[Senate Hearing 109-662]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 109-662
 
                     TO REVIEW USDA DAIRY PROGRAMS

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

                                HEARING

                               before the

                       COMMITTEE ON AGRICULTURE,
                        NUTRITION, AND FORESTRY

                          UNITED STATES SENATE


                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION


                               __________

                             JULY 20, 2006

                               __________

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


  Available via the World Wide Web: http://www.agriculture.senate.gov


                                 ______

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           COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY



                   SAXBY CHAMBLISS, Georgia, Chairman

RICHARD G. LUGAR, Indiana            TOM HARKIN, Iowa
THAD COCHRAN, Mississippi            PATRICK J. LEAHY, Vermont
MITCH McCONNELL, Kentucky            KENT CONRAD, North Dakota
PAT ROBERTS, Kansas                  MAX BAUCUS, Montana
JAMES M. TALENT, Missouri            BLANCHE L. LINCOLN, Arkansas
CRAIG THOMAS, Wyoming                DEBBIE A. STABENOW, Michigan
RICK SANTORUM, Pennsylvania          E. BENJAMIN NELSON, Nebraska
NORM COLEMAN, Minnesota              MARK DAYTON, Minnesota
MICHEAL D. CRAPO, Idaho              KEN SALAZAR, Colorado
CHARLES E. GRASSLEY, Iowa

            Martha Scott Poindexter, Majority Staff Director

                David L. Johnson, Majority Chief Counsel

              Vernie Hubert, Majority Deputy Chief Counsel

                      Robert E. Sturm, Chief Clerk

                Mark Halverson, Minority Staff Director

                                  (ii)

  
                            C O N T E N T S

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                                                                   Page

Hearing(s):

To Review USDA Dairy Programs....................................     1

                              ----------                              

                        Thursday, July 20, 2006
                    STATEMENTS PRESENTED BY SENATORS

Chambliss, Hon. Saxby, Chairman, Committee on Agriculture, 
  Nutrition, and Forestry........................................     1
Crapo, Hon. Micheal D............................................     3
Leahy, Hon. Patrick J............................................    11

                                Panel I

Glauber, Joseph PhD., Deputy Chief Economist, United States 
  Department of Agriculture, Washington, DC (substituting for 
  USDA Chief Economist, Keith Collins): Accompanied by Lloyd Day, 
  Administrator Agriculture Marketing Service and Teresa 
  Lasseter, Administrator Farm Service Agency....................     4

                                Panel II

Beckendorf, Charles, National Milk Producers Federation, Tomball, 
  Texas..........................................................    16
Berthiaume, Leon, St. Albans Cooperative Creamery, Inc., Swanton, 
  Vermont........................................................    23
Green, Jim, Kemps LLC/HP Hood LLC on Behalf of International 
  Dairy Foods Association, St. Paul, Minnesota...................    19
Hall, Ken, Dairy Producer, Terreton, Idaho.......................    21
                              ----------                              

                                APPENDIX

Prepared Statements:
    Chambliss, Hon. Saxby........................................    34
    Beckendorf, Charles..........................................    62
    Berthiaume, Leon.............................................    89
    Glauber, Joseph..............................................    35
    Green, Jim...................................................    70
    Hall, Ken....................................................    85
Document(s) Submitted for the Record:
    National Family Farm Coalition...............................   103
    Progressive Agriculture Organization (With attachments)......    97



                     TO REVIEW USDA DAIRY PROGRAMS

                              ----------                              


                        THURSDAY, JULY 20, 2006

                                       U.S. Senate,
         Committee on Agriculture, Nutrition, and Forestry,
                                                      Washington DC
    The committee met, pursuant to notice, at 10:05 a.m. in 
room 328-A at the Russell Building, Washington, DC Hon. Saxby 
Chambliss, chairman of the committee, presiding.
    Present: Senators Chambliss, Coleman, Crapo, and Leahy.

       OPENING STATEMENT OF HON. SAXBY CHAMBLISS, A U.S. 
         SENATOR FROM GEORGIA, CHAIRMAN, COMMITTEE ON 
              AGRICULTURE, NUTRITION, AND FORESTRY

     The Chairman. This hearing will now come to order and good 
morning. I want to welcome you all to this hearing here this 
morning, on the Department of Agriculture Dairy Programs and 
let me tell you a little about what our scenario is going to 
be. Senator Crapo and I are obviously the only one's here. All 
members are going to have the opportunity to make a five minute 
opening statement. We've been notified that other members are 
going to be here a little bit later on. So, as they come, we'll 
either let them make their statement as part of their 
questioning period and not charge that time to them, or we'll 
allow them to make a statement as they come in. So, if we have 
to interrupt the panel, know that's the reason for that 
interruption.
    We're fortunate to have the Deputy Chief Economist of the 
Department of Agriculture Dr. Joseph Glauber, with us today. 
I'm certain that Dr. Glauber can help us make sense of the 
various dairy programs our government administers. I'd like to 
note that USDA Chief Economist, Dr. Keith Collins, was 
scheduled to be with us here today, but unfortunately, is not 
feeling well.
    Dr. Collins recently celebrated his 30th year of service to 
the Federal Government, 29 of which have been at USDA. We 
appreciate Dr. Collins' long record of hard work and dedication 
to this country, and wish him a speedy recovery. And I would 
note, that having visited with the Secretary this morning and 
with Dr. Glauber here a little earlier, that I understand Keith 
is doing well and is going to be out of the hospital in the 
next day, or so. And we'll keep him in our prayers and 
certainly hope for that speedy recovery.
    In addition to Dr. Glauber, we have with us today dairy 
industry leaders from both the private industry and producers 
who work with dairy cattle each and every day. We appreciate 
you all taking the time to be with us, and we look forward to 
hearing from each of you in regard to how USDA dairy programs 
impact your businesses. I also welcome those listening today 
via our website.
    The United States dairy industry is constantly undergoing 
change. During the Great Depression of the 1930's, Congress 
enacted the Federal Milk Marketing Orders in an attempt to 
ensure a stable supply of milk and provide for the orderly 
marketing of milk. These orders have experienced great change 
over the years as we continually attempt to make them more 
responsive to market forces. From these noble intentions, we 
have progressed into a network of dairy programs intended to 
assist the producer when prices are low, ensure a supply of 
milk for American consumers, assist industry in exporting 
product, and ensure a uniform price for our producers. This 
network of programs is complex and often can have different 
effects on different regions of the country. Over the years, 
dairy policy has included dairy compacts, base-excess plans, 
state regulations, voluntary supply controls, the Milk 
Production Termination Program, and the list goes on and on.
    Understanding the complexity of the dairy issue, the 
Committee on Agriculture has attempted to assemble a group of 
witnesses today that represent various parts of the country and 
whose views may differ from program to program. Despite our 
best attempts, we are mindful that the witness list does not 
necessarily accommodate all of the regional interests in dairy 
policy. As such, the Committee is also conducting farm bill 
field hearings throughout the country. Each of these hearings 
will provide dairy producers an opportunity to relate to the 
Committee their unique positions on dairy policy. We are 
confident that this hearing today, supplemented by the 
testimony of producers throughout the country, will provide the 
Committee with a comprehensive view of dairy programs and their 
effects on all of the Nation's dairy producers. This record 
will provide us with valuable information as we look to writing 
a farm bill in 2007.
    Many of the issues of concern in the dairy industry are 
seen through a regional lens. For example, as I have traveled 
the country and discussed dairy programs such as the MILC 
income loss program, I know that no matter what my position on 
this issue may have been -at least half the room would agree 
with me. This is often the case with many dairy programs, as 
their intended consequences can often affect producers based on 
where the producers operation is located or how large or small 
their operation may be. As we continue to tweak dairy programs 
to ensure that all stakeholders are able to participate, we 
must be mindful of the potential impacts on the entire 
marketplace so that we do not unintentionally stagnate growth, 
innovation, or negatively affect the competitiveness of the 
U.S. dairy industry in the international marketplace.
    As we meet here today, we are all aware of the cyclical 
nature of milk production in the United States. The summer 
months create a tremendous challenge to millions of dairy 
farmers as they attempt to keep dairy cattle cool and happy. 
Technological advancements have provided producers with 
increasing opportunities to meet the demands for milk during 
these warm months and the steady increase in cow numbers and 
milk output per cow, particularly in the Western United States, 
has continually increased national milk production volumes. 
According to USDA, current 2006 milk production continues to 
outpace demand resulting in higher stock levels of dairy 
products and lower prices for milk and dairy products. In 
addition, high energy costs have affected the dairy industry as 
they have every other participant in agriculture. It is in this 
climate of falling milk prices and rising production costs that 
we conduct this hearing, but again, we must all be mindful of 
the cyclical nature of milk production and prices.
    Today's hearing will provide Members of this Committee with 
valuable information on how the current dairy programs at the 
USDA have affected processors, producers, and other dairy 
industry participants. Later this year, this Committee will 
conduct another hearing on dairy that will focus on how we 
should approach this critical segment of the agricultural 
complex in the 2007 farm bill. It is our hope that this 
oversight hearing today, coupled with the more forward-looking 
hearing on dairy later this year and the direct regional 
producer input we are receiving at the field hearings, will 
provide the Members of this Committee with the tools and 
information needed to provide an ample safety net for dairy 
producers in the next farm bill, while minimizing any potential 
disruptions in the marketplace.
    I, again, want to thank all of our witnesses for being here 
today. We look forward to your testimony and at this time, I'll 
turn to Senator Crapo for any statement he wishes to make.
    [The prepared statement of Hon. Saxby Chambliss can be 
found in the appendix on page 34.]

 STATEMENT OF HON. MICHAEL D. CRAPO, A U.S. SENATOR FROM IDAHO

    Senator Crapo. Well, thank you very much, Senator 
Chambliss. And first, I want to thank you for holding this 
hearing and second, I appreciate and share the perspective that 
you have given us in your opening comments. I'm not going to 
take my full 5 minutes, but I do want to thank our witnesses 
for taking the time to come and attend with us here today, and 
to participate in this hearing.
    I especially want to thank Ken Hall from Idaho, who has 
traveled out here to share his views on Federal Dairy Policy. 
And as we take stock of current dairy programs, I think that 
witnesses like Ken Hall, are going to have a very valuable 
perspective to provide to this discussion.
    You mentioned there were some regional differences and 
different perspectives on dairy programs, which is to put it 
mildly, Mr. Chairman, and I think that the perspective you will 
get from those of us in Idaho is increasingly becoming a very 
strong concern.
    The Idaho dairy industry has been growing at a very rapid 
pace. In fact, in 2005 Idaho became the fourth largest milk 
producing state in the Nation with more than 700 dairy 
operations and over 400,000 dairy cows. The dairy industry in 
now Idaho's leading agriculture sector, contributing more than 
$800 million dollars of personal income from activity on 
dairies in Idaho. So, that's how significant this issue is and 
it's growing in Idaho.
    And what I'm hearing from Idaho dairymen and what you're 
going to hear later this morning, I think from Ken Hall, is 
that the Federal dairy support programs are not working. The 
number of dairies has been decreasing despite Federal dairy 
programs. And specifically, Idaho dairy producers have concerns 
with the MILC Income Loss Program--or contract program, or 
MILC, depresses the price of milk and distorts markets. 
Further, they want to ensure access to valuable risk management 
tools such as forward contracting that provide them the means 
necessary to protect against volatile price differences in the 
market.
    And as this committee begins the process of writing the 
next farm bill, it's essential to do a thorough review of these 
programs, and analyze effectively their impact on the industry. 
I look forward to the discussion this morning, and I again, 
appreciate the opportunity to share these concerns with you, 
Mr. Chairman. And I also wanted to say, in conclusion, I 
appreciate working with you. You're an outstanding Chairman of 
the Agricultural Committee and you take these issues on head-on 
and help the rest of us on the committee grapple with them in 
ways that I think are going to generate much better policy for 
the country, so thank you very much. Thank you.
    The Chairman. Thanks, Senator Crapo and we're going to 
start this morning, as I said, with Dr. Joseph Glauber, the 
Deputy Chief of Economist, United States Department of 
Agriculture. He is accompanied by Mr. Lloyd Day, the 
Administrator of the Agriculture Marketing Service, and Ms. 
Teresa Lasseter, Administer of the Farm Service Agency. So, 
welcome to all of you and Dr. Glauber, we look forward to your 
testimony.

