[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]



                     HEARING TO REVIEW FEDERAL MILK
                    MARKETING RULEMAKING PROCEDURES

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                     LIVESTOCK, DAIRY, AND POULTRY

                                 OF THE

                        COMMITTEE ON AGRICULTURE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 24, 2007

                               __________

                           Serial No. 110-13


          Printed for the use of the Committee on Agriculture
                         agriculture.house.gov

                               -----

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                        COMMITTEE ON AGRICULTURE

                COLLIN C. PETERSON, Minnesota, Chairman

TIM HOLDEN, Pennsylvania,            BOB GOODLATTE, Virginia, Ranking 
    Vice Chairman                    Minority Member
MIKE McINTYRE, North Carolina        TERRY EVERETT, Alabama
BOB ETHERIDGE, North Carolina        FRANK D. LUCAS, Oklahoma
LEONARD L. BOSWELL, Iowa             JERRY MORAN, Kansas
JOE BACA, California                 ROBIN HAYES, North Carolina
DENNIS A. CARDOZA, California        TIMOTHY V. JOHNSON, Illinois
DAVID SCOTT, Georgia                 SAM GRAVES, Missouri
JIM MARSHALL, Georgia                JO BONNER, Alabama
STEPHANIE HERSETH SANDLIN, South     MIKE ROGERS, Alabama
Dakota                               STEVE KING, Iowa
HENRY CUELLAR, Texas                 MARILYN N. MUSGRAVE, Colorado
JIM COSTA, California                RANDY NEUGEBAUER, Texas
JOHN T. SALAZAR, Colorado            CHARLES W. BOUSTANY, Jr., 
BRAD ELLSWORTH, Indiana              Louisiana
NANCY E. BOYDA, Kansas               JOHN R. ``RANDY'' KUHL, Jr., New 
ZACHARY T. SPACE, Ohio               York
TIMOTHY J. WALZ, Minnesota           VIRGINIA FOXX, North Carolina
KIRSTEN E. GILLIBRAND, New York      K. MICHAEL CONAWAY, Texas
STEVE KAGEN, Wisconsin               JEFF FORTENBERRY, Nebraska
EARL POMEROY, North Dakota           JEAN SCHMIDT, Ohio
LINCOLN DAVIS, Tennessee             ADRIAN SMITH, Nebraska
JOHN BARROW, Georgia                 KEVIN McCARTHY, California
NICK LAMPSON, Texas                  TIM WALBERG, Michigan
JOE DONNELLY, Indiana
TIM MAHONEY, Florida

                                 ______

                           Professional Staff
                    Robert L. Larew, Chief of Staff
                     Andrew W. Baker, Chief Counsel
                 April Slayton, Communications Director
           William E. O'Conner, Jr., Minority Staff Director

                                 ______

             Subcommittee on Livestock, Dairy, and Poultry

                   LEONARD L. BOSWELL, Iowa, Chairman

KIRSTEN E. GILLIBRAND, New York      ROBIN HAYES, North Carolina,
STEVE KAGEN, Wisconsin                    Ranking Minority Member
TIM HOLDEN, Pennsylvania             MIKE ROGERS, Alabama
JOE BACA, California                 STEVE KING, Iowa
DENNIS A. CARDOZA, California        VIRGINIA FOXX, North Carolina
NICK LAMPSON, Texas                  K. MICHAEL CONAWAY, Texas
JOE DONNELLY, Indiana                JEAN SCHMIDT, Ohio
JIM COSTA, California                ADRIAN SMITH, Nebraska
TIM MAHONEY, Florida                 TIM WALBERG, Michigan

              Chandler Goule, Subcommittee Staff Director

                                  (ii)






                             C O N T E N T S

                              ----------                              
                                                                   Page
Boswell, Hon. Leonard L., a Representative in Congress from Iowa, 
  opening statement..............................................     1
    Prepared statement...........................................    64
Conaway, Hon. K. Michael, a Representative in Congress from 
  Texas, opening statement.......................................    17
Costa, Hon. Jim, a Representative in Congress from California, 
  opening statement..............................................    52
Gillibrand, Hon. Kirsten E., a Representative in Congress from 
  New York, opening statement....................................    12
Goodlatte, Hon. Bob, a Representative in Congress from Virginia, 
  opening statement..............................................     3
    Prepared statement...........................................    63
Hayes, Hon. Robin, a Representative in Congress from North 
  Carolina, opening statement....................................     3
    Prepared statement...........................................    66
Kagen, Hon. Steve, a Representative in Congress from Wisconsin, 
  opening statement..............................................    15
King, Hon. Steve, a Representative in Congress from Iowa, opening 
  statement......................................................    56
Peterson, Hon. Collin C., a Representative in Congress from 
  Minnesota, opening statement...................................    30
    Prepared statement...........................................    61
Walberg, Hon. Tim, a Representative in Congress from Michigan, 
  opening statement..............................................    16

                               Witnesses

Ahlem, Jr., William R., Co-Founder and Vice Chairman of the 
  Board, Hilmar Cheese Company...................................    49
    Prepared statement...........................................   145
Day, Lloyd, Administrator, Agricultural Marketing Service, U.S. 
  Department of Agriculture; accompanied by Dana Coale, Deputy 
  Administrator, Dairy Programs, AMS, U.S. Department of 
  Agriculture; Ron Bosecker, Administrator, National Agricultural 
  Statistics Service, U.S. Department of Agriculture.............     5
    Prepared statement...........................................    67
    Report, entitled Questions and Answers on Federal Milk 
      Marketing Orders...........................................    79
Donohue, Dennis, General Manager, Manitowoc Milk Producer 
  Cooperative; on behalf of Midwest Dairy Coalition..............    28
    Prepared statement...........................................   103
Erickson, Warren, Executive Vice President & COO, Anderson-
  Erickson Dairy Company.........................................    45
    Prepared statement...........................................   135
French, Billy, Dairy Farmer; on behalf of Virginia State 
  Dairymen's Association; Maryland & Virginia Milk Producers; and 
  South East Dairy Farmers Association...........................    30
    Prepared statement...........................................   108
Gallagher, Edward W., Vice President, Economics and Risk 
  Management, Dairylea Cooperative Inc...........................    34
    Prepared statement...........................................   115
Hitchell, John, General Manager, Raw Milk Procurement & 
  Regulations, Kroger Co.........................................    50
    Prepared statement...........................................   151
Kraft, Chris, Owner, Dairy Farm; Board Member, Dairy Farmers of 
  America, Inc. (DFA)............................................    26
    Prepared statement...........................................    97
Krug, Kelly, Director, Division of Marketing Services, California 
  Department of Food and Agriculture.............................     8
    Prepared statement...........................................    92
Ooms, Eric, Dairy Farmer; Member, Board of Directors, and 
  Chairman, Dairy Committee, New York Farm Bureau................    32
    Prepared statement...........................................   113
Submitted material, article, entitled ``Predictability Needed in 
  Federal Order Hearing Process'', by Geoffrey Vanden Heuvel, 
  dated April 20, 2007, Cheese Reporter..........................   155
Reidy, Mike, Senior Vice President of Procurement, Logistics, and 
  Business Development, Leprino Foods Company; Chairman, 
  International Dairy Foods Association (IDFA)...................    44
    Prepared statement...........................................   122
Wells, Douglas J., Co-President, Wells' Dairy, Inc...............    47
    Prepared statement...........................................   141

 
   HEARING TO REVIEW THE FEDERAL MILK MARKETING RULEMAKING PROCEDURES

                              ----------                              


                        TUESDAY, APRIL 24, 2007

                  House of Representatives,
     Subcommittee on Livestock, Dairy, and Poultry,
                                  Committee on Agriculture,
                                                   Washington, D.C.
    The Subcommittee met, pursuant to call, at 10 a.m., in Room 
1300 of the Longworth House Office Building, Hon. Leonard L. 
Boswell [Chairman of the Subcommittee] presiding.
    Members present: Representatives Boswell, Gillibrand, 
Kagen, Holden, Baca, Donnelly, Costa, Peterson (ex officio), 
Hayes, Conaway, Smith, Walberg, and Goodlatte (ex officio).
    Staff present: Chandler Goule, Tyler Jameson, John Riley, 
Sharon Rusnak, Lisa Shelton, April Slayton, Debbie Smith, 
Kristin Sosanie, Lindsey Correa, John Goldberg, Alise Kowalski, 
and Jamie Weyer.

OPENING STATEMENT OF HON. LEONARD L. BOSWELL, A REPRESENTATIVE 
                IN CONGRESS FROM NORTH CAROLINA

    Mr. Boswell. Well, good morning and welcome to our hearing 
today. We appreciate you being here to enlighten us on the 
Federal Milk Marketing Order. I found it to be a very 
interesting process which requires a little learning. I would 
like to thank you and I appreciate you taking the time to 
address some of the concerns of the rulemaking procedure for 
Federal Milk Marketing Orders. A special thanks to our 
witnesses for testifying before the Committee and a special 
welcome to our two Iowans, Warren Erickson from my district, 
and Doug Wells from Mr. King's district. I very much look 
forward to hearing their testimony as well as the rest.
    Since January, I have been on sort of a crash course in 
dairy policy, not having an extensive background in the dairy 
industry, although I did grow up milking cows, but I did it the 
old-fashioned way and I think my father might have celebrated 
my departure, and I say that respectfully because after I left 
the farm when we were hand-milking, he got a surge system, and 
I came home the first time on leave from the military and I 
said, ``What is going on here, Pop?'' He said, ``Since you are 
not here to milk your 10 cows,'' or however many it was I was 
assigned, ``I found something to take your place.'' It was 
pretty nice.
    But anyway, I have been trying to learn all of this process 
as quickly as I can and I find it very, very challenging. A 
running joke I hear over and over around here is that there are 
three people in D.C. who fully understand dairy policy; 
however, two of them aren't telling the truth.
    With that being said and as we begin to learn more about 
the issues of the dairy industry, and as I spoke to dairy 
producers in my district, a recurring theme kept arising: the 
rulemaking process for Federal Milk Marketing Orders takes too 
long, often taking up to 2 years to get a rule approved and 
implemented by the USDA. Many in the industry who have concerns 
over of the length of the rulemaking procedures point to the 
California model. Granted that the California order covers only 
one state, I might say a very large and a very important state, 
and the Federal Orders cover almost 70 percent of the milk 
marketing in the United States. The California model has a time 
table that must be met. These time tables ensure that hearings 
are held promptly and rulings are passed and implemented in a 
timely fashion. One of the major complaints with the current 
Federal Milk Marketing Orders is that they do not currently 
represent the dairy market of 2007.
    After reading through much of the testimony, there is a 
consensus throughout the dairy industry that the rulemaking 
procedures take too long, but there are varying views on how to 
achieve a more streamlined process. We are interested in 
hearing about the new steps that the Agricultural Marketing 
Service is implementing to ensure quicker turnaround on 
rulemaking. I appreciate USDA recognizing that there has been a 
problem in the amount of time that it has taken some rules to 
pass and to be implemented, but I also welcome discussion on 
further improvements that can be made. Federal Milk Marketing 
Orders were created to assist the marketing of dairy by dairy 
producers and have done just that for years. We must ensure 
that the process is quick and efficient and represents what the 
dairy market of 2007 looks like.
    As we look forward toward the 2007 Farm Bill discussion 
that we are in the process of doing right now, we will be 
looking at different proposals to change the Federal Milk 
Marketing Order System. One such proposal is to create a 
commission to review and recommend ways to streamline the 
system, increase its responsiveness to market forces and ensure 
that it is still serving the best interests of the industry and 
the consumers. I look forward to more conversation on that 
issue. I find it interesting that the USDA acknowledges the 
consolidation of dairy industry on the heels of last week's 
hearing on the market structure of the livestock industry. They 
recognize that today we have considerably more dairy producers 
than processors and grocers. With only 10 retail grocer 
companies, concentration of the dairy industry is evident. 
There is some concern that the grocery companies, without the 
Federal Milk Marketing Orders, could push milk prices down to 
the processing industry, which in turn would push lower prices 
down to the dairy farmers. Dairy is not a commodity that can be 
withheld from the market until prices improve. Since dairy must 
be sold every day, producers are susceptible to having to sell 
their product regardless of the price. This is one reason why 
the Federal Milk Marketing Orders were created, to balance 
competition in the dairy industry.
    I appreciate everyone taking the time to discuss the issues 
at hand. I welcome further discussion on the Federal Milk 
Marketing Order. So thank you again for joining us today and at 
this time, I would like to turn it over to my good friend and 
colleague, the Ranking Member, Robin Hayes, from North 
Carolina, for any opening remarks he might wish to make.
    [The prepared statement of Mr. Boswell appears at the 
conclusion of the hearing:]

  OPENING STATEMENT OF HON. ROBIN HAYES, A REPRESENTATIVE IN 
                  CONGRESS FROM NORTH CAROLINA

    Mr. Hayes. Thank you, Mr. Chairman, and thank you for 
holding the hearing today. Thank you to all of the witnesses 
for your time and attention to this important matter.
    As you are all aware, during my chairmanship in the 
previous two Congresses, dairy was under the jurisdiction of 
another subcommittee, so I have not had the opportunity to 
fully immerse myself in what is among the most complex 
problems--excuse the play on words--program under the Ag 
Committee's jurisdiction. I have been looking forward to this 
hearing as a chance to learn as much as I can about this 
industry, especially considering it is the only farm bill 
program that the Subcommittee has jurisdiction over. Now, as we 
get into these issues, I think it will be pretty clear that 
some of us up here on the dais tend to take a free market 
approach, while others tend to favor some level of government 
involvement in the marketplace. Where I think we all agree is 
that if the government is involved, it needs to be a 
facilitator, not an impediment.
    What I know about the Federal Milk Marketing Order System: 
the industry faces some fairly cumbersome hurdles, both 
administrative and legislative, that only serve to hamper 
efforts to improve the Orders for all participants, and I 
appreciate that USDA has acknowledged this fact and is working 
hard to do what they can to improve the process. I recognize 
also that there is a consensus among the industry that more 
needs to be done. I appreciate all of the witnesses, again, for 
being here and I look forward to the discussion of this 
important issue. Thank you, Mr. Chairman.
    [The prepared statement of Mr. Hayes appears at the 
conclusion of the hearing:]
    Mr. Boswell. Thank you, Mr. Hayes, and I appreciate your 
comments. I think, at this time, we are ready to start with our 
first panel and so thank you very much. I would like for each 
of you to just for a moment, for all present, to introduce 
yourselves and then we will start with----
    Mr. Goodlatte. Mr. Chairman?
    Mr. Boswell. Where is Mr. Goodlatte? Oh, there he is. I am 
sorry.
    Mr. Goodlatte. I wonder if I might make a statement?
    Mr. Boswell. I expect you would be up here for some reason 
or other. We would like to recognize the Ranking Member of the 
full committee, Mr. Goodlatte, of course.

 OPENING STATEMENT OF HON. BOB GOODLATTE, A REPRESENTATIVE IN 
                     CONGRESS FROM VIRGINIA

    Mr. Goodlatte. Thank you, Mr. Chairman. I very much 
appreciate your holding this hearing and I appreciate the 
opportunity to give a few remarks.
    I found that the easiest way to clear a room is to begin 
talking about dairy policy. Few markets suffer such an extreme 
level of government regulation. Dairymen are over-regulated in 
just about every aspect of their business. When we discuss 
dairy policy in this Subcommittee, we must always be cognizant 
that the slightest change can have severe repercussions. As 
such, it is very rare for the Agriculture Committee to consider 
dairy proposals that are acceptable to all players. However, as 
the full committee traveled throughout the country last year, a 
common theme among dairy producers and processors emerged: the 
Federal Milk Marketing Order System needs to be more 
responsive.
    As most of us have become painfully aware, even simple 
changes to Federal Orders can often take a year or more to 
accomplish. For example, dairymen in my region of the country 
petitioned for a change in October of 2005 to adjust 
transportation credits in the Southeast and Appalachian Orders. 
The USDA proceeded to consider this proposal on an expedited 
basis. A year later, the Department published an interim rule 
that covered only a portion of the original petition. As we sit 
here today, this rulemaking is still open and the problem for 
my dairymen has yet to be resolved. It will be easy to sit here 
and blame the USDA for the length and complexity of the 
process. If we did that, however, we would be ignoring the fact 
that the USDA is simply abiding by the laws our predecessors 
created. Likewise, we would be ignoring the effect the various 
industry participants have in slowing down the process when it 
suits them to do so. Unlike other Federal rulemaking procedures 
that are regulated under the Administrative Procedure Act, 
Federal Milk Marketing Order rulemaking is regulated by the 
arcane procedures of the Agricultural Marketing Agreement Act.
    The USDA has some discretion to improve their internal 
management of the process, and we will hear today that this is 
something the USDA Dairy Program is committed to doing. 
Unfortunately, that will only get us so far. The rest needs to 
be done by the Members of this Committee. As we begin this 
process, we are fortunate that we have a successful model that 
we can evaluate. There are many aspects of the California 
system that we could incorporate into a Federal system, which 
is encouraging. If we are successful in capturing the best of 
both systems, we may actually have finally done something good 
for dairy, at least in terms of making our decisions more 
expeditiously and in a manner that will be more responsive to 
the marketplace. Thank you, Mr. Chairman.
    [The prepared statement of Mr. Goodlatte appears at the 
conclusion of the hearing:]
    Mr. Boswell. Thank you, Mr. Goodlatte, and again, I 
apologize for not recognizing your presence. So we will take 
note of that the next time. At this time, I would request the 
other Members to submit their opening statements for the record 
so the witnesses may begin their testimony and give us ample 
time for questions. And we would like to welcome our first 
panel, as I said earlier, to the table. And so Administrator 
Day, I want to just ask you to introduce your two deputies and 
then we will introduce Mr. Krug and we will get started.

