnesses know, we have probably a dozen
hearings going on at the same time and I do appreciate the
consideration of the panels and the time they have taken.
Mr. Smith, if I might start with you, I know that in
addition to your job as Executive Director of the Compact
Commission that you are also an attorney. Now, you have heard--
I am just trying to help the people who are getting these cell
phone calls by being willing to stop immediately so that they
can take their important call out in the hall.
You are also an attorney. Now, Professor Neuborne, whom I
also respect, although I disagree with him on this, says the
Compact represents rank protectionism which is condemned by the
constitutional text.
Would you like to respond to those points?
Mr. Smith. The Compact's lineage traces directly back to
the Article of Confederation and the concern with economic
protectionism. When we designed the Compact, we had that basic
principle in mind that States cannot be authorized to use
regulatory authority in a protectionist or discriminatory
manner, meaning to the benefit of the local citizenry and the
detriment of citizens outside the State. So it is built right
into the basic design of the Compact and it is built right into
the basic design of the Federal order system, which is you
regulate the market uniformly with regard to all market
participants.
As I indicated in my earlier statement, the New England
marketplace includes New York farmers. The milk sales from
those farms are regulated on the same footing as the milk sales
from New England farms. The regulation attaches to the purchase
by the processor and the funding generated by that regulation
traces right back to the farm.
So in marked contrast to the Whisky Rebellion and the other
concerns that the Articles of Confederation transition to the
Constitution addressed, the Compact is not a tariff because the
benefits track back to the producer of the product.
That is what the court concluded as well, Senator. I would
just followup with that. As I said before, the argument that
was presented was argued by the plaintiffs in the lawsuit that
reached the First Circuit Court of Appeals and the court found
no merit in the claim for that reason, because the New York
farmers are receiving the money.
Chairman Leahy. We have heard some say that Government
price regulation is somehow un-American or against our market
principles. Of course, long before I was born, the milk market
was regulated and still is today, so it is not a new idea. It
was done because of the perishable nature of milk which could
give processors some unfair bargaining ability with local
farmers. We are familiar with the old expression ``smell it or
sell it.''
Now, if we deregulated this entirely, who has the upper
hand at that point, the processors or the individual farmers?
Mr. Smith. That is the essential policy question at issue
with the Federal order system, and a lot of the debate, I
think, over the Compact is really that the Compact is being
used as a stocking horse for a debate over the Federal order
system, whether the milk market order system ought to be
deregulated completely and the market made national for milk.
Congress has consistently made the policy decision that
milk should be supplied locally for local consumption, and the
Compact reinforces that policy decision by the Congress. In
that sense, we are again dealing with regulatory authority of
the marketplace. It is not a cartel design. In a cartel design,
the market participants gain the benefits of the price-fixing,
true price-fixing with the cartel, as opposed to the regulation
of the price, whereas with the Compact the regulation is set by
an administrative action.
In response to Professor Neuborne's concern about
democratic participation, there is democratic participation at
two levels: one, at the legislative level where the compacts
are authorized, and, two, during the administrative process.
Anybody who has been to a Compact Commission meeting knows that
it is local government at work in all its fine and detrimental
parts, which includes absolutely open all hours of the day,
like the Congress, and we end up staying up all night while
people ventilate their concerns. So it is truly a local-level,
democratic process.
Chairman Leahy. Sort of like a town meeting.
Mr. Smith. Very similar to a town meeting, Senator, yes.
Chairman Leahy. Mr. Burrington, in your written testimony
you raised the issue of Suiza Foods, and if I can quote from
the written testimony, you mention that ``There is strong
evidence that Suiza has used its market power to gouge
consumers. Suiza doesn't need New England dairy farms, but the
regional processors who represent its remaining competition
do.''
Could you amplify on these points and explain what might
happen if New England farmers would go out of business?
Mr. Burrington. Suiza, as indeed a multinational
corporation, is well positioned to ship milk anywhere and
everywhere. The remaining milk processors in New England don't
have that ability, and it is clear from conversations with
their people, as well as from what you would conclude if you
just reasoned your way through it, that if our milk supplies in
the Northeast dry up, Suiza's only remaining competition would
follow in very short order.
We are in a very unfortunate situation right now in New
England. I think you will hear more from Commissioner Healy
later on about the experience with our school meals program in
Massachusetts. We have seen the elimination of competition in
the bids for that, and the recent study from the University of
Connecticut shows that consumers in the last couple of years
have been paying a very large amount to middlemen and both the
farmers and the consumers have fared badly because of the
consolidation in milk processing.
Chairman Leahy. Thank you. My time is up, so I will save my
questions either for the record or later for Mr. Norquist and
Professor Neuborne.
Senator Kohl?
Senator Kohl. Thank you.
Mr. Smith, several studies, including one ordered by the
Northeast Compact Commission itself, have confirmed that the
additional costs of the Compact have been passed on to
consumers. These studies put the retail impact of the Northeast
Compact at anywhere from 4.5 to 14 cents a gallon. These are
studies in which your own Compact Commission participated. This
increase means that consumers have paid anywhere from between
$55 to $170 million more for their milk since 1997.
Also, in the early days of the Compact supporters argued
that New England needed the Compact to keep dairy farmers in
business. Well, the American Farm Bureau numbers show that New
England continues to lose dairy farmers at the pre-Compact
rate. And if it weren't for those emergency payments last year,
I am sure that even more producers would have gone out of
business. With New England continuing to lose farmers, all I
see left is a policy that hurts consumers.
So, Mr. Smith, I want to ask you, if the Compact is not
achieving its goal of keeping prices down for consumers, if it
is not achieving that goal and if prices are up and fresh milk
is available in non-Compact States, then how can your Compact
be justified?
Again, farmers continue to go out of business in the New
England States. Prices of the Northeast Dairy Compact have been
passed on to consumers. So what is the justification for the
Compact? Is it for some social reason?
Mr. Smith. No.
Senator Kohl. Cultural reason? Prices are up to consumers.
Mr. Smith. The reason I paused is that we have----
Senator Kohl. Farmers are going out of business. What is
the point of the Compact?
Mr. Smith. The point of the Compact is that it is
functioning very effectively in the complete reverse direction
to your description of it. It is, in fact, keeping farmers in
business and it is, in fact, having, I hope will show over
time, a positive impact on retail prices rather than a negative
impact.
I would point you back to the graph that I put on your
table; hopefully, it is there in front of you. You can see from
that graph that for the Compact period, essentially, except for
about 9 months, over a 4-year period the procurement cost was
flat at $1.46 a gallon.
For the first period of the Compact program, there was a
spike-up initially, but then the price drifted back down,
arguably in reaction to the level of procurement cost. Then
Federal order prices went into a dramatic fluctuating period
which kind of threw the dynamic into uncertainty. But at least
for a period of time, one of the theories of the price
regulation, which was that if you can stabilize the procurement
cost for a supermarket they would have an incentive to thin out
their margin and reduce the price, as opposed to responding
protectively for their margins by raising price over time to
fluctuating prices--so I will grant you the record is uncertain
with regard to the impact on retail prices, but at least for
one period of time during the Compact price regulation's
operation prices came down.
And I would suggest to you, as I did before, that the
retail market needs some time to sort this out and that the
Commission has the ability to intervene in the market in the
public interest.
With regard to farm loss numbers, I would respectfully
suggest to you that the numbers are not in the pattern that you
describe. Commissioner Healy will be speaking with regard to
the actual numbers of farm losses in New England before and
after, and I would suggest you direct your question to him with
regard to actual numbers.
Senator Kohl. I have to move on, but I just want to make a
point, and maybe you can respond to this. So then you would
also suggest that if similar kinds of conditions exist in other
industries throughout the country, then they too might consider
the efficacy of price-fixing cartels. Is that theoretically
true?
Mr. Smith. No.
Senator Kohl. Theoretically, is that true?
Mr. Smith. I think that milk is a unique product.
Senator Kohl. Why is it different from any other perishable
commodity?
Mr. Smith. Because of its bulkiness as well as its
perishability, so that the cost of transporting milk is unique
in the sense that it is both bulky and perishable.
Senator Kohl. But then if there is this cost of
transporting milk--and I talked to Mr. Burrington about the
same point--then the consumers aren't going to buy it. If it
costs a ton to transport milk from other long-distance States--
the facts don't indicate that that is a problem, but if it is
true, then people will continue to buy locally produced fresh
milk, among other reasons because it can be brought cheaper to
the market than milk trucked in from faraway States.
So I argue to you that this point that you are trying to
make that milk is different from everything else in the world--
it is unique and there is nothing like it--is specious. It is
almost breathtaking in the sense that you are making that
argument and saying there is only one commodity in the world
that argues for a price-fixing operation, and that is milk. I
am blown away by that argument.
Mr. Burrington, would you like to comment?
Mr. Smith. If I might, Senator, I would like to leave the
door open at least for States to consider the need to restore
their regulatory authority over marketplace for other
commodities. So I don't want to close the door on other
commodities.
Milk is a product that has been regulated at the regional
level as a matter of Federal policy. And I don't mean to take
time away from Mr. Burrington, but I would suggest to you that
the issue you have is with the Federal order system and that is
the policy question that Congress has confronted and resolved
in favor of maintaining local supplies of milk.
I would defer to Mr. Burrington.
Senator Kohl. Any thoughts, Mr. Burrington?
Mr. Burrington. I don't have a lot to add to what has been
said, but a family can go through the same amount of milk in
about a day as it would an amount of grapes in 3 weeks. I mean,
it has historically been treated as a distinctive commodity.
I have not puzzled my way through exactly the bounds of
what you might take a similar approach to, but we haven't seen
the basis for taking the compact approach to anything other
than milk so far. It hasn't been, to my knowledge, suggested by
anyone else. But, again, the facts as the transportation cost
of milk, I think, are fairly undisputed.
Something else that I think is hard to dispute is that in
many parts of the country where land values are very high, it
is hard to reverse the process of farm loss. So if our farms go
in New England, we aren't going to get them back. So the
process could unfold, and I believe would unfold in a way that
is different from what you might theoretically imagine the
market might produce.
So I think that the market is not going to drive land back
into dairy farm production. If the farms go out of business,
only for our consumers to discover that maybe the Midwestern
milk isn't such a great deal coming from 500 miles away, I
don't see us pulling down $600,000 houses off of land that was
once dairy farms.
Senator Kohl. As you know, we have farmland protection
programs that are funded at both the State and local level. So
there are other ways to deal with the problem that you raise.
I see my time is up, unless Mr. Norquist wants to make a
comment.
Chairman Leahy. The chairman tried to stick to within his 5
minutes, and I would ask others to do that and certainly give
plenty of time for another round, if you would like.
I understand Senator Feingold, with his usual courtesy, is
willing to let Senator Schumer make an opening statement.
STATEMENT OF HON. CHARLES E. SCHUMER, A U.S. SENATOR FROM THE
STATE OF NEW YORK
Senator Schumer. Thank you, Mr. Chairman. I want to thank
you and Senator Feingold for his courtesy. I am in the middle
of a hearing that I am chairing in the Banking Committee, and
so I will be brief and not ask questions. But I would like to
make a statement, since this is very important to me.
First, I want to thank Chairman Leahy for his leadership.
He has been leading on this issue and helping Northeast dairy
farmers long before I even got to the House, let alone the
Senate. I just want to tell you, Mr. Chairman, that the farmers
in my State, the dairy farmers and others, are extremely
grateful for the work that you have done.
I would also ask unanimous consent that a statement from
the Governor of my State supporting the extension of the
Compact be put into the record.
Chairman Leahy. Without objection.
Senator Schumer. Mr. Chairman, people often forget that
there are farmers in the northeastern part of the country and
that these hard-working men and women produce much of the food
we rely on to stay healthy.
In my State of New York, there are 2,000 vegetable farmers,
700 apple orchardists, and 7,200 dairy farmers, a number
declining. But you meet these people and they are hard-working,
dedicated people. Last year, we produce 11.9 billion pounds of
milk, making us the third largest milk-producing State, behind
California and Wisconsin.