  STATEMENT OF JOSEPH GLAUBER, PhD., DEPUTY CHIEF ECONOMIST, 
    UNITED STATES DEPARTMENT OF AGRICULTURE, WASHINGTON, DC 
    (substituting for USDA Chief Economist, Keith Collins): 
 ACCOMPANIED BY LLOYD DAY, ADMINISTRATOR AGRICULTURE MARKETING 
 SERVICE AND TERESA LASSETER, ADMINISTRATOR FARM SERVICE AGENCY

    Dr. Glauber. Well, thanks very much. First, thanks for the 
kind words about Dr. Collins. He--I did speak with him last 
night. He should be out of the hospital today and I think 
he's--hopefully, will be back in the saddle on Monday. I know 
he regretted missing this hearing. He was talking about it a 
lot over the last week.
    Mr. Chairman and Members of the Committee, Administrator 
Lasseter, Administrator Day, I thank you for the opportunity to 
discuss this situation in the U.S. Dairy Industry and the 
performance to the Federal dairy program as the committees 
prepare for the 2007 Farm Bill.
    U.S. dairy farming has changed dramatically in the last two 
decades with improvements in transportation and processing, 
fluid milk markets have expanded from local to regional, and 
manufactured diary product markets are international in scope. 
Consumption of dairy products have increased lead by cheese, 
which has seen per capita consumption rise by over 75 percent 
since 1980. Today, cheese production accounts for 40 percent of 
milk use. Per capita consumption of fluid milk consumption 
continues to decline and now, only accounts for a little over a 
third of milk production.
    The structure of milk production is still changing rapidly 
as increased productivity, and economies, and size continue to 
reduce the number of dairy farms and increase average farm 
size. Since 1980, milk output per cow is up 50 percent and 
production is increased by nearly one-third, while the number 
of dairy cows has declined. Today, fewer than 4 percent of U.S. 
dairy farms have more than 500 cows, but these farms account 
for nearly 50 percent of milk production.
    Milk production continues to expand in the West with 
California the nation's leading milk producing state and second 
largest producer of cheese. Western farms tend to be larger and 
have lower average production costs than farms in other 
regions. This year, dairy markets are adjusting to 2004's 
record high milk prices and the near record high prices in 
2005. Reflecting these prices, U.S. milk production, the first 
quarter of 2006 was up 5 percent over the previous quarter--a 
year over a year quarter.
    For all of 2006, we're projecting production to be up more 
than 2.8 percent, more than twice the trend rate of increase. 
Consequently, the all-milk price is forecast to average between 
$12 dollars and 60 cents per hundredweight in 2006, down 17 
percent from 2005. This year's lower milk prices, and higher 
feed, and fuel expenses, as you mentioned earlier, are expected 
to trim growth in milk production in 2007 to less than 1 
percent. With continued strong demand, the 2007 all-milk price 
is forecast to increase of $13 dollars and 35 cents per 
hundredweight, up 6 percent from this year. Now, the MILC price 
support program, Commodity Credit Corporation purchases butter, 
cheese, and nonfat dry milk at price levels intended to support 
the price of milk at no less than $9 dollars and 90 cents per 
hundredweight.
    Starting into the late 1990's, CCC began purchasing large 
amounts of nonfat dry milk, with inventory peaking at 1.4 
billion pounds in 2003. Since then, a change in the relative 
purchase price of nonfat dry milk and butter by the Secretary--
excuse me, a change in the relative purchase price of nonfat 
dry milk and butter, stronger global dairy markets, and 
donations under domestic and foreign food assistance programs, 
implementation of livestock feed assistance programs, and CCC 
sales reduced the nonfat dry milk stocks, held by the CCC, to 
under 12 million pounds in June. For all of 2006, CCC purchases 
of nonfat dry milk are projected to reach 105 million pounds, 
while little to no purchases of butter and cheese are expected.
    In addition to the Price Support Program, dairy producers 
have received more than $2 billion dollars in direct payments 
under the MILC Income Loss Contract Program--or MILC, for sales 
during fiscal years 2002 through 2005. As of July 10th, 2006, 
more than $150 million dollars has been received by dairy 
producers since payments began in April 2006 following the 
program extension signed by the President in February 2006. We 
expect that $1.2 billion dollars in payments will be made 
during Fiscal Years 2006 and 2007.
    The Dairy Export Incentive Program--or DEIP, provides 
payments to exporters of nonfat dry milk, cheese, and butter to 
increase their competitiveness in world markets. DEIP exports 
are limited by quantity and dollar value under the Uruguay 
Round Agreement. DEIP has not been activated during the past 2 
years, however, due to higher world prices, which have enabled 
dairy exports to be--U.S. dairy exports to be competitive 
without DEIP assistance. Strong global demand reduced MILC 
production in Australia and New Zealand, and lower EU dairy 
export subsidies contribute to the stronger global markets.
    In 2005, U.S. dairy exports hit a record $1.7 billion 
dollars as U.S. MILC producers benefited from tight world dairy 
product supplies in a weakening U.S. dollar. Trade conditions 
are similar for 2006. Global demand for dairy products remains 
firm. The U.S. dollar remains favorable to exports, and U.S. 
nonfat dry milk prices are expected to remain competitive 
without export subsidies. Dairy product imports were up in 
2005, including MILC protein concentrates, but MPC's remain 
well below levels reached earlier in the decade.
    Last, I want to mention the Federal MILC marketing orders, 
which established minimum price--minimum MILC prices, handlers 
must pay based on use. Minimum prices under MILC orders are 
based on the market prices of dairy products, so orders are not 
priced in income support programs, nor do they regulate 
production or the volume of marketings. MILC orders help assure 
adequate supplies of fresh fluid milk and enable producers to 
share in the revenues for all milk sold under an order.
    Today, 80 percent of the nation's dairy herd sell 65 
percent of total MILC marketings under 10 active orders. USDA 
is in the process of addressing a number of issues through the 
Federal Order Hearing Process, including redefinition of milk--
fluid milk products, and the level of manufacturing, or make 
allowances used to calculate the value of milk used in cheese, 
butter, and milk powder products. USDA has also requested 
proposals on the entire Federal Order Class III and Class IV 
Price Formula. Other USDA programs that assisted dairy industry 
are addressed in our written testimony.
    As the Committee reviews the dairy situation, several 
issues that merit consideration. while price and income support 
programs and direct payments help producers during periods of 
low prices, programs issues include budget deficit concerns and 
the tax payer cost of the programs, eligibility criteria used 
under the MILC Program, the affects of the price support 
programs and MILC programs on market prices, and the ability of 
dairy markets to adjust when prices are low. And finally, the 
consistency to these programs with current and perspective WTO 
obligations.
    Mr. Chairman, we look forward to working with you and your 
committee members in the months ahead. Thank you.
    [The prepared statement of Dr. Glauber can be found in the 
appendix on page 35.]
    The Chairman. Thank you very much. Some dairy industry 
participants have complained that the current safety net for 
dairy producers, which includes both the dairy price support 
program and the Milk Income Loss Contract program, often 
disrupts the marketplace by encouraging over production when 
prices are low. Some also argue that the Dairy Price Support 
Program inhibits the development of products such as milk 
protein concentrates and caseinates because it is more 
profitable to sell nonfat dry milk to the government, than to 
invest in the manufacturing of these types of products.
    Do the Dairy Price Support Program and the MILC Program 
work in concert to provide a safety net to producers, or do 
these programs, at times, work at cross-purposes to one 
another? In your opinion, are these programs working 
effectively?
    Dr. Glauber. I guess the answer, at least, is whether or 
not they're working together or at cross purposes, is probably 
both yes, at times at least. If we think about how the Price 
Support Program works, it's a very indirect program. We support 
prices by purchasing of products. The 2002 Farm Bill has given 
the Department flexibility to change that relationship, so-
called tilt arrangement between the various products. And so, 
the Department has some flexibility to adjust the relative 
prices between products, but understand, that it's done 
indirectly. And in that way, the price of milk is supported to 
the $9.90 per hundredweight.
    The problems, I would say, with the program, is that 
obviously because it's raising prices, there is a consumer 
aspect to that of raising consumer prices, but the other thing 
is the potential product imbalance. Again, the 2002 Farm Bill 
helped with that, but we have seen certainly periods where we 
have acquired a lot of stocks of one particular product like 
nonfat dry milk. And because of that, stockpiles can--when 
world prices are low, stockpiles can end up growing quite 
large.
    It also can distort markets in the sense of what we saw 
with--at least back in the late 1990's, or early 2000, with the 
import of milk protein concentrates. I think that has--we've 
made some changes where--which I think have mitigated that a 
great deal since then. But those are some of the cause of the 
program.
    The flip side, of course, is the MILC Program. And there, 
the MILC Program operates as a direct income program, a 
counter-cyclical program much akin to some of the programs we 
run for grains. Their producers receive a price difference 
based on Boston Class I--the Boston Federal Market Order Class 
I price and six--administer price of $16 dollars and 94 cents 
per hundred. That is, they're factored by a--in current 
legislation by 30--you just get 34 percent of that, but then, 
that's multiplied times your monthly marketings. Now, those are 
restricted to 2.4 million pounds per dairy operation, per year. 
Because of that, that roughly translates to about 120 cows. So, 
there are a lot of producers--larger producers, of course, who, 
as we--you had said earlier, produced the bulk of the milk 
supply, who receive only partial benefits in that case. About 
50 percent of the milk produce of the U.S. is covered, more or 
less, by MILC.
    And--but, it does have some potential production impact and 
in that sense, it's a--it may be cross-purposes with a 
underlying market price support program. If you're creating 
incentives to produce more milk, well then, that can 
potentially cause a price decline and at which point, we--if it 
gets below $9.90, or the--well, I should say at the product 
level, then the U.S. Government steps in and we purchase 
product.
    We did do a study of this at Congress's request, and I 
think about a year and a half ago, or so, and the findings in 
that study suggest that the production impact of the program 
actually, was quite small. I think the findings were less than 
.2 percent. However, there is that and I think that that 
potential, particularly when prices are extremely low. So, in 
that sense, I think that there is some potential cross-
purposes.
    The Chairman. It's my understanding that last year, a group 
of dairy cooperatives and private companies came together to 
petition USDA for an emergency hearing to update the cost data 
used to calculate make allowances. The USDA responded to this 
request and held hearings on this issue in January of this 
year. Many industry participants were disappointed when USDA 
announced that they would forego a decision on this issue in 
lieu of an additional emergency hearing in September of this 
year.
    Some industry participants have claimed that this delay 