             STATEMENT OF LLOYD DAY, ADMINISTRATOR,
        AGRICULTURAL MARKETING SERVICES, U.S. DEPARTMENT
       OF AGRICULTURE; ACCOMPANIED BY DANA COALE, DEPUTY 
            ADMINISTRATOR, DAIRY PROGRAMS, AMS, U.S.
          DEPARTMENT OF AGRICULTURE; AND RON BOSECKER,
 ADMINISTRATOR, NATIONAL AGRICULTURAL STATISTICS SERVICE, U.S. 
                   DEPARTMENT OF AGRICULTURE

    Mr. Day. Well, Mr. Chairman and Members of the 
Subcommittee, good morning and thank you for the invitation to 
appear before you today. Accompanying me is Ronald Bosecker, 
the Administrator of the National Agricultural Statistics 
Service, and Dana Coale, the Deputy Administrator of AMS's 
Dairy Programs. The following remarks will provide a brief 
overview of the Federal Milk Marketing Order System, including 
a review of its rulemaking procedures. My complete statement 
has been submitted for the record.
    I wanted to briefly touch on the current status of the U.S. 
dairy industry. Although the dairy industry is facing increased 
feed costs and higher energy costs, slowed increases in milk 
production and robust demand for dairy products are resulting 
in stronger milk prices. The average Federal Order uniform milk 
price of $15.61 per hundredweight reported for March of this 
year is a year-over-year increase of more than 23 percent. 
Internationally, the United States has become a leading 
exporter of nonfat milk products since 2005 and is expected to 
remain the leader through 2007 and beyond. We expect exports of 
295,000 metric tons for 2007, an increase of 1.7 percent over 
2006 levels, even as the overall market is contracting 
slightly. The tight international markets led to higher prices, 
which in turn have boosted domestic prices.
    AMS administers, among other programs, the Federal Milk 
Marketing Order Program. Federal Milk Marketing Orders are 
authorized by the Agricultural Marketing Agreement Act of 1937, 
as amended. The Act authorizes the Secretary of Agriculture to 
establish and maintain such orderly marketing conditions as 
will provide, in the interest of producers and consumers, an 
orderly flow of the supply to avoid unreasonable fluctuations 
in supplies and prices. Funded by user fees, the 10 Federal 
Orders cover a majority of the United States and are a major 
part of milk marketing in the United States. More than 90 
percent of U.S. milk is marketed under either Federal Orders or 
under similar regulations issued by state governments. A milk 
market administrator administers each Order.
    The Federal Milk Marketing Order System facilitates the 
marketing of milk by dairy farmers and their cooperative 
associations. Federal Orders regulate handlers who buy milk 
from farmers and their cooperatives. Federal Orders set minimum 
prices paid by regulated handlers for milk according to how it 
is used. Dairy farmers who supply enough milk to the market's 
fluid handlers to meet an Order's performance standards share 
in the revenue of all milk sales under the Order. Regardless of 
how an individual dairy farmer's milk is used, the farmer 
receives at least the blend or market average minimum price for 
milk sold in all classes. Federal Milk Marketing Orders provide 
a structured means of sharing the benefits and compensating for 
the additional costs for supplying Class I needs of a market 
and prevent dairy farmers from being subject to undue pressures 
from buyers in the marketing of a highly perishable product.
    Milk Marketing Orders benefit dairy farmers, manufacturers 
and processors, and others in the marketing chain, in other 
ways. In addition to market information made available by Dairy 
Market News, the Federal Milk Order Program amasses a 
considerable amount of data on producer numbers, milk 
marketings, prices, fluid milk sales and dairy product 
production that AMS publishes for the use of all market 
participants. These data are made available over the Internet 
and thus are more current and accessible than ever before.
    It should be noted that the Federal Milk Marketing Order 
Program is a marketing program, not a price or income support 
program. USDA operates the Milk Price Support Program and the 
Milk Income Loss Contract Program, or MILC Program, for those 
latter purposes. Federal Milk Orders do not regulate dairy 
farmers. Dairy farmers are able to produce as much milk as they 
wish and they can sell to any handler who is willing to buy 
their milk. Federal Orders do not guarantee a market for a 
farmer's milk. Farmers must find their own market and must 
arrange for the delivery of their milk to the handlers and bear 
those marketing costs.
    Further up the marketing chain, the grocery industry is 
also highly concentrated. Absent Milk Marketing Orders, the 
potential exists to push lower milk prices down to handlers, 
who in turn could push lower prices down to dairy farmers to 
below a sustainable long-run average production cost level. The 
perishable nature of raw farm milk puts the dairy farmer in a 
vulnerable negotiating position. Raw milk, unlike store-bought 
commodities, cannot be withheld from the market in an effort to 
gain a better price. Federal Milk Orders help balance the 
competition between many dairy farmers and relatively few fluid 
milk processors.
    The Agricultural Marketing Agreement Act of 1937, as 
amended, requires that formal rulemaking procedures be used to 
make changes to the Federal Milk Marketing Order. The process 
is extensive and time consuming but provides for maximum 
industry participation and transparency. The industry offers 
proposals, provides testimonies in support or in opposition to 
proposals, and may cross-examine the witnesses at public 
hearings before an Administrative Law Judge, submit briefs and 
proposes findings of facts, comments on recommended decisions, 
and produces approved final decisions to referenda before any 
changes to an Order are effective.
    AMS is aware of the concern about timely decisions and in 
response undertook an extensive internal review of its part in 
the process and developed several new rulemaking initiatives 
and customer service standards. During this process, AMS 
consulted with other organizations, including the California 
Department of Food and Agriculture, to determine best practices 
that could be incorporated into the Federal rulemaking process. 
Our goal is to improve timeliness while maintaining 
transparency and the opportunity for public involvement that 
currently exists. Some of the steps initiated by AMS include 
having meetings to discuss issues with interested parties 
before the proposals are submitted; holding pre-hearing 
information sessions to discussion proposals received with 
interested parties before the ex parte rulemaking restrictions 
apply; we have had held one such session to date on the current 
Class III and IV proceeding; developing supplemental rules of 
practice to better define public input timelines once the 
formal rulemaking process begins; and procuring the services of 
court reporters, in terms of best value rather than lowest 
cost, to reduce transcript delivery times and improve their 
quality and accuracy, and this has been very successful.
    Under the new customer service standards, we are planning 
to have amendments issued within 14 months for any non-
emergency rulemaking proceeding. This process would allow 3 
months in total for public participation. In situations when 
emergency marketing conditions warrant the omission of a 
recommended decision, the Department could move from a hearing 
to final amendments in 10 months or less. These new standards 
are reducing the amendatory time from more than 2 years to 
around 1 year. We have had extensive discussions with the 
industry regarding the time-frames necessary for insuring 
sound, reasonable decisions that allow maximum public 
participation, and have concluded that our revised process will 
yield better results than a mandated timeframe.
    My written testimony for the record discusses in detail why 
the Department is opposed to mandated time-frames. The problems 
associated with mandated time-frames include the inability to 
respond to urgent issues, such as those presented by the 
hurricanes in 2004 and the potential for increased litigation. 
It is important to understand that the Federal Milk Marketing 
Order Program continually changes to reflect relevant marketing 
conditions facing the dairy industry. Since 2000, AMS has 
undertaken 19 rulemakings to amend Federal Orders, requiring 
the publication of more than 62 documents in the Federal 
Register. Of these rulemakings, 14 have been finalized.
    Finally, I would like to stress, again, that Federal Milk 
Marketing Orders today remain an important tool for dairy 
farmers. AMS will continue to work with all sectors of the U.S. 
dairy industry to administer Federal Milk Marketing Orders so 
that dairy farmers are assured of a reasonable minimum price 
for their milk, and consumers are assured of an adequate supply 
of fluid milk to meet their needs throughout the year. This 
concludes my statement, Mr. Chairman. I would be pleased to 
respond to any questions.
    [The prepared statement of Mr. Day appears at the 
conclusion of the hearing:]
    Mr. Boswell. Well, thank you, Administrator Day. I thought 
you might introduce your two deputies, so allow me, with your 
permission, to do that with you or for you. But you have Dana 
Coale from Dairy Programs with you. Welcome. Glad to have you 
here. I want the panel to know that. And also Ron Bosecker. 
Glad to have you here.
    Mr. Bosecker. Thank you, sir.
    Mr. Boswell. And with that, I would like to recognize Mr. 
Krug, Director of Marketing Services, California Department of 
Food and Agriculture, from Sacramento. Welcome, Mr. Krug. We 
recognize you at this time.

         STATEMENT OF KELLY KRUG, DIRECTOR, DIVISION OF
     MARKETING SERVICES, CALIFORNIA DEPARTMENT OF FOOD AND 
                          AGRICULTURE

    Mr. Krug. Thank you and good morning. My name is Kelly 
Krug. I am the Director of the Division of Marketing Services 
of the California Department of Food and Agriculture. Thank you 
for the invitation to speak to you today about the hearing 
process used by the California dairy pricing and pooling 
systems.
    I direct the division of the Department that administers 
the state's milk pooling and pricing system. For more than 70 
years, the Department's California dairy pricing program has 
worked to carry out four goals established by the California 
Legislature, which are stated in the Food and Agricultural 
Code. They are: (1) to maintain an adequate and continuous 
supply of pure and wholesome food milk to consumers; (2) to 
eliminate unfair dairy trade practices; (3) promote and 
encourage intelligent production and orderly marketing; and (4) 
maintain a reasonable level of stability and prosperity in the 
California dairy industry. These goals address the interest of 
all parties, including producers, processors, cooperatives, 
retailers and consumers.
    California's dairy pricing system is similar to Federal 
Milk Marketing Orders. Both rely on established minimum farm 
milk prices for producers. USDA's Federal Milk Marketing Orders 
regulate more than \2/3\ of the Grade A milk marketed today. 
California is the principal milk production area that does not 
fall under the jurisdiction of a Federal Order and has 
maintained its own state order marketing program since the 
passage of the Young Act in 1935. California also has operated 
a milk pooling program since the passage and implementation of 
the Gonsalves Milk Pooling Act in 1968, which provides for 
dairy producers to share the revenue from the sales of all 
classes of milk. Again, California's operation of milk pooling 
is quite similar to pooling that is done in Federal Milk 
Marketing Orders.
    Currently, California operates its milk pricing plan with 
two marketing areas, northern California and southern 
California. Each marketing area has a separate but essentially 
identical stabilization and marketing plan. Each plan specifies 
the formulae for establishing minimum prices for California's 
five classes of milk. Much like the Federal Milk Marketing 
Orders, and to promote stability in the state's dairy industry, 
California's milk marketing program establishes minimum prices 
that processors must pay for food grade or for Grade A milk 
received from dairy farms, based on end-product use. These 
prices are established within defined marketing areas where the 
milk production and marketing practices are similar.
    The California pricing system was designed to encourage 
innovation and to react quickly to market signals. Minimum farm 
prices are determined by supply and demand signals that are 
based upon actual market conditions and prices for manufactured 
dairy products. These formulae are established through a public 
hearing process in which interested parties offer testimony and 
evidence relating to the proposed formulae. Revisions to these 
pricing formulae, other provisions of the stabilization 
marketing plans, and provisions of the pooling plan for market 
milk are made only after a public hearing has been held. Most 
hearings are initiated by entities representing either milk 
producers, cooperatives or milk processors, but they can be 
requested in writing by any interested party. Infrequently, the 
Department will call for a hearing on its motion. This formal 
hearing process generally allows for changes to be implemented 
in approximately 3 to 5 months.
    Next, I will outline the steps of the hearing system. The 
request for a hearing must be received in writing and it must 
specify which plan is recommended for change, that is, which of 
the stabilization plans or the milk pooling plan. A request 
must explain why a change is sought and must include relevant 
analysis and data along with the proposed implementation 
language. Once a request is received, the Department has 15 
calendar days to decide if a hearing would be granted. If the 
Department accepts the request, a formal hearing announcement 
is released with a time table for the hearing events. A filing 
period for submission of alternative proposals is identified 
and a few weeks before the hearing is conducted, the Department 
will hold a pre-hearing workshop. The workshop allows the 
requester, and any parties filing alternatives, to explain 
their proposals. The Department also performs initial analyses 
of all the proposals, which are released at the pre-hearing 
workshop. Departmental exhibits are made available to the 
public 7 days prior to the date of the hearing, then the 
hearing is conducted.
    Most hearings require 1, or possibly 2, days to complete. 
The Department generally allows up to 10-day brief filing 
period for participants to clarify or amplify their testimony 
presented at the hearing. From the date of the hearing 
completion, which is the end of the oral testimony, the 
Department is required by the Food and Agriculture Code to 
implement any changes resulting from the hearing within 62 
days. The Code also requires a 10-day notice to the public of 
the upcoming changes, which reduces the analysis time to 52 
days from the date of the hearing closure. I have included a 
hearing timeline diagram with my testimony that further 
explains the hearing process. Also a summary brochure is 
included that provides details of the dairy hearing process to 
interested parties.
    This concludes my testimony. Thank you for the opportunity 
to speak to you today about the hearing process used for the 
California dairy pricing and pooling systems. If you have any 
questions regarding our program, I would be pleased to try to 
answer them. Thank you.
    [The prepared statement of Mr. Krug appears at the 
conclusion of the hearing:]
    Mr. Boswell. Well, thank you, Mr. Krug. I think we will 
have a question round now. I will ask a couple questions and I 
will remind Members that we are going to try to limit to 5 
minutes, then we could have a second round if we need, and I 
will adhere to that myself. But you mentioned something, 
Administrator Day, about the number of reforms to speed up the 
process. Can you expand a little bit on the steps that you are 
taking? Just briefly, what steps are you actually suggesting 
you are going to take?
    Mr. Day. Sure. I would be happy to, Mr. Chairman. First, 
we, like you, recognize that speed is very important to be 
responsive as possible to the dairy industry. Therefore we 
undertook an extensive review, meeting with folks from 
California and with industry to determine what we could do to 
speed things up, to understanding, first off, when we are going 
into a hearing, what the issues are, the relevant issues are, 
to bring the players together in this informal meeting process, 
which is the next step, in order to get all of our ducks in a 
row, so to speak, in order to when we actually announce a 
hearing, that folks are prepared for that hearing and they come 
in and they have that opportunity to testify in a clean and 
efficient way. We then moved on to develop administrative 
procedures that we are going to put in place for ourselves and 
for the public and we are going to be publishing that very 
shortly. That will talk about the timelines for public 
participation, which will be streamlined as well, as well as 
looking at our own internal processes to make that move faster. 
And then the third area is court reporters. These are legal 
proceedings and so the transcript, which can go on for--the 
hearings sometimes go on for weeks--need to be done in a very 
efficient, effective and accurate way. And so we have moved to 
hiring best value instead of--or the reporters that are the 
best, regardless of the price, so that we are able to get 
accurate statements and an accurate body of evidence that we 
can present to the public in a more efficient way.
    Mr. Boswell. Well, thanks very much. I think I will move 
over to Mr. Krug just for a moment. In the California State, 
where you enforce tight deadlines, have they been hard to 
enforce?
    Mr. Krug. I think that because they have been in place for 
a long time and there are a lot of long-term relationships in 
the dairy industry and producers, processors, co-op side, no, 
it has worked pretty well.
    Mr. Boswell. What has been your major challenge?
    Mr. Krug. The time for economists to analyze the testimony 
thoroughly.
    Mr. Boswell. Okay. And not to put you on the spot, but we 
are here for everybody to work together and I know you are too. 
Would you think that the USDA would be able to work a model 
similar to yours?
    Mr. Krug. Well, obviously, it would take a major change to 
the rule process. Possibly the regional issues that are 
involved make the Federal system more complicated.
    Mr. Boswell. It would take more time?
    Mr. Krug. Yes. And I think that there, with probably some 
additional time, maybe a rigid calendar would work well, but 
you might need to pull it out or lengthen it somewhat.
    Mr. Boswell. Thank you very much. Back to you Administrator 
Day, if I could. A few witnesses, in their written testimony, 
have suggested creating a Federal Orders commission with 
producers and processors charged with hashing out their own 
problems. What would you think of this proposal and would it be 
helpful to the agency to have the industry come together and 
offer solutions to some of the issues that come up with a 
Federal Order?
    Mr. Day. Well, whenever we can have industry consensus, it 
is always a good thing and that is one of the reasons why 
sometimes the rulemaking for the Federal Orders takes so much 
time, because there is not even anything close to industry 
consensus. I think a commission is something that we would 
certainly be happy to look into and work with. We would have to 
make sure that it was composed of the right balance of folks 
from the industry and USDA and others, so we would be happy to 
work with that.
    Mr. Boswell. I appreciate that. I think now that I am going 
to recognize my Ranking Member and ask what questions he might 
have. I want to recognize you for 5 minutes, sir.
    Mr. Hayes. Thank you, Mr. Chairman. Mr. Day, last Friday, 
USDA announced a reporting error with regard to a National 
Agricultural Statistics Service survey of nonfat dry milk 
prices. Can you outline the process you are now involved in to 
examine the extent and impact of this reporting error?
    Mr. Day. I would like to turn that question over to the 
Administrator of NASS, Administrator Bosecker.
    Mr. Hayes. Okay.
    Mr. Bosecker. Thank you for the question. Once again, my 
name is Ronald Bosecker. I am the Administrator of the National 
Agricultural Statistics Service, or NASS. We are the 
statistical arm of the Department, the data collection arm. We 
issue over 500 reports per year. One of those data series is 
the Dairy Products Prices Program that we have been collecting 
data from the plants for 8 years now, week in and week out, 52 
weeks a year, and an error was brought to our attention 
recently. We made a revision in a recent report. We had noticed 
an anomaly in the prices, but there are technical reasons why 
the prices, which are weighted by product, could differ from 
the spot prices reported in Dairy Market News. And we were 
looking at the plants that might be involved and as a matter of 
fact, annually, we visit the plants and make sure they are 
reporting according to the rules, about what product or what 
prices are supposed to be included and what are supposed to be 
excluded, and we were in the process of this at the first 
instance that we heard that there were problems, there could be 
problems, and we were visiting all of the plants to make sure 
they were reporting correctly. As the problem grew, recently, 
we went back to plants again to re-verify and that is when the 
error was discovered.
    Mr. Hayes. So from this point forward, what are you doing 
to examine the extent and impact of the error? I am not sure I 
got that answer.
    Mr. Bosecker. Currently, we are revisiting the plants 
again. That is part of our standard procedure. But we are 
instituting a special visitation for all of the plants to once 
again go over the inclusions and exclusions in the program and 
make sure that is thoroughly understood, and we are going to 
ask them, as well, to review the data they have reported for 
the last year and make sure that the reports that we have 
gotten from all the plants are accurate.
    Mr. Hayes. Okay. When are you going to report back to us on 
the impact of this error?
    Mr. Bosecker. There will be the data collection period over 
the 45 days and then there will be the processing of the data 
that we have and the economic analysis and then the 
calculations of the impact of any changes that are found, and 
so I would suspect July might be the earliest that we could 
have answer for you.
    Mr. Hayes. Okay, we won't hold dinner for you, but get that 
to us when you can. Mr. Day, do you intend to seek legislative 
changes in the Agricultural Adjustment Act to expedite 
processing of Federal Order amendment petitions? And also, time 
is getting short. You have expressed in your testimony that 
USDA is doing a number of things to speed up the decision 
making process of the Department, as it relates to Federal 
Orders. And I will tell you, some of the producers in the 
Southeast have a lot of concern about the Orders and there is 
talk of suspending the Orders in our area. I am wondering, 
given the original purpose of the Order System to ensure we all 
have adequate access to fresh fluid milk, do you think we still 
need the Orders to do this today?
    Mr. Day. Well, thank you for that question. We are not 
seeking any changes in legislation at this time. We are trying 
to do all of the changes administratively. With regard to the 
Southeast, we have been working proactively with the Southeast 
dairy industry to find consensus among all the different 
participants, in order to see how the Orders can achieve their 
purposes of improving the situation in the Southeast. We have 
recently met with them. They have found some consensus and they 
have sent a proposal to us which we are analyzing as we speak. 
So in answer to the question, are the Orders still useful to 
them, I believe they are and I believe this proposal will help 
address the situation, both in the short and medium term, in 
the Southeast.
    Mr. Hayes. Thank you, Mr. Chairman. I yield back.
    Mr. Boswell. Thank you, Mr. Hayes. At this time, we would 
like to recognize, for 5 minutes, the lady from New York, Mrs. 
Gillibrand.