To argue that New York State in agriculture is any more
compelling than other areas of the country is impossible, but
for years New York and many other States in the Northeast have
been denied the same attention from the Federal Government that
other parts of the Nation have received.
While we have started to change that situation under
Senator Leahy's leadership over the last few years, there is
still much to do to make up for the Federal Government's long
neglect of northeastern agriculture. A few provisions in the
crop insurance bill isn't enough, and so today this committee
has the opportunity to take a giant step forward, reversing the
years of Federal neglect, by launching the effort in the Senate
to pass the Northeast Dairy Compact.
I know we are going to hear a variety of views about the
Dairy Compact. Let me just explain why extending and expanding
it to include New York and other States is so important to the
Northeast and the country.
Whenever I visit or meet or hear from the dairy producers
in New York, I hear the same thing. They tell me the answer is
simple: extend the Dairy Compact and the dairy industry will
survive in New York. Don't extend the dairy Compact and we will
have no dairy industry in New York.
If New York had been a member of the Compact last year when
dairy prices were at rock bottom, an individual dairy farmer
would have received an average payment of $18,200, enough to
stay afloat, and that would be at no cost to the Government.
I have talked to thousands of my constituents and many of
my congressional colleagues in New York City. They say, for the
good of the State and the good of the economy of our dairy
farmers, they are willing to pay a little more when milk prices
are declining--they are not going to pay more when they are
rising--to help those farmers stay in business for the good of
our State and our country.
The price stability and predictability that the Compact
offers are crucial to the long-term survival of our industry.
Evening out the monthly highs and lows and the very significant
swings in Federal price orders allows dairy producers to plan
ahead.
Right now, our farmers--and I know Mr. Norquist likes this,
but the farmers are slaves to the whims of the market. They
don't know what their resources are going to be from year to
year. The only way to deal with that would be to make huge
farms that can cushion this. We are not going to have huge
farms in New York State.
Successful businesses are those that can plan ahead for
good and bad times. From greater certainty flows easier access
to credit, a more certain bargaining position, and probably
most important of all, a peace of mind with which the future
can be imagined. Right now, there is so much price instability
and uncertainty in dairy that many in the dairy community don't
see a future.
For many farms in New York, the Compact is the last chance
because it prevents waves of consolidation and collapse from
completely engulfing them. The attrition rate for family
dairies within the Compact, as I think has been stated ably by
Mr. Smith and Mr. Burrington, is much less than those who are
outside of the Compact.
Let me, in conclusion, Mr. Chairman, key in on the most
revolutionary and important feature of the Dairy Compact.
Unlike other dairy pricing out there, the Compact gives
producers and consumers a direct say in setting the price that
producers receive. By having representatives on the Compact
Commission, producers and consumers help determine the price of
milk, something that has never happened before in the dairy
world.
To me, that is democracy at its best, and I hope and pray
that we will not only renew the New England Dairy Compact, but
add New York and other northeastern States into the Compact.
The survival of our dairy industry depends upon it.
With that, I want to thank the chairman and thank Senator
Feingold for their courtesy.
Chairman Leahy. Thank you very much.
Senator Feingold, who takes a somewhat different position
than the Senator from New York and the Senator from Vermont,
unless he has suddenly had an epiphany here, it is over to you.
Senator Feingold. Thank you. Mr. Chairman, you have heard
of a New York minute. That was a New York 2 minutes, but I am
pleased to hear from the Senator from New York.
Professor Neuborne, I want to thank you for coming here
today to testify. You are very effective. I also want to thank
you for all your efforts and input in the Congress in the past,
and especially your help on campaign finance reform. I know if
it is that you just pick good issues or you are very good. I
think it is both, but it was wonderful hearing from you.
Of course, farmers in my home State of Wisconsin are
penalized by the Compact Commission's ability to act as a
price-fixing entity that walls off the market in a specific
region and then hurts producers outside the region.
In Federalist No. 42, Madison warned that if authorities
were allowed to regulate trade between the States, some sort of
import levy would be introduced by future contrivances. I would
argue that the dairy compacts are exactly the sort of
contrivance feared by Madison. Dairy compacts are clearly a
restriction of commerce, in that they impose what I believe
amounts to a tariff between the States. The Founding Fathers
never intended the States to impose levies on imports, such as
those imposed by one nation on another's goods.
So what do you think James Madison would say if he knew
that the Compact Clause was being used to block a shipment of
milk between States?
Mr. Neuborne. Well, originalism isn't my strong suit, but I
think that Madison would be very surprised and very troubled.
There is one historical fact that speaks the loudest about
this. The Compact Clause has been in effect for 212 years.
Congress has authorized approximately 300 compacts during that
period. The Northeast Regional Milk Compact is the only compact
that has ever been established that allows for regional price-
fixing. Every other compact that has been established for the
last 212 years has dealt with essentially three problems.
In fact, the Compact Clause arose as a device to deal with
boundary disputes. At the close of the Articles of
Confederation, there were 11 separate boundary disputes that
were complicating the relationship between the 13 original
States. There was no way to resolve those disputes short of
litigation in the Supreme Court or absolute internecine warfare
that would have torn the place apart. The interstate compact
was a brilliant solution for the resolution of those boundary
disputes.
In the 19th century, we expanded the interstate compact
idea as a way of managing shared natural resources--harbors,
rivers, contiguous forests--to be able to assure that there was
fire prevention. Those are excellent ways of permitting State
cooperation and creating ad hoc political entities to deal with
issues that no State could deal with alone.
But price-fixing is something that we have never thought
the interstate compact was designed for, and I believe that is
really quite inconsistent with the ethos of the Constitution
itself and, for two reasons, I think, unconstitutional as well,
although no one can sit before you and give you an absolute
answer on that. I mean, anyone who tells you they know whether
this is constitutional or not is either a fool or a charlatan.
It is so difficult to guess.
But my personal belief is that this raises very serious
constitutional questions and might well be unconstitutional,
for two reasons. One, I don't think Congress has the power to
lift the negative Commerce Clause in order to establish price-
fixing. They have always lifted the negative Commerce Clause in
the past to deal with police power problems. They have lifted
the negative Commerce Clause to allow the States to deal with
importation of alcohol. They have lifted the negative Commerce
Clause to restore the States' ability to regulate the insurance
industry. But they have never, ever lifted the negative
Commerce Clause to create a regional price-fixing scheme.
Suppose the statute said the negative Commerce Clause shall
be lifted for the following States to permit them to regulate
the price of milk. I think that would be flatly
unconstitutional, and wrapping it up as a Compact Clause
instead of a direct legislative act doesn't add one iota to
Congress' power.
I know that Mr. Smith said that this issue had been raised
in earlier litigation. I assure you that it has not. I have
read those cases. There are two cases dealing with the legality
of compacts. Neither of those cases dealt with the very
fundamental question of whether the equality clauses of the
Constitution forbid Congress from using the Compact Clause as a
way of permitting one or more States to wage economic warfare
on other competitors.
Senator Feingold. Thank you. I am very pleased to have that
on the record. I think it is going to be helpful.
I would like to turn to Mr. Norquist. Thank you for being
here. You discussed how the Northeast Dairy Compact acts as a
pricing mechanism and hurts the ability of farmers to market
their milk freely. It is important to note that the Northeast
Interstate Dairy Compact Commission is just one of the ways
that Midwestern dairy farmers are disadvantaged under the
current milk marketing structure, where dairy farmers in the
Northeast already receive higher minimum prices for their milk
under the antiquated milk pricing system.
Do you, sir, see any justification for saying to dairy
farmers in Wisconsin that they should not be able to market
their milk freely across the United States?
Mr. Norquist. No.
Senator Feingold. Mr. Chairman, thank you.
Chairman Leahy. Thank you. If there are other questions, we
will submit them for the record. I think each of us has had a
chance to ask questions of this panel.
Mr. Smith, Mr. Norquist, Mr. Burrington and Mr. Neuborne,
thank you very much for being here.
Mr. Neuborne. Thank you, Senator.
Mr. Burrington. Thank you.
Chairman Leahy. On our next panel, we will have Jonathan
Healy, who is the Commissioner of Agriculture of the
Commonwealth of Massachusetts; Harold Brubaker, who is a State
Representative of the State of North Carolina; Lois Pines,
former Massachusetts State Senator; Dr. James Beatty, an
economist from Louisiana State University; and Richard Gorder
from the Wisconsin Farm Bureau.
Commissioner Healy, it is always good to see you, and I
want to also thank you for the amount of time you have spent in
coming up to the State of Vermont and the amount of time you
have spent with Vermonters.
We will begin with you, sir.
STATEMENT OF HON. JONATHAN HEALY, COMMISSIONER OF AGRICULTURE,
COMMONWEALTH OF MASSACHUSETTS, BOSTON, MASSACHUSETTS
Mr. Healy. Thank you very much, Mr. Chairman. I am pleased
to be here. I have been the Commissioner of Agriculture in
Massachusetts for 8 years.
It is very interesting to me in this ongoing debate over
the Dairy Compact how the landscape changes a bit. I am here to
tell you that the Compact, in spite of intense, intense
lobbying on Beacon Hill, enjoys the strong support of our
Governor and the great majority of the State legislature.
The first kind of argument that came up about the Compact
was that it gouged consumers and really was a bad deal for
them. Our studies in Massachusetts show that the top price the
Compact could cost is 12 cents a gallon, and what has really
happened is about 6 cents has been passed on to consumers and
about 6 cents has been assimilated. So it has cost 6 cents a
gallon to consumers in our State.
Ironically, however, since the inception of the Compact, we
have had anywhere between a 30 to 45 cents a gallon increase in
those retail costs. So some of us find it very ironic that the
processors and the retailers would have you think that this
paltry 6 cents a gallon for farmers represents a cartel.
The irony from my perspective is that the opponents of the
Compact have made much more profit in their margins than the
dairy farmers they decry. Our consumers have seen through this
smokescreen in terms of this myth. The Massachusetts Public
Interest Research Group strongly supports it, represents
hundreds of thousands of consumers in Massachusetts. Groups
from the Massachusetts Audobon Society, Gun Owner Action
League, the WIC program, as you have heard from, are strong
supporters of the Compact.
It has helped, on balance, the consumers in the State
because the opponents don't tell you where your milk comes
from. We are already getting our milk, a lot of it, from New
York State, and under the Compact, if we lose it, we will have
to go farther and farther to receive our milk at much greater
transportation cost per gallon to our consumers than what we
pay under the Compact.
The second myth I would like to talk about refers to
questions about farm loss. I am a little bit interested that
the American Farm Bureau, based probably in D.C., has some
figures that have been bandied about here today. But this is
from the New England Agricultural Statistics Service, which is
funded by the Federal Government, and I would urge people on
this august committee to talk with people who get New England
agricultural statistics, and talk to those of us who are in the
individual departments of agriculture in New England.
The farm loss in the Compact region, pre-Compact, was 572,
versus 408 after the Compact. These are admittedly inexact
numbers, but using farm loss as an indication of the efficacy
of the Compact is really apples and oranges. We have so many
things happening in our businesses.
For instance, in Massachusetts we have lost 84 farms. That
is what the statistics will say, but let me tell you really
what has happened during that time period. Ten farms have
consolidated, so they look like a loss. They have consolidated.
Four have moved out of State. We have had 13 new farms not
reflected in these statistics, but that is about twice a higher
percentage than before the Compact.
Even more importantly, we have had 40 farms that have
transitioned from dairy into other forms of agriculture. So a
figure that looks like 84 is really 24 in terms of the number
of farms we have lost since the inception of the Dairy Compact.
As you know, any of you who run businesses, there are a lot of
factors that go into effect in terms of why people stay or get
out of business.
In Connecticut, from Commissioner Ferris, prior to the
Compact, 64 farms lost; after the Compact, 47. In New
Hampshire, from Steve Taylor, the number of farms declined from
187 to 176. Commissioner Taylor says, ``I would expect by now
we would be down to 130 or even fewer without the Compact.''
In Rhode Island, 6.5 farms were lost per year, on average,
prior to the Compact. Ken Ayer says the rates declines to 2.3
farms since the inception of the Compact. Commissioner Bob
Speers in Maine says a loss of 16 percent of the dairy farms
before the Compact, 9 percent after the Compact.