costs the dairy industry, particularly dairy product 
manufacturers, approximately $26 million dollars per month, and 
could jeopardize the viability of several plants. Can you 
explain to the Committee the reason for this delay, and has 
USDA taken into consideration the potential impacts on the 
dairy industry that this delay could cause, and do you feel it 
is in the best interest of the dairy industry to delay this 
decision until further data can be obtained, or should an 
interim decision be made as several Members of Congress have 
requested?
    Dr. Glauber. Well, thanks. I'm going to let Lloyd Day 
answer some of the questions about the hearing process itself. 
But first, let me just say that obviously, this is a very 
important issue, because make allowances ultimately determine 
purchase prices, so it affects product, the product producers. 
It also affects dairy producers, ultimately in the forms of the 
blend prices they receive. It also can ultimately affect price 
support operations, and also MILC contract payments, 
potentially. So, it is a very important issue. Let me talk--let 
Administrator Day take care of the hearing aspects of it.
    Mr. Day. Thank you, Dr. Glauber. Mr. Chairman, thank you 
for the opportunity to give the Agency's perspective on this, 
indeed, very important issue. It's an important issue, as Dr. 
Glauber mentioned, because it affects the price that, not only 
dairy producers or processors pay dairy farmers, but the 
operations of naturally those that use dairy for manufacturing 
processes such as cheese, butter, et cetera.
    When we convened this hearing on an emergency basis, the 
hearing process in the Federal MILC marketing order as allowed 
for the opportunity for all sides to come in and to present 
evidence, that eventually is how we base a decision on whether 
there should be an increase in the make allowance, or in other 
parts of the price III and IV pricing formulas.
    Looking at the data that we received, it boiled down to 
really two sets of data. One set was from the California 
Department of Food and Agriculture, which isn't reflective of 
the rest of the nation, but just the State of California. And 
the other set, was from the Rural Business Cooperative Service. 
The problem with the two sets of data, is that they're 
different sets. One is from California. It looks at large, 
small proprietary firms. The other, looks at only a survey of 
cooperatives and doesn't get a broad national scope of all 
sizes, and proprietary versus cooperative dairies.
    We also, during the hearing process, we--even proponents of 
changing the--using this data, found problems with the data. 
And thus, we had--prior to even having an emergency hearing, we 
had contracted with Cornell University to look at the whole 
national scope, all sizes of the plants, proprietary 
cooperative, large, small, different types of dairy 
manufacturing, so that we have a broader national data set to 
make this important designation.
    Now, as we speak, Cornell University is actually meeting 
with the dairy programs at USDA. I don't know how long it's 
going to be until they finalize that data. Hopefully, it's 
going to be very soon. Once we get that data, we're going to 
make that data public, so all participants, again, have the 
opportunity to view it. And then, we can move to--toward that 
interim decision, in order to help those that are coping, as 
you mentioned, with the rising prices for many, many factors, 
as well as falling dairy prices.
    The Chairman. Last, Dr. Glauber, the reported aggregate 
measure of support for dairy totals $4.5 billion. If the WTO 
negotiations are successful, the United States will be 
restricted to $7.6 billion in the amber box. It's my 
understanding, that expenditures for the MILC Program are not 
included in the $4.5 billion amber box amount, since the 
program was created after our latest amber box notification in 
2001. As a matter of clarification, does the $4.5 billion total 
for dairy include MILC Program payments? If not, do you 
anticipate that report aggregate measure support for dairy will 
increase, once MILC payments are included?
    Dr. Glauber. In fact, it does not. The aggregate measure of 
support, the $4.5 billion dollars, that you've sited, does not 
include MILC. The measure itself is calculated by convention 
that all countries who have price support programs and for us, 
it's essentially the Dairy Program and the Sugar Program that 
fall under this particular methodology. But the amount is 
calculated on the basis of the difference between the 
administered price--the $9.90 and a world price, which is an 
average world price of 1986 to 1988 for fluid milk. That price 
difference, times the fluid milk production in the U.S. So, 
that gives you the $4.5 billion. That is trended up, because 
milk production has been moving up by one to 2 percent per 
year.
    Now, what is added to that is any other dairy program or 
income transfer, like MILC. So, for example, this year, if--for 
1906, we're projecting at roughly $.5 billion dollars in MILC 
payments, that would be added to the roughly $4.5 billion 
dollars, giving you $5 billion dollars. So, you--you're 
absolutely right, when we're looking at a proposal of reducing 
our AMS by six--60 percent to the $7.6 billion dollars. It 
would imply, at least, if nothing were done with the Dairy 
Program under the current 2002 legislation, that the 1906 
number, at least, would be roughly 60 to 65 percent of that 
total.
    The Chairman. OK. Senator Crapo?
    Senator Crapo. Thank you very much, Mr. Chairman. And Dr. 
Glauber, I want to talk, first, with you about forward 
contracting. As you probably know, I'm a very strong proponent 
of forward contracting as a risk management tool that frankly, 
is frequently used by farmers outside the dairy sector. The 
majority of the farmers that use forward contracting to lock in 
prices they can receive for cotton, corn, and wheat. And dairy 
farmers actually, often utilize forward contracts to lock in 
feed, fuel, and other input costs. But unfortunately, as we 
tried to make this program permanent last year, we were 
unsuccessful in doing so.
    At that time, the Department told Congress that the USDA 
supported making this program permanent, and we're going to be 
looking at it again, as I'm sure you're aware. And I just 
wanted to check with you, because I want to make sure that the 
Department continues to take this position. I know that there 
was recently was a Farm Bill theme paper that endorsed risk 
management tools, and I wanted to assure, once again, that the 
USDA does support making the forward contracting programs 
permanent.
    Dr. Glauber. Yes, yes, we do. And we believe that forward 
contracting provides a good mechanism for producers to share 
risks. I know there's a lot of criticism of that program, I 
think some unfounded. The--if you remember the pilot, it 
applied only to Class III and Class IV uses and so, in the 
sense that--of undercutting the program, or anything like that 
of the Federal Milk Marketing Order, because the MILC for 
manufacturing purpose is not required to be pooled in the 
Federal Order, regardless of whether or not there's a forward 
marketing contract, we believe this did not have an adverse 
affect on that.
    Senator Crapo. Well, thank you very much. I just wanted to 
be sure to get that on the record, as we continue to deliberate 
regarding these kinds of matters. And I want to go back now, to 
the--frankly, the first question that was asked by the 
Chairman, with regard to MILC, and I know that you've answered 
that, but I wanted to get into it in a little more detail.
    In a report issued by the USDA in October of 2004 on the 
dairy programs, the USDA reported that the MILC conflicts with 
Dairy Price Support Program, it actually decreases milk prices 
paid to producers. According to this report, without the MILC 
Program, the remaining dairy programs raise the all-milk price 
by 4 percent, compared to about 1 percent with MILC on an 
average over 5 years. And in the same report, it was found that 
when the market prices fall toward the price support safety net 
and thus, is calling for an adjustment in supply, the results 
are partially muted by the MILC Program, which by providing 
production linked funds to producers, may encourage production 
and retard the supply adjustment. The result being, that milk 
stays lower--prices stay lower longer than they otherwise 
would, increasing the likelihood of larger CCC purchases, and 
raising costs for both programs.
    It appears to me, that there's an inherent conflict between 
the MILC Program and the Dairy Price Support Programs, and do 
these programs continued existence make economic sense?
    Dr. Glauber. I think the problem that you've raised, is a 
legitimate one. That is, the having both in unison, and we--you 
can make analogous issues about programs in grains or anything 
else, where we have both price support features and direct 
payment features. The difference here is that, again, the real 
difficulty is when prices are extremely low, because it does 
mute the otherwise price response that producers would have of 
cutting back production.
    Now, again, this is--the MILC Program is limited to a 
degree, because of the $2.4 billion dollar--million pound limit 
on how much is eligible for production--or eligible for 
support. Now, let me just add, as an economist, I might add, if 
you look at these programs separately, I can see a lot of nice 
things about a MILC Program, in the sense that it provides an 
income support, which is--it doesn't distort product--
underlying product markets. That it provides some safety net, 
but doesn't distort the underlying product markets. The--but if 
you add on top of that a price support program, that is, trying 
to do the both and I think there are potential problems. Now, 
again, I would argue that it's minimal in the sense--or it's 
smaller than many might believe, because of the relative price 
levels, where we have been. But the danger is exactly at the 
point when, you mentioned, when prices are extremely low, when 
they're near support already, and that producers aren't getting 
the signal to adjust.
    Senator Crapo. Well, I understand that through September 
2005, the USDA reported over $2 billion dollars in MILC 
payments.
    Dr. Glauber. That's correct.
    Senator Crapo. And I haven't been a proponent of this 
program, as you know, and many Idaho dairy producers aren't in 
favor of it either, but the program was considered--or 
continued in the last reconciliation bill. And I'm concerned 
that the ongoing cost of this program that depletes funding 
that could be used elsewhere, is not warranted. And while 
considerable resources are spent on this program, I understand 
that dairy farmers are continuing to leave the business at the 
same rate, as before MILC existed. So, the question I have 
there, first of all, is that your understanding as well? And 
also, is this current system the most fiscally sound way to try 
to provide an adequate safety net for dairy farmers?
    Dr. Glauber. Yeah, the--I would say that the overall 
structural changes that are going on in the dairy industry are 
more being directed by productivity gains and things like that, 
which are far outstripping--you know, traditionally, or at 
least historically, over the last 20 years, and I'd say even 
over the last 10 years if you're looking at outstripping 
demand. And so, that's a structural imbalance.
    Senator Crapo. But one of--I'm not saying that MILC is 
causing that, but----
    Dr. Glauber. Right.
    Senator Crapo. --but I'm saying, it's not stopping it at 
all.
    Dr. Glauber. Right. No, that's certainly true. I'm not sure 
the price support program, either, would necessarily do that, 
would have much affect either, but your point is very well 
taken about the compatibility about these programs, 
necessarily, that one has to consider that.
    Senator Crapo. All right. Thank you. I see my time's 
expired. Thank you, Mr. Chairman.
    The Chairman. I commented on that earlier. Mr. Leahy, we 
realized you couldn't be here to start with, any opening 
statements you wish to make, please feel free to do so.