      OPENING STATEMENT OF HON. KIRSTEN E. GILLIBRAND, A 
            REPRESENTATIVE IN CONGRESS FROM NEW YORK

    Mrs. Gillibrand. Good morning. Thank you for coming and 
thank you for giving us your time and testimony. I come from 
upstate New York and in upstate New York, our dairy farms are 
really in a crisis right now. With high feed costs, with high 
fuel costs and low milk prices, they are really having a very 
difficult time making a living. And most of them, because of 
the low milk prices last summer at $12 per hundredweight, are 
heavily in debt, hundreds of thousands of dollars in debt, and 
their big concern is that they are not going to be able to 
recover because of that high level of debt. Even if the prices 
do go to a proper level, they will not be able to pay off all 
of their debt and continue to sustain their farm.
    So I am very concerned about the issue that my colleague 
brought up, about this misreporting of pricing, and I would 
like you to address a little more fully how you are going to 
review the price reporting procedures and make them more 
effective. And I want to just read something from The Milkweed, 
which is a popular publication for our dairy farmers. It says, 
``Failure by USDA to input accurate nonfat dry milk commodity 
prices has caused a systemic failure in the Federal Milk Order 
Pricing System. Because of too low milk powder survey prices, 
USDA's complicated milk pricing system has low-balled dairy 
farmers' milk prices during the past half year. During that 
time, USDA's Class IV prices have been undervalued, because 
prices for nonfat dry milk have been misreported to USDA's 
weekly dairy commodity price survey.''
    I would like you to address what you are doing now, but 
also what you didn't address, what is to stop more 
underreporting in the future and how you are going to deal with 
this on a long-term basis. For some of our dairy farmers, they 
have analyzed that this has cost them as much as $3 per 
hundredweight in the prices they received because of this 
fraudulent activity.
    Mr. Bosecker. Thank you, Congresswoman. As you mentioned, 
the program is complex. There are a number of instructions to 
our reporters for what they are to include and what they are to 
exclude. One of the things they are to exclude is a long-term 
fixed price contract and that is specified on each 
questionnaire, weekly. And as I mentioned, we visit them 
annually, in person, to talk to the officials who fill out the 
reports and we go over each of these items, what is to be 
included and excluded. However, because of the complexity, it 
is possible that misreporting can occur. We take it very 
seriously, the potential for misreporting, and that is why we 
visit with the plants and periodically go over what they should 
do. The plant in question that we revisited very quickly, 
cooperated with us to provide the data and now we are again 
visiting all the plants within the next 45 days to make sure, 
number one, that they understanding going forward and to try to 
find out what the impact might have been in the past. There are 
a lot of numbers that are floating around out there. We want to 
do our best to try to find out just how much that might be.
    Mrs. Gillibrand. And what will you do going forward? Once 
you figure out what the mistake was, what will you do going 
forward to prevent this from happening again?
    Mr. Bosecker. NASS is working cooperatively with our 
compatriots in the AMS to define a rule for auditing of the 
plants, and I would let Administrator Day address that.
    Mr. Day. Right. We are moving rulemaking through the 
Department. I believe we are expediting that to get it out as 
quickly, by the end of this week, over to other members of the 
U.S. Government that review rulemakings that we produce. And 
they are sensitive as well to the importance of this issue, 
given the misreporting that has occurred. And once that rule is 
in place, the Agricultural Marketing Service will have auditing 
power to go in and look at the pricing to ensure that handlers 
are giving NASS accurate pricing data.
    Mrs. Gillibrand. Thank you.
    Mr. Boswell. Thank you and we will have a second round. 
Okay. The chair would like to recognize Mr. Goodlatte for any 
questions he might have.
    Mr. Goodlatte. Thank you, Mr. Chairman. Administrator Day 
and Administrator Bosecker and Deputy Administrator Coale, 
welcome. Mr. Krug, we are very pleased to have your testimony, 
too, as I alluded to in my opening remarks. Let me first say 
that I appreciate the efforts that the Department has made to 
work with the dairy industry in the Southeast to address some 
of the unique problems that we are facing. I know that you are 
considering some proposals. You referenced that in response to 
the questions from Mr. Hayes. Those proposals were just 
submitted last month. I wonder if you could tell us what the 
current status of that action is? What is the process? When 
might we expect to have some decisions made about the proposals 
that were submitted?
    Mr. Day. We received the proposal on April 9, I believe. Is 
that right, Dana? And we are analyzing those proposals right 
now and from that we will announce a hearing on the proposals, 
once we finish the analysis that it warrants a hearing. And so 
from that we will go into in the rulemaking process and given 
that this has been a significant concern in the Southeast, I 
would think we would go under this under an emergency 
rulemaking to implement it as quickly as possible. And we will 
use those procedures that we have dictated or discussed early 
before, to make it move as smoothly as possible and as quickly 
as possible.
    Mr. Goodlatte. Thank you. Any idea of when you might 
announce such a hearing?
    Mr. Day. I would assume in the very near future.
    Mr. Goodlatte. Okay. Regarding the broader issue that I had 
mentioned in my opening remarks, and Mr. Hayes also mentioned, 
of Marketing Order reform, in a full committee hearing just 
earlier this year, on February 14, I asked Secretary Johanns 
about the possibility of legislative proposals from the USDA to 
improve the Order amendment process. The Secretary's answer 
focused more on the mandates of the Administrative Procedure 
Act than the Agricultural Marketing Agreement Act. Having had 
an opportunity for further review, I am wondering, you said in 
response to Mr. Hayes, that you are not looking for any 
legislative proposals. This time you were looking for some 
internal administrative changes and that is good. I am glad you 
are doing that. But as I indicated, I am not sure that is going 
to be enough and so I am wondering if the USDA might at least 
be able to clarify the record regarding what can be fixed 
administratively and what requires legislative attention, so 
that if the Members of this Subcommittee want to work with the 
Chairman of the Subcommittee and the Chairman of the full 
committee on a legislative fix what things are beyond your 
purview, and what things you can and are attempting to address 
administratively.
    Mr. Day. Well, administratively we have done some of the 
things that I have discussed already before and we are working 
to develop supplemental rules of practice through informal 
rulemaking that will define the parameters of everything from 
submitting briefs to everything that the industry has to put 
together for the formal rulemaking process. The only 
legislative thing, as I understand, that you could do is 
somehow amend the Act, and that would be the Administrative 
Procedure Act, that governs formal rulemaking, which is fairly 
controversial and I know it would have lots of folks with lots 
of different opinions on that. But if you were able to do 
something like that, it could potentially speed up the process.
    Mr. Goodlatte. So it is your opinion that amendments to the 
Agricultural Marketing Agreement Act would not be helpful?
    Mr. Day. At this time, I don't think they would be helpful. 
I think what would be useful is that, in this commission that 
folks are discussing to put together, if they could take a look 
at potentially what exists within both administrative purviews 
as well as legislative purviews for potential fixes, we could 
certainly consider further what could be done both 
legislatively and administratively.
    Mr. Goodlatte. Well, as we move forward in this 
Subcommittee, I hope that you will make a further examination 
of that and advise us of any things that you identify that are 
within the jurisdiction of this Committee that could be done to 
legislatively streamline the decision making process, because 
it is one that I know that the Department has been very 
dedicated in acting on in this particular case, which I am very 
familiar with, but one that nonetheless requires such a lengthy 
process, that by the time a decision is made, marketing 
conditions have often changed yet again. And in terms of the 
concern addressed by the gentlewoman from New York, dairy 
farmers across the country are very much squeezed right now by, 
well, they are not the lowest prices, they are relatively low 
prices and that is juxtaposed against high input costs that 
require a quick response in terms of marketing Orders. Thank 
you, Mr. Chairman.
    Mr. Day. Yes, we would be happy to look at that and see 
what we could come up with.
    Mr. Goodlatte. Thank you, Mr. Chairman.
    Mr. Boswell. Thank you, Mr. Goodlatte. The chair at this 
time would recognize the gentleman from Indiana, Mr. Donnelly. 
He stepped out. I guess we are going to move on then to the 
good doctor from Wisconsin, Dr. Kagen.

  OPENING STATEMENT OF HON. STEVE KAGEN, A REPRESENTATIVE IN 
                    CONGRESS FROM WISCONSIN

    Mr. Kagen. Thank you, Mr. Chairman. Mr. Day, what is the 
minimum time that AMS could issue a decision on a Federal 
Marketing Order?
    Mr. Day. The minimum time? Well, it depends. On an 
emergency basis, we have done it within about 3 months, but in 
most cases, we are trying to focus to under a year on an 
emergency basis; about 14 months, on a normal rulemaking 
procedure.
    Mr. Kagen. Well, if you were an emergency room physician 
and you had to wait a period of time, as you suggest, the 
patient wouldn't make it. So I am sure you are interested in 
squeezing that time down even more. What are you doing in that 
regard to hasten it?
    Mr. Day. Well, we have discussed a little bit earlier today 
some of the procedures that we are putting in place to bring it 
down for the normal cases from 2 years to about a year or 14 
months and those include everything from bringing the industry 
together beforehand to having a pre-hearing meeting to working 
within the administrative procedures that we have outlined to 
develop supplemental rules of practice through internal 
rulemaking and then finally by procuring better or the best 
court reporters we can in order to get--when that evidence 
comes through, to get it done as quickly as possibly so we can 
then submit it out to the public so that they can view and 
comment on it.
    Mr. Kagen. Does the USDA have any plans to address the role 
that whey plays in Class III milk prices?
    Mr. Day. That is under consideration.
    Mr. Kagen. Can you elaborate?
    Mr. Day. Well, it is under current rulemaking, so I am 
afraid I am, by law, not able to elaborate on that.
    Mr. Kagen. I wouldn't want you to violate any laws. I will 
yield back my time.
    Mr. Boswell. Thank you. The chair at this time would 
recognize the gentleman from Michigan, I have it straight, Mr. 
Walberg.

  OPENING STATEMENT OF HON. TIM WALBERG, A REPRESENTATIVE IN 
                     CONGRESS FROM MICHIGAN

    Mr. Walberg. Thank you, Mr. Chairman. I had the privilege 
of having seven agricultural listening sessions 2 weeks ago for 
in-district work period and frankly, the dairy concerns were 
probably number one of all of the testimony, information, and 
concerns that were addressed, so I appreciate the opportunity 
to ask some questions today. And Mr. Krug, thank you for 
joining us here this morning. Let me ask you. Recognizing the 
inherent differences in the scope of the Federal and California 
milk marketing programs, I assume there are aspects of the 
California system that simply would not work for the Federal 
system. You have confirmed that to some degree already. Can you 
offer some perspective on what you would think will or will not 
work in the Federal system?
    Mr. Krug. Well, one major difference of our two systems is 
the amount of testimony submitted in the record and that 
probably comes about because cross-examination is not allowed 
in our hearing process of the witnesses, except questioning by 
the panel from the Department of Agriculture. Questions can be 
submitted to the panel to be asked. The audience can submit 
those questions. But anyway, I know that the records that get 
generated in the Federal process are huge and then it takes a 
long time for the analysts to go through the record. So I think 
that is partly because you have 10 Orders and so many 
geographic areas and the regional issues that are out there; so 
that makes the issue much more complex than we probably handle 
in one state.
    Mr. Walberg. Of course, you are a diverse agricultural 
state. Michigan has the, I guess, distinction of being second 
only to California in the diversity of its agriculture. But you 
are saying the administrative process is much more broad and 
cumbersome here?
    Mr. Krug. Well, the rules are set up for a more exhaustive 
process under the Federal Order System. We have very tight 
time-frames and the hearings generally don't go longer than 2 
days. And when you have a 2-day record, it is easier to do that 
analysis in a shorter period of time.
    Mr. Walberg. Okay, thank you. Administrator Day, let me ask 
you. Within the context of Doha, the United States has proposed 
cutting amber box by 60 percent; and 83 percent for the EU. To 
put a dollar figure on this, the United States proposed to 
reduce its domestic support from the current level of 
approximately $20 billion to around $8 billion. Combining MILC 
and the price support program, dairy accounts for more than $5 
billion. Do you envision the Administration proposing a 
reduction in the level of the domestic support to the dairy 
sector?
    Mr. Day. That is a very good question, Mr. Walberg. I 
notice from this hearing that I need new glasses because it is 
very difficult to read the names. But I am not responsible for 
the Doha discussions and the debates and so I will read to you 
what I believe would be the Secretary's response to that, to a 
similar question that he received. The proposal that we have 
for the farm bill recognizes that milk prices have been well 
above support prices in recent years and the trend is expected 
to continue. Therefore our proposal focused on a safety net for 
dairy farmers to address the variability in milk prices. We 
maintain the MILC program, but propose that the MILC payments 
are consistent with our other counter-cyclical safety net 
programs. The payment rate would be phased down over the life 
of the program and payments would be based on 85 percent of 
historical milk marketings over the 2004 through 2006 period. 
The proposals are also good WTO policy, because payments that 
are based on historical production are less trade-distorting. 
Now, I know that doesn't answer your question, if we were going 
to reduce that support based on what the Doha deal is, but----
    Mr. Walberg. Well, it sounds like a reduction.
    Mr. Day. Well, it is a small reduction, but one that still 
maintains that safety net.
    Mr. Walberg. Okay, thank you. I appreciate that and I yield 
back.
    Mr. Boswell. Thank you. At this time, the chair recognizes 
the gentleman from Texas, Mr. Conaway.