It seems to me that there is a clear indication that the
farm loss has not been as extensive as has been quoted here
today, and we would be happy to provide more numbers for folks.
The last point I would like to make is what Senator Leahy
has alluded to in terms of the monopolies and the cost to
consumers. I would respectfully submit that the 6 cents a
gallon that farmers are receiving in Massachusetts and New
England under the Dairy Compact pales in comparison to the real
issue. The real story here today as far as I am concerned is
not the 6-cents-per-gallon cost, but it is the rapid
consolidation of milk processing in New England and the effect
of this strong consolidation on milk prices.
Suiza Corporation, of Dallas, Texas, now controls over 70
percent of the milk processing industry in Massachusetts. An
indication of their adverse effect on consumers is illustrated
by recent bids on the Massachusetts school lunch contract, and
I would respectfully submit to Senator Kohl and others this is
what happens sometimes in the free market.
Before the Suiza consolidation in Massachusetts, we had
competition on our school bids. In 1998, the Commonwealth
received six different responses from milk processors and the
competition resulted in a final contract which was 12 percent
below the initial original bid. Just two short years later, in
June of 2000, the Commonwealth was very disturbed to receive
only one bid from Suiza. This bid was 16 percent higher than
the 1998 contract.
At that time, there was nowhere near a 16-percent increase
to Suiza of their raw milk costs. Suiza, however, used it
market muscle and steadfastly refused to negotiate any price,
even though their volume was much higher under the new
contract.
Stephen Crosby, a fiscal conservative, who was the chief
fiscal officer in Massachusetts, was so upset with the price
cost for the school lunch contract he wrote our attorney
general, Thomas Reilly, stating ``Suiza's response as to the
procurement team's request is a clear indication of its ability
and desire to exercise its monopolistic market power.''
I would submit to you that this is the real issue, and the
consumers in Massachusetts are already paying extensively more
on the school lunch contract because of that market
consolidation. I respectfully urge you to continue the New
England Regional Dairy Compact and support Senate bill 1157
because we need it now more than ever, given the fact that our
farmers have fewer and fewer options of where they are going to
sell their milk.
Now, it looks like it is only going to be one show in town,
as you have indicated, in terms of where farmers will be able
to sell their milk. And the implications for consumers are
very, very troubling, given what has happened to the New
England milk market, at least in our region.
Thank you.
[The prepared statement and attachments of Mr. Healy
follow:]
Statement of Commissioner Jay Healy, Commissioner of Agriculture in
Massachusetts, in support of the New England Regional Dairy Compact
Good morning. For the record, my name is,lay flealy. 1 have been
the Commissioner of Agriculture in the Commonwealth of Massachusetts
for the past eight years. Since the Compact's inception in July of
1997, it has been a valuable resource in preserving a fresh,
nutritious. and continuous supply of local milk to Massachusetts
consumers.
The Compact enjoys the steadfast support of Governor Jane Swift and
the Legislature, even though large amounts of money have been spent by
opponents of the compact. Here in Massachusetts, the International
Dairy Foods Association (IDFA), which represents Suiza Corporation,
spent $238,000 to fight the compact. Only one other company, Phillip
Morris, spent more on lobbying on Beacon Hill this past year.
These paid political opponents say that the compact has adversely
affected our consumers. This is simply not the case. Our Department of
Food and Agriculture estimates that the compact has, on average, cost
consumers six cents a gallon. Since the inception of the compact,
however, the average price per gallon of milk has risen over thirty
cents per gallon. Processors and retailers would have you think that
this paltry minimum wage for farmers, an added six cents a gallon,
represents a ``CARTEL!'' The irony is that the opponents of the Compact
have made much more profit on their margins than the dairy farmers they
decry.
Massachusetts consumers have seen through the smokescreen. They
know that they will pay much more for the transportation costs for
milk, up to fifty cents per gallon, if they lose the New England dairy
farmers and milk shed that supply local milk for Massachusetts. (see
Costs for Transporting Milk) They know we will lose thousands of jobs
at the Friendlys, the Breyers, and the Sealtests when some of the
thirty thousand plus dairy processing jobs in eastern Massachusetts
follow the milk supply and leave the state.
Citizens have repeatedly stated that the compact should be
retained. The compact helps preserve over 100,000 acres of
Massachusetts open space owned by our dairy community. It has helped
the Mass WIC and School Lunch and Breakfast Program by setting aside
funds to insure these populations are not adversely affected.
Consumer support is indicated from groups as widely divergent as
the Mass. Public Interest Research Group (MASSPIRG), Mass. Audubon
Society, Gun Owners' Action League, and the director of the
Commonwealth's WIC program (see letters enclosed). MASSPIRG alone
represents a huge amount of consumers. Why, if Massachusetts consumers
allegedly dislike the Compact, would this well-respected organization
support the Compact?
This strong public support was reflected in a recent legislative
battle on Beacon Hill, where IDFA outspent compact supporters by a wide
margin. While the urban-oriented state Senate supported IDFA by
including an outside section of the state budget that deleted the
Compact, an overwhelming majority of tlic House blocked a possible
conference committee report by signifying they would not support any
conference report that would delete the Compact.
In light of the large amounts of money being circulated in
legislative opposition to the Compact, I urge you to look very
carefully at erroneous lobbying alleging no Massachusetts consumer
support for the Compact. 1 understand that you will hear today from a
former state senator who opposes the compact. On May 27, 1998, as
Senate Chair of the Committee on Natural Resources and Agriculture, she
signed a report that concluded, ``In the absence of data confirming
opponents objections, the Committee does not find any compelling
evidence to lead to a recommendation or legislation to alter the
membership and/or scope of the Compact'' (see attached report). My
understanding is that this same individual is now paid to work for
antiCompact efforts in the Massachusetts consumer community.
The real impact on Massachusetts consumers is not the small six-
cent per gallon cost of the Compact. The real story is the rapid
consolidation of the milk processing industry in New England and the
effect of this strong consolidation on milk prices. Suiza Corp. of
Dallas. Texas now controls over seventy percent of the milk processing
industry in Massachusetts. An indication of their adverse affect on
consumers is illustrated by recent bids on the Massachusetts school
lunch contract. Before the Suiza consolidation, there was competition
on the bids. In 1998, the Commonwealth received six responses from milk
processors and competition resulted in a final contract twelve percent
below the original bid. In June 2000, the Commonwealth was very
disturbed to receive only one bid, from Suiza GTL. This bid was sixteen
percent higher than the '98 contract. At that time there was nowhere
near a sixteen percent increase in Suiza's raw milk costs from prior
years. Suiza, however, used its market muscle and steadfastly refused
to negotiate prices, even though volume would be increasing
dramatically over the course of the two-year contract. Our
Commonwealth's chief fiscal officer, Stephen Crosby, was so upset he
wrote a letter to our Attorney General, Thomas Reilly, stating,
``Suiza's response to the procurement team's request is a clear
indication of its ability and desire to exercise its monopolistic
market power. Food and Agriculture's earlier warnings have been
realized. Suiza possesses the ability to hold the line on milk prices
to be paid by both state agencies and by local school districts, which
can least afford such dramatic increases.''
I respectfully submit that if Suiza can directly hold our
Commonwealth hostage with huge price increases, one can only imagine
the long-term adverse affects on consumers. Suiza increases profits
when it drives down the raw costs of milk (see enclosed DMR article).
The lack of competition in the school lunch procurement process,
however, indicates that there is no correlation between raw milk costs
and consumer savings. In fact, there is a strong probability that the
reverse is true. Market consolidation and Suiza's market power has
resulted in our Commonwealth repeatedly asking our Attorney General to
investigate Suiza (see enclosed letters). These requests have resulted
in Attorney General Reilly's announcement on June 25, 2001 of a
settlement with Suiza Foods and Stop and Shop.
I urge you to support re-authorization of the New England Regional
Dairy Compact. Given the market dominance of middlemen like Suiza, if
our New England dairy industry is to be able to continue to provide a
continuous supply of fresh, local milk, we need the Compact even more
now than we did in the past.
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Chairman Leahy. Thank you, Commissioner, and thank you for
taking the time to be here.
I understand Senator Edwards wished to introduce the next
witness. Am I correct?
Senator Edwards. Yes, Mr. Chairman.
Chairman Leahy. I yield to you.
Senator Edwards. And I had a brief statement, if I have
time for that.
Chairman Leahy. You can make the statement; that would have
been on the time you had earlier. I know you were at another
hearing and couldn't, so I will yield to you for that.
STATEMENT OF HON. JOHN EDWARDS, A U.S. SENATOR FROM THE STATE
OF NORTH CAROLINA
Senator Edwards. Thank you very much, Mr. Chairman.
First, I want to welcome Harold Brubaker, Speaker Brubaker,
who was the Speaker of our House of Representatives in North
Carolina.
Mr. Speaker, we are glad to have you here and glad to have
your testimony. I know this is an issue that you care deeply
about and understand in great detail. We appreciate you taking
time and sharing your expertise with the Senate on this issue.
Those of us who have represented agriculturally strong
States lament the current crisis in agriculture. One particular
concern I have talked about often is the extraordinary problems
our dairy farmers face. Low prices are forcing our dairy
farmers out of business.
North Carolina, which is what I am concerned about, is
losing its dairy farms at an alarming rate. Ten years ago,
there were 810 dairy farms in North Carolina. As of January of
this year, that number has plummeted to 422. Almost half have
been lost during that time.
And we are losing more than just a reliable source of milk.
Last year, North Carolina's dairy industry generated $600
million in economic activity, but that income will vanish as we
lose more and more farms. That is an economic base that we in
North Carolina cannot afford to lose.
The measure before us today is, in my judgment, the best
tool to help our dairy farmers. I am sure we will hear the same
arguments today, and some have already been stated, that we
have heard for years: compacts raise the price of milk,
compacts encourage over-production; they are milk cartels and
they are unconstitutional. Let me just talk about a few of
those.
The reality is compacts provide a steady supply and
reliable price for consumers. This is especially important in
my State of North Carolina, which is a milk-deficit State.
Furthermore, compacts do not encourage over-production. Through
financial incentives, the Northeast Dairy Compact encourages
farmers to maintain current production levels.
Compacts are not cartels. Consumer representatives on the
Northeast Dairy Compact Commission have just as much to say
about the price paid to farmers as the farmers do. And as I am
sure the chairman knows very well, the courts have consistently
affirmed the constitutionality of dairy compacts.
Another argument I am sure we will hear today is compacts
are harmful to our milk processors. Lobbyists for the dairy
industry would have you believe milk processors are united
against the Dairy Compact. That is not the case. In fact, in
North Carolina two major milk processing plants are endorsing
the Southern Dairy Compact.
Recently, Jim Green, the vice president of Meola Milk and
Ice Cream Company, in New Bern, North Carolina, told the House
Judiciary Committee that the decline of North Carolina's dairy
industry has forced his company to look elsewhere for milk. In
fact, since 1996, Meola has paid more than $1.4 million in
import charges for raw milk. That is more than $1 million in
freight and hauling charges that this locally owned company has
to pay to bring in milk from another State.
Meola is the only remaining independent milk processing
plant in my State. It can't continue to absorb these high
import charges. Those import charges do nothing but drive up
the price consumers pay for their gallons of milk.
Milkco is another North Carolina processing plant that
supports this measure. Charles Gaither, president of Milkco,
initially opposed the Southern Dairy Compact. However, after he
has seen the success that has been created by the Northeast
Compact, Mr. Gaither said that he now believes that the
Southern Dairy Compact is the only answer to the volatile
pricing conditions for raw milk.
Last week, I met with a group of dairy farmers. Jeff
Bender, of Norlina, North Carolina, was a member of that group.
Jeff knows that without a Southern Dairy Compact the volatility
of milk prices will drive him and others out of business, as
they have been continuously over the course of the last 10
years. He will be forced to lay off those who work for him, and
the small rural town of Norlina--towns like that exist all over
our State, as the Speaker well knows--will lose a huge part of
its economic base.