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

    Senator Leahy. Thank you, Mr. Chairman. I'll make a brief 
one, if I might and we had the voting rights extension bill, 
one of the most important bills we'll take up this year on the 
floor. And Senator Specter and I are managing that bill on the 
floor, so I'll be in and out as a result. I did want to thank 
you for holding this important hearing on the dairy programs 
that are in the 2002 Farm Bill.
    We're going to have Mr. Leon Berthiaume, who is the General 
Manager and CEO of St. Albans Co-op. I see Leon back there. 
Leon has provided a tremendous leadership of Vermont's largest 
cooperative for many years. I think his wisdom on dairy issues 
is only exceeded by his practical experience in dealing with 
them in the real world, so I look forward to his testimony.
    We actually had an historic accomplishment--the 2002 Bill 
that unified national dairy policy that's worked for all dairy 
farmers from Wisconsin to Vermont to the State of Washington. 
At the same time, we know the dairy matters are often 
contentious. But this one, this program brought about 
tremendous unity in dairy farmers. The MILC Program--and I was 
glad to hear Mr. Glauber speak about that--or Dr. Glauber speak 
about that, because that's the vital lifeline of 1,000's of 
small and medium sized dairy operations.
    In my State of Vermont, we depend on the--and in Vermont, 
agriculture dairy is by far, the most important part. MILC has 
provided more than $47 million dollars in support that's helped 
100's of dairy producers, where the severe market fluctuations. 
Actually, the law allowed them to stay in business and stay on 
the farm. And in 2004, the Government Accountability Office 
agreed. They found that quote, payments introduced through the 
MILC Program have kept small dairy farms in business, close 
quote. I agree, it takes some pride knowing MILC is the best-
targeted program that USDA operates. It's counter-cyclical; 
payments are made only when the market price is low. When the 
prices are good, as they were throughout most of 2005, the 
program doesn't operate. There's even a firm payment limitation 
to 125 cows.
    Now, under your leadership, Mr. Chairman and under the help 
of many others, we were able to extend MILC for an additional 2 
years. We have overwhelming bipartisan support in this 
committee and on the floor. The 2002 Farm Bill, we extended the 
Dairy Price Support Program. That's an effective means of 
providing a minimal safety net. We also made a historic 
commitment to working lands conservation programs. That's 
proven valuable to our dairy producers and others.
    The regional equity requirement of the 2002 Farm Bill also 
guaranteed traditionally under served states of per share in 
USDA conservation programs. So, we made progress and I 
appreciate the chance to be here. I would ask, if I might, in 
my questions of the witnesses, we've had a--probably the worst 
triple whammy I can ever remember in Vermont's history, this 
year. We had low milk prices, the highest fuel cost we've ever 
seen, and then on top of that, we had devastating floods in 
Vermont in the late spring and early summer. Any one of those 
would create difficulty. Put together, it's been horrendous.
    In fact, the whole State of Vermont has been declared an 
agriculture disaster by USDA. Now, the Senate has responded to 
this and other disasters around the country, we added a $4 
billion dollar agriculture disaster program to the fiscal year 
2007 Agriculture Appropriations Bill. I know the Administration 
threatened to veto a similar package on the Supplemental 
Appropriations Bill earlier this year. And so, the House had to 
remove it during conference.
    Has--so, I'd ask the witnesses--let you pick whoever you 
want--has the Administration's position changed? If so, what's 
your current position?
    Dr. Glauber. Certainly, either of my colleagues will 
respond as well, but as far as I know, it has not changed. And 
in largely, because in looking at the overall picture in U.S. 
agriculture in for particularly for 2005, that there were--it's 
certainly true that we saw some low prices in certain--for 
certain commodities, we also saw record yields for a number of 
commodities. And in terms of revenue for a number of 
commodities, those tended to be up of--just for example, corn 
was second highest production in yield on record. Soybeans, 
record yield, second highest production on record. Cotton, 
record production, second highest yield on record.
    Senator Leahy. So, your answer would be that although 
there's $4 billion dollars, you'd still be in the same 
position, the veto would be threatened for that?
    Dr. Glauber. Well, I--I'm not a Policy Official, Senator, 
and so I will defer to my two colleagues here, but----
    Senator Leahy. Well, would you say that----
    Dr. Glauber. I can tell you----
    Senator Leahy. Would it be safe to say that you would not 
support it?
    Dr. Glauber. I would not support it.
    Senator Leahy. Thank you. I do thank you for--I disagree 
with you on that, but I do thank you for extending the MILC 
Program during the budget reconciliation process last year. I 
know President Bush endorsed an extension of the MILC Program 
when he was campaigning in Wisconsin during the Presidential 
Campaign and your department played a supportive role in our 
efforts on Capitol Hill to extend the program for two 
additional years. I look forward to working with Secretary 
Johanns and Deputy Secretary Conner, of course he's well known 
to members of this committee on the dairy provision.
    I was also pleased to note that you say this--the MILC 
Program is not expected to have any significant impact on total 
milk production. I think that was important, because there were 
many who thought that it would increase production and lower 
the market price. So, I'm glad to see you disagree, as I do.
    On a percentage basis, can you tell us how many U.S. dairy 
farms are fully covered under MILC with a 2.4 million pound 
limit?
    Dr. Glauber. You know, I don't have those numbers right 
with me. I do know in the aggregate, about 50 percent of milk 
production is covered, but--but my guess is the number of dairy 
farms covered would be quite--would be much higher than that, 
because of the structural things. And--but we certainly can get 
these numbers.
    Senator Leahy. I'm told it's about 80 percent, and I 
wondered if you could just submit that?
    Dr. Glauber. Yeah, my colleagues say that, that is correct.
    Senator Leahy. OK. And would you agree that the MILC 
Program is highly targeted to small and medium sized dairy 
farms?
    Dr. Glauber. Absolutely.
    Senator Leahy. OK. Mr. Chairman, as you know, I've spent 
years on this committee. I've been very supportive of 
agriculture around the country. I think that probably by 
National Security is the ability to have agriculture around the 
country, but also, have it diversified around the country, so 
no one part of the country can be wiped out when it has. I know 
that's your view, too, and I look forward to working with you 
on this bill. If I have other questions, I'll submit them for 
the record. Just tell the witnesses, be cautious who's watching 
you from the wall behind, when you're talking. It'll probably 
be Senator Lugar, of course. Thank you.
    The Chairman. Well, thank you and you're absolutely 
correct. You have been a strong advocate for agriculture, 
period, and you and I went through--have been through two Farm 
Bills together, as well as a difficult reconciliation process, 
and I will have to say, you have been a champion for 
agriculture, period. In particular, obviously, you're parochial 
interest. But you've always been very kind to my peanut and 
cotton growers, and you support eating Georgia peanuts, which I 
noticed you're doing now and we appreciate that.
    Dr. Glauber, many dairy industry stakeholders are concerned 
with the time it takes to amend Federal Orders 
administratively. Many are concerned that USDA has no incentive 
to make timely decisions, and that often, difficult decisions 
are delayed or buried in procedure. I was heartend to hear in 
your testimony that USDA has developed several new rulemaking 
initiatives that would address this issue. In fact, your 
testimony states that the time to complete regulatory action 
could be reduced by over one-third. What's the current status 
of these rulemaking policy initiatives, and when might they be 
released to the public?
    Dr. Glauber. I'm going to let our AMS Administrator, Lloyd 
Day, answer that question.
    Mr. Day. Well, thank you, Mr. Chairman, for the question. 
We've actually begun the new and revised processes to decrease 
time requirements and we're estimating that we're going to be 
able to decrease time requirements by about 9 months. 
Currently, using the Federal Order Rule Making Process, this 
could be anywhere from 18 to 24 months in order to get the 
input from everyone, and have these public hearings, and 
briefs, and then you know--and then finally move on to a final 
rule.
    What we've been doing is pre-hearing meetings to discuss 
with interested parties before the ex parte restrictions apply 
to be piloted to improve rulemaking time lines. We've developed 
supplemental rules of practice to define the public input time 
lines, once formal rulemaking processes begin and we're also 
procuring services for court reporters in terms of best value, 
instead of lowest cost, so we can get better speed in terms of 
getting a transcript of these meetings back to the hearing. So, 
these changes are underway right now, sir.
    The Chairman. OK. All right. Well, thank you very much. 
Senator Crapo, do you have anything else?
    Senator Crapo. I think I have one follow up question.
    The Chairman. Sure.
    Senator Crapo. Back to forward contracting. I just wanted 
to try to get on the record, a little bit more discussion of 
that. When we debated this last year, there were supporters of 
making forward contracting program permanent, but there were 
also critics whose objections were based on some--what I 
consider to be some misconceptions of the program. Some of them 
have argued that if the Forward Contracting Program is made 
permanent, that it's going to cause the Federal Milk Marketing 
Orders to collapse, and they argue that processors who forward 
contracted were not required to participate in the Federal 
Order Pooling Requirements. I--my question is, is that true, 
and do you think that the pilot program undercut the Federal 
Milk Marketing Order system, or exempted participating 
processors from their obligations to pay into the Producer Fund 
or the Pool?
    Dr. Glauber. I--let me answer the last question first, no, 
I don't think they undercut it. Again, MILC use for 
manufacturing purposes does not require it to be pooled on any 
Federal Order regardless of whether or not there's a Forward 
Contracting Program. Manufacturing processes--processors elect 
whether or not they wish to have the milk they use pooled based 
on a comparison of the revenues that will be received from 
participating versus the costs incurred to participate.
    Under the Pilot Program, if manufacture met the Forward 
Contract Pilot Program requirements, they were allowed to have 
the milk pooled on an order, but were able to pay less than the 
Federal Order minimum blend price. I, again, I stress here that 
the Forward Contracts only apply to the amount of milk in the 
Class III and Class IV uses. So, since proprietary handles--
handlers accounted to the Federal Order Pool, for all the milk 
they use at Class prices, the full--the pool itself, was 
unaffected. Consequently, we believe that the program did not 
undercut--repeat, did not undercut Class V pricing within the 
Federal Order system.
    Senator Crapo. All right. Thank you. And then, I guess this 
is just sort of a followup; did the Dairy Forward Contracting 
Program cost the government anything?
    Dr. Glauber. I hear no's.
    Senator Crapo. All right. I'll take that as a no from the 
support staff there.
    Dr. Glauber. Yeah.
    Senator Crapo. Thank you.
    The Chairman. All right. Thank you very much. We appreciate 
your being here. We look forward to staying in touch as we get 
ready to write the farm bill next year, and I'm sure we'll have 
you back again sometime.
    Dr. Glauber. Thanks very much.
    The Chairman. And tell Keith, again, we're thinking about 
him and certainly hope he's back to work soon.
    Dr. Glauber. Will do. Thank you very much.
    Senator Crapo. That's all?
    Dr. Glauber. Yes.
    The Chairman. Our next panel that we're going to ask to 
come forward consists of Mr. Charles Beckendorf from the 
National Milk Producers Federation, Tomball, Texas; Mr. Jim 
Green, Kemps LLC/HP Hood LLC on behalf of International Dairy 
Foods Association, St. Paul, Minnesota; Mr. Ken Hall, a Dairy 
Producer from Terreton, Idaho; and Mr. Leon Berthiaume, St. 
Albans Cooperative Creamery, Inc., Swanton, Vermont.
    Gentlemen, welcome to each of you and I can't tell you how 
much we appreciate you taking time out of what I know is a busy 
schedule for each one of you, to come to Washington, and to 
share some thoughts with us as we conduct some oversight of the 
2002 Farm Bill. We look forward to your testimony. Mr. 
Beckendorf, we'll start with you, and we'll come right down the 
row for any opening comments you wish to make. So, welcome and 
thank you for being here.