OPENING STATEMENT OF HON. K. MICHAEL CONAWAY, A REPRESENTATIVE 
                     IN CONGRESS FROM TEXAS

    Mr. Conaway. Thank you, Mr. Chairman. I appreciate that. 
And based on your opening statement, I am even less qualified 
to ask questions this morning than you are, because I don't 
have a lot of dairy in my district, but I do have a couple of 
points that caught me during the testimony. One, our colleague 
from New York used the word fraud with respect to the reporting 
error. Mr. Bosecker, is it fraud, mistakes, honest errors, or 
what?
    Mr. Bosecker. At this point, we cannot answer for sure on 
that question. We are going back to the plants and I must say 
that when we did re-contact a plant in question, they were very 
forthcoming.
    Mr. Conaway. Do they have a turnover of personnel? Is there 
somebody new preparing the reports? I suspect these reports are 
basically the same every period. Do they have somebody new 
doing it and are they just misunderstood?
    Mr. Bosecker. That is not my understanding. I don't have 
any knowledge that there was someone new.
    Mr. Conaway. So the same person made a change in it?
    Mr. Bosecker. However, there could be changes and what is 
entering their pricing schemes come in and out and something 
may not have been in there for a long time and showed up. There 
are a number of factors that are possible.
    Mr. Conaway. Okay. Mr. Day, you used the word emergency and 
you also used the word urgent. Let me ask this other question 
first. Something that struck me that was really odd is that 
USDA has a problem with court reporters. Court reporting or 
hearing reporting is done everywhere and you are the first 
person who has come to us, or at any place I have ever been, 
who said you had a problem getting qualified, competent 
reporters. What did you just tell us?
    Mr. Day. That is a very good question. We used to have a 
practice of getting the best value, in other words, the least 
expensive court reporters that weren't as good as getting a 
higher-paid, higher-skilled court reporter, and so we have 
moved to paying a higher premium to get folks that will be able 
to get the court reporting done in a quick and efficient way.
    Mr. Conaway. How long did it take you to come to the 
conclusion that your reporting wasn't being done timely? I 
mean, how long have you had this problem?
    Mr. Day. We moved to it in 2005, so it was 2 years ago and 
I don't know----
    Mr. Conaway. Yes, before 2005, you weren't using court 
reporters?
    Mr. Day. I am going to turn it over to the person who 
actually made a lot of these changes and has been working hard 
to streamline the system, Deputy Administrator Coale.
    Ms. Coale. Thank you. Prior to 2005, we were required, 
under the contracting regulations or rules in place at USDA, to 
use a USDA-contracted court reporting service and this was a 
service that USDA contracted for. We used them in one 
particular hearing and the industry can attest to this. It took 
us over 3 months to get a hearing transcript from the 
proceeding and ultimately, when we did get the transcript, it 
was in such poor shape that we weren't able to----
    Mr. Conaway. Okay. Given my limited time, Ms. Coale, is 
this the only the only problem you had?
    Ms. Coale. No, prior to that. Once we started doing the 
best service, since 2005, we have had good delivery on our----
    Mr. Conaway. So Mr. Day, the comment about reporting is a 
dated issue?
    Mr. Day. Correct.
    Mr. Conaway. I am not sure how it is helpful to us this 
morning. Help me understand what emergency and urgent mean, in 
the context of a 14-month rulemaking process. What denotes 
emergency that takes 14 months to fix? I have a little 
different context on emergency, kind of like what my colleague 
from Wisconsin was talking about.
    Mr. Day. Well, it is not an emergency, it is more the 
marketing conditions which have changed and the industry comes 
to us and they request emergency proceedings so that we can 
expedite the rulemaking and so it doesn't take 2 years, so that 
we can get it done within a year.
    Mr. Conaway. I am sure the witnesses that will follow will 
be very relieved that we have trimmed it off from 24 months to 
14 months. Again, I am not really qualified to be grilling you 
like this, Mr. Day, but what I have heard from you this morning 
is an awful lot of mumbo-jumbo.
    Mr. Day. Well, I am sorry it sounds like mumbo-jumbo. It 
sounded like mumbo-jumbo when I first had to deal with it 
myself, sir, I can assure you. But the way that it is 
structured is so that there is a maximum public participation 
and transparency in the Federal rulemaking process, through the 
Administrative Procedure Act, so that all participants have the 
ability to present their case and also to cross-examine the 
case of those who are putting the proposal out there. And so it 
becomes this complex body of evidence--excuse me--that is 
reviewed by all participants in the industry and then they 
produce comments on it. So it is not that it is mumbo-jumbo so 
much that it is a complex legal proceeding that is structured 
now for maximum public participation that can stand up to 
litigation, which it frequently comes under.
    Mr. Conaway. Okay. Thank you, Mr. Chairman.
    Mr. Boswell. Thank you, Mr. Conaway. And that is our first 
round. By the way, it was an interesting question. Mr. Day, we 
could find some court reporters. I could direct you to a little 
college that is turning out some good ones, but you would have 
to ask me that. I couldn't volunteer that. A question I would 
have, Mr. Day: Each decision made in a Federal Order is voted 
on by the producers in that group or Order, but they are not 
necessarily given the right to vote, the individuals. The Order 
allows for cooperatives to block-vote their membership. Does 
this create any concern to you for what the producers 
themselves might feel as far as you collecting information? Do 
you feel they should have the right to be able to vote on 
decisions that affect their business?
    Mr. Day. That is an excellent question. Historically, since 
these cooperatives are composed of boards that are made up of 
their producers, we feel that that issue of the producers not 
having a say in the vote isn't actually a problem. They have 
the right to go through their cooperative process to tell their 
board what----
    Mr. Boswell. Well, I understand that, but I thought we 
should discuss it a little bit. I have been a lifetime 
supporter of co-ops. I have chaired a co-op board for many 
years and times, but it is so volatile, this business of milk 
marketing, that I just wonder if there have been times that you 
felt like you maybe ought to have reached out to the individual 
producers themselves, and that was the reason for the question. 
What would AMS need to add to its current budget and staffing 
levels to provide the level of data collection that is 
ultimately now provided by CDFA?
    Mr. Day. The level of the data collection?
    Mr. Boswell. Yes. And auditing.
    Mr. Day. I think we will have to get back to you on that.
    Mr. Boswell. Okay, would you do that?
    Mr. Day. Yes.
    Mr. Boswell. We are delving into budget matters as well. 
And I had another question for you, Mr. Krug, but I think you 
have pretty well answered it, on the timeliness of getting your 
decisions out, so I thank you for that. At this time, I would 
recognize Mr. Hayes.
    Mr. Hayes. No questions.
    Mr. Boswell. No questions. Mrs. Gillibrand?
    Mrs. Gillibrand. Thank you, Mr. Chairman. I would like you 
to take some time. I have looked at the USDA's website and you 
have discussion questions and answers on Federal Milk Marketing 
Orders and the question of today is how are specific price 
levels determined? And your answer on the website reasonably 
reflects economic conditions affecting the supply and demand 
for milk, such as feed prices, assure a level of farm income 
adequate to maintain productive capacity sufficient to meet 
anticipated and future needs, be in the public interest, and to 
assure adequate supply. I would like you to address these four 
principles, particularly, has the milk pricing been reflecting 
the cost of feed? With the interest in corn-based ethanol, feed 
prices have skyrocketed and when I look in these industry 
magazines, they recommend that dairy farmers lock in feed 
prices now because those prices are going to continue to go up.
    So I want you to address that, how you look at the feed 
prices. I also want you to look and explain to me how you 
assure a level of farm income adequate to maintain productive 
capacity sufficient to meet anticipated future needs, because 
from what I have been able to understand over the past several 
months and over the past year, that milk pricing hasn't 
reflected the adequate level of farm income and that our farms 
are going out of business. In the Northeast and in New York 
State alone, over 30 percent of our dairy farms have gone out 
of business over the last several years and it is really 
impacting our economy, our quality of life, the level of 
wholesome foods available, so please address these issues.
    Mr. Day. Well, thank you for that question, Mrs. 
Gillibrand. I understand full well the concern that many dairy 
farmers, and many beef and poultry farmers as well, are facing 
right now with the higher cost of feed. I just want to 
reiterate that the Marketing Order Program is not a price 
support program. What we do is guarantee a minimum price, a 
blend price based on what is actually the supply and demand 
factors that NASS reports on the price of milk and butter and 
cheese. And so what we do is we add, for dairy farmers, the 
price is less for Class III and IV than it is for I and II, 
they get that blend price no matter what. And many in the 
industry have tried to come to us in the last several weeks, 
because of the increasing price of corn, to say you need to use 
the Marketing Orders to fix that, but again, we are not a price 
support system.
    Mrs. Gillibrand. Let me interrupt you for a moment. Is the 
answer on your website, then, incorrect?
    Mr. Day. What was the answer, again?
    Mrs. Gillibrand. It says, how are specific price levels 
determined? Point A, reasonably reflect economic conditions 
affecting the supply and demand for milk, such as the price of 
feeds.
    Mr. Day. That is true. It is in there and it is part of 
what is the make allowance, which becomes the price of 
manufacturing of Class III and IV product, and then the price 
of Class I and II product is a differential that is on top of 
that, but those are economic factors that are under 
consideration in that formula. And recently there was a court 
case in January that upheld that decision. Or in February. 
Excuse me.
    Mrs. Gillibrand. So please address the second point. I 
understand it is not a price support system, but if these are 
how the prices are determined, are you actually using these 
four components in your price system? I mean are you, in fact, 
assuring a level of farm income adequate to maintain productive 
capacity sufficient to meet anticipated future needs?
    Mr. Day. One of the issues about that, that is a good 
question because at the end of the day, the production of the 
product and the amount of supply and demand is going to 
determine what the price of that product is. And if the price 
of the product goes into a point where the farmers, such as the 
ones you are discussing, are not able to pay their loans, then 
the statement on the website is not exactly accurate, because 
farmers react in all sectors, in dairy, in corn, in whatever, 
to the price in the marketplace. As that price goes up, as you 
saw from the recent corn planting intentions, more people are 
going to move into that commodity and so we have these 
unfortunate swings that occur. But what this program does is at 
least guarantee a minimum price for those producers and some of 
them obviously don't make it and we are distressed by that, but 
that happens in all segments of agriculture, unfortunately.
    Mrs. Gillibrand. I only have 17 seconds, but in the last 
item it says be in the public interest. How do you, as the 
USDA, define the public interest? Is survivability of dairy 
part of the public interest?
    Mr. Day. Well, certainly and part of the public interest is 
also to have an adequate supply of fluid milk, and so through 
the Marketing Order Program, we are able to do that, both by 
guaranteeing a minimum price as well as by balancing it with 
the blend price so that you don't have the potential chaotic 
conditions that might occur when processors and farmers, or 
farmers are competing to get a different price from the 
processors.
    Mrs. Gillibrand. Thank you, Mr. Chairman. Thank you for 
your testimony.
    Mr. Boswell. Thank you. The chair recognizes the gentleman 
from Virginia, Mr. Goodlatte.
    Mr. Goodlatte. Thank you, Mr. Chairman. Let me follow up on 
the question from Mrs. Gillibrand. Administrator Day, in 
response to my questions, you said the Administration wasn't 
looking to offer any legislative solutions and you pointed to 
the Administrative Procedure Act as being something that is 
very controversial and making changes to that could be quite 
difficult and I certainly understand that. That is a 
government-wide administrative process, is it not?
    Mr. Day. Yes.
    Mr. Goodlatte. That it governs actions taken by the 
Environmental Protection Agency, actions of all kinds of 
environmental and labor regulations and so on. What you are 
attempting to do, and I appreciate very much the sincerity of 
what you have had to say and what is said on your website about 
trying to be responsive to the needs of dairy farmers. What you 
are trying to do is react quickly to changing market 
conditions. That is a very different type of thing than some of 
the types of regulations that are issued under the 
Administrative Procedure Act, is it not?
    Mr. Day. Yes, it is, sir.
    Mr. Goodlatte. Well, one of the things that I understand 
has been an ongoing discussion is whether or not dairy policy, 
changes in dairy policy, like the transportation issue that we 
have been concerned about in the Southeast and other issues 
related to responding to things like the make Order and how 
farmers address the fact that their grain prices go up a lot 
more quickly in a year, which was what you said you tried to 
get emergency responses taken care of. Wouldn't it be better to 
think outside the box here and examine whether or not there 
ought not to be a better way to make these decisions more 
quickly than under the Administrative Procedure Act? That would 
certainly be under the jurisdiction of this Committee, to look 
at changes in the Agricultural Marketing Agreement Act that 
would allow us to come up with a new way of allowing you to act 
more quickly to make some of these decisions.
    Mr. Day. Oh, we would certainly be open to consideration of 
any new ideas.
    Mr. Goodlatte. Well, we are looking for ways to empower you 
to be able to act more quickly. Obviously taking into account 
all the complexities that go into dairy policy, and we 
certainly understand that, but at the same time recognizing 
that when a farmer is hung out there with high grain prices, 
high energy prices, they need changes pretty quickly as has 
been correctly noted, that is not how you would respond to 
other types of emergencies when people are hurting pretty 
badly. So I hope that we can expand these discussions and 
include the Chairman and his staff and others to look at 
whether there isn't a creative way to insert into this farm 
bill some new process that you could follow that would allow 
you to act more promptly, and to address the things that have 
been noted by Mr. Krug, that actually are correct if you start 
from the premise that we are hamstrung by the Administrative 
Procedure Act. Maybe there is a way to put you on to a 
different process than to simply say you have got to follow all 
of those procedures, because that is what is done with all 
other regulations under the Federal Government.
    Mr. Day. Right.
    Mr. Goodlatte. And I think there are other sectors of our 
economy that react much more quickly to market forces and are 
not bound by the process of the Administrative Procedure Act 
and we certainly wouldn't expect, for example, the Federal 
Reserve to respond to interest rates in that fashion and to say 
we will get back to you in a year about whether we need to 
raise or lower interest rates.
    Mr. Day. And we look forward to working with you on that, 
sir.
    Mr. Goodlatte. I thank you and I thank the Chairman.
    Mr. Boswell. The chair appreciates, Mr. Goodlatte, your 
comments and let us associate ourselves, the whole committee, 
with those suggestions. Thank you very much. And we would like 
to work with you and expedite, if at all possible, the things 
we have been discussing about. At this time, the chair would 
recognize the gentleman from Wisconsin, Dr. Kagen.
    Mr. Kagen. Thank you, Mr. Chairman. I have to apologize to 
you for being late, so I didn't get to hear Dana Coale speak, 
but I would like to ask you, since the Agricultural Marketing 
Agreement Act of 1937 was enacted and subsequently amended, 
``to establish and maintain such orderly marketing conditions 
as will provide, in the interest of producers and consumers, an 
orderly flow of supply to avoid unreasonable fluctuations in 
supplies and prices.'' Can you remind me of two things that you 
are most proud of in doing, in your position, to see that that 
Act is carried out? Dana.
    Ms. Coale. Thank you, sir. I have been in the position for 
the last 2\1/2\ years and I think one perfect example of how we 
were able to react to marketing conditions would have occurred 
when the hurricanes hit in the Southeast region of the United 
States in 2004. During that time, there were several hurricanes 
and what we saw was a huge disruption to the marketing of milk 
in that region. The Department was able to work very closely 
with the industry and we were able to identify provisions 
within the Orders that could be changed to help ensure that 
fluid milk was being obtained by the marketplace for consumers, 
and that the dairy industry was not having to incur unnecessary 
transportation costs to meet those needs.
    Mr. Kagen. So under extreme emergencies, you can respond 
rather quickly?
    Ms. Coale. Absolutely. One of the unique things that made 
that situation work very effectively for everyone was the fact 
that there was nearly complete consensus in the industry, both 
on the processing side and the producer side, and I think if 
you were to examine the industry, that that is a very rare 
occurrence, for everyone to have a consensus. But everybody 
identified the need and we were able to move quickly on that. I 
think that is an important thing for the industry as a whole. 
To move forward and to move more rapidly, we need to be able to 
build consensus within the industry on issues that can be 
addressed within the Federal Order program, and I think that 
will go a great length in helping to expedite any processes and 
any proceedings that come before us. Part of the challenges 
that we face is, when we hold a hearing, there are very 
differing opinions and these differing opinions occur not only 
between processors and producers, but they occur between 
producers themselves. It makes it very challenging for the 
Department to look at all sides of the issue and determine what 
is truly an appropriate response and appropriate action that is 
going to ensure the efficient marketing of milk for the 
industry.
    Mr. Kagen. And what can you identify for us this morning as 
perhaps your most glaring need to improve upon?
    Ms. Coale. The most glaring need to improve upon, there are 
probably several issues that could be addressed on that. I 
think if we were to look at particular proceedings, I could 
identify a couple that I would have desired that they would 
have moved more quickly. But part of that is a failure for 
possibly USDA and the industry to discuss the issue prior to 
getting into restrictions by the rulemaking process, to 
identify things that would be needed for the evidentiary record 
of the proceeding for the Department to be able to make a 
decision. Absent having that information on the record, it 
becomes very difficult to make a decision. Part of the process 
that we implemented with the current Class III/IV proceeding 
was to put in place a pre-hearing workshop and this was 
designed clearly after the California system. When we talked 
with them, we made modifications to it to fit our current 
program. But what that was, it was an attempt for the 
Department and the industry to have a thorough conversation 
before anybody who was interested in participating, to discuss 
the issues so that everybody understood what the proposals were 
that were being considered and what information would be needed 
by the Department to be able to make a decision based on the 
hearing as we are going through it.
    Mr. Kagen. Thank you very much. I yield back.
    Mr. Boswell. Thank you, Dr. Kagen. Mr. Walberg is 
recognized for 5 minutes.
    Mr. Walberg. Thank you, Mr. Chairman. Just to take another 
shot at the rulemaking process and follow up a bit with what 
Mr. Goodlatte addressed, if indeed, in the Agricultural 
Marketing Agreement Act, the formal rulemaking process is 
required. If we were to go to an informal rulemaking process, 
would that speed it up, the whole process of making the rules, 
and would it be valuable enough to proceed in that direction?
    Mr. Day. Well, I think it is certainly something that we 
can discuss as we continue to have a discussion related to how 
we can speed up this process. I think the quick answer is that 
moving to informal rulemaking would not necessarily make it any 
faster because, as Dana just articulated very well, there is 
often a lot of division about a given proposal. The good thing 
about formal rulemaking and the process as it is today, is that 
it raises all of that discussion into an evidentiary record of 
the proceeding that can then be decided upon and analyzed and 
stand up in a court of law, because often these cases are, 
before they even become final rules, there is an injunction of 
some kind.
    Mr. Walberg. Well, it just seems that though there is 
disagreement out there and significant, that some way, somehow, 
that there can be a coming together and present those diverse 
opinions and even hopefully come to agreement that we have to 
coalesce around an issue and make a decision to bring it before 
the rulemaking process and ultimately the process could move 
more quickly in a formal proceeding. I don't necessarily 
understand why we have to major on the disagreements to the 
point that we just extend the disagreement talk over and over 
and over.
    Mr. Day. Yes, I understand and I think what we have tried 
to do in the Southeast is something where we worked together 
with the industry to bring everyone together so that before we 
move into a hearing process, that we built that consensus, and 
I think we will have to see how that proceeding moves forward, 
but I think that will be evidence of where the Department has 
actually gone out and been proactive to address a certain 
economic condition to build that industry consensus before we 
get into a proceeding and hopefully that will make it a lot 
smoother and a lot faster and a lot less contentious.
    Mr. Walberg. Well, hopefully that would be the case. I know 
the producers don't have that luxury in most cases. In the 
process of going through this, first, the farm bill myself, I 
have been doing 101 training and educating and mentoring the 
process and reading reports and things like that. It was 
interesting to read some of your reports, the USDA, and one 
such indicated that, with the milk program and the price 
support program, they seem to be contradicting each other, in 
some ways going in the opposite direction, and indicating that 
it has a net negative impact upon the producer prices. And so 
my question is, if their combined effect is to hurt producers, 
why has the Administration proposed to continue these two 
programs beyond the 2007 Farm Bill?
    Mr. Day. I am not aware of the study or the comments where 
farmers have said that they hurt producers. I know that when 
the Secretary conducted his farm bill hearings around the 
country, a lot of dairy farmers came to talk to him and some of 
them talked about MILC, some about the dairy support program, 
some talked about the speed of Federal Milk Marketing Orders, 
but it seemed pretty uniform, especially when he met with 
smaller farmers, that there was a lot of support for the MILC 
and for the Milk Price Support Program, and because of that, 
the Administration moved forward to continue those programs, 
sir.
    Mr. Walberg. I mean, this was just coming from your reports 
indicated that the simultaneous operation of the milk program 
and the price support program has a net negative impact on 
producer prices, and so I am just responding to that statement.
    Mr. Day. Yes.
    Mr. Walberg. I am wondering why, if that be the case, the 
Administration goes forward and pushes the continuation of 
these programs, the two programs, that seems to, according to 
your reports, have a negative impact on producer prices.
    Mr. Day. Well, I will have to look at those reports in 
question, but I believe the farmers around the country see 
those two programs as providing that safety net for them in the 
event that production increases so much that prices fall 
dramatically.
    Mr. Walberg. Okay. Well, I appreciate you checking on the 
report, then, and finding out why the Department says that it 
is a problem and when the producers are saying that it isn't a 
problem, what you are telling me today. So I see my time is up. 
Thank you.
    Mr. Boswell. Thank you. Well, I think that pretty much 
brings us to closure. Anybody have any last question they want 
to ask to this panel? Mrs. Gillibrand, please go ahead.
    Mrs. Gillibrand. Just one question. My background is as an 
attorney and I did a lot of antitrust law and so that is the 
framework that I look at for this new industry that I am now 
trying to represent, the dairy farmers of upstate New York, and 
I have a question about DairyAmerica. It is a marketing agency 
of cooperatives and they understand that they control roughly 
80 to 85 percent of all nonfat dry milk produced in the 
country. Have you guys ever analyzed any antitrust issues or 
concerns about how this kind of organization could impact the 
pricing?
    Mr. Day. I think that would be the Department of Justice 
that would look into that. I don't know. From our perspective 
at AMS, we haven't done anything like that.
    Mrs. Gillibrand. Is it relevant at all to your inquiry if 
information comes only from one entity?
    Mr. Day. Could you repeat that question?
    Mrs. Gillibrand. Is it relevant to your analysis at all, of 
the source of the information for pricing?
    Mr. Day. I think that is a question for you, Ron.
    Mr. Bosecker. Certainly since all of our data are weighted 
by the amount of the product that is actually sold, then the 
size of the firm would very definitely impact the overall 
average price of the product.
    Mrs. Gillibrand. Thank you.
    Mr. Boswell. Okay. Well, thank you very much. We appreciate 
your testimony and your participation and we will excuse you at 
this time and ask the second panel, if they would join us at 
the table. Thank you very much. And so just by introduction, we 
have Mr. Chris Kraft, a Board Member of Dairy Farmers of 
America, from Fort Morgan, Colorado. Welcome. Mr. Dennis 
Donohue, General Manager, Manitowoc Milk Producers Cooperative, 
from Manitowoc, Wisconsin. Am I saying it right, Manitowoc? Mr. 
Billy French, Dairy Farmer, testifying on behalf of Virginia 
State Dairymen's Association, from Maurertown, Virginia. Did 
you by chance know an old colleague of mine that lived just up 
the hill in Maurertown, on the hill, named Roy Calvert? We 
served in the Army together and I am aware that he is recently 
deceased and if you happen to see Jean, please give her my 
regards. Thank you. I saw him just a few days before he passed. 
He was a great soldier. And Mr. Eric Ooms, a Dairy Farmer, Old 
Chatham, New York, and from Mrs. Gillibrand's district. I was 
just informed. That is good and we welcome you. Mr. Ed 
Gallagher, Vice President, Economics and Risk Management, for 
Dairylea Cooperative, Inc. from Syracuse, New York. So with 
that, Mr. Kraft, please begin at this time. Thank you very 
much.

  STATEMENT OF CHRIS KRAFT, OWNER, DAIRY FARM; MEMBER, DAIRY 
                 FARMERS OF AMERICA, INC. (DFA)

    Mr. Kraft. Good morning. I am Chris Kraft and my wife, 
Mary, and I own and operate two dairy farms in the Fort Morgan, 
Colorado area.
    The U.S. dairy marketplace is composed of approximately 
62,000 commercial dairy farms, 400 fluid milk plants owned by 
perhaps as few as 75 entities. Ten retail companies that, 
according to industry publication Supermarket News, account for 
68.4 percent of all grocery sales, have a firm grip on the 
retail grocery market. Clearly, dairy farmers are not in a 
position of equal bargaining power and Federal Orders are the 
key in maintaining a more level playing field for dairy 
farmers. Orders provide the marketing framework for dairy 
farmers. They announce and enforce minimum prices, provide 
common terms of trade for milk marketing, and ensure timely and 
accurate payment for milk sold by farmers, and audit milk sales 
to help farmers capture their share of the consumer dollars. 
Without them, producer incomes would be worse and we feel 
consumers would be ill served.
    Because the dairy industry and markets evolve, Orders must 
be open to change. While the industry appreciates the fact that 
the change process should be open, transparent and deliberate, 
the extreme slowness of the process leads many to become 
disgruntled and discouraged, leading to frequent complaints. I 
am concerned that if the Federal Order hearing process is not 
improved, producers will succumb to the constant rhetoric about 
the negatives of Orders and throw the baby out with the bath 
water.
    In my testimony today, I will outline three issues 
involving the Federal Order System and hearing process. They 
include: (1) changes needed to streamline the Order hearing and 
decision procedure and the data necessary to hold a hearing; 
(2) the inadequacy of staffing levels at key positions within 
the Order System; and (3) a few key comparisons between the 
Federal Order System and the California order system.
    The industry is very concerned about the length of time 
that it takes to make changes in the provisions of a Federal 
Order. There are no mandated time constraints to institute a 
sense of urgency to the process. Our cooperative has had 
several business lines that are currently stymied in their 
planning and marketing operations because an Order decision 
that affects them has not been announced in a reasonable time. 
We feel that USDA does a good job of moving decisions through 
the process, so long as the decision itself remains inside the 
dairy program staff area. However, once they travel up the 
chain of command and back down with any revisions needing 
multiple briefings, reviews and rewrites, the process often 
stalls. It would be helpful if USDA revised its administrative 
procedures rules to institute guidelines and time tables. For 
example, if all the decisions were required to be published to 
the dairy industry within a certain time period, possibly a 
hundred days after a hearing, USDA would have to streamline the 
process. The Committee should get a clear answer from Mr. Day 
this morning, whether or not USDA believes it can promptly 
effect this type of rule change in its own administrative 
procedures process, or whether it requires a Congressional 
action. Either the Federal Order System should be exempted from 
certain other review processes or given the authority to 
certify that a particular decision meets the intended nondairy 
rules or requirements.
    Mr. Gallagher outlines several examples of procedural 
changes specific to the hearing process, including a formal 
review of the process by a third party that would report back 
to this Committee. We very much endorse this review concept and 
urge the Committee to adopt it. More specifically, we would be 
willing to participate in the process if asked. We would 
appreciate the Committee requesting a report from Mr. Day, 
within 60 days, as to what USDA intends to do to speed up the 
hearing process and follow the progress reports on how these 
steps are being completed. A second issue related to the 
hearing process that needs attention, because the dairy 
industry, by itself, cannot do an adequate job in this area, is 
collecting data relative to the product formula price hearings.
    Milk is a perishable product. As a dairy farmer, I have to 
sell my product every day. I simply can't put milk in an 
elevator and wait to bargain for a better price tomorrow. Our 
industry requires a system that establishes prices in a 
reasonable time and is responsive to market conditions. Our 
current system uses storable products to set prices on 
perishable milk. This mechanism is termed product price formula 
pricing. It is a reasonable way to price milk, but to do this 
the industry needs a good price discovery, milk component and 
plant yield data and the cost to convert milk into various 
products. Everyone in the industry has a vested interest in the 
numbers that must be generated for the price formulae so each 
of our individual company data represented at the hearings is 
biased. We need USDA to do the product yield research and cost 
surveys and post the data for industry to use. The process of 
sorting through all of this proprietary data at a hearing is 
difficult at best. Each side has its own data set and reports 
as it chooses, but always with an eye to their own interest.
    I think I have gone over my time and I think that I will 
conclude right here. There are some other suggestions that we 
have and I thank you for your time.
    [The prepared statement of Mr. Boswell appears at the 
conclusion of the hearing:]
    Mr. Boswell. Thank you. The chair would recognize Mr. 
Donohue for 5 minutes.