Jeff should not have to give up his business or his way of
life. Meola shouldn't have to depend on out-of-state farmers
for its raw milk. North Carolinians shouldn't have to deal with
an unsure supply and volatile milk prices, and my State
shouldn't be forced to lose millions of dollars in economic
activity that these farms generate for us. We have the tool to
help these very hard-working men and women. We have answered
the questions and laid to rest the concerns. It is time to pass
this measure.
Thank you, Mr. Chairman.
Chairman Leahy. Thank you very much, Senator Edwards.
Just because of scheduling conflicts, what we will do is we
will have Mr. Brubaker's testimony and then we will recess
until two o'clock this afternoon and come back to the hearing
at that time. I mention this so that everybody can adjust
schedules accordingly.
Mr. Brubaker?
STATEMENT OF HON. HAROLD BRUBAKER, STATE REPRESENTATIVE, STATE
OF NORTH CAROLINA, ASHEBORO, NORTH CAROLINA
Mr. Brubaker. Thank you, Mr. Chairman. Senators, it is
great to be with you today.
My name is Harold Brubaker, a member of the North Carolina
House of Representatives for 26 years. I am pleased and honored
to be here today before this committee and its many
distinguished members to speak in favor of proposed legislation
reauthorizing and extending the Northeast Interstate Dairy
Compact and granting consent to the formation of a Southern
Dairy Compact.
For the Southern States which are trying to form a compact,
much is at stake. Family farmers in the South are threatened
with the distinct possibility of extinction. In 1974, there
were 1,646 dairy farms operating in North Carolina, and as the
Senator from North Carolina said, today there are 427.
North Carolina and much of the South has experienced a
drastic decrease in milk production since the 1990's. While the
Nation's milk production increased 13 percent from 1990 to the
year 2000, with 2000 marking the fourth consecutive year of
record-breaking milk production, 7 of the top 10 largest
production decreases in the United States since 1990 occurred
in Southern States. These Southern States lost between 25 and
35 percent of their milk production in the last decade alone.
Establishing regional compacts will benefit both farmers and
consumers, and protect the fragile rural ecology that dairy
farms provide.
Opponents of dairy compacts forget that the milk market has
been regulated by the Federal Government since the 1930's. They
forget that in the era of mega corporations, consolidating
agribusinesses, and allegations of price gouging and widening
retail and processor profit margins, regional and State milk
commissions comprised of consumer representatives and
government officials offer the public recourse and scrutiny
into milk prices that are fair to consumers and farmers.
This is the framework of the Compact Commission, and
perhaps some forget that our country was founded on Federalist
principles, that States and regions have sovereign rights, as
do their citizens and elected officials who are concerned about
the long-term viability of a distinctly regional product.
Yes, milk is a regional commodity, bulky, perishable, and
expensive to transport. In order to protect this regional
commodity which forms the backbone of many rural communities,
it is altogether fitting and proper that regional compacts be
used to regulate in the public interest.
There are currently 35 States interested in compact
legislation. No less than 25 States, their legislatures, my
legislature and myself have voted to ratify language
authorizing our participation in a dairy compact. I ask that
Congress give due deliberation to our collective voices.
This legislation also calls to stake a fundamental issue,
the ability of States to craft regional and State-based
initiatives to solve problems inadequately addressed, in some
cases, at the Federal level. Since 1990 alone, Arkansas has
lost 36 percent of its milk production. In light of these
numbers, would any member say that State leaders do not have a
responsibility to their citizens to use their State governing
body to formulate solutions?
The principles of federalism are the guiding touchstone
behind the value of our political system, and it is in these
principles that dairy compact legislation lies. Local
experimentation by States are in the finest tradition of a
Constitution that embraces federalism. Through State program
experimentation, new ideas can be tested and redefined.
Programs and initiatives can percolate up to the Federal level
where, if successful, their innovative techniques can be
applied. Congress should be hesitant to choke such an
experiment before it has had a chance to fail or succeed on its
own merits.
Since the original six New England States passed compact
legislation in 1996, well over half the country has moved
toward embracing the idea of regional compacts for control of
regional commodities. The Compact Clause of our Constitution
anticipates the use of State instrumentalities, like compact
commissions, through which matters of regional concern may be
addressed through policies shaped by regional values and
expertise.
We must keep in mind that there are limits to what can be
achieved through uniform national regulation, especially when
dealing with a regional commodity such as milk and milk
production that by its very nature impacts each region of the
country differently. Regional initiatives under the Compact
Clause allow States to furnish a unique yet viable mechanism to
respond to regional concerns and values. Congress should not
forget this when discussing the dairy compact legislation.
As a colleague in the State Senate told me 1 day, Senator,
Madison had a cow behind his house.
Thank you for your time and attention.
[The prepared statement of Mr. Brubaker follows:]
Statement of Harold Brubaker, State Legislator, North Carolina
My name is Harold Brubaker. I am a state legislator from North
Carolina. I am pleased and honored to be here today, before this
committee and its many distinguished members, and to speak in favor of
proposed legislation reauthorizing and extending the Northeast
Interstate Dairy Compact and granting consent to the formation of a
southern dairy compact.
For the southern states which are trying to form into a compact--
much is at stake. Family farmers in the south are threatened with the
distinct possibility of extinction. In 1974, there were 1,646 dairies
operating in the state of North Carolina. Today, low milk prices and
volatile markets have reduced these numbers to a total of 427. During
the 1990's, milk price volatility resulted in the accelerated loss of
over 400 dairy farms in that decade alone. And these trends are not
isolated to North Carolina--much of the south has experienced dramatic
decreases in milk production since the 1990s. While the nation's milk
production increased 13% from 1990 to 2000--with 2000 marking the
fourth consecutive year of record-breaking milk production, seven of
the top 10 largest production decreases in the United States since 1990
occurred in southern states. These southern states lost between 25 and
35% of their milk production in the last decade alone.\1\
---------------------------------------------------------------------------
\1\ Those states in descending order of highest production loss
are: Tennessee, Arkansas, Alabama, Mississippi, Missouri, Kentucky and
Louisiana (data and USDA Milk Marketing Administrator--Central Order)
---------------------------------------------------------------------------
Establishing regional compacts will benefit both farmers and
consumers. Compacts also benefit the public interest by assuring a
stable supply of fresh, regional milk and help to support the now
fragile rural ecology that dairy farms provide. It is time to dispel
the myth that compacts are government sponsored price fixing cartels--
nothing could be farther from the truth. Opponents of dairy compacts
forget that the milk market has been regulated by the government since
the 1930's. They forget that in the era of mega-corporations
consolidating agri-businesses and allegations of price gouging and
widening retail and processor profit margins, regional and state milk
commissions comprised of consumer representatives and government
officials offer the public recourse and scrutiny into milk prices that
are fair to consumers and farmers. That is the framework of the compact
commission. And perhaps they forget that our country was founded on
federalist principles--that states and regions have sovereign rights,
as do their state citizens and elected officials, who are concerned
about the long-term viability of a distinctly regional product. Even
though the Mid-West would no doubt love to supply the entire country
with fluid milk--milk is a regional commodity: bulky, perishable, and
expensive to transport. In order to protect this regional commodity,
which forms the backbone of many rural communities, it is altogether
fitting and proper that regional compacts be used to regulate in the
public interest. There are currently 35 states interested in compact
legislation. No less than twenty-five states, their legislatures, my
legislature, and myself have voted to ratify language authorizing our
participation in a dairy compact. I ask that Congress give due
deliberation to our collective voices.
This legislation also calls to stake a fundamental issue: the
ability of states to craft regional and state-based initiatives to
problems inadequately addressed at the federal level. Since 1990 alone,
Arkansas has lost 36% of its milk production. In light of these
numbers, would any member say that state leaders do not have a
responsibility to their citizens to use their state governing body to
formulate solutions? The principles of federalism are the guiding
touchstone behind the value of our political system and it is in these
principles that dairy compact legislation lies.
Local experiments by states are in the finest tradition of a
Constitution that embraces federalism. Through state program
experimentation, new ideas can be tested and refined, programs and
initiatives can percolate up to the federal level, where if successful,
their innovative techniques can be applied. Congress should be hesitant
to choke such an experiment before it has had a chance to fail or
succeed on its own merits. And, the results for dairy compacts are
quite clear. Since the original six New England states passed compact
legislation in 1996, well over half the country has moved toward
embracing the idea of regional compacts for control of regional
commodities. The compact clause of our constitution anticipates the use
of state instrumentalities, like compact commissions, through which
matters of regional concern may be addressed through policies shaped by
regional values and expertise. We must keep in mind that there are
limits to what can be achieved through uniform national regulation,
especially when dealing with a regional commodity (such as milk and
milk production) that by its very nature impacts each region of the
country differently. Regional initiatives under the Compact Clause
allow states to furnish a unique yet viable mechanism to respond to
regional concerns and values. Congress should not forget this when
discussing dairy compact legislation.
Thank you for your time and attention.
Chairman Leahy. Thank you. I can't add to that.
We will stand in recess until two o'clock. Thank you.
[Whereupon, at 12:10 p.m., a luncheon recess was taken.]
[The committee reconvened in afternoon session at 2:17
p.m., Hon. Charles Schumer presiding.]
Senator Schumer [presiding]. The hearing will resume, and
we want to apologize to the witnesses. Because of all sorts of
scheduling and other problems, you have had to wait, and we
appreciate it.
Let me introduce each of the witnesses. We have the
Honorable Jonathan Healy, who is the Commissioner of
Agriculture of the Commonwealth of Massachusetts; the Honorable
Harold Brubaker, a State Representative from the State of North
Carolina, from Asheboro; Lois Pines, a former Massachusetts
State Senator and Polly Trotenburg's former boss. Polly is my
legislative director. Welcome.
We have Dr. James Beatty, who is an economist from LSU, in
Franklinton, and we have Richard Gorder, of the Wisconsin Farm
Bureau.
With unanimous consent, each witness' entire statement can
be read into the record, and we will ask each witness to try to
keep their remarks to 5 minutes. We are up to Ms. Pines. Thank
you very much. I didn't realize that the first two had spoken.
STATEMENT OF LOIS G. PINES, FORMER MASSACHUSETTS STATE SENATOR,
NEWTON, MASSACHUSETTS
Ms. Pines. Thank you very much, Senator Schumer. I am here
today to tell the story of my experience when I was a
Massachusetts State Senator with regard to the Northeast Dairy
Compact.
Although I speak in opposition today to Senate 1157, I was
once a supporter of the Compact. When opponents tried to obtain
repeal of Massachusetts' membership in the Compact, I played a
role in preserving it. Yet, since that time the evidence has
convinced me that the Compact has not helped prevent the loss
of family farms and it has hurt Massachusetts and New England
consumers, despite the Compact supporters' claims to the
contrary.
In my opinion, these failures of the Compact are more than
enough reason to replace it with more effective programs to
help preserve the family farm and preserve open space that do
not have so many negative impacts on the general public.
In February 1998, together with my House Chair of the
committee that I chaired on the Senate side, we convened an
oversight hearing in the Massachusetts Legislature about the
Compact, which had been in effect for only 7 months. Over and
over again, Compact proponents assured us that consumers would
not be hurt and that the Compact would save family farms.
After weighing the limited evidence that was available at
that time, I decided to give the Compact the benefit of the
doubt, but I insisted that the Compact be revisited after more
evidence was available. The committee report that I signed
supporting the retention of the Compact at that time stated, in
addition, ``If the Compact does not ameliorate the current
trend of farm foreclosures and farmers leaving the dairy
business, then the long-term proposed benefits of the Compact
will have failed.''
My reluctant decision in 1998 to not oppose the Compact has
disturbed me in view of what we now know about the impacts of
the Compact. Looking back, I can see that the claims made by
Dairy Compact supporters have had two debilitating impacts on
State and Federal policy processes.
One, they misled many, many lawmakers in Congress as well
as in State legislatures, including myself, and persuaded them
to mistakenly give their support to dairy compacts. Two, they
have diverted lawmakers' attention from developing and
implementing policies that could really keep small dairy
farmers on the land, generally protect consumers, and
effectively preserve open space in rural New England.