   STATEMENT OF CHARLES BECKENDORF, NATIONAL MILK PRODUCERS 
                   FEDERATION, TOMBALL, TEXAS

    Mr. Beckendorf. Thank you, Mr. Chairman and to you, and the 
Ranking Member Harkin, and the other Committee Members. I 
appreciate the opportunity to be here and good morning to you. 
My name is Charles Beckendorf. I currently serve as Chairman of 
the National Milk Producers Federation in Arlington, Virginia. 
I'm a fourth generation dairy farmer in Tomball, Texas and 
currently dealing with the heat and cows, doesn't work very 
well down there.
    On behalf of the Nation's 60,000 dairy producers, I 
appreciate the opportunity to review the current status of 
National Farm Policy in how the 2002 Farm Bill has worked to 
benefit America's dairy producers and their cooperatives. My 
testimony will focus on economic policy issues, as well as on 
other topics impacting dairy farmers profitability.
    In 2000 National Milk Producers Federation prepared for the 
Farm Bill by obtaining grassroots input through our Dairy 
Producer Conclave process. The results of the Conclave meetings 
were reflected in many of the positions that we took back in 
2001.
    To begin with on Economic Policy, the National Milk 
Producers Federation recommended the enactment of the dairy 
safety net program, which included several features. Number 1, 
extending the dairy price support purchase program at $9.90 per 
hundredweight. Numbers 2, maintaining the CCC purchase price 
for nonfat dry milk at $1 dollar a pound. Extending the Dairy 
Export Incentive Program; and establishing a supplemental 
direct farmer payment program. The 2002 Bill authorized the 
Dairy Price Support Program from June 1st of 1902 through 
December 31st of 1907, just as we have requested.
    If the Diary Price Support Program had not been in effect 
during 2002 and 2003, farm milk prices would have been 29 
percent below the average level for the previous 5 years. 
Without the Price Support Program, income received by dairy 
farmers would have been reduced by an additional $2.4 billion 
dollars. From June 1902 through June 1906, we estimate that the 
Price Support Program has prevented a $3.5 billion dollar loss 
to dairy farmer income, at a cost of $1.1 billion dollars.
    The Price Support Program has incurred almost no purchases 
or costs during the fiscal year of 2005 and the first half of 
fiscal year 2006, proving that the program is truly a standby 
state--safety net. The Price Support Program is an effective, 
efficient, and equitable safety net program and continues to 
benefit all dairy producers.
    There were some goals that NMPF outlined in the 1902 Farm 
Bill that were not implemented and I'd like to address two of 
those now. The National Milk which supported the creation of a 
Class III and Class IV Supplemental Payment Program. Enacting 
this program would have increased dairy producer income by $5.4 
billion dollars between 2002 and 2008. We believe that this 
supplemental program, coupled with the Price Support Program, 
could provide a broader safety net for dairy producers. 
Congress didn't enact our recommendations for the supplemental 
program, but instead, created a new Direct Payment Program, 
which came to be know as MILC, or the MILC Income Loss 
Contract. The National MILC, at this time, still remains 
neutral on the MILC Program.
    The second issue is the ability to assist imported dairy 
products, the same 15 cents per hundredweight, that American 
dairy farmers pay for promotion. For 22 years, America's dairy 
producers have spent billions of dollars on research, 
advertising, and promotion. Since importers of foreign diary 
products also benefit from selling in our market, they should 
also be subject to an equivalent assessment. The imported check 
off was included in the 1902 Farm Bill and however, due to an 
implementation concerning the legality of this measure, USDA is 
determined it cannot implement the import check off without 
further legislation from Congress. We urge the Senate to work 
with USDA to address the concerns that have been identified 
with this provision. This is a measure that Congress should 
take up well before the next Farm Bill.
    On the issue of animal health, notable progress has been 
made to address a number of animal health related issues that 
were dealt with in the 1902 Farm Bill. Of greatest 
significance, is the $464 million dollars in funding that USDA 
has received for completion of the National Animal Health 
Research and Laboratory Complex in Ames, Iowa. APHIS and ARS 
will share this facility, and this will provide the U.S. with a 
state-of-the-art animal health research and diagnostic 
laboratory facility.
    The National Johne's Disease Control Program was authorized 
under the 1902 Farm Bill, but not adequately funded. While the 
Farm Bill contains authorization language, we annually have to 
fight to obtain funds for the Johne's program. Congressional 
appropriations have provided USDA with basic funding to 
administer a voluntary control program for, but more needs to 
be done with the Johne's program.
    On the environmental compliance front, dairy producers have 
a vested interest in acting as good stewards to--of the 
environment. Because of this, dairy farmers support 
environmental regulations based on sound science and uniformed 
implementation. The most effective way to encourage compliance 
with regulation is to assist farmers in helping meet complex 
requirements.
    USDA has done a good job of managing the Environmental 
Quality Incentives Program--or the EQIP Program, which Congress 
authorized as part of the 1902 Farm Bill. Some of the things 
farmers are most pleased about with respect to EQIP include the 
local control over the approval of the cost-share contracts, 
the increased funding in the 1902 Farm Bill and the increase in 
the allowable cost-share percentage. Dairy farmers realize this 
program needs to be further streamlined, and more funding from 
Congress would also help. Throughout this process, however, it 
should continue to be a very locally, rather than nationally, 
driven program.
    Trade policy plays a significant role in impacting the 
direction and effectiveness of government dairy programs. It's 
likely that trade policy will continue to play a critical role 
in determining American dairy farmers' profitability. Congress 
should be involved in carefully reviewing future trade 
agreements, as well as providing our negotiators with the 
necessary resources to negotiate and monitor trade agreements.
    A key point is ensuring that our rights and 
responsibilities under current trade agreements are pursued. 
The Dairy Export Incentive Program is a good case in point.
    In 2001, we asked that the DEIP be reauthorized at the 
maximum levels permitted by the WTO, and Congress did that in 
the 1902 Farm Bill. Since then, USDA has done a good job of 
making use of the non-fat dry milk portion of DEIP. However, 
there have been times when National Milk wanted the USDA make 
more aggressive use of the program, particularly for butter 
and, most recently, for cheese.
    NMPF remains a strong supporter of the Federal Milk 
Marketing Orders. Just last month, USDA issued a recommended 
decision in response to a new milk-based drinks that compete 
with fluid milk, but do not pay the Class I price. USDA's 
decision will close a technical loophole and restore equity to 
fluid milk pricing and we applaud their decision.
    Additionally, this spring, USDA stopped large bottling 
plants in two markets from using an exemption originally 
intended for small farmers to use. This decision complements 
the MILC Regulatory Equity Act, which Congress passed earlier 
this year, and ensures that these plants will compete in those 
markets on an equal basis with the other plants and producers.
    In 2003, dairy producers started a program called 
Cooperatives Working Together to help strengthen and stabilize 
farm-level prices. We created a new marketing cooperative to 
voluntarily pool financial resources to pay for programs that 
reduce dairy supplies. Our supply reduction activities have 
helped farmers income and their livelihoods.
    However, CWT is not a replacement for government safety net 
programs. It operates as a complement to--not a replacement of, 
Federal farm program. It's a unique program in agriculture. 
We're very proud that farmers of all sizes, in all regions, 
have come together to cooperate and to help each other 
economically.
    In summary, NMPF believes that the Farm Bill signed by the 
President in 1902 was a reasonable, rational, and fair approach 
to farm policy. Most of the items we asked the Senate and House 
Ag Committees to include found their way into it.
    Our message to the Senate is that dairy farmers are not 
looking for a handout. We're not looking for a hand up; what 
farmers are looking for from government is a handshake. Dairy 
farmers want a sign of commitment such as a handshake 
indicating, when times are tough, there will be a modest safety 
net in place to help catch those who are vulnerable. National 
Milk Producers Federation takes comfort in knowing that members 
of this Committee realize that tremendous impact of the Farm 
Bill has on U.S. agriculture and look forward to working with 
Congress and this committee when it's time to collaborate on 
the next Farm Bill. Thank you for your attention.
    [The prepared statement of Mr. Beckendorf can be found in 
the appendix on page 62.]
    The Chairman. Thank you. Mr. Green.

  STATEMENT OF JIM GREEN, KEMPS LLC/HP HOOD LLC ON BEHALF OF 
   INTERNATIONAL DAIRY FOODS ASSOCIATION, ST. PAUL, MINNESOTA

    Mr. Green. Thank you, Mr. Chairman, members of the 
Committee. My name is Jim Green, President and CEO of Kemps, a 
Saint-Paul, Minnesota based dairy company that makes a--makes 
and markets a wide variety of dairy products including fluid 
milk, ice cream, sour cream, cottage cheese, dips and yogurt. 
Kemps is a wholly owned subsidiary of H.P. Hood Company, which 
is one of the larger dairy companies in America.
    I have been in the dairy industry all my life, starting 
with a family owned business, a family owned dairy in South 
Central Pennsylvania. And today, I have the privilege of 
serving with Kemps, as well as serving as the Chairman of the 
International Dairy Foods Association. Thank you for the 
opportunity today, to offer my perspective about our National 
Dairy Policy.
    Most of our dairy policies were enacted in the 30's and 
40's, although Congress has layered on new programs in recent 
years. All of this has lead to a current set of programs that's 
failing our industry, and it's failing the consumer, as well.
    And let me explain. Under Federal Milk Marketing Orders 
created in 1937, USDA requires regulated milk processors to pay 
minimum prices for milk through a complicated classified 
pricing, and--and pooling scheme. As a result, many companies 
are forced to make business decisions around bureaucratic 
rules, as opposed to making decisions around the marketplace.
    No agriculture commodity has a classified pricing system 
other than dairy. We have heard today about the failure of USDA 
to update much needed make allowances. In every month that goes 
by, it's costing the dairy processors around $26 million 
dollars and it's becoming potentially crippling to our 
industry.
    As long as the Federal order system exists, USDA needs a 
clearly defined decisionmaking process and firm deadlines. On 
top of the Federal orders, USDA administers two conflicting 
dairy subsidy programs, the Dairy Price Support Program and the 
MILC Income Loss Contract Program. Judging their past 
performance, I would suggest that reconciling these two counter 
veiling programs and creating a single program that works, will 
be one of the greatest challenges as you craft the next Farm 
Bill. And here's some points to consider as you do that. 
Through the Dairy Support Program, which dates back to 1949, 
USDA buys nonfat dry milk, butter, and powder at government 
mandated prices to support the prices that are paid to dairy 
farmers. While conceived as a safety net, the program now 
essentially encourages production of certain products, mainly 
nonfat dry milk, and discourages production of other products. 
This program makes it more profitable to sell nonfat dry milk 
to the government, rather than invest in technology to make 
milk proteins, which is a product that being increasingly 
demanded by the marketplace.
    The Bush Administration is taking the first step in 
recognizing they need to change the Dairy Price Support Program 
by sending Congress legislative language to minimize its 
negative impacts. We support this goal in ensuring at a minimum 
this program is managed with greater fiscal responsibility. But 
frankly, the past performance to the program does not validate 
its continued existence.
    The other subsidy program, MILC, pays dairy producers when 
milk prices fall below a specific target price. It was put in 
place as a transition from the failed Northeast Interstate 
Dairy Compact. It was never intended to be a permanent 
government program. Since its creation in 2000, we've learned 
that the MILC Program creates costly government outlays and 
fans regional divisions among dairy producers. The biggest 
problem being that MILC conflicts with the Dairy Price Support 
Program. USDA, through MILC, pays some dairy farmers to over 
produce. And the USDA through the Dairy Price Support Program 
buys that excess, buys that surplus in the form of powder, 
butter, and cheese, and essentially paying twice for the same 
milk. And needlessly, interfering with commercial marketplace.
    The next Farm Bill should reconcile these two conflicting 
programs and create a single program that really does work. The 
Dairy Forward Contracting Pilot Program that existed between 
2000 and 2004 was a success and we believe it should be 
reinstated on a permanent basis.
    Currently, only diary cooperatives can offer producers this 
type of price stability. This fair risk management tool creates 
a level playing field, so all producers--all producers can 
control their own future and not rely on government 
expenditures and this program costs the government not a single 
cent.
    The next Farm Bill provides an opportunity for Congress to 
transition away from ineffective dairy policies of the past, 
and from our perspective this can be best accomplished by three 
initiatives. Number 1, initiating a transition from the two 
current conflicting support programs to a single national dairy 
farmers safety net that minimizes government interference and 
provides critical assistance, when it is needed. Second, by 
leveling the playing field by making the Dairy Forward 
Contracting Pilot Program a permanent government program. And 
third, streamlining the Federal Milk Marketing Order 
decisionmaking process.
    Mr. Chairman and members of the committee, the diary 
processing industry has committed to working with you and the 
dairy producers to achieve policies that allow producers and 
processors to prosper and to be more competitive. Thank you 
very much for this honor.
    [The prepared statement of Mr. Green can be found in the 
appendix on page 70.]
    The Chairman. Thank you very much, Mr. Green. And it was 
not by accident that we timed Senator Coleman's entrance just 
as you began. Mr. Green, I want you to notice that.
    Mr. Green. I appreciate that.
    The Chairman. Mr. Hall