 STATEMENT OF DENNIS DONOHUE, GENERAL MANAGER, MANITOWOC MILK 
  PRODUCERS COOPERATIVE; ON BEHALF OF MIDWEST DAIRY COALITION

    Mr. Donohue. Chairman Boswell, Ranking Member Hayes and 
Members of the Subcommittee, thank you for the opportunity to 
testify today. I am Dennis Donohue, General Manager of 
Manitowoc Milk Producers Cooperative based in Manitowoc, 
Wisconsin. I offer this testimony on behalf of my cooperative 
as well as the Midwest Dairy Coalition.
    The Federal Milk Marketing Order System has been in 
existence since the Agricultural Marketing Act of 1937. The 
number of Federal Orders has ranged from a high of 83 to the 
current low of 10 Orders. Even though the number of Orders has 
been consolidated, the rulemaking procedures are more time 
consuming, convoluted and costly than ever. It is no secret 
that Federal Orders are controversial in the upper Midwest. 
Many producers and cooperatives in our region believe that the 
structure of the Federal Orders is biased in favor of high 
Class I utilization regions and against regions such as ours, 
where the majority of the milk is used in manufacturing. Some 
producers and producer groups argue that Federal Orders should 
be eliminated all together. My cooperative does not support the 
elimination. However, we do share the concerns about the need 
for more equitable structure for the Federal Orders.
    Without a doubt, some of the frustration is related to the 
cumbersome and uncertain procedures for making changes. First, 
there appear to be no clear and consistent criteria for USDA to 
use in determining whether a hearing request will be granted. 
Some proposals that seem to have little merit are given full 
hearings, seemingly for political reasons. This wastes time and 
money for taxpayers, farmers, cooperatives and processors.
    Second, there are no clear and consistent criteria for how 
long it will take USDA to respond to a request for a hearing. 
For example, in September of 2005, a significant portion of the 
dairy industry requested an emergency hearing to adjust make 
allowances for manufacturing dairy products. A hearing was not 
held on the issue until January 24, 2006, about 4 months after 
the initial request. In contrast, in the case of a recent 
request by National Milk Producers Federation for an emergency 
hearing to amend Class I and II price formulae, the request was 
made on October 2, 2006 and a hearing was held on December 11, 
2006, roughly 2 months later.
    Third, the timeline for how long a hearing will be held 
after it has been formally announced is often too short. The 
process of preparing for a Federal Order hearing is very 
involved and complicated. The affected parties should be given 
adequate and consistent time to prepare. Once a hearing starts, 
the process is much too time consuming and costly. It is not 
uncommon for hearings to last a week or more for single 
witnesses to be on the stand for statements and cross-examined 
for 3 hours or more. As a result, the price tag for legal and 
technical representation also runs in the tens of thousands of 
dollars for a single hearing subject.
    After a hearing is completed, the delays before a decision 
is made are excessively long. In the case of the Class III and 
IV make allowance changes, the tentative final decision was 
issued on November 22, 2006, roughly 10 months after the 
hearing began on the subject, and this was designated an 
emergency hearing. Once a final decision has been announced, 
producers and cooperatives are also given an inadequate amount 
of time to vote on the referendum. When a cooperative such as 
mine is involved, we must discuss the subject at a board 
meeting before we make a decision. In some cases, the 
referendum deadline is so soon, that there is no time for the 
board to meet. Many have pointed out that the procedures used 
in California's state orders are much more streamlined and 
standardized and have suggested that the Federal Order process 
be modified to follow the California model. In general I agree. 
With the multi-regional nature of the Federal Order System, it 
may require slightly more time for USDA to provide full 
analysis.
    In light of these concerns, the Federal Milk Marketing 
Order rulemaking procedures should be modified to: (1) 
Establish clear and objective criteria for determining whether 
a hearing request will be granted. Parties requesting a hearing 
should be required to show that the proposal is consistent with 
the requirements of the AMA Act of 1937 and there is 
significant support for that proposal. In the absence of those 
criteria, USDA should not grant the hearing. (2) Establish a 
clear timeline for how long USDA has to respond to a hearing 
request. USDA should be given a maximum of 2 or 3 weeks to 
grant or decline a hearing request. (3) Establish a clear 
timeline for how much time needs to elapse between the hearing 
announcement and the hearing date to give adequate time to 
prepare for the hearing. Once a hearing is announced by USDA, 
the hearing should be held 45 to 50 days later. (4) Establish 
clear procedures and time limits on presentation and cross-
examination during the hearing process. (5) Establish time 
limits for how long USDA will have to issue a decision after 
the completion of a Federal Order hearing. USDA should have no 
longer than 3 months to issue a decision after a hearing is 
completed, perhaps even less in the case of a single Order 
decision. (6) Establish timelines for how long the affected 
parties will have to review a decision prior to the referendum 
deadline. Once a decision is announced, affected parties should 
have 45 days to vote on the referendum to ensure that 
cooperative boards have time to meet. By establishing clear and 
objective procedures for rulemaking, we all gain. It takes the 
guesswork out of the process, minimizes cost and ensures that 
no one group has an unfair advantage.
    In closing, the Federal Order rulemaking procedures are one 
small aspect of the concerns related to the Federal Milk 
Marketing Order System, and even smaller still relative to the 
many dairy policy issues confronting the Committee as you 
prepare to mark up the 2007 Farm Bill. Therefore it is 
important to reiterate that our main dairy policy priority for 
the farm bill is to maintain and strengthen a credible safety 
net for dairy producers, as reflected by the continuation of 
the MILC Program and reauthorization of the Milk Support 
Program, with adequate changes to make it a true safety net. 
Thank you for this opportunity to testify.
    [The prepared statement of Mr. Donohue appears at the 
conclusion of the hearing:]
    Mr. Boswell. Thank you. Chairman Peterson, did you want to 
make any comment at this time?

OPENING STATEMENT OF HON. COLLIN C. PETERSON, A REPRESENTATIVE 
                   IN CONGRESS FROM MINNESOTA

    Mr. Peterson. I want to thank you, Mr. Chairman and Ranking 
Member--Mr. Goodlatte, you are the Ranking Member today on this 
Subcommittee--for holding this hearing and I think it is 
important that people get an opportunity to learn more about 
this part of the dairy policy, which continues to be a problem, 
the unresponsiveness of the Federal System. By the time they 
get done making these conclusions to these Order processes, the 
problem they are trying to fix has gone away. So we have got to 
try to figure out a better way to do this and I think this is a 
good place to start. I think we can learn a lot from the way 
California operates and eventually, I hope that we can get the 
whole country on the same page in dairy policy. This hearing 
will get us started in that direction. So thank you for your 
leadership.
    [The prepared statement of Mr. Peterson appears at the 
conclusion of the hearing:]
    Mr. Boswell. We know you have got a lot on your plate and 
we appreciate you being here for whatever time you can expend.
    Mr. Peterson. Thank you.
    Mr. Boswell. Thank you. Mr. French, welcome. We will 
recognize you for 5 minutes.

STATEMENT OF BILLY FRENCH, DAIRY FARMER, ON BEHALF OF VIRGINIA 
    STATE DAIRYMEN'S ASSOCIATION; MARYLAND & VIRGINIA MILK 
      PRODUCERS; AND SOUTH EAST DAIRY FARMERS ASSOCIATION

    Mr. French. Good morning, Chairman Boswell, Ranking Member 
Hayes, Members of the Subcommittee and my Congressman, Bob 
Goodlatte. I want to thank you for the opportunity to appear 
here today on behalf of the Virginia State Dairymen's 
Association, my cooperative, Maryland & Virginia Milk 
Producers, and the South East Dairy Farmers Association.
    I am here today as a part of what I believe is a consensus 
in the U.S. dairy industry, that regulated milk marketing is 
beneficial for farmers, processors and consumers. While we have 
a regulated system, it is a system that is designed to respond 
to the signals sent by the marketplace. When those market 
conditions change, the regulations are supposed to change with 
them. We may be living in the age of instant messaging, 
overnight mail isn't fast enough anymore, but our milk 
marketing regulations have not be able to keep up to date fast 
enough for several years now. So I am also here to join the 
consensus opinion in the industry that our rulemaking process 
needs an update.
    Like dairy farmers everywhere, we are struggling in the 
southeastern United States. After nearly 2 years or rock-bottom 
milk prices, we now have above average farm prices. Our market-
based system is indeed responding. Projections for the next 
several months look relatively strong. Our input costs, 
however, are at record prices. Fuel prices have been high for 
more than 2 years. Just a little less than a year ago, the 
price of feed grain began a rapid climb. Only the announcement 
of record corn planting intentions, along with the predictions 
of a normal weather year in the corn belt, have started to 
soften the feed grain prices in just the past couple weeks. 
Like dairy farmers everywhere, I am concerned that our input 
costs to milk price ratio will remain challenging, at best, for 
the foreseeable future.
    Unlike dairy farmers everywhere, though, we in the 
Southeast face these production challenges in the face of a 
fluid milk market that gets bigger every day. Population growth 
in the region far exceeds trends in other parts of the country. 
Federal Milk Marketing Orders 5, 6 and 7 are home to 5 
metropolitan areas that experienced population growth exceeding 
20 percent from 2000 to 2006. There are only a total of 16 
cities that grew that fast during that time period in the 
entire country. The City of Atlanta, in the heart of the 
Southeast, is the fastest growing big city in the country. That 
population growth not only fuels demand, it also challenges 
supply because it drives up prices for agricultural land. 
According to the USDA's National Agricultural Statistics 
Service, the Southeast has the highest increase in cropland 
value in 2005, up $890 per acre in just 1 year to an average 
price of $4,550 per acre. The increase was even more dramatic 
in Virginia, with an increase of 21 percent in just 1 year to 
an average price of $4,900 per acre. State statistics show a 
similar increase in 2006.
    To recap, we have the same challenges of input costs as 
dairy farmers everywhere else, but we operate in a region with 
a constantly growing population and where affordable farmland 
is increasingly difficult to come by. I believe our needs for a 
milk marketing regulatory system that responds to the changing 
market conditions might be even more immediate than we need 
elsewhere in the country.
    The industry in the Southeast has been affected in the past 
few years by those higher input costs much more than other 
regions of the country. We have asked for and received a 
hearing on increasing transportation credits to help cover the 
cost of moving an increasing amount of milk into the region 
during more weeks of the year to satisfy our market. The inter-
market credits have been increased but our request for intra-
market credits, which would help cover the cost of moving milk 
within our markets, has yet to be acted upon.
    The Federal make allowance hearing, while addressing Class 
III and IV prices only, has reduced producer income in the 
region, when the price signals sent to the farmers should have 
been just the opposite. At the same time, Federal Order Class I 
differentials in use today reflect economic conditions of a 
decade ago.
    And then there is the weather. You may have heard we have 
had a few hurricanes in the Southeast in the past few years. 
Extreme weather challenges every part of the country 
occasionally, but here again the Southeast is different. Even 
before the tragic events of Hurricanes Katrina and Rita in 
2005, there were Charlie, Frances, Ivan and Jeanne a year 
earlier. In 2004, the industry in the Southeast sent a request 
for an emergency hearing to seek assistance in covering the 
extraordinary cost of transporting milk during and after the 
four hurricane hits that year. Production was lost and had to 
be replaced, most often with milk transported from great 
distances and at great cost. When plants were shut down, the 
milk normally supplied to them had to be process elsewhere, 
again with additional transportation costs incurred.
    We asked for a simple, temporary 3 month increase in Class 
I prices in Federal Orders 5, 6 and 7. Processors joined us in 
the request. There was no opposition to the request or to 
treating the request as an emergency. Our request was made 
early that fall, once the damage had been fully assessed. In 
the meantime, farmers in the entire region bore the additional 
milk marketing costs associated with the four hurricanes in a 
row. With all of this being said, however, the USDA AMS staff 
is operating within the current requirements of the system. 
Federal Order rulemaking must follow set protocols. Interested 
parties are allowed to have their say.
    I see that my time is up, so I think I have covered most 
everything. Thank you.
    [The prepared statement of Mr. French appears at the 
conclusion of the hearing:]
    Mr. Boswell. Thank you, Mr. French. The chair would now 
like to recognize Mr. Ooms.

    STATEMENT OF ERIC OOMS, DAIRY FARMER; MEMBER, BOARD OF 
 DIRECTORS, AND CHAIRMAN, DAIRY COMMITTEE, NEW YORK FARM BUREAU

    Mr. Ooms. Thank you for the opportunity to be here today. 
My name is Eric Ooms. My father and two brothers and I own and 
operate a 400-cow dairy in Chatham, New York. We also grow 
approximately 1,800 acres of corn, alfalfa and grass for our 
herd and sell some to neighboring farms as well. I serve on the 
New York Farm Bureau Board of Directors and also as the 
Chairman of the New York Farm Bureau Dairy Committee. The Farm 
Bureau is a general farm organization and it is in that 
capacity that I will be addressing you today.
    As a dairy farmer, I would be remiss if I did not emphasize 
the importance of the MILC Program and how important it is to 
have it extended in the farm bill and returned to the 45 
percent rate that it started at in 2001. I realize that is not 
the charge of this hearing, but I had to mention it.
    With the recent negative price/cost paradigm that the dairy 
industry has endured, many farmers are calling for closer 
scrutiny or elimination of the Federal Orders. While I do not 
have any objection to reviewing the Orders to assess whether 
the current patchwork structure with so many unregulated and 
state-regulated areas is practical, to eliminate them at this 
point may be shortsighted. It is important to remember that the 
Orders exist in large part to facilitate the movement of milk 
within a region, not necessarily to ensure a fair price to my 
farm or any other farm, for that matter, even though we found 
today that their website says something different.
    The first thing that comes to mind is the urgent need to 
amend the Federal Order System in such a way that it would be 
more responsive to changes in the marketplace. With the recent 
high energy prices, there were several calls for USDA to review 
and adjust the make allowance for cheese. Several cooperatives 
asked for an emergency hearing on this issue as early as March 
2005. It took until November 2005 to agree to hold the hearing, 
which was held in January 2006. Based on testimony presented in 
January, the Department decided to have a follow-up emergency 
hearing in September 2006. By November 2006, a decision was 
reached. Despite an unsuccessful lawsuit, the new rule was 
implemented in February 2007. That is 2 years to commence and 
act on an emergency hearing. I can only guess that if there 
were a call for a hearing and it was not seen as an emergency, 
the Department would still be gathering facts about what the 
Wright Brothers had been up to in Kitty Hawk, North Carolina. 
Regardless of what one thinks about the need for the changes 
that were made, this process should be able to be completed in 
6 months or less. While this was going on, California, which 
has a state order, dealt with the exact same issue and the 
process took less than 5 months. As a producer, it would be 
easy to think, why can't we in the Northeast simply opt out of 
the Federal Order and do it that way? But when you realize the 
number of States that we are dealing with in our milk shed, it 
is not that simple.
    It would also be a good idea to include the ability for the 
Federal Orders to have the authority to add in a fuel price 
adjustment mechanism that can be paid by handlers. As it 
currently stands, when our haulers need more money to haul 
milk, and no one can doubt that these costs are legitimate, it 
always falls on the backs of farmers. There has to be a 
practical way to push this cost to a place where it is not 100 
percent on the backs of farmers. With the recent low milk 
prices, there has been a great deal of concern about whether 
our cooperative system is working for us. Let me state clearly, 
I feel that the answer to dairy farmers' problems can be 
cooperatives, so I would implore all of you to retain or 
strengthen Capper-Volstead. This does not mean that there does 
not ever need to be oversight of cooperatives or that being 
certain that cooperatives are doing an adequate job of 
educating their members as to what is happening with an 
industry. One tool that we use to keep informed is we get a 
monthly newsletter from the Federal Milk Market Administrator 
so we can keep an eye on our cooperatives.
    One other thing of concern is the lack of oversight in 
auditing over price reporting through the NASS survey. It is 
more than a little disturbing that my family's income is based 
on a survey that essentially uses the honor system. Whether 
there is fraud or not, whether it is malicious or not, USDA 
needs to audit the reports just to be certain that they are 
correct.
    Lastly, part of the reason why we need to streamline the 
process is the petition that is currently before the Department 
that would increase the price of milk for Class I and Class II. 
With the price of a gallon of milk in Brooklyn tied directly to 
the price of a 40 pound block of cheese in Chicago, there 
certainly is merit to having a hearing to deal with the issue. 
The length of time that this hearing will take is an effective 
barrier for any regular farmer from following or participating 
in the process, because few of us have 3 years to follow a 
hearing process.
    I thank you for the opportunity to speak here today and I 
would be happy to entertain any questions you may have.
    [The prepared statement of Mr. Ooms appears at the 
conclusion of the hearing:]
    Mr. Boswell. Thank you, Mr. Ooms. The chair recognizes Mr. 
Gallagher for 5 minutes.

       STATEMENT OF EDWARD W. GALLAGHER, VICE PRESIDENT,

            ECONOMICS AND RISK MANAGEMENT, DAIRYLEA
                        COOPERATIVE INC.