When Compact supporters came to me as a State Senator for
help in advancing their agenda, they said ``The Compact is the
only way to stop the loss of dairy farms and protect
irreplaceable open space.'' Now, however, we know that the
Compact has not even reduced the loss of dairy farms. The
American Farm Bureau Federation surveys have shown that more
dairy farms were lost in New England since the Northeast Dairy
Compact began in July 1997 than in the 3 years prior to the
Compact.
I would note that Commissioner Healy's chart and numbers,
although they are misleading, basically say the same thing. The
number of farms have reduced since we instituted the Compact.
This has grave implications for open space preservation, since
it is difficult, if not impossible, to reduce the rate of loss
of dairy farmland without first reducing the loss of dairy
farms.
In response to the obvious question of how can one raise
dairy farmers' milk prices without hurting consumers, I was
even told by Compact supporters that the Compact would somehow
stabilize consumer prices and even keep them lower than they
would have been in the absence of the Compact. In hindsight, I
believe I was naive to believe their economic hocus-pocus that
essentially says that more is less.
There is substantial evidence available to prove that
increases in farm milk prices will lead to increases, not
decreases, in retail milk prices. No amount of smoke and
mirrors can hide the fact that the Compact price increases have
been shouldered by consumers. That is why national consumer
groups such as the Consumer Federation of America, headed by
your former colleague Senator Metzenbaum, absolutely oppose
Senate 1157.
Another myth that you have heard this morning is that the
Federal feeding programs are exempted from harm by Compact milk
price increases. In reality, nutrition programs that have no
exemption from the Compact represent more than three times the
milk consumption of WIC, the only program that is fully and
effectively protected. New England's food stamp recipients, who
can least afford it, have lost $14 million in purchasing power
due to the Compact. Child and elderly feeding programs such as
Meals on Wheels are not protected and have absorbed more than
$1.5 million. This measure will exacerbate this kind of problem
across the country.
In conclusion, Mr. Chairman, time is running out and each
year that we continue the failed Northeast Dairy Compact
experiment in New England, despite good intentions,
policymakers are being distracted from the task of creating and
funding programs that will really work for dairy farmers,
consumers, and the environment.
For the past 4 years, the high costs and false hopes
associated with the Compact have placed an unnecessary burden
on the people of New England. By opposing Dairy Compact
extension and expansion legislation, members of this committee
can help prevent similar damage from being inflicted on
consumers in other parts of the country.
Thank you.
[The prepared statement of Ms. Pines follows:]
Statement of Lois G. Pines, Esq., Former Massachusetts State Senator,
Newton, Massachusetts
Introduction
My name is Lois G. Pines. I live in Newton, Massachusetts, and have
been a member of the Massachusetts Bar since 1964. I currently practice
law and have been teaching public policy and advocacy at the John F.
Kennedy School of Government at Harvard University, in Cambridge,
Massachusetts. I want to thank you for giving me the opportunity to
provide testimony pertaining to S.1157, a bill to reauthorize and
expand the Northeast Interstate Dairy Compact and create new dairy
compacts in southern, plains, mountain and western states.
I am here today primarily to tell the story of my personal
experience with the Northeast Interstate Dairy Compact. Although I
speak in strong opposition today to S.1157, I was once a supporter of
the Northeast Dairy Compact and helped protect it from attacks by
ardent opponents in Massachusetts, when heated debate and negative
publicity brought the issue before the state legislature in 1998.
At that time, I was the Senate Chair of the Joint Committee on
Natural Resources and Agriculture of the Massachusetts Legislature,
which had jurisdiction over the dairy compact. Since that time,
however, I have become convinced that the Northeast Dairy Compact has
not helped prevent the loss of small dairy farms and has hurt New
England consumers despite claims by dairy compact supporters that it
would not. In my opinion, the Compact's failure to achieve its goals
and the harm it has done to consumers and low-income families is more
than enough reason to replace it with more effective programs that do
not have negative impacts on the general public.
Mr. Chairman, for most of my more than twenty-five years of public
service, I have fought for the interests of ``the little guy'', the
underdog, and for consumers, who are at the mercy of the marketplace
and government regulations like the Compact. For six of those years, I
have fought not just for consumers and small businesses in
Massachusetts, but for consumers and small businesses throughout all of
New England. During the Carter Administration, I served as the Regional
Director of the New England Office of the Federal Trade Commission with
a mission to protect consumers and small businesses from fraud,
misrepresentation and noncompetitive practices. More recently, since
1999, I have served as a Public Interest Director of the Federal Home
Loan Bank of Boston, serving all six New England states. As a member of
the Massachusetts House of Representatives and Massachusetts Senate for
eighteen years, I fought for measures that would protect the state's
consumers, small businesses and protect the environment.
Why, as a MA State Senator I Supported the Northeast Dairy Compact in
1998
In 1998, my longtime commitment to small business, consumers and
the environment led me, as co-chair of the Joint Natural Resources
Committee, to sympathize with the plight of the small dairy farms in
Massachusetts and the rest of New England. I can recall the events of a
Joint Committee on Natural Resources and Agriculture Oversight hearing
in February of 1998 quite vividly. The room was filled with farmers and
other supporters of dairy compacts, including the Governor of Vermont.
Over and over again, compact proponents assured the Committee that
consumers would not be hurt by continuation of the Compact and that the
Compact would ``save family farms!''
Although well-informed advocates and experts also presented
testimony opposing the Compact, they had difficulty convincing
committee members not to accept Compact supporters' claims about the
cost and benefits to consumers, farmers and the environment. In
hindsight, the overwhelming hurdle faced by the Compact's opponents at
the Hearing was the fact that the Compact had been in existence for
only seven months. Consequently, evidence about its actual impacts was
limited or nonexistent. Given conflicting claims by Compact supporters
and opponents, I was inclined to give the benefit of the doubt to New
England's small dairy farmers, especially since my House of
Representatives committee co-chair was in favor of the Compact.
Even then, however, I had reservations given the testimony I heard
from opponents of the Compact especially regarding the harm to working-
class consumers, low-income families, and federal nutrition assistance
programs. Their arguments convinced me that the legislature had a
responsibility to the people of the Commonwealth to insist that the
Compact be revisited by the legislature as soon as sufficient evidence
was available about its actual impacts.
Although I cared a great deal about the fate of small dairy farms
throughout the region, I was also deeply concerned about impacts of the
Compact on consumers in Massachusetts and the rest of New England,
whose interests I had championed for much of my time in public service.
I was particularly concerned about Massachusetts consumers since more
than 45% of the revenues generated by Dairy Compact price increases
would come from higher milk prices paid by them. As a result, I
insisted that the Committee Report on the Compact that emerged from the
Oversight Hearing process include language requiring reconsideration of
the evidence at a later date. The Report stated, ``If the Compact does
not ameliorate the current trend of farm foreclosures and farmers
leaving the dairy business, then the long term proposed benefits of the
Compact will have failed. A review of trends six months and one year
from now should be instructive.''
The Evidence from New England Compels Me Now to Vigorously Oppose Dairy
Compacts
My reluctant decision in 1998 not to oppose the Northeast Dairy
Compact has haunted me, particularly as more and more information about
the impacts of the Compact has become available. When the May 1998
report was prepared, we had barely nine months of data with which to
work. Moreover, we had no data on changes in the number of New England
dairy farms since the Compact began. This month, on the other hand, the
Northeast Dairy Compact celebrated its fourth anniversary. That means
we now have a great deal of evidence with which to assess the real
impacts of the Compact.
Unfortunately, when I look at the evidence, I find that my worst
fears have been justified. The evidence clearly shows that Compact
supporters were wrong about how the Compact would save small family
farms and protect the region's consumers. In an effort to do something
to rectify my 1998 decision, I joined forces with the International
Dairy Foods Association, which was working to replace the Compact in
Massachusetts with an alternative. The State Senate proposed a state-
funded dairy farm income support program, which I strongly supported,
that would (1) provide extra state money for purchasing dairy farmland
development rights; (2) establish a state fund to be used to fully
replace the Dairy Compact payments that were being given to
Massachusetts dairy farmers; and (3) establish a state Commission to
consider what other initiatives might be taken by Massachusetts to
truly assist the dairy farmers, with particular emphasis on the needs
of the small dairy farmer.
In hindsight, I believe that the Compact has been a public policy
failure. The claims made by dairy compact supporters have had two
debilitating impacts on state and federal policy processes: 1) they
have grossly misled hundreds of lawmakers in Congress and state
legislatures, including myself, and persuaded them to mistakenly give
their support to dairy compacts; and 2) they have diverted lawmakers'
attention from developing and implementing policies that could really
help keep small dairy farmers on the land, genuinely protect consumers,
and effectively preserve open space in rural New England.
1. the compact has not slowed the loss of new england dairy farms
No one can deny that the Compact has increased New England dairy
farmers' incomes. However, when Compact supporters came to State
Senator Lois Pines for help in advancing their agenda, they never said,
``please give dairy farmers a subsidy or a handout.'' They knew that I
would never support a blanket subsidy to the dairy farm sector.
Instead, they said, ``the Compact is the only way to stop the loss of
dairy farms and protect irreplaceable open space.'' Now, however, we
know that the Compact has not come close to stopping the loss of dairy
farms. Moreover, the evidence suggests that the Compact has not even
reduced the loss of dairy farms.
The annual surveys of commercial dairy farms conducted by the
American Farm Bureau Federation tell the story. Since the fall of 1998,
those surveys have consistently shown that more dairy farms were lost
in New England since the Northeast Dairy Compact began in July 1997
than in the three years prior to the Compact's starting date. All told,
465 of New England's dairy farms, out of the 3,237 that existed in July
1997, left the business by June 2000. That's a loss of nearly 15% of
the region's dairies in just three years. The statistics for
Massachusetts are even more compelling. Between July 1997 and June
2000, 64 of the state's dairy farms were lost. Compared to a loss of 57
farms in the three years prior to the Compact. In other words, with the
Compact in force, Massachusetts lost about 20% of its dairy farms. The
next Farm Bureau survey will undoubtedly show that the losses have
climbed to 25% in 2001. Something is clearly not working!
The high rate of loss in the face of the Compact really should not
come as a great surprise to policy makers. Opponents of the Compact
have pointed out for the last couple of years that, according to the
latest (1997) Census of Agriculture, three-fourths of all New England
farms leaving the business in the 1980s and 1990s had less than 50
cows. Since the Compact pays each farmer the same premium for every
gallon of milk they produce, it is the larger farms, which produce the
bulk of the region's milk, that benefit most from the Compact. Since
these farms are most likely to stay in business anyway, why is anyone
surprised that the Compact has not reduced the loss of dairy farms?
Some Compact supporters, in the face of the depressing Farm Bureau
data, may claim that without the Compact, even more New England dairy
farms would have left the business. I have been down that road of
listening to unsubstantiated claims made by Compact supporters before.
Based on my experience, I encourage you to take a hard look at the
evidence before you embrace that viewpoint.
Even if such evidence did exist--and I certainly haven't seen any
--the fact that so many dairy farms still went out of business in the
presence of the Compact should give us all reason to question whether
the Compact is an effective mechanism for stopping the hemorrhage of
dairy farms. It's little consolation to policy makers and their
constituents that more dairy farms did not go out of business in view
of the large number of dairy farms that did. If that's the best the
Compact can do, then it is truly an inadequate policy instrument.
2. if the compact did not slow the loss of farms, it could not slow the
loss of open space
It goes without saying that the failure of the Compact to slow the
loss of dairy farms undermines the claims by Compact supporters that
the Compact will reduce the loss of open space throughout New England.
To reduce the rate of loss of open space, the Compact has to first
reduce the loss of dairy farms.
It has puzzled me the last couple of years to see a number of
environmental groups from Massachusetts and New England argue, over and
over again, that the Compact is the answer to the rapid conversion of
New England dairy farmland to suburban and urban uses. They certainly
have reason to be concerned about the loss of New England dairy
farmland to nonfarm uses in the last couple of decades. I also share
their concern for the plight of New England dairy farms.