     STATEMENT OF KEN HALL, DAIRY PRODUCER, TERRETON, IDAHO

    Mr. Hall. Thank you, Mr. Chairman and members of the 
Committee, my name is Ken Hall. I am a dairy producer from 
Terreton, Idaho. That's in the Eastern part of the state, and I 
am before you today representing myself and also the Idaho 
Dairymen's Association. The Idaho Dairy Association was formed 
as a dairy producer advocacy group in 1944 and has a dairy 
producer board of directors that is elected by their peers. All 
dairy producers in Idaho are members of IDA and pay a one-cent 
per hundredweight assessment to cover the cost of the 
organization.
    I began working in the dairy industry in 1979 and managed 
absentee owner farms for roughly 15 years. In 1993, my wife and 
myself started Hall Dairy, LLC and we started our own operation 
in Terreton with 100 cows. Today we are milking 2,000 head.
    The upcoming farm bill debate should be utilized as a time 
to review, to determine the long-term effectiveness of 
agricultural programs. Since the 1930's the government has 
attempted to assist agricultural producers by replacing the 
signals of the market that would impact price by keeping supply 
and demand in check with government signals.
    If the intent of the government support programs is to 
provide an adequate return on time and investment, then the 
outcomes shows that the programs have failed. In 1981 the Class 
III price, which is the basis for all milk pricing, averaged 
$12.57. In 2000 it averaged $9.74. For the 48 months 
representing 2000 to 2003 40 percent of the time the monthly 
Class III price was below the $9.90 support price, and with 
November of 2000 dipping all the way down to $8.57. This 
extreme volatility and pricing that is lower than prices 
producers received over 30 years ago, it is a direct result of 
failed government programs that do not allow the market system 
to work. The same results can be seen in the corn market. The 
average price per bushel in 1981 was $2.92 and today it's 
roughly $2.40.
    So, how do agriculturalists survive? They expand by 
planting more acres or milk more cows, and adapt technology 
that increases yields. Those who can't adjust leave the 
business. Since 1981, commercial dairies have been reduced from 
225,000 to 64,000, a 72 percent reduction. This begs the 
question, are the government program--dairy support programs 
working? The short answer is no.
    An example of such a program is the MILC. I believe that it 
interferes with the free market system by sending false market 
signals. It also interferes with other government price--dairy 
price support programs, and discriminates against producers and 
their operations based on size. In the 2004 USDA Economic 
Effects Of US Dairy Policy and Alternative Approaches To Milk 
Pricing Report to Congress stated that there is a basic 
incompatibility between MILC and other pre-existing dairy 
support programs.
    The Agriculture Department found that MILC does in fact 
artificially depress the price of milk by--it does, in fact, 
artificially depress the price of milk by encouraging 
overproduction. The price support program and the Milk Income 
Loss Contract program provide an example of problems that can 
be caused by conflicting policy outcomes. In reality, MILC 
distorts the market and conflicts directly with other pre-
existing subsidy programs all at a cost to--of $2 billion since 
its inception, nearly twice the $1 billion originally budgeted 
for it.
    The milk price-support program, which dates to the 
Depression-era Agricultural Adjustment Act, should also be 
reviewed to determine if it is fulfilling its purpose as 
intended or inhibiting the market system to function. Under 
that program, the government steps in and buys dairy products 
when the price falls below a certain level. If the support 
price is set low, it provides some income security to farmers 
while allowing the market to slowly clear and production to 
fall to the point where prices can rise again. It is our belief 
that the program no longer serves its stated purpose and allows 
the price of milk to stay low for an extended period of time, 
longer than if the market system was allowed to function 
without government interference. As I have stated above many 
times since 2000 the Class III price dropped below the support 
price.
    Idaho is viewed as a large dairy producer state, yet 50 
percent of our producers milk 200 cows or less and receive full 
benefit of the Milk Income Loss Contract program. Due to that 
fact, we studied the Milk Income Loss Contract program 
thoroughly before coming to a position of opposition. Utilizing 
the factual data presented by USDA and agricultural economist 
we struggle to understand why those who have the best interest 
of dairy producers in mind, including members of this esteemed 
committee and farm organizations, would continue to support 
dairy programs that have failed the industry.
    One tool that I would encourage including in the 2007 Farm 
Bill is the permanent authority for all dairy producers to use 
forward contracting. Simply put dairy forward contracting 
provides price stability by allowing dairy producers to manage 
risk. USDA tracked performance during the 2000-2004 pilot 
program and found that forward contracts were effective in 
achieving stable prices.
    Utilizing forward contracts, dairy producers can service 
debt more easily, obtain more favorable financing, expand their 
operations, and guarantee a margin above the cost of 
production. Dairy producers deserve to have a tool that 
provides them with the freedom to price every pound of milk 
they sell before it is produced.
    Forward contracting is extensively utilized by other 
commodities, even those with government support programs, 
because it allows the buyer and seller to mutually agree on an 
advance price and they can more predictably basis--and be a 
more predictable basis for planning their investments and 
financing needs.
    Congress provided the necessary tools for agriculturalist 
to control their destiny in February 1922 with the adoption of 
the Capper-Volstead Act. The Act also--the Act, as you're aware 
allows producers the freedom to work together. National Milk 
Producers Federation has taken the lead in the formation of 
Cooperatives Working Together. The program, which is funded--is 
producer funded, is an example of the Capper-Volstead 
functioning as intended. Although approximately 50 percent of 
the milk produced in Idaho is marketed directly to processors 
and not through cooperatives 84 percent of the milk produced in 
the state is participating in the self help program.
    It is our estimation that the elimination of government-
sponsored agriculture programs would allow the free market 
system to work with producers being protected through the 
ability to work together under the protection of the Capper-
Volstead Act.
    Mr. Chairman, I greatly appreciate this opportunity to 
testify today. Thank you.
    [The prepared statement of Mr. Hall can be found in the 
appendix on page 85.]
    The Chairman. Thank you very much, Mr. Hall. Mr. 
Berthiaume.