    Mr. Gallagher. Good morning. My name is Edward Gallagher. I 
am the Vice President of Economics and Risk Management for 
Dairylea Cooperative. Dairylea is the largest dairy cooperative 
in New York State and the largest dairy cooperative in the 
Northeast and the fifth largest in the United States. We want 
to thank you for holding this hearing and we want to thank you 
for inviting Dairylea to testify before you today.
    Dairylea is strong and our 2,400 members are strong 
supporters of the Federal Order System. We think it is one of 
the most important economic development programs for the United 
States dairy industry that has ever been implemented. However, 
the rulemaking process does need to change. Federal Orders will 
need to change to survive. The Orders must adapt to changing 
markets, marketing conditions, business practices and 
technological advancements. Federal Orders must be able to 
quickly adjust the regulations as circumstances arise if the 
program is going to remain relevant. Presently, the process of 
changing Federal Orders to adapt to these changes takes far too 
long. Reform of the process is necessary.
    As part of this reform, the Secretary of Agriculture must 
have a mechanism that allows him or her to quickly address 
issues that are causing disruptions in the marketplace. For 
instance, incentives to increase ethanol production are leading 
to strong increases in livestock feed prices without a 
commensurate response in the milk price, or at least not one 
that has shown up to a large enough degree yet. This has 
compounded the dairy farm profitability issue emanating from 
higher input prices because of energy-related items. The 
Secretary of Agriculture must have tools at hand to react 
quickly. It would help, for instance, if a decision to raise 
Class I prices could be immediately implemented. As it is, a 
hearing about increasing Class I prices ended 4 months ago and 
the industry has no idea when the decision might be issued.
    The present operation of the Federal Order hearing process 
has resulted in hearings with no resolutions or hearings where 
the ultimate resolution takes years. The failure to provide 
quick decisions has implications on the underlying support for 
the Federal Order program and generates business risk for dairy 
farmers, plant operators, and businesses that market dairy 
products. Dairylea has proposed for consideration and debate an 
8 point plan to improve the situation.
    First of all, the Secretary should have authority to 
quickly increase milk prices. Second, there are two national 
Federal Order hearings that have concluded without a final 
decision being implemented or the proceedings terminated. This 
Committee should urge USDA to move to a final Order and 
implementation within the next 45 days. Third, it has been 
testified today about a number of initiatives taken by USDA to 
speed up the hearing process. These should be acknowledged, 
supported and encouraged to continue. Fourth, an independent 
review should occur relative to the hearing process and the 
post-hearing decision process. Fifth, statutory changes to the 
hearing and amendatory process are needed. Strict timelines are 
needed in order to get timely decisions. The Code of Federal 
Regulations should be amended to facilitate a different and 
faster hearing process. Deadlines for the steps of the process 
must be included. As part of this process reform, there must be 
greater interaction between those seeking changes and USDA 
prior to requesting a hearing. Industry-wide pre-hearing 
conferences and the advance submission of hearing testimony 
must be required. The industry has to work better together, 
USDA, cooperatives, milk plants, the entire industry needs to 
work differently to get better solutions. And the proposal that 
Dairylea has made in Exhibit 1, I believe can result in more 
timely information. In fact, if the industry works together the 
right way, USDA should have all the information they need, for 
the most part, to make a decision before the hearing even 
starts, if you have advance submission of testimony. Most of 
the hearing record that has any relevancy to it is in the 
testimony of the people testifying at the hearing. If this is 
already in before the hearing starts, USDA can already start 
their economic analysis before day one of the hearing. I think 
that is vitally important.
    Sixth, hire and retain additional Administrative Law Judges 
and make sure there are professional court reporting services. 
Seventh, increase the use of the market administrator's staff 
members. USDA will be challenged to be able to maintain the 
professional staff that it needs to work through the complex 
issues. There are cost-of-living issues, there are quality-of-
life issues working in an expensive market such as this. USDA 
is fortunate to have a number of satellite offices around the 
country, including one in Albany, New York, that provides a 
much more stable quality of life that I believe can help them 
attract and retain high-quality people that can help them move 
through this hearing process.
    And finally, I believe it is necessary to have the 
Secretary of Agriculture make at least an annual report to this 
Committee on how the Federal Order hearing process, amendatory 
process, is coming and what changes have been made and to make 
a report that encapsulates what is going on in the Federal 
Order program.
    With that, my time is up. I thank you again for the 
opportunity to testify before you and I look forward to any 
questions you may have.
    [The prepared statement of Mr. Gallagher appears at the 
conclusion of the hearing:]
    Mr. Boswell. Well, thank you, Mr. Gallagher. I appreciate 
all of your comments, particularly that last one. That is what 
we are just buzzing up here about. That was a good thought. In 
fact, you lined up quite an order of priorities, so I assume 
you had them in order of precedence?
    Mr. Gallagher. Pardon me? I am sorry.
    Mr. Boswell. Was your number one recommendation for what 
we----
    Mr. Gallagher. It has to be done.
    Mr. Boswell. It has to be done. Well, with that, I think I 
will just ask the rest of the panel to tell us what would be 
your top recommendation, if we would do something to improve 
the Federal Order System. No particular order. Whoever is ready 
to respond. What is your top recommendation? Mr. Ooms, we will 
just start with you. We will just go down the line.
    Mr. Ooms. I would just say that I had a number of 
suggestions that would just expedite the process, because there 
are a lot of things that USDA has the power to do. As a small 
businessman and dairy farmer, I hear bureaucrats tell me that 
it takes 10 or 14 months and it is just not good enough. We can 
do better than that. We are living----
    Mr. Boswell. I think you have all made that very clear, but 
if you were just to say tomorrow you will do something first, 
what would you have them do?
    Mr. Ooms. From my farm perspective, I would have them 
decouple Class I from the cheese price.
    Mr. Boswell. Okay. Thank you. Mr. French?
    Mr. French. In this process, if we would just set a 
timeline to have timely regulations that we can live with, it 
would be the number one thing today.
    Mr. Boswell. A timeline, okay. Mr. Donohue? Thank you.
    Mr. Donohue. Possibly even reducing the number of Orders 
from 10 to possibly even looking at a single Order.
    Mr. Boswell. One Order, okay. Mr. Kraft?
    Mr. Kraft. Make decisions on hearings that have already 
happened.
    Mr. Boswell. Make decisions on the hearings that have 
already happened, okay. That is a good comment. Okay, with 
that, Mr. Kraft, you mentioned that the California system does 
an unparalleled job of collecting industry data for hearings on 
price formulae. In your opinion, where is the USDA falling 
short of this data collection?
    Mr. Kraft. Well, there is no auditing process on the 
survey. They don't check. They need to check the numbers and 
make sure they are right.
    Mr. Boswell. Okay. All right. Mr. French, you said in your 
testimony that the Class I differentials in use today reflect 
economic conditions of a decade ago. What should they be?
    Mr. French. The Class I price in the Southeast is probably 
reflective of the value of Class I, but our blend price is 
getting reduced down by the lower-class usage that we have. And 
the Class I, the producers that I talk to in the field look at 
the price in the grocery store and they always relate that back 
to the hundredweight they are receiving and tell you there is 
no relationship. And when the price of the Class goes up in the 
grocery store and their farm check doesn't show it, then they 
ask you why. I served on the Board for 3 years and that was 
always the question you got, why is the price for milk so high 
in the grocery store and yet we are getting so little on the 
farm? And so the average producer out there, that is what they 
see day to day as the value of his product, is that grocery 
store price and they don't see that correlation between the 
grocery store price and his farm check. And so they are all 
going to tell you that if the value of their milk is what it is 
in the grocery store, then the value at the farm needs to be 
higher and they will tell you that 100 percent if you meet at 
the farm gate or at the auction. That is what they are all 
going to hit you with. They will all tell you it is going to be 
higher somewhere. They see a value somewhere with the grocery 
store. Now, we all know that is not realistic, but it certainly 
needs to go hand in hand.
    Mr. Boswell. Now, if it gives you any comfort as a farmer 
myself, as a cow/calf producer, I have noticed that in the cost 
of beefsteak. However, your point is well made and I appreciate 
it. The chair would recognize Mrs. Gillibrand for 5 minutes.
    Mrs. Gillibrand. Thank you, Mr. Chairman. I would like to 
talk to each of you about your ideas for change. So Mr. Ooms, 
can you talk about what you think the impact would be if you 
decoupled Class I from the price of cheese? And then I would 
like the other panelists to also describe what they think the 
impact would be.
    Mr. Ooms. Well, it would depend on what region of the 
country you are in and what your Class I would be in your 
region. I know the biggest thing for us is we do have Class 
differentials that do address this, but it would make a big 
difference in that, and he just talked about it. The price of 
milk in the stores are based on what they can get for their 
product. But if you think about it, our milk is largely set by 
the price of cheese in Chicago at the Mercantile Exchange or 
the NASS, which is obviously unaudited. So it is going to be 
different in every area of the country, but there should be a 
price discovery mechanism, whether it be regional or national, 
for Class I milk. As far as the impact to my farm, it is going 
to vary. I couldn't give you that right here today. I could get 
back to you on that.
    Mrs. Gillibrand. But to the broader issue, it sounds like, 
certainly from our region of the country, the price of milk is 
just too low and it is typically too low and it doesn't reflect 
the cost of producing the milk, and I understand that the cost 
differentials for Class I are supposed to reflect that. Do you 
have any sense, as just a producer, why these price mechanism 
aren't working? Do they, perhaps, not have enough influence in 
the formula?
    Mr. Ooms. Well, I think part of the problem is, is I know 
that with the make allowance change, they were asked to change 
the make allowance for cheese to reflect the transportation or 
the fuel costs to go into making cheese. At the same time, they 
were asked to, I know I talked with Ed about it, about changing 
the differential for Class I and the judge kind of set that 
aside because it was too controversial. And then the industry 
was segmented, because we all agreed on the whole package, but 
the way the process moved so slow, it was important to those 
that were cheese producers to get that fixed right away and we 
knew if we included the Class I, if the process was sped up, 
even if they didn't address Class I at that point, at least we 
would have had a hearing on it. But the problem is, as you get 
too many issues on the plate, you end up cutting stuff out, 
because when I see that the Southeast producers have their 
thing, and I agree with what they are asking for, and I said to 
myself, this is never going to happen because they are just 
never going to get to it.
    Mrs. Gillibrand. Thank you. And many of you have talked 
about transportation costs and you do refer to that in your 
testimony. If transportation costs weren't wholly absorbed by 
the producers, what could an alternative system be to address 
the differential issue?
    Mr. Ooms. This is for me?
    Mrs. Gillibrand. Well, I will finish with you and then I 
will go to the others. Thank you.
    Mr. Ooms. Okay. I know that Ed and some of his 
contemporaries in the Northeast, and I would defer to Ed on 
that, as far as how we could accomplish that.
    Mrs. Gillibrand. Ed, go ahead.
    Mr. Gallagher. Thank you. Relative to passing hauling on up 
through the marketing channel to the consumers, I think, is 
vitally important. There a number of initiatives that have been 
undertaken already. We have some fuel surcharges that we pass 
along on some of our sales of milk already. The Pennsylvania 
Milk Marketing Board, a state regulation has recognized that 
particular issue and in their state regulation they have a fuel 
surcharge. I do believe that there should be some sort of a 
surcharge mechanism under Federal Orders to help pass those 
costs along to the final consumer, where they should be paid.
    Mrs. Gillibrand. Okay. Thank you. Anyone else on those two 
issues?
    Mr. Kraft. We are in a difficult position because we pay 
fuel to the farm for all our input costs and we pay fuel from 
the farm for the milk that is going to the plants. So I know 
you talk a lot about the cost of moving the milk from the farm 
to the market, but we are getting hit on both sides, as well as 
harvesting costs. So the fuel costs on our operations is 
totally absorbed by us and I don't have any solutions to that, 
other than that it would be nice if that was shared a little 
bit. We have some processor friends behind us. I don't know if 
they would have the same opinion, but it would be pleasant.
    Mr. French. If you have a discussion about transportation 
costs in the Southeast in the past year, you would have really 
got beat up, because not only do we have the transportation 
costs of our own milk, but in the Southeast we are hauling 
supplemental milk in to cover our needs and the dairy farmers 
in the Southeast were covering that cost too. I know that first 
panel said that we had a minimum blend that we could receive, 
but in the Southeast, because of those transportation costs, we 
actually received the low blend for a good many, the last 2 
years, because of that supplemental cost to haul the milk in to 
service the market was bourne by the dairy farmers. We have 
done a lot of work in the last year, on behalf of a lot of 
people, to get that changed around to gain some efficiencies 
and correct that, to where now we are at least above the blend. 
But that transportation cost is huge when the price of fuel 
goes to $3 a gallon for diesel and the distance that we are now 
hauling milk to cover all of those markets.
    I don't know that the system will ever be able to respond 
fast enough, as fast as our fuel prices go up and down. When 
the fuel hits $3 and we start processing in Washington, D.C., 
the price drops back down and it is no longer an issue. There 
has to be something in place so that those agencies that 
oversee those milk marketings can control that issue at the 
time. That is just something that is going to have to be in 
place if they can call on and do and not have a hearing. But 
the transportation in the Southeast has been huge for the past 
and that has to do with all over the country, the system that 
was set up was set up for a surplus that was all over the 
United States and how we have certain areas that are deficit 
and other areas that are surplus that were not surplus 30 years 
ago. So it is changing and our system is just not changing fast 
enough to meet those.
    Mr. Boswell. Excellent discussion. Thank you very much. The 
chair recognizes Mr. Goodlatte for questions for 5 minutes.
    Mr. Goodlatte. Well, thank you, Mr. Chairman. And I want to 
particularly welcome Billy French, who is a constituent and 
very knowledgeable dairy farmer. His son was a page here at the 
Capitol last year and I know, from that, that he is not only a 
great dairy farmer, but also a great family man, so welcome, 
Billy. I want to welcome all of you. I appreciate your 
testimony here today and I would like to hear from each of you 
what you, as dairy producers, recommend this Committee do 
legislatively to speed up the process the USDA uses to amend 
Federal Orders. You could tell from the testimony of 
Administrator Day, that they are searching but they are 
somewhat reluctant to tell us to think outside the box and do 
something pretty dramatic. But given not only the problem with 
fuel costs, but also with feed costs, which change and 
sometimes can change fairly rapidly, as we have seen with corn 
prices over the last year. They need to be able to respond to 
you much more quickly. So what specifically can we do in that 
regard? Mr. Kraft, I will start with you.
    Mr. Kraft. Well, providing that the legislative process is 
faster than the milk marketing process, which moves faster is 
somewhat debatable, I would hope that----
    Mr. Goodlatte. Well, it is, but your timing is good because 
we are going to write a farm bill this year and the farm bill 
is the place to put this.
    Mr. Kraft. Well, like I said in my testimony, what we 
really need is a process that works and is much more 
responsive. And so I would hope that if they don't do it 
themselves, if you would require them to do some reporting, to 
do the audits on the reporting, to do some timely reporting as 
far as the process of a Federal Order hearing would go. So that 
would be my recommendation, is to hold their feet to the fire 
and make them have some deadlines so that the process moves 
ahead.
    Mr. Goodlatte. Thank you. Mr. Donohue?
    Mr. Donohue. Yes, I think the same thing. You could look at 
doing it legislatively, but in issues regarding Federal Orders, 
it does become very controversial and regionalized, and it can 
get bogged down in the Congressional type of situation just as 
well.
    Mr. Goodlatte. Let me correct any misimpression here. We 
are not going to decide, on a case-by-case basis, what the 
transportation allowance is. What we are trying to do is change 
the process so that the Administrator and the USDA are required 
to make their decisions much more quickly. We are not under any 
illusion that there isn't going to be the same controversy 
there has always been between regions of the country, between 
producers and processors, and everything else that goes into 
this. But like many other sectors of our economy, people face 
controversy and make decisions much more rapidly. As I 
indicated to you, if you think this is controversial, think 
about what investors think about whether or not interest rates 
should be raised.
    If you are going to pay for credit, you don't want those 
interest rates raised. If you have money you are lending, you 
want the interest rates raised. That comes out where the rubber 
meets the road. But when the Federal Reserve meets, they make a 
decision, they make the decision quickly and it takes effect 
immediately. Now, when prices change for energy, when prices 
change for feed, when the market shifts because of changes in 
demand and changes in technology that have enabled us to ship 
from the Shenandoah Valley our milk greater and greater 
distances, now it is going down to South Carolina and Georgia, 
we need to have a recognition that that costs somebody money to 
do it and we are not going to be producing it much longer if it 
costs more to produce it and ship than you get paid for it.
    And because this is not a free market system, this is a 
very tightly government-controlled system, and if there is 
consensus on eliminating that and going to a free market 
system, I would like to hear about it. But I haven't heard 
that, so we have got to change the government-controlled system 
to respond much more rapidly than it does now. That means 
everybody gets to have their say, but then quickly make a 
decision about what the change is going to be. Don't study the 
request, then set a date for a hearing, then have the hearing 
and then take months to examine the hearing record, then come 
up with a decision that might be a year or more late to the 
changes that have already taken place in the market. If you 
agree with that effort to both have them administratively 
change some of their procedures and for us legislatively to 
change what they can't change administratively, those are the 
ideas I am looking for.
    Mr. Donohue. Yes, in my testimony some of the points I made 
out to Mr. Gallagher have a precise timeframe, that once a 
request is made for a hearing, you have 2 to 3 weeks to grant 
the hearing. You have so long in the hearing process. You have 
so long and hold their feet to that. And if there is clear, 
concise criteria in every step of the way, it is going to speed 
up the whole process.
    Mr. Goodlatte. Thank you. Mr. French?
    Mr. French. And I agree with what both of those gentlemen 
presented in their testimony. Certainly there is a process 
where we can have a timely decision made and we certainly don't 
have it now. It is not going to solve all of the problems in 
the industry, that is for sure. It is not going to solve all of 
the contention that we have out there. But I think everybody 
would agree that if we had a timely decision-making process and 
everybody understood it, it would go towards alleviating a lot 
of those concerns and aggravation that we have today.
    Mr. Goodlatte. Thank you. Mr. Ooms?
    Mr. Ooms. I could just reiterate what they have said and 
what you have said. I am not the expert here on this issue. I 
am looking at it from a dairy farmer perspective and I am just 
going to say that it needs to be fixed and there is no reason 
why we can't give them timelines. I don't want to close anybody 
out of the process, but when I heard them hemming and hawing 
about the need for consensus in the industry, just because 
there isn't consensus doesn't mean that they can't take the 
facts and make a decision based on the facts. I don't believe 
they look for consensus. I believe they try to make a good 
decision. So this whole, ``We need to develop consensus'' I 
don't buy that. So the need for more time for consensus is 
probably not realistic.
    Mr. Goodlatte. Madam Chairman, my time has expired, but I 
would like them to expand on that in one area that I think you 
and the gentleman from Wisconsin would also be interested in, 
if I might. The USDA has testified, I don't think today but 
previously, against mandating time-frames, which is exactly 
what Mr. Donohue mentioned, in the law since it conflicts with 
their discretion to prioritize amendment petitions. And I 
wonder, Mr. French, I will start with you and Mr. Donohue, tell 
us what you think about that. Do you think that we should not 
mandate specific time-frames that they have to adhere to, so 
that they could move one petition ahead of another if they 
think it is more urgent? Or do you think we should say find the 
resources to address all of the petitions that are coming at 
you, in a timely fashion?
    Mr. French. I think, in the speed in which today's industry 
operates at, we don't have the luxury to prioritize and take 
one issue at a time and I don't think they should, either. I 
know when I have a cow that is sick and a child that has to be 
somewhere in school, I have got to figure it out and get both 
of them done. I don't have a chance to say, well, the cow dies 
and the kid gets to school. It is not an option on my part. We 
handle everything that comes across the plate today and get 
some done in a timely fashion or we are not in business. I 
think that the people that we pay in the government need to do 
the same thing. It is sometimes a rough day. I understand that 
very well. But you still have to get it all done.
    Mr. Goodlatte. Mr. Donohue?
    Mr. Donohue. Yes, I agree. You hear sometimes, that it was 
hard. We couldn't schedule an Administrative Law Judge and 
things like that. But if people have their ducks in order, the 
hearing has been requested and the timeframe should be 
followed.
    Mr. Goodlatte. Mr. Kraft?
    Mr. Kraft. In business you have an incentive to do things 
in a timely manner, as was said before, and in government it is 
a lot of times the opposite. If you work yourself out of a job, 
you don't have a job anymore. So you have to have some sort of 
an incentive or some sort of structure to make sure that things 
happen in a timely manner.
    Mr. Goodlatte. Mr. Gallagher, I neglected you in the first 
question, so you close. Mr. Chairman, in your absence, the 
Chairman was very generous with her discretion.
    Mr. Gallagher. Thank you.
    Mr. Boswell. Actually, we are all that way over here.
    Mr. Gallagher. USDA has had plenty of time to perform to 
the market and meet self-imposed deadlines. They have not. They 
need to have deadlines established for them to get the process 
done faster.
    Mr. Goodlatte. Thank you. Thank you, Mr. Chairman.
    Mr. Boswell. You are very welcome. Dr. Kagen?
    Mr. Kagen. Thank you, Mr. Chairman. I was a little confused 
there with all of this discussion about timelines and dates and 
deadlines. I thought we were talking about our involvement in a 
religious civil war in Iraq. Mr. Gallagher, as an economist, 
are you really suggesting that the Secretary of Agriculture 
should have the power to determine milk prices?
    Mr. Gallagher. I believe that the Secretary should have 
some sort of an authority to be able to quickly react to cost 
price squeezes, like those that are hampering the dairy 
industry right now.
    Mr. Kagen. Is that a free market description that you have 
just described?
    Mr. Gallagher. No, I think we could set up some sort of 
parameters. For instance, you could do something that would say 
that if the milk/feed ratio was below some number for a certain 
period of time, then something should be done on the Class I 
price. Something like that could be happening and there could 
be some ability for them to just go and within 30 to 60 days 
have it implemented.
    Mr. Kagen. And then a ratio also for fuel costs?
    Mr. Gallagher. Sure.
    Mr. Kagen. A ratio for hired hand costs?
    Mr. Gallagher. Pardon me?
    Mr. Kagen. Hired hand, you know, employee costs?
    Mr. Gallagher. It would be easy for an economic analysis to 
be put together that could show something like that, in fact.
    Mr. Kagen. And a ratio for healthcare costs?
    Mr. Gallagher. Yes, we are working on a cost of production 
formula right now within Dairylea to utilize in regulatory 
proceedings.
    Mr. Kagen. So you don't have any concerns about the 
Secretary of Agriculture possessing too much power? You think 
that the Congress or some form of legislation could rein him or 
her in?
    Mr. Gallagher. Again, with the right parameters wrapped 
around it, I believe it could work.
    Mr. Kagen. Well, I have been a small businessman for over 
25 years and I have been moving at the speed of business and 
now I am moving at the speed of government, so you understand 
there is some hesitancy for me to really accept that that is 
really going to be very functional.
    Mr. Gallagher. I understand.
    Mr. Kagen. And again, Mr. Gallagher, would you agree with 
this Dutch fellow sitting next to you, the Dutch farmer? I know 
if you are not Dutch you are not much. I have heard it all. 
From my area of the country, the V's in the phonebook are 
extensive, van this, van that. Would you agree with him that we 
really need greater oversight and audits, and have you done any 
audits of pricing?
    Mr. Gallagher. We audit our internal operations, surely, 
relative to, I think if you are referring to audits of the NASS 
price survey----
    Mr. Kagen. Yes.
    Mr. Gallagher.--I think it is a huge problem that there are 
no audits being done already and it is beyond my ability to 
comprehend why that is not occurring.
    Mr. Kagen. Would you call it shocking?
    Mr. Gallagher. Yes, I would.
    Mr. Kagen. Okay. And I don't mean to pry into your 
businesses, but what is your cost per hundred? Mr. Ooms?
    Mr. Ooms. I would guesstimate, because there are so many 
variables that go into it, but when we can stay around $15 a 
hundredweight; there is a lot of belt tightening. But that 
would just be a ballpark guess.
    Mr. Kagen. In the last 3 months, what is your average 
payment per hundred?
    Mr. Ooms. Actually, the last 3 months we have been just 
over--just around $15.80, $15 and we dropped down below around 
$12 for a good number of years. But the last 3 months, because 
of whey prices rebounding, if it was actually reported 
correctly, it probably would have been more, but that will be 
discovered. So the last 3 months they have been around $15.85, 
$15.58 and the last one was $16.30.
    Mr. Kagen. Mr. Donohue?
    Mr. Donohue. I am a quad manager and we don't really--all 
our members are in proprietary dairy plants and we don't pay 
those.
    Mr. Kagen. Okay.
    Mr. Donohue. So I cannot reflect on costs of production.
    Mr. Kagen. Mr. Kraft?
    Mr. Kraft. I think Mr. Ooms is probably right. It is very 
difficult to tell from month to month because of fuel prices 
changing so fast and I can tell you that, in the last 6 months, 
our feed costs have moved up 47 percent and that is a real 
number. I paid $19 a ton for corn salvage in the field last 
fall and we just made contracts with the guys, the farmers 
around us that grow corn for us and we are going to be paying 
$28 a ton this year. So that tells you what is going on. And it 
is very difficult to give you an accurate number. We kind of do 
it for a whole year, which is a conglomerate.
    Mr. Kagen. Yes.
    Mr. Kraft. But when costs are moving up so rapidly and the 
price that we receive for our milk lags behind it, not 
responding, that is where we get caught in a squeeze.
    Mr. Kagen. Thank you all for your time. I appreciate you 
being here. I yield back.
    Mr. Boswell. Well, I would like to thank the whole panel. 
It has been an excellent discussion and worth our time to have 
you here. Thank you very much for coming and we are going to 
excuse you at this time, and I invite the third panel to come 
to the table. I welcome to the third panel to table and 
apologize for the long delay you have had. You have been 
patient. Thank you very much. We appreciate it. And so we will 
just get started right away if we can. We have, just for 
introductions, Mr. Mike Reidy, Senior Vice President, 
Procurement, Logistics and Business Development, Leprino Foods 
Company, Denver, Colorado. Welcome. Mr. Warren Erickson, 
Executive Vice President and COO of Anderson-Erickson Dairy 
Company in Des Moines. Welcome. Mr. Doug Wells, Co-President of 
Wells' Dairy, Incorporated, La Mars, Iowa. Welcome. You didn't 
bring any samples. No, I am just kidding. Mr. William Ahelm, 
Co-Founder and Vice Chairman of Hilmar Cheese Company, 
California. Welcome. And Mr. John Hitchell, General Manager, 
Raw Milk Procurement and Regulations, the Kroger Company, 
Cincinnati, Ohio. Welcome. So with that, we would like to start 
with you, Mr. Reidy; please begin when you are ready.