However, I cannot understand how they can continue to support the
Compact in the face of such rapid loss of dairy farms over the past
three years. After all, every year of continued support for the
Compact, in the absence of truly effective, well-funded programs to
reduce dairy farm losses or purchase dairy farmers' development rights,
means another 5% of the region's dairy farms lost.
Since July 1997, participating dairy farmers have received about
$140 million as a result of the Compact. The payoff has been no
reduction in the loss of New England dairy farms. If we really wanted
to reduce the loss of dairy farmland to urban or suburban development,
just think about how much farmland could have been preserved by using
that money to buy dairy farmers' development rights. Given the
statistics on recent dairy farm losses, it is difficult not to conclude
that, from an open space perspective, the $140 million in Compact
premiums has largely been wasted.
3. consumers have shouldered the burden of paying for the compact–
In response to the obvious question of how one can raise dairy
farmers' milk prices without hurting consumers, I was always told by
Compact supporters that the Compact would somehow stabilize consumer
prices and keep them lower than they would have been in the absence of
the Compact. In other words, we could have it both ways: higher milk
prices for farmers; and lower milk prices for consumers.
In hindsight, I recognize that it was ridiculous to believe that
the higher milk prices imposed by the Compact would not be passed on to
consumers. There is plenty of evidence available to convince anyone
with an open mind that most, if not all, of the Compact price increases
have been shouldered by consumers. The fancy economic studies that have
been done on this question are not much help. From what I understand,
they each provide dramatically different results depending on the
methods they employed and the assumptions they made. A better,
commonsense approach is simply to look at the relationship between farm
prices and retail prices in New England to see what happened when farm
prices increased. In every graph of those prices that I have seen for
the Boston area since the Compact began, whenever farm milk prices
increased, retail milk prices increased by as much or more. In fact, in
recognition of this pass-through of Compact premiums to consumers, the
Consumer Federation of America said in a recent letter to Congress that
``Several economic studies, including one ordered by the Northeast
Compact Commission, have confirmed this pass-through of additional
costs to consumers. The Consumer Federation of America estimates that
the Northeast Compact has cost consumers more than $165 million over
3\1/2\ years. . .Dairy Compacts are especially costly to low income
consumers, who spend a greater percentage of their income on dairy
products than other families.''
Compact supporters have often misled policymakers into believing
that federal nutrition programs are protected from harm from Compact
price increases. The truth of the matter is, the feeding programs that
have NO exemption from the Compact represent more than 3 times the milk
consumption of WIC, the one program that is fully and effectively
exempted. New England's food stamp recipients, who can least afford to
pay more for a basic staple such as milk, lost $14 million in
purchasing power thanks to the Compact. Child and elderly feeding
programs, such as ``Meals on Wheels'', which are NOT protected from
harm by the Compact, have been forced to absorb more than $1.5 million
in higher costs.
S.1157 would only exacerbate this lamentable situation. If compacts
had expanded to include states in the mid-Atlantic, Southern and Plains
regions, studies that I have seen indicate that the costs to consumers
last year alone would have been between $600 and $700 million dollars.
Food stamp recipients would have seen their purchasing power drop by
roughly $100 million. In addition, S.1157 fails to protect important
child and elder care feeding programs from higher milk prices caused by
the Compact. Those programs would have paid about $20 million more in
higher milk costs if S.1157 were enacted.
Compact proponents have often argued that the extra cost to
consumers is worth it to ensure an inexpensive, local supply of fresh
milk. They claim that without the Compact, milk would have to be
shipped in from long distances at great cost to the consumer. The facts
suggest otherwise. Without the Compact, there would be a more-than-
adequate supply of fresh, locally supplied milk in New England.
Moreover, it would be less expensive than it currently costs with the
Compact in place.
Prior to the Compact's inception, New England milk production was
stable. As a matter of fact, New England produces twice as much milk as
it consumes as a beverage. Almost all of that is Grade A milk suitable
for use as a beverage. Milk production in nearby New York state was
also quite stable in the 1990s prior to the Compact. New York dairy
farms produce one-and-a-half times the amount of fresh milk the state
consumes. That means there is plenty of fresh milk available from
nearby dairy farms to add to the New England supply. New England
already relies on New York for 25% to 30% of its fresh milk needs.
Should more milk be needed to satisfy increased needs of New
England consumers, plenty of milk will be available to be shifted from
lower cost uses such as cheese, to higher priced beverage use.
Despite these factors, Compact supporters still claim that without
the Compact, New England milk production would drop to such low levels
that processors would relocate outside the region and ship milk from
long distances--at great expense--to New England. In view of the
abundance of milk available in New England and nearby states, this
claim appears to be highly suspect.
Summary and Conclusion
Like many members of Congress, I too have had to make a difficult
decision about supporting dairy compacts. Faced with a desire to help
my region's dairy farmers, woefully limited evidence, and
unsubstantiated claims about the benefits of the Northeast Dairy
Compact to consumers and farmers, I gave my tentative support to the
Compact three years ago.
Now, however, after four years of the Compact, we have sufficient
evidence with which to make a truly informed judgement. In my opinion,
in light of the overwhelming evidence, the Compact, as public policy,
has failed miserably in achieving its stated goals.
No doubt the Compact has put extra money into the pockets of dairy
farmers. Unfortunately, that is about the only positive thing that can
be said about the impacts of the Compact. It has failed to slow the
loss of dairy farms. As a result, it has been unable to reduce the loss
of rural open space. It has forced consumers to pay more for milk in
the name of a fictitious local supply shortage. It has imposed higher
costs on cash-starved nutrition assistance programs and food stamp
recipients.
Mr. Chairman, time is running out. Each year that we continue the
failed Northeast Dairy Compact experiment in New England, despite our
good intentions, policymakers are distracted from the task of creating
and funding programs that will really work for farmers, consumers and
the environment.
Each year another five percent of the region's dairy farms leave
the business.
Each year that much open space is dangerously exposed to urban or
suburban development.
Each year another $35 million or more is wastefully taken from New
England's consumers.
In closing, I urge the members of the Judiciary Committee not to
support S.1157. For the past four years, the cost and the false hopes
of the Northeast Dairy Compact have placed an unnecessary burden on
people of New England. By opposing Dairy Compact extension and
expansion legislation, you can help prevent similar damage from being
inflicted on more than 200 million others throughout the mid-Atlantic,
southern, plains, mountain and western regions of the country.
Thank you.
Senator Schumer. Thank you, Ms. Pines, and now we are up to
Mr. Beatty.
STATEMENT OF JAMES F. BEATTY, ECONOMIST, LOUISIANA STATE
UNIVERSITY, FRANKLINTON, LOUISIANA
Mr. Beatty. Thank you, Senator Schumer, Senator Kohl, for
inviting me. I will try to touch briefly on the five points in
my written testimony and then maybe concentrate as much as I
can on particularly the last one.
The Compact Commission includes consumers, and that is a
very key point. I am a public employee. I have to consider the
will of consumers in Louisiana in what I do. I don't think the
Louisiana Legislature would have passed the legislation if
consumers were not part of the Commission, and we have
experience with the State in the past.
Dairy does make a substantial contribution to many rural
areas in the Southeast, although we are a relatively small
State in terms of milk production. We only produce a fourth of
our milk needs in Louisiana, but it is an important
contribution in some areas. And the States that are petitioning
for a compact see it as a tool that might help us maintain that
production.
Dairy compacts regulate fluid milk prices only. We need to
keep that in mind. We are speaking specifically of fluid, which
is a different animal, because again perishability has been
mentioned, lack of inventory, those kinds of things.
The Southeast of the U.S.--and you can see the red area on
that map; those States in red do not produce enough milk even
for our fluid needs, just fluid. We have to import milk, no
cheese, no powder, no nothing. We see a compact as a way to
entice more milk into that region when we need it, without
putting that cost on the farmers.
At the present time, our local producers, in order to
maintain their market, subsidize the freight on milk that comes
into that area. We can hopefully get the price in the area
closer to either whatever it takes to produce it locally or get
it moved.
Another point: A compact does not prevent the flow of milk
in and out of a compact region. It does regulate the price.
Federal milk market orders have regulated milk prices for 60
years. It has worked relatively well in terms of supplying
fluid markets. That is why we have differentials.
I do agree with Senator Kohl. It is not working as well as
it should, as we would like it, and I am sure as well as this
gentleman from Wisconsin would like, the Federal orders are
not. But this is another tool that we can use in specific
regional cases to add to the signals that the Federal orders
send. But, again, we have set minimum prices for years and we
have done a good job of supplying a wholesome product at a
reasonable price to consumers.
The fifth point, and I think that is the key point, is how
much milk do we want to move and how far do we want to move it,
you know, for fluid purposes. Now, keep in mind any comments I
make relate basically to fluid. We are a fluid market.
But, again, if you look at the map, those States in red
produce less milk than they need for fluid use. The States in
that other color, and I am not sure what they call it, but the
States that are not green produce less than their needs for
their total milk consumption. They produce more than they need
for fluid, but not enough for their total milk product needs.
Of course, the States in green produce enough to supply their
own needs, plus to help supply other areas.
You can see the big blob of red in the Southeast, and you
can see it goes up the East Coast. The thing is, the Southeast
is bleeding for fluid milk, and we are hemorrhaging now and
that red area is spreading north and east as we continue to go
in the direction we are going.
In fact, recent figures, according to the Federal market
administrator who put the basic figures for this map--this map
comes out, of course, here--Texas, Tennessee and Virginia
should be added to the red area, and also Nevada. Now, you see
what that does to the Gulf Coast, for instance. Texas puts 100
million pounds of milk a month into Louisiana. They are losing
production.
We are not sending a strong enough signal to that red area
in terms of fluid milk, and that is what the Federal orders are
designed to do, send a strong enough signal to do one of two
things, and I think we always focus on one of the two. Send a
signal that says produce it in Georgia, or send a signal that
says to the guy in the green area, you can haul it to Georgia,
take the freight off your cost, you know, pay the freight and
still make as much money as you will at home.
I think that is the problem with the market the way it is
operating. New Mexico has got a lot of milk, but it gets more
money at home than the New Mexico price, plus the $4 it costs
to haul it to New Orleans. Again, part of that is the way the
Federal market orders are working, you know, utilization, and I
don't want to say predatory pooling. I didn't say that;
opportunistic pooling.
But we need to send a stronger signal out of the Southeast
to either get it produced locally or get it moved, because as
of now our local producers are subsidizing our consumers. The
processors in our area between August and October spend about
$2 to $3.60 a hundredweight to go out in a region, get milk and
bring it in. They take a net loss. That is spread across our
local producers. The less local milk we have and the more we
have to haul in, the higher that cost gets per hundredweight,
and it is going to continue to drive our producers out of
business.
So to me, the key question is neither farmer on either end
is getting enough money. We don't have enough milk in the red
area. We can't get the milk moved from the green area because
we can't get the freight. So the question in my mind concerning
the Compact is are we going to pay the money to farmers or are
we going to pay the money to trucks. I have got nothing against
trucks, but we are starving farmers on both ends.
Again, that says to me that we have got to have a stronger
signal or a higher price in that red area and areas surrounding
it.
[The prepared statement of Mr. Beatty follows:]
Statement of James F. Beatty, Economist, Louisiana State University,
Franklinton, Louisiana
Thank you Chairman Leahy, Ranking Member Hatch and members of the
Committee for inviting me here today to discuss Dairy Compacts.
These are 5 points that should be considered when evaluating the
effects of dairy compacts.
1. The proposed legislation includes consumers on dairy compact
commissions. Therefore, any dispute over the level of price
between producers and processors will be settled by consumers.
2. Milk production contributes a substantial economic impact
and tax base in many rural areas in the states petitioning for
formation/extension of dairy compacts. These states would like
to use compacts as a tool for maintaining these contributions.
3. Dairy compacts regulate fluid milk prices at the farm only.
Therefore, the ability to generate dairy farmer income is
determined by the volume of fluid sales in the compact area and
the level of compact price determined with input from
consumers. A compact should help encourage milk produced in
other parts of the country to come into the Southeast region
when it is needed to supply the market.