STATEMENT OF LEON BERTHIAUME, ST. ALBANS COOPERATIVE CREAMERY, 
                     INC., SWANTON, VERMONT

    Mr. Berthiaume. Good morning, Chairman Chambliss and 
members of the Senate Act Committee. Again, my name is Leon 
Berthiaume and I'm the General Manager of the St. Albans 
Cooperative Creamery. I joined the Cooperative in 1984 and had 
the privilege of becoming the General Manager in 1991.
    We are a member of Governed Dairy Cooperative, representing 
500 dairy farmer operations and their farm families. Primarily, 
these farms are located in the state of Vermont, but we do have 
some in New York, as well as in New Hampshire. We market 
approximately 1.3 billion pounds of milk on an annualized 
basis.
    Today, as we talk about dairy programs, I feel very 
strongly that they are vital components to our agriculture 
industry and I commend the Senate Act Committee in reviewing 
and assessing the effectiveness of these dairy programs.
    When I took this opportunity today, I'm here really as a 
voice for our dairy farmers and obviously, we've talked a 
little bit in this opening remarks today about the economic 
situation that our dairy farmers are facing. Again, we are 
experiencing again, depressed milk prices, some that bring us 
back to 2002, 2003, but it can also bring us back to 1979. But 
at the same time, we are experiencing, as Senator Leahy 
indicated in his opening remarks, about escalating operating 
costs, as well as adverse weather conditions. And I can't 
imagine what crisis we would be in without our dairy programs.
    I am in full support that, as USDA, we should have an OR 
arcing policy to support regional production of milk. 
Agriculture is an essential part of our rural communities and 
our economy. The Vermont dairy industry, alone, generates 
approximately $1 billion dollars in direct economic activity 
for our state. When we look at the 2002 Farm Bill, there are 
several dairy programs directly impact dairy producers, their 
income, and their operations. I'll just touch up on three this 
morning.
    One, has been the economic safety net for dairy farmers. 
The other, Federal Orders and the third, is conservation 
programs. I definitely am a proponent for economic safety net 
policy, which is needed to operate when producer prices could 
force too many producers out of business and damage our 
Nation's milk producing infrastructure.
    I favor the continued operation of the Dairy Price Support 
Program and we need to know that there is a floor for 
manufactured products. It is time to evaluate though, the 
current targeted $9.90 for the U.S. average manufacturing milk 
price. We also need to ensure that the mechanism is in place, 
that prices do not fall below the established targeted level.
    The other safety net has been the MILC Income Loss Contract 
Program and its extension. This has provided much needed 
economic assistance to our farms in Vermont, when prices have 
become so depressed. In 2002 and 2003, Vermont dairy farmers 
received over $45 million dollars in MILC payments. The MILC 
extension also has been essential in 2006, and our work to 
date, paying over $2 million dollars to our dairy farmers.
    I believe we need to understand the MILC is not a cost, but 
it is actually investment in dairy farms, in Ag businesses, and 
processors, and our rural communities. There are significant 
returns on these investments. As we look to continue to look at 
safety net programs and the consideration of MILC, we must 
evaluate the $2.4 million production cap. We need to understand 
today's farm structure. There has been the need for many farm 
operations to consolidate or to grow existing family farms to 
support future generations. We have many multifamily farm 
operations and that must be considered in the evaluation of the 
caps.
    The orders allow dairy farmers to share equitably in 
returns of the marketplace. Given St. Albans Cooperative's 
location of its operation, and its member farms, and its 
overall size in a relationship to the marketplace, our dairy 
farmers continue to receive benefit from the Federal Order 
System.
    I would agree with the other remarks made today, that the 
Federal Order System needs to be streamlined, so that it can 
respond more quickly to changes when needed.
    Relative to conservation programs, conservation programs on 
that you address those questions promptly, if you do receive 
any.working agricultural lands brings benefit to both producers 
and the public. The 2002 Farm Bill added significant 
authorization for expanded funding to environmental quality 
incentive program. Vermont has also been committed to improving 
its water quality and conservation measures. The regional 
equity requirement was essential to a small state like Vermont 
to assist our dairy farmers in implementing the necessary and 
required conservation initiatives. I support to continue 
funding and the need for the regional equity provision in the 
future.
    In closing, there are many complex issues surrounding the 
structure of agriculture. We must have a vision for agriculture 
in this country. We must support this industry with sufficient 
resources. I thank you, Chairman, and the members of the 
committee to have the opportunity to participate in today's 
panel. Your leadership, vision, and understanding are critical 
to the implementation and oversight of the USDA's dairy 
programs. I look forward to questions that you may have, or the 
opportunity to provide additional information to the committee. 
Thank you.
    [The prepared statement of Mr. Berthiaume can be found in 
the appendix on page 89.]
    The Chairman. Thank you very much. Mr. Green, Mr. Hall, you 
both gave us your thoughts relative to the issue of Forward 
Contracting. Mr. Beckendorf, Mr. Berthiaume, what are your 
positions relative to Forward Contracting being extended to 
producers?
    Mr. Beckendorf. In national milk, probably most of our 
members co--member's cooperatives offer a Forward Contracting 
Program through the cooperative. The Pilot Program was a 
limited program. We felt like it underminded the minimum 
pricing and farmers that were involved got less money.
    The Chairman. OK. So, I take it your organization would not 
support?
    Mr. Beckendorf. No.
    The Chairman. OK. Mr. Berthiaume?
    Mr. Berthiaume. Again, as a dairy cooperative, we have 
provided the opportunity to our members, as well, Forward 
Contracting opportunities. As it, again, relates, our concern 
would be again, not to--again, undermine the--again, Federal 
Order of Classified Pricing System would be our major concern.
    The Chairman. OK. Let me ask this to all four of you, do 
you support mandatory butter powder tilts as proposed by the 
Administration in the President's budget for both 2006 and 
2007, and are mandatory tilts an effective way to limit 
government expenditures and purchases of manufactured dairy 
products, or would these tilts disrupt the market?
    Mr. Beckendorf, we'll start with you.
    Mr. Beckendorf. There are already provisions in place to 
facilitate these tilts when the time comes. We felt like the 
last two tilts that were done, lead us into 18 months, or 20--
24 months of the lowest prices we've had in 25 years. We didn't 
support the Administration's proposal.
    The Chairman. OK. Mr. Green?
    Mr. Green. I think the--our position would be that the 
mandatory tilts--I think the system, the way it is in terms of 
tilts right now, is operative, that the real issue here is the 
conflict between the two programs, and the conflict between the 
Dairy Price Support Program and the MILC Program. And that is 
the--that inherent conflict that leads to volatility on our 
industry and volatility on our industry is extremely 
detrimental, relative to the demand for dairy products.
    So, we see the big issue here being the conflict between 
the inherent conflict--the operating conflict between the two 
programs.
    The Chairman. Mr. Hall?
    Mr. Hall. I think the--my position on it is, that it 
interferes with the free market. We're--as Idaho dairy 
association, we're in favor of a free market system, and 
anything that would possibly--that interferes with that goes 
against our belief, and that less government interference would 
be the way we should go. And as dairy producers, that's the way 
we feel on that.
    The Chairman. OK. Mr. Berthiaume?
    Mr. Berthiaume. Again, USDA does have, again, parameters in 
terms of using its authority as it relates to the tilt. And 
again, I would suggest that the Department should utilize its 
tilt authority with the utmost restraint. Certainly, when farm 
milk prices are on the upswing.
    The Chairman. OK. Senator Crapo?
    Senator Crapo. Thank you. Well, I want to talk to you about 
both Forward Contracting and the MILC Program. In your 
testimony, you expressed support for the availability of 
Forward Contracting as a tool for all producers. Could you just 
explain to us generally, how Dairy Forward Contracting works, 
particularly for those who don't have access to it now, those 
who're not in cooperative, and why it's important for the 
availability of the Forward Contracting for all producers?
    Mr. Hall. Thank you for the question, Senator. As a large 
dairy producer, having availability of a--to be able to do a 
Forward Contract allows me to be able to go to my bank and say 
I've got this price locked in, here are my costs, assuming 
everything stays fairly much equal, this is the kind of return 
I'll be able to get on the investment. And so, it helps us to 
secure financing to go forward, and to be able to expand, and 
do the things that we're involved in.
    Senator Crapo. And is there any rationale, that you can 
think of, to say that cooperatives can utilize this tool, but 
those who are not a member of the cooperative cannot utilize 
it?
    Mr. Hall. I can't think of any.
    Senator Crapo. Let me go on with the--to the MILC Program. 
In your testimony, you know, one of the debates we have up 
here, is between small operations and large operations, because 
the MILC Program is--has--the cap is what, 250?
    Mr. Hall. 2.4 million pounds.
    Senator Crapo. Yeah, 2.4 million pounds. One of the debates 
here is that this is just a debate between large producers and 
small producers, but as you indicated in your testimony, 49 
percent of the Idaho dairy producers milk 200 cows or less.
    Mr. Hall. Right.
    Senator Crapo. And they receive the full benefit of the 
MILC Program.
    Mr. Hall. They did.
    Senator Crapo. Yet, they don't get--the Association does 
not support the MILC Program. Can you explain that?
    Mr. Hall. Our position is that it holds prices down longer. 
It enables inefficiency to remain in business and by that, many 
producers who maybe are propped up by a support program, and 
that might be a little bit harsh, but that's the reality of 
agriculture, and free enterprise.
    Senator Crapo. All right. Thank you. I don't have any other 
questions, Mr. Chairman, so I----
    Senator Coleman
    [presiding]. I'll think I'll take the gavel, Senator Leahy?
    Senator Leahy. Thank you, Mr. Chairman. I feel, as I 
mentioned with the Voting Rights Act on the floor, I've been in 
and out, but I do want to recognize Mr. Berthiaume. Leon, I'm 
glad you were able to join us. I know the board is meeting 
today, without you, so if you give Ralph McNall my thanks for 
letting you come down. I'm sure you were as disappointed as I 
was to hear that the Administration will not support the 
disaster relief that we were able to add to the appropriations 
bill. I know I'm disappointed, I'm sure you were.
    As your testimony pointed out, dairy prices continue to 
decline. Fuel costs continue to increase. Then the flood, as I 
said in St. Albans last week, this is the worst triple whammy 
I've seen certainly in all my years here on the Agriculture 
Committee. I was there in Paul and Bonnie Bergold's Farm and I 
saw what happens when you get flooding, low milk price, and 
doubling or more fuel prices. That hurts.
    What would be the situation right now in Vermont if we 
didn't have the MILC Program?
    Mr. Berthiaume. Again, thank you, Senator. I guess first, I 
would like to say, first of all in Vermont, I think we're 
already at a critical juncture relative to our dairy industry. 
We need to maintain the number of cows that we currently have 
in order to, again, substantiate the infrastructure that we 
currently have. So, without the MILC and even with the MILC, 
right now, we are experiencing significant financial stress at 
the farm levels.
    Farms are not cash-flowing. We have farms that are in the 
process of having to make some serious decisions in terms of. 
One, do I continue to invest in this industry--No. 1? Two, how 
much more do I borrow against the equity that I have in my 
farm? Three, is this really the time that I should be selling 
out? And then, this is also really affecting the attitudes of 
our younger generation that are on these farms.
    Without the MILC, we would definitely be experiencing a 
more exodus of farms out of this business, which ultimately 
would affect the Ag businesses within our state. It certainly 
would affect the cooperative in terms of the volume of milk 
that is represented. It would potentially also affect the 
outlook that our processors would have that invested within our 
State of Vermont. So, again, the importance of MILC is 
critical. By, again, just to share the nature of the situation, 
is that again, based the information, and calls, and visits 
I've had with dairy farmers, we've also have gone to the State 
to ask for that additional support because of the crisis that 
we are experiencing, because of the depressed milk prices, the 
adverse weather conditions, and the escalating costs.
    Senator Leahy. And even though the committee was able to 
extend the MILC Program last year, is reduced somewhat. The 
extended version of the program pays only 34 percent of the 
difference between the target price of the market price. What 
did that percentage reduction do to your members?
    Mr. Berthiaume. Well, again, I would say that many of our 
members right now are not covering their cost reduction, and 
that has certainly been a major challenge that our farms 
continuing to experience in certainly the reduction in the 
percentage that might have been received under the MILC, 
affects the operating cash-flow of our farms. It affects the 
outlook that our, again, the younger generation has in terms of 
what stability is there in continuing in agriculture. And it's 
also continued to again, have farmers make those serious 
decisions as to which bills do I pay this month versus last 
month? But again, depending on what that payment, that can 
range as much as $500 to $1,000 dollars for the month. You 
know, in terms of the change in the MILC percentage 
calculation.
    Senator Leahy. Thank you. And Mr. Green, I noted from you 