        STATEMENT OF MIKE REIDY, SENIOR VICE PRESIDENT,
PROCUREMENT, LOGISTICS AND BUSINESS DEVELOPMENT, LEPRINO FOODS 
COMPANY; CHAIRMAN, INTERNATIONAL DAIRY FOODS ASSOCIATION (IDFA)

    Mr. Reidy. Thank you, Mr. Chairman and Members of the 
Subcommittee. My name, again, is Mike Reidy, Senior Vice 
President of Procurement, Logistics and Business Development 
for Leprino Foods Company based in Denver, Colorado. Leprino if 
the largest mozzarella cheese manufacturing company in the 
world, with facilities in California, Colorado, Michigan, 
Nebraska, New Mexico, New York and Pennsylvania. I am also the 
Chairman of the International Dairy Foods Association, IDFA.
    IDFA and its members are committed to working with dairy 
farmers and Congress on new policies that ensure a healthy 
dairy industry. That is why today, at hearings in both the 
House and the Senate, we are releasing our dairy policy 
proposals for the 2007 Farm Bill, called Ensuring a Healthy 
U.S. Dairy Industry: A Blueprint for the 2007 Farm Bill, and it 
looks like this. It can be found at 
www.heatlhydairyindustry.org.
    Our comprehensive proposals include an improved dairy 
farmer safety net, with direct payments not tied to price or 
current production; greater access to risk management tools, 
like revenue insurance and forward contracting; a plan to 
identify needed improvements in the Nation's milk pricing 
system through the establishment of a blue ribbon commission to 
look at Federal Milk Marketing Orders; and securing long-term 
trade prospects through repeal of the dairy import assessment. 
A copy of our blueprint will be delivered to your offices this 
afternoon.
    As our policy proposals suggest, the Federal Milk Marketing 
Order System cannot be viewed in isolation. It is only a part 
of the government's involvement in dairy. Federal Orders exist 
along side the decades-old Dairy Price Support Program and the 
newer Milk Income Loss Contract Program. They are supposed to 
operate as the principal safety nets for dairy farmers. 
However, if these safety net programs were working effectively 
and truly helping today's dairy farmers, I would argue that we 
would not have the level of controversy and uncertainty over 
the Federal Order System that brings us here today.
    At Leprino, we purchase between 4 percent and 5 percent of 
the Nation's milk supply. We have a keen interest in making 
sure we keep our existing market strong while finding new 
outlets for the cheese and other dairy products we produce. As 
such, I have day-to-day experience in seeing how Federal Orders 
and current U.S. dairy policies impact the marketplace. Leprino 
does not subscribe to the dismantlement of the Federal Order 
System. In fact, while many in the industry think we would be 
better off in a deregulated environment, there is no consensus. 
However, there is increasing frustration with the length of 
time it takes USDA to make needed changes, and mounting concern 
when decisions finally arrive, because they are escalating 
regional divisiveness within our industry. This must be 
examined and improved.
    For example, only in the dairy industry do we have to go to 
the government to ask for permission to update the margins 
processors can use to cover their costs of turning raw milk 
into finished dairy products. It has taken USDA over a year to 
address this emergency issue, as you have heard several times 
this morning. And while we wait, some cheese companies and 
cooperatives have closed factories and many others are still 
challenged to make ends meet. These milk pricing issues are 
bound to get worse as USDA struggles to make the 1937 Federal 
Orders fit the business realities of today. We need strategic 
processes to sort out the future of the Order System. That is 
why Leprino supports the creation of a blue ribbon commission 
to analyze these issues more fully and make recommendations 
that are built on consensus among producers and processors.
    As a company fully invested in the long-term health and 
success of the U.S. dairy industry, Leprino believes this 
Committee must pursue a holistic approach to dairy policy. We 
cannot find our way forward on Federal Orders unless producers 
have a reasonable safety net program. We think the structure of 
the underlying safety nets can change for the betterment of 
producers and processors. We support a direct payment program 
that would decouple payments from price and production and 
would be available year round to help farmers. This type of 
direct payment has the added advantage of not distorting 
markets, which is good for processors. A complete safety net 
also needs to provide more risk management tools through 
forward contracting and revenue insurance.
    Finally, our dairy policies should support expanding market 
opportunities. This can be done by not erecting artificial 
barriers to trade, like the dairy import assessment, which 
might lead to retaliation that may threaten any number of U.S. 
dairy exports, including the whey and lactose products we make. 
Mr. Chairman, establishing a commission on Federal Orders and 
fixing the dairy safety net in this farm bill is a tall order, 
but the time has come. Thank you for the opportunity to speak 
to you today.
    [The prepared statement of Mr. Reidy appears at the 
conclusion of the hearing:]
    Mr. Boswell. Thank you. Mr. Erickson, welcome. Five 
minutes.

STATEMENT OF WARREN ERICKSON, SENIOR EXECUTIVE VICE PRESIDENT & 
              COO, ANDERSON-ERICKSON DAIRY COMPANY

    Mr. Erickson. Thank you for the opportunity to be here 
today. I am Warren Erickson, Chief Operating Officer of 
Anderson-Erickson Dairy. Oh, you got to hit the talk button. 
Excuse me. Mr. Chairman, you know our company well and I want 
to thank you for your leadership as our Congressman, on behalf 
of the Iowa dairy industry.
    I came back to my family's dairy business after some time 
in the accounting industry and I am here to tell you that 
complicated tax and accounting issues can't hold a candle to 
the Federal Milk Marketing Orders. That is why we support 
Congress creating a commission of industry experts and USDA 
officials to look at the future of the Federal Milk Marketing 
Orders and the problems that plague the system. Here are just a 
few examples we have experienced.
    After 70 years, the Federal Government still operates a 
discriminatory pricing system that assigns milk prices based on 
the products it is used to make. At AE, we pay the highest 
price for the milk that we buy. We produce fluid milk, known as 
Class I, and yogurt and other cultured products, known as Class 
II. There are also two other classes, Class III for milk used 
to make cheese and Class IV for milk being turned into butter 
and powder. As far as I know, no other perishable commodity in 
America prices their commodities that way, and there is no real 
reason that milk should.
    For fluid milk processors like us, we also pay more for 
milk based on a system that originally priced milk from the 
distance of a plant from Eau Claire, Wisconsin. Known as Class 
I differentials today, you can see from this map that the price 
still goes up the further you get away from Eau Claire. This 
regionally-based pricing method doesn't fit today's economics 
or dairy industry. And I can tell you from firsthand experience 
that the formal rulemaking process used by the USDA to modify 
complicated Federal Order rules is unresponsive, based on the 
realities of our business environment, unreasonably slow and 
costly to everyone involved.
    Here is an example of how out of touch the Orders are. At 
AE, we buy from both co-ops and independent farms. We have a 
new dairy farm in our area and we plan to buy their milk. But 
how to do I explain to them that the Class I price reported 
every month by the USDA is what I pay for the milk but not what 
my farm supplier receives? In frustration, I refer to it as a 
communist system where the market administrator tells me what 
to pay instead of what my supplier and I both agree on is a 
fair price. In addition, it is exceedingly complicated to 
explain to the supplier what they will receive as payment for 
the milk shipped to AE. A more straightforward approach would 
be much easier for all parties involved. But a straightforward 
approach is difficult with the current system. For example, 
several years ago, I testified at a USDA hearing on the 
implementation of Congressionally-mandated Federal Order 
reform. Can you imagine being cross-examined by the USDA on the 
interplay between milk, cheese, butter and powder prices and 
the distance of my plant from Eau Claire, Wisconsin? I gave it 
my best shot.
    After 3 years of deliberation during the last Federal Order 
reform, countless hours of testimony and hundreds of thousands 
of dollars spent by processors, co-ops and the government on 
the process, the USDA ultimately proposed a more market-
oriented pricing system. However, Congress intervened and 
mandated a different scheme with higher Class I differentials. 
This result hit our bottom line pretty hard. Higher prices for 
our milk leads to less consumption, which not only hurts my 
business, but the dairy farmers as well. From my perspective, a 
pricing system that makes my milk from Iowa more expensive than 
milk going to a Minnesota cheese plant, but less expensive than 
milk in Florida doesn't make a lot of sense.
    You see now why we have this tension in the system. The 
outcome is always different depending on where your farm or 
plant is located and what the milk is used for. There has got 
to be a better way. However, nobody can agree on how to fix the 
Federal Order System. And fixing it will not be an easy or fast 
process because the problems are so complex and the solutions 
so politically charged.
    Mr. Chairman, I believe Congress can rise above the 
regionalism and divisiveness that comes with trying to solve 
such a problem in a political arena by charging the dairy 
industry to work together to find consensus and solve our own 
problems. That is why we support Congress creating a commission 
made up of producers, processors, USDA officials and experts to 
recommend ways to streamline and simplify the system, increase 
its responsiveness to market forces, and ensure it is still 
serving the best interests of the industry and consumers.
    In spite of all of the complications and uncertainties, AE 
will continue to do our best to meet our consumers' demand and 
try to increase milk and dairy consumption. We will continue to 
try to do business according to the highest standards of 
quality my grandfather established when he started our company 
77 years ago. In the short term, please give us some assistance 
by establishing a Federal Order commission. Thank you.
    [The prepared statement of Mr. Erickson appears at the 
conclusion of the hearing:]
    Mr. Boswell. Well, thank you, Mr. Erickson. You have 
referred to that new farmer and I think I know where you are 
talking about, trying to explain it to him and you made the 
comment it is kind of like the communist system.
    Mr. Erickson. Yes, sir.
    Mr. Boswell. I am going to ask you to consider if maybe you 
could encourage or I encourage you to say, that there is a 
right way, a wrong way, and the USDA way, which we are trying 
to fix.
    Mr. Erickson. I will take that into account, Mr. Chairman.
    Mr. Boswell. Okay. Thank you. Mr. Wells?

STATEMENT OF DOUGLAS J. WELLS, CO-PRESIDENT, WELLS' DAIRY, INC.

    Mr. Wells. Well, thank you, Mr. Chairman, for your earlier 
warm welcome of Warren and I, and congratulations on your 
chairmanship, and the opportunity to be here today.
    As a regional processor serving a national market, Federal 
Orders and our Nation's dairy policies greatly impact our 
business. At Wells' Dairy, we are constantly looking for ways 
to make our business processes faster, more efficient and 
reduce waste. Competition in the dairy industry is challenging 
and our margins are squeezed very tightly. We have a strong 
relationship with our suppliers and we take pride in dealing 
with all family-owned farm businesses.
    Unfortunately, Federal Milk Marketing Orders and other 
Federal dairy programs are based on outdated, inefficient 
business models that in many ways impede our ability to 
increase sales of dairy products in the marketplace. Since 
1976, milk consumption has declined by 36 percent to 21 gallons 
per capita in 2005, the lowest level on record. Looking back, 
Federal Orders played an important role, helping to stabilize 
milk supply after the Great Depression and through World War 
II. However, I can't think of any other business in America 
where the government sets the price, constrains allowable 
overhead costs, requires manual reporting of what is bought, 
manufactured, transported and sold, and then charges us, the 
milk buyers, the cost of administering this system.
    Let me give you an example. Wells operates partially in the 
Central Order. In 2005, the rules changed so that now, to 
qualify for the producer settlement fund, or pool, we have to 
ship farm milk that would normally be processed in our Omaha 
yogurt plant to La Mars. At the same time, we have to do the 
reverse and that is transport milk that is produced close to 
our La Mars plant to Omaha. Federal Order rules didn't allow 
processors to vote on this decision; only dairy farmers, and 
more pointedly, their co-ops were the only voters. Wells' Dairy 
competes with companies inside the Federal Orders, with 
California, which is outside the Federal system, and with some 
unregulated plants.
    You have heard how cumbersome and slow the regulatory 
pricing system is and you have heard of ideas being discussed 
to fix the system, such as bringing California into the Federal 
system, or making one national Order. It is impossible to 
generalize about the impact of these proposals on Wells' Dairy. 
The devil is in the details. That is why we need a commission 
to study and make non-politicized recommendations and wring as 
much inefficiency out of the system as is possible. We can look 
to California for a possible model to consider. Their system 
does have speed and responsiveness in making cost changes.
    Mr. Chairman, one way to improve the system is to take away 
some of the uncertainty and better manage price risk by 
allowing producers and processors to forward contract. Because 
of Federal Orders, processors like Wells' Dairy are restricted 
from working out price agreements or forward contracts with 
producers. Wells participated in USDA's Dairy Forward 
Contracting Pilot Program until it expired in 2004. The program 
was very successful. We need to get this basic risk management 
tool back and please, in the process, don't add unnecessary 
paperwork and oversight. Dairy processors and producers are 
intelligent business people and we do not need additional USDA 
hand holding.
    Mr. Chairman, bringing back the Dairy Forward Contracting 
Program is the number one farm bill issue for us at Wells' 
Dairy. Forward contracting will help us plan ahead to ensure 
that Iowa's processing capacity can handle Iowa's growing milk 
supply. Forward contracting will help make it easier to do 
long-term planning and attract needed investment in farms and 
plants.
    I want to finish on the point I started with in this 
testimony. Business efficiency can only go so far unless it is 
complimented by governmental efficiency. We need more 
efficiency in the Federal Order System and to find the right 
solutions will require a well thought out consensus from a 
commission of experts, not quick fixes. Unrestricted use of 
dairy forward contracting is also needed to ensure that all 
milk buyers and sellers can achieve greater price stability, a 
key component in any successful business plan. Thank you for 
your time.
    [The prepared statement of Mr. Wells appears at the 
conclusion of the hearing:]
    Mr. Boswell. Thank you for your testimony. Mr. Ahlem?