4. The proposed legislation does not prevent the flow of milk,
raw or packaged, into the compact region nor does it restrict
the flow of money out of that region. The farmer who produced
any milk sold as fluid milk in the compact region receives the
revenue generated, regardless of his location.
5. The key question in the debate over fluid milk compacts is:
should a substantial portion of the milk consumed as fluid be
produced relatively close to the site of consumption? Twenty-
five states have decided, through their state legislatures, the
answer to that question is yes. That is the reason those states
are petitioning this congress for permission to use a dairy
compact as a tool in achieving that goal. Ten additional states
are concerned enough that they are considering their need for
compacts.
The U.S. dairy industry is constantly transporting ever increasing
amounts of milk over increasing numbers of miles to supply fluid
markets. At present, dairy farmers in the Southeast share in the cost
of procuring and transporting supplemental milk. The dairy farmers
contribution will cease if local production ceases.
Production capacity in the Southeast United States, Table 1, has
deteriorated to the point that further decreases will push production
below the point of no return. The loss of the critical mass necessary
to maintain efficient support industries (milk hauling, feed, milking
equipment, custom forage production) would lead to unbearably increased
costs of production and marketing.
Production in the states of Louisiana, Mississippi, Alabama,
Georgia, Florida, North Carolina and South Carolina was 5.7 billion
lbs. less than required to supply the fluid markets in 1996. Regional
production continues to decrease while consumption increases and
supplemental supplies are farther and farther away. Texas, Missouri,
Kentucky and Tennessee, who have traditionally provided supplemental
supplies, have lost 16-26% of their production since 1995 (Table 1).
The loss of production in Texas has been primarily in east Texas, and
more recently in central Texas, leaving remaining supplies farther
west. For Louisiana, Mississippi and Alabama this means the reserve
supply is farther away and is more likely to be needed to supply
consumers where it is produced.
Production trends in the Southeast U.S. prove prices have not been
high enough to maintain supply (Table I). This down trend in production
has continued even as farm milk prices reached record levels in 1996,
set new records in 1998, and approached 1998 levels in 1999. These
events occurred in spite of grain prices, the major factor affecting
the cost of milk production, which have been extremely low since 1997.
This is the case in most of the states east of the Rockies. (Table I,
II and III).
Prudent consideration of recent and current milk production trends
strongly suggests that the downward trend in production east of the
Rocky Mountains should be slowed before it becomes irreversible. Are we
are willing to commit to producing all or a very substantial portion of
the milk needed for fluid consumption in a few states in the very
northern and western regions of the country.
Is a decision to produce all milk in those areas where on-farm
costs are lowest and routinely transport very large volumes of fluid
milk very long distances a sound economic decision?
Will that decision remain economically sound in the future?
Are we giving proper consideration to current and future
transportation costs?
Four lbs. of concentrate feed will produce 10 lbs. of fluid milk.
Should the feed be transported rather than the milk? Transporting the
feed is a lot cheaper.
Again, the key question in the debate over Fluid Milk Compacts is;
will a reasonable amount of the milk consumed as fluid be produced
relatively close to the site of consumption in the future? Doing so has
served U.S. consumers very well for over 60 years.
If the milk production capacity in large areas of the country is
destroyed, the cost of regenerating it in the future will be
astronomical.
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Senator Schumer. Thank you, Mr. Beatty. We appreciate it. I
am sorry to move things along, but we have a vote in now about
7 minutes.
Mr. Gorder?
STATEMENT OF RICHARD GORDER, MEMBER, BOARD OF DIRECTORS,
WISCONSIN FARM BUREAU FEDERATION, MINERAL POINT, WISCONSIN
Mr. Gorder. Well, thank you, Senator Schumer and Senator
Kohl. I would like to thank Senator Feingold for his very nice
comments this morning, and thank Senator Kohl for allowing me
to participate and speak on behalf of the farmers of the State
of Wisconsin.
I am a dairy farmer from Mineral Point, Wisconsin. I am
also a member of the board of directors of the Wisconsin Farm
Bureau Federation. I am considered by most to be a relatively
small dairy, milking today just around 50 cows. However, in the
last 18 months I reinvested in my dairy operation in excess of
over $200,000 and will be increasing my herd size in an attempt
to remain economically viable.
When I started farming in 1979, there were over 46,000
dairy farmers in the State of Wisconsin, and today there are
less than 19,000. Senator Feingold made the statement that
there were less than 20,000. For the record, I would submit
that just this last week the Wisconsin Department of Ag Trade
and Consumer Protection released the fact that there are
18,245, a loss of over 1,600 dairy farms from July of 2000.
Wisconsin, like most States, has lost their dairy farmers
for a variety of reasons--economics of profitability, urban
pressures, normal retirement, and an adverse Federal dairy
policy. Today, the subject of these hearings is dairy compacts,
or as we refer to them in the upper Midwest, the dairy cartel.
Even one of your Southern colleagues, Senator Zell Miller,
while Governor of Georgia, referred to the cartels as
counterproductive and akin to a price-fixing scheme.
Will this hearing shed any new insight or documentation
that has not already been discussed? For most, the issues and
positions are established--those who have and want to preserve
the Compact, those who want to expand the compacts, and those
of us who look at the compacts as just bad dairy policy that
promote regional division.
The Northeast Dairy Compact was never intended to be a
permanent pricing structure, but a stop-gap measure to slow the
decline of the number of dairies in the Northeast until
Congress could address a national dairy policy as a whole.
Today, we in this country still wait for a comprehensive,
inclusive dairy policy that knows no regional barriers.
One of the remarks often touted for justification by
Compact proponents is we are just trying to save our family
farms. Yet, statistics do not support this. In the first 2
years of the Compact, the Northeast lost more dairy farms than
in the previous 2 years. Yet, there was an increase in
production more than twice the national average.
The debate is not just about the continuation of the
Northeast Dairy Compact, but the adverse economic impact from
the expansion of compacts into the South and even into some of
the Western, Mountain and Pacific Northwestern States that have
a high Class I utilization.
Regional dairy compacts place a floor under the price of
milk used for fluid purposes in the compact region. This
artificial price increase creates an incentive for more milk
production in the region, yet represses consumption of fluid
milk in that area. That surplus finds its way into manufactured
milk products such as cheese, butter and milk powder.
While dairy compacts insulate the market from competition
by placing restrictions on milk entering the compact region,
they impose no restrictions on the surplus milk and milk
products that must leave the region in search of a market. As a
result, the market distortions of dairy compacts have a
negative effect on the prices of producers in the non-compact
areas.
You have heard a lot of numbers here today, Mr. Chairman. A
1999 University of Missouri study shows that with the expansion
of compacts into the Southern States, Wisconsin dairy farmers
would lose over $64 million per year. Another report, The
Interregional Analysis of Interstate Dairy Compacts, conducted
by three noted economists from the University of Wisconsin,
demonstrates that with the expansion of the compacts into 9
northeastern and 16 southern States, the economic impact on
farmers in non-compact States to be at $326 million per year.
Whichever number is used, the long-range consequences would be
even greater if you were to calculate the economic impact to
our rural communities' infrastructure.
As we in this country attempt to gain access to foreign
markets, we continue to battle countries that place tariffs on
our goods that restrict our ability to compete in their market.
While we decry those who place protectionist policies or
tariffs on our goods, we in kind have allowed the same type of
policy within our own borders. All milk that runs into a
compact area must be priced at the established compact price,
in essence a tariff.
Mr. Chairman and members of the committee, I urge you not
to exacerbate an inferior policy, a defective policy that will
come back and haunt us time and time again, not only from
within our own borders but from those countries who wish to
impose their own protective agenda.
You have the ability to right this wrong. There are two
bills that are currently before you that attempt to address
national dairy policy for the 21st century.
Senator Schumer. Mr. Gorder, I am going to have to ask that
you begin to conclude.
Mr. Gorder. I have just one paragraph, if I could finish
up, Mr. Chairman.
Senator Schumer. Please.
Mr. Gorder. Mr. Chairman, while my organization has not
taken a specific stand on either of these bills, we believe
that they could be a catalyst for a national dairy policy that
attempts to unify a divided dairy industry. We also believe
that these bills are consistent with our vision to be leaders
in unfettered trade.
I thank you, Mr. Chairman and members of the committee, for
the opportunity to address you today.
[The prepared statement of Mr. Gorder follows:]
Statement of Richard Gorder, Member, Board of Directors, Wisconsin Farm
Bureau Federation, Mineral Point, Wisconsin
Thank you, Mr. Chairman and Members of the Committee for the
opportunity to appear and testify before you today.
I am a dairy farmer from Mineral Point, Wisconsin. I am also a
member of the Board of Directors of the Wisconsin Farm Bureau
Federation.
I am considered by most to be a relatively small dairy, milking
just 50 cows. In the last 18 months I have reinvested in my dairy
operation in excess of over $200,000 and will be increasing my herd
size in an attempt to remain economically viable.
When I started farming in 1979 there were over 46,000 dairy farms
in the state of Wisconsin. Today there are less than 19,000. Wisconsin
like most states has lost dairy farms for a variety of reasons;
economics/profitability, urban pressures, normal retirement, and an
adverse federal dairy policy.
Today the subject of this hearing is dairy compacts, or as we refer
to them in the upper Midwest, the dairy cartel. Even one of your
southern colleagues Senator Zell Miller while Governor of Georgia
referred to the cartels as ``counterproductive'' and akin to a ``price
fixing scheme''.
Will this hearing shed any new insight or documentation that has
not already been discussed? For most, the issues and positions are
established. Those that have and want to preserve the compacts, those
that want an expansion of the compacts, and those of us that view the
compacts as just bad policy that promotes regional division.
The Northeast Dairy Compact was never intended to be a permanent
pricing structure but a stop-gap measure to slow the decline of the
number of dairies in the Northeast until Congress could address
national dairy policy as a whole. Today, we in this country still wait
for a comprehensive/inclusive federal dairy policy that knows no
regional barriers.
One of the remarks often touted for justification by compact
proponents is that the compact is a mechanism for saving our family
farms. Yet statistics do not support this. In the first two years of
the compact the Northeast lost more dairy farms than in the previous
two years, yet there was an increase in production more than twice the
national average. In the first two years of existence the compact cost
Massachusetts milk consumers an estimated $25 million. At that time the
state had only 350 dairy farms, which equates to $72,000/farm. Yet the
average payment to each Massachusetts dairy was $3000. Consumers in
Massachusetts are basically subsidizing Vermont.
This debate is not just about the continuation of the Northeast
Dairy Compact, but the adverse economic impact resulting from expansion
of compacts into the south and even into some of the Western mountain
and Pacific Northwestern states that have a high class 1 utilization.
Regional dairy compacts place a floor under the price of milk used
for fluid purposes in the compact region. This artificial price
increase creates an incentive for more milk production in the region,
yet represses the consumption of fluid milk in that area. The surplus
that results finds its way into manufactured milk products such as
cheese, butter, and milk powder.
While dairy compacts insulate that market from competition by
placing restrictions on milk entering the compact region, they impose
no restrictions on the surplus milk and milk products that must leave
the region in search of a market. As a result, the market distortions
of dairy compacts have a negative effect on the prices of producers in
non-compact states.
A 1999 University of Missouri study shows that with the expansion
compacts to the southern states, Wisconsin dairy farms would lose over
$64 million per year. Another report ``The Interregional Analysis of
Interstate Dairy Compacts'' conducted by three economists from the
University of Wisconsin-Madison demonstrates that with the expansion of
compacts into nine Northeastern and 16 Southern states, the economic
impact on farmers in non-compact states would be about $326 million per
year. Whichever number is used, the long range consequence would be
even greater if you were to calculate the economic impact to our rural
community infrastructure.
As we in this country attempt to gain access into foreign markets,
we continue to battle countries that place tariffs on our goods that
restrict our ability to compete in their market. While we decry those
who place protectionist policies or tariffs on our goods, we in kind
have allowed the same type of policy within our own borders. All fluid
milk that moves into a compact area must be priced at the established
compact price, in essence a tariff.