testimony, which I did read before I came down, you'd like to 
revive the Forward Contracting Pilot Program. Congress decided 
not to extend it. USDA--one of the reasons for that--one of the 
many reasons, USDA calculated over the life of the Forward 
Contract Pricing Pilot Program. Producers that are 
participating receive $7 million dollars less than they 
would've received if they had not participated. I understand 
how the program benefits dairy processors, it allows them to 
pay less than the Federal ordered minimum price for milk, but 
how again, does it help dairy farmers? Not the processors, but 
the farmers, themselves?
    Mr. Green. Our position, Senator Leahy, is that the Forward 
Contracting Program needs to be a benefit to all processors, a 
level playing field. And we feel that the--our obligation as a 
processor to the Federal Milk Marketing Orders----
    Senator Leahy. Not my question, Mr. Green, and my time has 
run out. So, if you'll go back to my question, I know how it 
helps the processors is, how does it help dairy farmers--
individual dairy farmers?
    Mr. Green. It can help individual dairy farmers--all diary 
farmers by allowing them to reduce to have a--make an 
investment, and have a return that they know into the future, 
and that they know that they will not have to deal with the 
price volatility in the marketplace. And it works the same for 
the processors. It's not--from the processing perspective, it's 
not an issue. It's not an issue about paying the lower prices. 
It's an issue about reducing the volatility in the marketplace, 
and by reducing the volatility in the marketplace to allow our 
consumption of dairy products to increase.
    Senator Leahy. My time is up. I would disagree, but we 
could have--or, and Mr. Chairman, again, I thank you for your 
courtesy and letting me pop in and out on this. And I also 
appreciate your support. You covered entirely different part of 
the country than I do, but you've been very supportive of our 
folks in the Northeast. That means a lot to me.
    Senator Chambliss
    [presiding]. It's because I like milk, Senator Leahy. They 
make good milk up there.
    [Laughter.]
    The Chairman. Senator Coleman?
    Senator Coleman. Thank you, Mr. Chairman. I think you just 
like food and----
    The Chairman. Thank you.
    Senator Coleman. And I do, by the way, want to thank you 
for giving the committee the opportunity to review dairy 
programs. The complex nature of dairy policy, USDA 
implementation of these programs, it really makes a difference 
in some of my communities, whether they cross or whether they 
don't. So, it is really kind of life or death decisions in 
this. And so, I appreciate the opportunity.
    I understand Mr. Chairman, that you dealt in your 
statement--you have dealt with some questions regarding update 
make allowances. And I don't know if I want to plow through 
that again. I--Mr. Kemp, and by the way, welcome. It's Mr. 
Green, Mr. Kemp, it's very welcome--great to have you here. I'd 
say Kemp's is great, great, great, great Minnesota business, 
and we appreciate your product, and we want you to be 
profitable.
    I think, you know, the question about Forwarding 
Contracting is one I've--I'm someone that'll say up front, a 
proponent of the MILC Program, and obviously there's some 
disagreement here about that. And I'm also a proponent to 
Forward Contracting to have some stability. And long-term 
stability is a good thing, we do it in other areas, and to me, 
it kind of makes sense. I would--my word of--if I would offer 
some advice, one of the challenges we face in dealing with on 
this committee, is oftentimes, disagreements between us in the 
end make everybody losers. And we represent what, about 2 
percent of the overall population of this country, the 
agriculture of farmers, producers. Fewer and fewer of our 
political districts, principal rural in Minnesota, I think 
you're going to have two out eight there principally rural, so 
we're shrinking in size. We're not shrinking in--by the way, in 
productivity. We're doing great in productivity. Dairy is 
shrinking, dairy has some issues.
    And so, I would just urge if there is a way to a little bit 
of give and take, I don't know if the world is so upended by 
the MILC Program. I don't--my sense is, I look at Minnesota 
producers. That I just don't see, you know, great changes on 
the market because of the safety net, and I see the consequence 
that Mr. Berthiaume talks about in the absence of that safety 
net. At the same time, I understand the basic common sense 
interest in having some stability and it was something like 
Forward Contracting. Why would we not want to do it? And we 
start measuring who wins, who loses? If we do that as 
mathematicians, as a--just--I think we lose. I think society 
loses something. So, I just wanted to kind of to offer that.
    If I can get just one question to you, Mr. Green, about the 
update make allowances. Do you have anything to say on what the 
reason for the delay is, has that been articulated to you by 
USDA?
    Mr. Green. It was articulated here, this morning, that it's 
under consideration and hopefully, we'll get a resolution soon. 
We have a--we have an industry that's losing $26 million 
dollars a month, Senator, and it's becoming crippling to us as 
an entire industry, but to specific cheese makers, it's 
becoming to the point of--coming down to the point of 
bankruptcy. So, we really need a process here--a decisionmaking 
process that it comes along with it from deadlines in terms how 
USDA comes through with this decisionmaking process.
    Senator Coleman. And one of the realities in Washington is 
that we have these hearings, all things get process. I had one 
with Homeland Security yesterday looking for a manual dealing 
with credit cards. So, the Department of Homeland Security it's 
2 years in the works, and the morning of the hearing, it comes 
out. And my question is, is--has there been a lack of data or a 
lack of information that has hampered this process?
    Mr. Green. There was several months ago, the--there was 
actually a 4-day hearing in term--where evidence and facts were 
gathered. In fact, the facts--very parallel situation, when the 
MILC allowances were first enacted. So, there has been a lot of 
time and a lot of effort in terms of gathering of evidence, 
gathering of facts. It seemed, as an industry it's, again, we 
need a process that has firm deadlines and come to conclusions, 
right--rightly or wrongly, we have to come to a conclusion. We 
have a regulation in place now, that essentially fixes margins 
for these cheese plants, and if you're going to have a--put a 
regulation that fixes margins, then you need to adjust those. 
As inputs adjust, you have to take that into consideration in 
terms of the formulas. So, it's--it gets very frustrating.
    Senator Coleman. One final question I might have, I was 
interested in a--actually, it was I think Mr. Hall mentioned 
the--was it the CWT Program? Did you talk about that?
    Mr. Hall. Yes.
    Senator Coleman. I'd be interested--you gave some Idaho 
figures. Mr. Beckendorf, from a national perspective, can you 
give me some insight? You had some pretty strong numbers in 
terms of the Idaho level. Is that kind of a unique situation, 
or can you give me a national perspective on this CWT Program?
    Mr. Beckendorf. CWT has--well, national milk producers--our 
membership is core producers of course and we have about 68 or 
69 percent of the milk in the country in our membership. 
Through the CWT Program, because we set it up the way we did as 
a cooperative, we're able to have independent producers as 
well, and nonmembers of national milk participate. And so, 
we're at 70 percent now for a extension. We started out in 2003 
at five cents a hundredweight. We tried 18 cents, is what we 
said we needed and we wound up at a nickel, but we saved the 
program and it's the best thing that's ever happened to dairy 
farmers--to get that many people together.
    And so, on July the 1st, we went from a nickel to 10 cents 
and we've got 70 percent of the producers, or the production in 
the country involved in that. And a lot of that is, as Mr. Hall 
said, is independent producers, so it's a very good program.
    Senator Coleman. OK. Very, very helpful. I appreciate 
this--I appreciate hearing that. Thank you. Thank you, Mr. 
Chairman.
    The Chairman. Thank you. Mr. Beckendorf, in your testimony 
you mentioned that USDA could have more aggressively utilized 
the Dairy Export Incentive Program over the last several years, 
and in particular, you mentioned the program could increase the 
export of butter and cheese if used effectively. Would you 
please comment on how USDA could more effectively administer 
this program to assist the dairy industry in developing new 
markets, and their products in other countries?
    Mr. Beckendorf. Am I limited to 5 minutes?
    The Chairman. Whatever it takes.
    Mr. Beckendorf. OK. USDA has never used the DEIP Program 
for butter to the full extent. We've used powder and it was, as 
you know, developed to create international markets for the 
U.S. domestic dairy products. And so, what we've tried to do is 
use that program, and as Mr.--as the Dr. from USDA said, it's 
not been used for the last 2 year. It has purchased a little--
or CCC has purchased a little bit of powder, recently, in the 
last two, 3 months. But we think we need to use that to develop 
the programs. When we look at what's coming down the line in 
trade policy and WTO, this may be one of the programs that the 
Ambassadors are going to use to trade away to end the 
negotiations.
    It's going to be pretty hard to trade away a provision if 
you're not even using it. You know, what value is there there? 
But, it is a great value to producers to be able to do that, to 
develop those markets overseas. CWT has done that through 
export bonuses to the members and has been very successful. So, 
it's a good program.
    The Chairman. Gentlemen, here's my dilemma. All of you make 
very strong cases here, this morning, as to why programs are 
good, or why programs aren't good, and the direction in which 
we need to go. We've got regional differences; we've got farm 
size differences. As we look at all of our programs in dairy, 
we've got to develop a cookie cutter approach to dairy that is 
going to have to apply to all these farms. And one reason that 
we have this hearing today, is obviously to look back and let's 
see how 2002 worked as we move forward, and that's why we're 
going to have another hearing this fall, to talk more 
specifically about what we should do moving forward.
    So, I just ask that all of you within your organizations, 
within the farmers that you deal with on a regular basis, that 
you all continue to think about how we're going to look forward 
with the dairy program that may have to operate with less 
money. We don't know what those numbers are going to be, but we 
may have to. We may have to operate within different--a 
different atmosphere from a trade perspective. And I would 
just--I would hope, obviously, that we can get all of our dairy 
farmers, producers, and everybody together, and processors 
together on a common theme, but I know that's difficult. But I 
would just say, that as I listen to each of you, as I listen to 
Dr. Glauber a little earlier, and somebody who doesn't come 
from an entirely neutral standpoint, but dairy is not huge in 
my part of the world. It gets too hot for cows in my part of 
the world.
    But it--this is going to be, as it always is, the most 
complex part of the Farm Bill and the most difficult part of 
the Farm Bill to reach a conclusion on. These guys are all my 
friends and I want to make all my friends happy when we wind up 
with a dairy program. So, I would urge you to just think 
through this. Think out of the box. Give us your ideas. Talk to 
Senator Coleman, Senator Leahy, Senator Crapo, and others about 
any thoughts that you have, that we might try to develop from a 
long term standpoint as we write this Farm Bill, because this 
is going to be the toughest year ever to write a Farm Bill for 
any number of reasons, and dairy is going to be obviously, 
critically important to us, and it's going to be a very 
difficult part of the Farm Bill to write.
    So, I thank you. Thank you for being here today, and giving 
us this insight, and giving us your testimony.
    Senator Coleman. Just two things, Mr. Chairman. I want to 
thank the Chairman, again. What we see is that with this 
Chairman, is a very focused, concentrated effort to try to deal 
with the complexity of agricultural quality and in areas that 
he doesn't necessarily have a dog in that hunt. I've seen it in 
regard to sugar, seen it in regard to ethanol, but I do think 
there some ethanol plants now, being built in Georgia, and 
obviously, we've seen it with dairy. And I just--I want the 
Chairman to know how much that's appreciated. It's just a very 
thoughtful way in which he approaches and the challenge that's 
he's laid out, I share. I associate myself with his work.
    So, let me--if I can just ask Mr. Beckendorf one question. 
I was reflected on the frustration that Mr. Green talked about 
getting the USDA update and make allowances. And from a 
national milk perspective, do you share the belief that it's 
important for the long-term economic health of dairy farmers to 
make allowances that reflect current cost?
    Mr. Beckendorf. Yes, and--and it's our proposal that these 
make allowances hold Class I and II whole, that it not affect 
those, but yes. And we also have been talking to USDA forever 
about the timeliness of their decisions, and that there needs 
to be some revision there to speed those decisions up.
    Senator Coleman. Thank you. Thank you, Mr. Chairman.
    The Chairman. All right. I noticed we have kept a full 
audience here today, which is unusual. So, there's a lot of 
interest outside of the committee on what we're going to be 
doing, relative today in the next Farm Bill, and I can't help 
but notice my long time, good, personal friend, Mr. Gary Hanman 
back there.
    Gary, a former CEO of Dairy Farmers of America, has been a 
dear friend of mine for a long time. Gary, thank you for being 
here. Thanks to all of you for being here. The record will 
remain open for 5 days; there may be written questions 
submitted, to you gentlemen, we'd ask
    With that, this hearing will be concluded.
    [Whereupon at 11.50 a.m., the hearing was adjourned]

      
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                            A P P E N D I X

                             July 20, 2006



      
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                   DOCUMENTS SUBMITTED FOR THE RECORD

                             July 20, 2006



      
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