Regional compacts foster interstate trading barriers thus
challenging the intent of the framers of the Constitution, who warned
strongly against economic warfare between states. A number Commerce
Clause cases arose out of attempts to protect local dairy farmers in
the 1930's and later in the early 1990's. All were struck down by the
Supreme Court stating that states cannot establish a policy for the
purpose of creating a protective economic barrier against competition
from another state. See Baldwin v. G.A.F. Seelig, 294 U.S. 511,523, 527
(1935)
Mr. Chairman and Members of the Committee I urge you not to
exacerbate a inferior policy. Regional dairy compacts are a defective
policy that will come back to haunt us time and time again, not only
from within our own borders but from those countries who wish to impose
their own protective trade agenda.
You have the ability to right this wrong. There are a couple of
bills that attempt to address national dairy policy for the 21 st
century. The National Dairy Farmers Fairness Act of 2001 (S.294)
introduced by Senators Kohl and Santorum, and National Family Farm
Dairy Equity Act (H.R.1878) introduced Congressman Kind. These bills
attempt a counter-cyclical approach to the pricing of all milk.
Simplified, when prices are good there wouldn't be a payment and when
prices fall below a designated level a support mechanism is activated.
My organization has not taken a formal position on either of these
bills. We believe, however, that they can be the catalysts for
establishing a national dairy policy that attempts to unify a divided
dairy industry. We also believe that these bills are consistent with
our vision to be leaders in unfettered trade.
Thank you Mr. Chairman and Members of the Committee for the
opportunity to come before you today. I urge your support for a
sensible national dairy policy that can benefit farmers in all regions,
without pitting farmers in one region against farmer in another.
Senator Schumer. I thank you, Mr. Gorder, and I want to
thank all the witnesses. We are not going to have questions
because we have about a minute-and-a-half left to vote.
Senator Feingold. Mr. Chairman, I would like to ask a
couple of questions, if I could.
Senator Schumer. Well, then would you mind chairing the
hearing and then asking questions?
Senator Feingold. I would be delighted.
Senator Schumer. You have a fine Chair, someone I don't
agree with on this issue, but respect tremendously. Senator
Feingold will Chair and then ask some questions.
Thank you, and I thank the witnesses.
Senator Feingold [presiding]. Thank you very much, Mr.
Chairman. I just have a couple of questions.
First, again, Mr. Gorder, I am so glad you are here. You
talked about your support for a national dairy policy, one that
helps all farmers. I strongly agree with you that Congress
should focus on a unified national dairy policy that can help
all of America's dairy farmers fairly compete in the modern
marketplace.
I would like you, as the only dairy farmer who is speaking
at this entire hearing, to please talk a little bit about the
merits of a national dairy policy versus a fractionalized dairy
structure.
Mr. Gorder. Thank you, Senator Feingold. As you know,
Wisconsin has a strong infrastructure in its dairy and we are
dependent on the Nation as a whole and even an export market
into the world, for all practical purposes. There is no way
that we in Wisconsin are going to be able to consume all of our
dairy products, and so we are dependent on an expansive export
program.
What happens when you get the regional compacts that we
have today--and there has been much discussion as to the fact
that there is no barrier for our milk going into, let's say,
the Northeast. The fact is that any time you have an
established price, and take whatever price that raw product is
coming in, and you add the transportation cost, that
transportation cost has to be added on top of that established
price. That in itself is restrictive for us to move into that
market.
So what we certainly propose is a national policy that
knows no regional barriers. We understand that there are areas
in the country that can't produce milk as efficiently as
Wisconsin. I will tell you that we even have sometimes
competition with California, but that is the way the system
works, and we are certainly willing to work within the system.
We would just like the bridle taken off and allow us to go
where the market leads us.
Senator Feingold. Thanks so much.
I just have one other question for Senator Pines. I am
sorry I missed your testimony, but I certainly know some of
your background on this and where you come down on this issue.
I am very encouraged by the comments in your written testimony
supporting alternatives to the Northeast Dairy Compact. Again,
I believe that Congress should be focusing its attention on
legislation that helps all dairy farmers instead of just
specific regions.
I wonder if you could tell us a little bit about your
experience in advocating for alternative proposals to help
dairy farmers in Massachusetts and why you pushed for these
programs as an alternative to the Compact. Did you, for
example, feel these were simply better alternatives or did you
feel that the Compact had failed?
Ms. Pines. Senator, I had indicated earlier, and so stated
in my written testimony that I was very ambivalent in terms of
initially being supportive of the Dairy Compact. We had only
information for a 7-month period and I was concerned that I was
proposing to eliminate the Compact before we had an opportunity
to see it work. As a result, I supported it back in 1978.
I left the Senate in December 1998, and I felt insecure as
I found out more and more about the Compact because I had been
so ambivalent in my efforts as Chair of the committee. As the
years passed and I became a little bit more alert to what had
transpired, I was more disturbed because I had hoped that my
instincts were wrong.
I have spent my career, over 25 years, working on behalf of
consumers and small business people, and I am very proud of my
record. I ran the Federal Trade Commission under President
Carter, protecting consumers and working to enforce laws in the
areas of antitrust.
In my entire career, I had fought for consumers and it
disturbed me to find that people who were poor were being
forced to pay a disproportionate amount in purchasing milk. I
am very proud of an initiative that we established in
Massachusetts on behalf of osteoporosis. We were the first
State in the country to try to educate the public about the
need to have young people drink milk and use other calcium
products. I spent a long time on that issue and we have a
wonderful program in our State trying to encourage the elderly
to exercise and to take calcium with vitamin D.
And here I was in a position where I had proposed
legislation, or allowed the continuation of a program and not
aggressively opposed it which charged these individuals, the
elderly as well as poor people and people on food stamps, more
for the price of milk. It seemed so counterintuitive to where I
had been for my career.
So I guess about a year-and-a-half ago I learned that some
of my colleagues in the legislature were contemplating
revisiting the issue, and I had hoped that they would. I no
longer was there and no longer chaired the Committee on Natural
Resources and Agriculture, but others took my place and there
was an effort in the Massachusetts Senate to provide an
alternative.
Forty-five percent of the fund in the Northeast Dairy
Compact comes from Massachusetts consumers. Yet, only 7 percent
of our farmers contribute. The money goes to New York and to
Vermont. I had understood that that would be the case, but I
thought it would be offset by helping to preserve farms, but it
wasn't.
So my colleagues in the Senate proposed a measure which
passed the Senate but was defeated in conference committee
which would have increased the program that we have in place to
provide for development rights to farmers. It would have
provided funding to replace all the funds that our farmers in
Massachusetts had received under the Compact.
We would have established a commission which would have
aggressively looked at other alternatives that the State of
Massachusetts might take to help preserve the family farm and
to preserve open space, which is very important. I felt that
these other alternatives really were more appropriate as
someone who has been concerned with public policy.
I had been teaching public policy and advocacy at the
Kennedy School of Government at Harvard, and looked at this
particular issue specifically because of all of the policy
issues and the problems that occurred. I thought that it might
be an interesting issue for my students to consider and to
evaluate.
As it turned out, I didn't use the case study, but I had
the opportunity to really think through the issue again and I
truly believe that the Compact in and of itself is not doing
what we all hoped it would do. It is not saving the family farm
and preserving open space. Dairy farmers need to be helped and
this is not, in my opinion, the best way to do that.
Senator Feingold. Well, Senator, that is very effective
testimony coming out of the heart of New England, and I think
we will find your comments being repeated as the debate goes
on. I appreciate your being here. I want to thank all of the
witnesses on both panels. It has been a long day, but we are
grateful.
I would ask unanimous consent to keep the record open for 3
weeks for questions and further submissions.
With that, the hearing is concluded. Thank you very much.
[Whereupon, at 2:46 p.m., the committee was adjourned.]
[Submissions for the record follow:]
SUBMISSIONS FOR THE RECORD
Allied Federated CO-OPS Incorporated, Canton, New York,
13617
July 27, 2001
Senator Charles Schumer
313 Hart Senate Office Building
Washington, DC 20510
Dear Senator Schumer,
On behalf of the members of Allied Federated Milk Cooperatives, I
wish to share several comments on the Dairy Compact versus other
proposals to assist dairy farmers. First, I will share a bit of
background of our organization. Allied Cooperatives has a total of 36
milk cooperatives as members of our organization. The total number of
member is an average of 1850. Our members are principally in New York
and Pennsylvania, with a few in Massachusetts and Maryland.
At a recent Allied Board of Directors meeting, I handed out copies
of the Kohl-Santorum bill S.294--Many have given me feed back. All
favor the Compact over the bill. As one producer put it--the compact
paid him an average of 94 cents per hundredweight last year on all of
his milk not a portion. He originally ``sacrifices'' seven cents more
to the commission but because he did not increase production, he gets
an additional seven and one half cents back. So his average price was
$1.01/cwt higher than mine.
Now the proposed bill would only raise prices 50 cents during low
milk prices like last year. They all expressed similar sentiments that:
a) the Compact had all the players sitting at the table to set
the price
b) it is the first time that farmers have been able to directly
influence a portion of their pay price
c) it is a no cost program to the government
d) it maintains supply for the area
e) it does not limit expansion by those who would like to move
their business to a higher level (understand that even though
many do not like the seven cent supply management portion they
know that this is not a deterrent to their expanding if they
chose, where quotas or other ways usually are)
f) they all expressed the concern that programs such as Kohl's
only last as long as the economy is good, taxes are not
increasing and the program does not become a target of some
group determined to change it,
g) in contrast, the compact has the ability to revise the price
as needed by the commission's agreement.
Additionally,, the compact puts a value on fluid milk which
typically varies very marginally in supermarket price year round.
Cheese prices or class III prices fluctuate widely based on many
factors such as world pricing, import levels and a limited number of
players buying and selling on the Chicago Mercantile Exchange. No one
including the members from Lanco (600 members), our coop in
Pennsylvania, wish to see the Compact end. All however agree the
compact must be expanded and allow others to set up other compact
areas. All are unanimous in saying that the Compact can not remain a
New England thing. Everyone expresses the desire for dairy farmers to
have the right to negotiate prices with the other parties in the
industry to reflect their input costs among other things.
I think that other areas should be able to set their compact
pricing off whichever portion of the pay price they want in their area.
For example, California and the Mid-west might chose to set a class III
price under a compact. Obviously, the class utilization rate has a
great deal of impact on the final price an area receives. The reason
why the class I price in the Compact works for our area is our higher
utilization rate. I also think Compacts will be more responsive to
maintaining supply to match demand than the government has shown itself
to be. I believe Compacts have a better chance of responding to world
market as well as local market prices with their commission. I think it
encourages the processors, handlers, supermarkets and consumers to work
with the farmer to ensure all industries remain healthy. It allows
leadership and communication to develop that in the end benefits
everybody and again at no cost to the government.
So the question comes, do dairy producers deserve the right (the
equal right, I might add) to negotiate their price as all other
commodities do or not? Is the government serious in it's desire to
empower the farmer to be competitive and earn a living wage? Is the
government committed to preserving a land base for agriculture to
provide food for America if not for the world? Are they interested in a
safe secure supply of food for the United States? Or do they want to
pat one another on the back and say they gave us something? Farmers are
not asking to be given anything! They are willing to work very hard.
They do want to see a profit that allows them to support their families
and business. Whatever the farm bill looks like it must be able to
respond to the conditions that develop not only stateside but
worldwide. Most people also believe that anything the government does
will be challenged by the WTO. But most people believe the compact is
not able to be challenged by the WTO successfully since it is not
initiated as a government program and it does have producer
involvement.
On behalf of our organization, I ask you to submit our comments to
others and that you speak in favor of the extension and expansion of
the Dairy Compact on our behalf. If anyone has questions on these
comments, they may direct them to me. I can be contacted at Allied
Federated Cooperatives at 315-386-8116 during normal business hours, 8
Am to 5 PM. M-F. Or they may email their questions to me at
infodir@slic.com.
Finally, I would like to reiterate our thanks to you for your
representation of all facets of agriculture. Your willingness to listen
and act on our concerns is very important to us. Thank you!
Sincerely,
Judith Aldrich
Director of Information
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