    STATEMENT OF WILLIAM R. AHELM, Jr., CO-FOUNDER AND VICE 
          CHAIRMAN OF THE BOARD, HILMAR CHEESE COMPANY

    Mr. Ahelm. My name is Bill Ahelm and I want to thank you 
for the opportunity of testifying today. I too got a lot of 
kicks out of hand-milking when I was a child, Mr. Chairman.
    Mr. Boswell. You did say kicks?
    Mr. Ahelm. Yes. I want to thank you for the warm welcome 
today. I am a Co-Founder of Hilmar Cheese and 1 of its 12 
family farm owners. Hilmar Cheese is the largest single site 
cheese and whey manufacturer in the world. I would like to say 
that I feel that we are in good hands today, particularly since 
my own Congressman, Dennis Cardoza, sits on this Committee.
    I have been a jersey dairy farmer my entire life and it is 
a privilege to be here today to talk about dairy policy, 
particularly milk, natures most perfect food. My perspective 
comes from being an active dairy farmer and processor in 
California under the state milk marketing system, and we are 
building a plant that will be opening, hopefully, in October in 
Dalhart, Texas. We will become part of the Federal Order 
System.
    Relationships between dairy manufacturers and dairy farmers 
have changed dramatically during the last couple of decades. 
Today, over 86 percent of the milk handled is handled by co-
ops, dairy farmer-owned co-ops, as well as vast holdings owned 
by dairy farmer co-ops in the processing arena, as well as 
companies like Hilmar Cheese. The more seamless and more 
market-driven the relationship between processors and dairy 
farmers, the more prosperous the entire dairy sector will be. 
Furthermore, government expenditures will decrease dramatically 
because it will eliminate costly government programs.
    Acknowledge, for example, the cheese manufacturing plants 
going out of business, particularly in the Midwest. The 
elaborate government involvement in these markets and the 
distortion of market signals not based on contemporary markets 
has much to do with the reason dairy manufacturing plants 
cannot survive. We, as a dairy sector in general, would be 
better off without time-consuming, cumbersome and complicated 
Orders that are open for misinterpretation and bias, making it 
impossible to reflect the dynamic market changes. Why is it 
that we are denied forward contracting and revenue insurance 
tools as a safety net? And yet we have a CCC, Commodity Credit 
Corporation, that distorts and creates an oversupply of product 
at the time it purchases that product at the extreme low prices 
and then later, as prices begin to rise, put the product back 
on the market that continues low prices for an extended time 
into the future. In a sense, it is a double hindrance in 
establishing market values for the dairy products.
    Federal Order regulations and other dairy policies react 
very slowly to contemporary market signals. California, on the 
other hand, is much more responsive. By comparison, for 
example, USDA's proposed make allowance update, that was 
requested on an emergency basis, has already taken more than a 
year. California, on the other hand, was able to get greater 
relief in a more timely response. As a matter of fact, it took 
them 4 months and they are already investigating and studying 
another make allowance proposal. This is just one example of 
why I don't see any benefit for California to become part of 
the Federal Marketing Order System.
    We support programs that do not interrupt market signals. 
This is why we do not support the MILC Program. It stimulates 
production increases and mixes price signals. It also pits one 
dairy farmer against another, one region against another, and 
sometimes even one legislator against another. We should be 
focused on expanding the marketplace, both domestically and 
internationally. We also need help dealing with some other very 
pressing issues, such as labor and managing the cost of 
environmental regulations. Passage of the Ag Jobs Guest Worker 
Program is vitally important to dairy. Conservation-related 
direct payments, which could replace the MILC Program, could be 
a way to help farmers deal with environmental compliance and 
rising feed costs.
    I will end by saying that, like many others today, I 
support changes in the way that we approach the Federal 
Marketing Orders. We cannot rely on California's system by 
merely adopting it. We need to solve other problems. I think 
the first step would be to form a blue ribbon commission that 
could evaluate. Many of the others have suggested that as well. 
I think it is a very important first step. I have got 17 
seconds left and I want to tell you about milk. I am excited 
about milk. If you take a glass of milk and you look at it, it 
is so delicious to drink it just as it is, or you can flavor it 
with chocolate or strawberry and drink it. Or you can take it 
and you can shake it and make whipped cream out of it. You can 
churn it and make butter out of it. You can freeze it and make 
ice cream out of it. You can dry it in a powder form. You can 
add culture to it and make cheese. You can take the whey out of 
the cheese and make protein, the highest value food protein 
known to mankind, characteristics of milk that create weight 
loss. What a challenge we have. The solution to what we are 
talking about here today is adding value to the dairy supply, 
is expanding those markets both domestically and 
internationally. And I thank you in advance for the kinds of 
changes that you are implementing today.
    [The prepared statement of Mr. Ahelm appears at the 
conclusion of the hearing:]
    Mr. Boswell. Thank you, Mr. Ahelm. I will get it straight 
sooner or later here. I appreciate your testimony and we would 
like to recognize Mr. Hitchell at this time.

     STATEMENT OF JOHN HITCHELL, GENERAL MANAGER, RAW MILK 
           PROCUREMENT & REGULATIONS, KROGER COMPANY

    Mr. Hitchell. Thank you, Mr. Chairman. As the last speaker 
on the panel today, Mr. Chairman, I would like to thank you for 
your patience and interest in the Federal Milk Marketing 
Orders. My name is John Hitchell. I am the General Manager of 
Raw Milk Procurement and Regulations for the Kroger Company, 
headquartered in Cincinnati, Ohio. Kroger operates 17 dairy 
plants in 14 states. They manufacture a variety of milk, ice 
cream and yogurt products that we sell in approximately 2,500 
retail outlets in 31 states. I will keep my comments brief.
    After listening to all of the speakers today, I am sure the 
issues and challenges surrounding the Federal Order System are 
clear. Kroger has a special role on this panel, as we sell 
directly to consumers and believe this process, the marketing 
of milk and government regulations of the U.S. dairy industry, 
is intended to work for consumers as well as farmers. My 
comments today are shared with our customers in mind.
    As others have acknowledged, it is not an easy task for 
USDA to continue to operate a governmental milk pricing system 
that has grown more complex through the decades. I have to give 
USDA credit; they have tried to make the rulemaking process 
easier to understand and allow for more dialogue within the 
industry. For instance, as you have heard earlier, recently 
they held a pre-hearing workshop to discuss proposed changes to 
how milk that goes into cheese, nonfat dry milk and butter is 
priced. Even more important, the pre-hearing workshop allowed 
USDA to consider the proposed changes before deciding on 
whether to start the formal rulemaking process. USDA is 
required to base the decision to hold a hearing on whether the 
changes are needed to ensure an adequate supply of fluid milk 
and orderly marketing. So this type of workshop allowed all 
interested parties to help USDA understand the real-world 
impact of various proposals in a constructive, open and 
transparent dialogue.
    However, less than one week after the pre-hearing workshop, 
USDA commenced an emergency hearing on a separate issue to make 
changes to the Class I and II formulae. There was no pre-
hearing session this time, which was of concern to Kroger 
Company because these changes would have a significant impact 
on the cost of the Class I and II products we process and the 
customers we serve. I am sharing this recent experience with 
you to point out the need to have more of an open process and 
predictable pattern before starting Federal Order rulemaking. 
It takes a lot of time and money to get through these hearings 
and they increasingly result in a more complex change to the 
government's milk pricing rules. The bar on whether USDA should 
go to hearings should be consistent and set high. Federal 
Orders were designed to set a minimum price to ensure the 
orderly marketing of milk and an adequate supply, not to 
enhance farmer income. Whether you like them or not, other 
government programs, like MILC, are there to perform that task. 
And a thoughtful and judicious approach to Federal Order 
rulemaking would allow USDA adequate time to consider the 
potential impact on consumers as well.
    Even more than the effect on our business or on our milk 
suppliers, USDA needs to be the gatekeeper to make sure this 
system works for the people who are consuming milk and dairy 
products every day. In reality, they are the engine that is 
driving this train and our future prosperity demands heavily, 
and some might say exclusively, on their willingness to 
continue to consume dairy products. If we make this system too 
complicated or too costly to meet consumer demands, then they 
may go elsewhere to fulfill their nutrition needs. And I can 
tell you, once you lose a customer, it is awfully hard to get 
them back.
    In the same way, we need to have an open and constructive 
dialogue in planning for the future of the Federal Order 
System, and we have to broaden our perspective to take into 
account the impact of Federal Order decisions on consumers. 
That is why I join others here today to urge you to put into 
place a blue ribbon commission to do just that in the farm 
bill. A commission will allow us to talk about important and 
complex Federal Order issues and the various proposals that 
have been considered to change the system.
    I would also suggest that one of the commission's primary 
responsibilities be to ensure that the Federal Milk Marketing 
Order System serves the interests of milk and dairy product 
consumers as well as farmers and processors. We look forward to 
working with Members of the Subcommittee, USDA, dairy farmers 
and our fellow processors to achieve this goal. Thank you 
again, Mr. Chairman, for considering these issues.
    [The prepared statement of Mr. Hitchell appears at the 
conclusion of the hearing:]
    Mr. Boswell. Thank you, Mr. Hitchell. Normally, the chair 
asks the first questions in the rounds of questions, but due to 
circumstances, I am going to yield my round to Mr. Costa, then 
I will claim his as the turn comes. So at this time, I would 
recognize Mr. Costa for 5 minutes.

   OPENING STATEMENT OF HON. JIM COSTA, A REPRESENTATIVE IN 
                    CONGRESS FROM CALIFORNIA

    Mr. Costa. Thank you very much, Mr. Chairman. I appreciate 
your efforts in holding this hearing and the important work 
that this Subcommittee is doing and it is something that I 
think we share in common, growing up in the dairy industry. And 
I know a couple of the witnesses firsthand and I appreciate the 
passion that Mr. Ahelm and his family share with milk and milk 
products. Certainly, they have done a great job in California 
and I have known the family for many years and actually went to 
school with some of his family members.
    A couple different questions: I am not going to get it all 
in 5 minutes, so I will have to submit them as we go. But as it 
relates to Mr. Reidy's testimony, you spoke about the 
assessment program. You have 11 plants around the country, the 
largest producer of mozzarella cheese in the world, I believe. 
The assessment issue that has posed problems for the 2002 Farm 
Bill you made reference to in your testimony. Certainly the 
provisions created problems with regard to some of the trade 
issues in terms of compliance, but I also believe you believe 
that the assessment might harm our ability to export products. 
I would like you to explain in a little more detail why.
    Mr. Reidy. Thank you, Congressman. I believe the reason we 
articulated that in the testimony that was submitted is the 
fact that in the world trade environment that we are dealing 
with right now, to say that it is somewhat skittish is maybe an 
understatement. The opportunity exists for any country to 
retaliate with tariffs of its own.
    Mr. Costa. How successful have you been in exporting your 
products abroad?
    Mr. Reidy. We have been very successful at this point in 
exporting our products abroad. We are the largest exporter of 
lactose into Japan and it is a very important market to us. And 
so consequently, we are very fearful of any retaliation.
    Mr. Costa. Okay. It is about a quarter of the product you 
produce or more?
    Mr. Reidy. I am sorry, sir?
    Mr. Costa. Do you estimate roughly that it is a quarter or 
more of the product you produce?
    Mr. Reidy. It would depend on different products, but some 
of the products it could be a quarter or more of the products 
we produce, yes.
    Mr. Costa. The other quick question I want to give to a 
couple of the other witnesses. You commented about the problems 
with the Federal Order and the prohibition with regards to 
forward contracting and such. Do you really think this task 
force has the ability that some are recommending to try to 
start over, in essence? And if we got a recommendation from a 
blue ribbon panel, that we could try to even out the boom and 
bust cycles and deal with the challenges in California?
    Mr. Reidy. I do. Sir, I do believe there is an awful lot of 
very good ideas that are out in the marketplace being debated 
right now by producers and processors and I think if there were 
an opportunity for a commission to evaluate those ideas, I 
think they could come up with meaningful recommendations that 
would benefit both producers and processors.
    Mr. Costa. Mr. Ahelm, you have direct experience with 
regards to the California Milk Pooling Program and made 
reference to it in your testimony. I too go back. I remember 
when our dairy contract wasn't worth the paper it was written 
on prior to the 1968 Act. The McKinsey report came out recently 
that I believe you are familiar with. There was a big meeting 
last week in Modesto. I suspect you or your family were there. 
Do you think it has the beginning, combined with this effort of 
a blue ribbon task force to, for my colleagues who aren't 
familiar with the McKinsey report, it was an effort to look at 
the problems with the California plan and to try to deal with 
some of the boom and bust cycles that we face in California and 
to figure out how we might improve it and how we deal with the 
problems of quota in California. It goes obviously on to a lot 
more detail, but it is getting some interest. I am just 
reminded, Mr. Ahelm, with your passion for milk, which I share, 
that one definition of insanity is continuing to do things the 
way you always did and expect different results. Could you give 
me your take on that?
    Mr. Ahelm. I think you are absolutely right in terms of the 
McKinsey report. It was funded by the California Milk Advisory 
Board, so it is producer-funded. It is investigating several 
different options as we look into the future, the needs both 
from the processing side and manufacturing side and how we go 
about taking our products to market. I think a pressing need, 
however, is----
    Mr. Costa. Would you see that combined with this blue 
ribbon task force that is being recommended?
    Mr. Ahelm. Yes, I think the investigation, though, for the 
blue ribbon task force needs to even be broader. Certainly, 
considering some of the things that we are considering in 
California----
    Mr. Costa. Forward marketing?
    Mr. Ahelm. Yes, forward marketing, revenue insurance, 
eliminating some of the costly MILC Programs that send mixed 
signals to the marketplace, and support prices as well. But 
what we really need help with is on the conservation programs, 
because of our environmental costs that are skyrocketing 
something unbelievable and that is not only in California, that 
is clear across the United States.
    Mr. Costa. Right. Well, our good friend Congressman 
Cardoza, and my time has run out, but as he is working with our 
colleagues on the EQUIP program in the 2007 reauthorization to 
create greater flexibility in some of the other conservation 
programs and I think there is bipartisan support to work on 
that and we will certainly continue to deal with that. My time 
has expired, but this is something, Mr. Chairman and my 
colleagues, that I think this Subcommittee is going to have to 
continue to work on. The situation in California, 
notwithstanding the advantages we think that exist in the 
pooling plan that has existed since 1968, is needing change and 
revision. Maybe this blue ribbon task force, on a nationwide 
basis, would allow us to step back and have all the parties 
come together with a set of recommendations that would really 
allow American dairymen to do what they do best, and that is as 
the finest producers with the highest quality and yields of 
milk products anywhere around the world. It is difficult 
because, regionally, we are stuck in our ways to some extent 
and I just want to leave you with this last anecdotal story.
    When I was Chairman of the Senate Agriculture and Water 
Committee back in the late 1990s, Congressman Cardoza tells the 
story because he had just become Chairman of the Assembly Ag 
Committee. We sat down with a panel for 10 months, with all of 
the dairy interests, and I think some of my friends remember 
this, with the notion that we would meet once a month to talk 
about reforms and that we wouldn't want to kill the goose that 
laid the golden egg with regards to the pooling plan. I must 
tell you, after 10 months of meeting religiously once a month, 
we were no further along at the end of the tenth month than we 
were on the first meeting in terms of the parties holding firm 
to their convictions and they weren't going to change. Whether 
it was the producers or the processors or the handlers or the 
co-ops, it was the other fellow or folks that were wrong, 
wasn't them, the other folks just needed to change. If we are 
going to make a difference here, I think we are going to have 
to have a better attitude than we had in our efforts there in 
California and I want to be a part of this effort and I know, 
with your leadership, we can make a difference here if we do it 
right.
    Mr. Boswell. Well, thank you very much. We will give it a 
try and thank you for staying and being able to participate. I 
know you have another requirement. At this time I would like to 
recognize Mr. Hayes.
    Mr. Hayes. Thank you, Mr. Chairman, gentlemen. Mr. Costa, 
thank you for the encouragement there, for the timely way in 
which you all solved all these problems. I want a volunteer and 
before I ask the question, you all can talk among yourselves. 
This is a volunteer. And it sort of follows up on what my 
friend from California just said. And I appreciate the 
frustration that processors and others feel with the Federal 
Milk Marketing Order System. What I don't understand is why you 
are requesting that we establish a commission, blue ribbon or 
otherwise, to continue studying the inefficiencies in the 
system while you all are here with the expertise that you 
clearly bring. Would you volunteer to offer some 
recommendations and we could get out of the way before we form 
another commission?
    Mr. Reidy. Congressman, I might take a first pass at that. 
In terms of specific recommendations, I will just say the 
commission is one that we believe is important in trying to 
sort a number of contentious details but first and foremost, in 
terms of specific recommendations, we believe that there needs 
to be a safety net, but it needs to be a different safety net. 
The safety net right now is a composition of MILC payments and 
dairy products for payments and quite honestly, those work at 
odds with each other.
    A much better safety net is one that would potentially 
support direct payments. At times this could be used to support 
the environmental compliance costs that Mr. Ahelm referred to. 
It also could involve risk management tools, including revenue 
insurance and forward contracting. Those are very practical 
solutions that I think could be implemented. The blue ribbon 
commission we are looking at, ordinarily it is dealing with 
Federal Orders. But as we mentioned earlier, Federal Orders are 
only a part of the complex tapestry that is the dairy issue and 
it is really some of these other things that we think can be 
dealt with in the farm bill.
    Mr. Hayes. Well, again, I didn't want to lose your 
expertise while you were here. I think you had a thought, Mr. 
Hitchell?
    Mr. Hitchell. Well, I, too, believe that we need a safety 
net that gives us the opportunity of having forward contracting 
and revenue insurance. And so the greatest opportunity is 
looking at the marketplace. As we look at that marketplace, 
there is no reason why we shouldn't be expanding the use of 
dairy products. As nature's most perfect food, that is the 
direction and the signal we need to get out to the marketplace. 
We do that more directly in California because we have a 
responsive system that does react in a more timely basis to 
those signals.
    Mr. Hayes. Okay. That is very helpful. Mr. Hitchell, I was 
asking one of my folks why organic milk was so much more 
expensive than non-organic milk and one of the questions is, I 
don't want to stir up a hornet's nest here, Mr. Chairman. Why 
is the retail price of whole milk $3.32 a gallon and the 
producer is only getting $1.26? You are in the witness 
protection program. We won't let them get you.
    Mr. Hitchell. Mr. Chairman, we strive to provide good 
prices to our customers every day and to be competitive in the 
markets that we operate. However, my area of expertise relates 
to the Federal Milk Order Program and how we interact with 
USDA. I won't be able to speak to any issues relating to retail 
pricing today, but I would be happy to work with you to get the 
answers to any questions that you may have.
    Mr. Hayes. Well, thank you. Along the same line, I think 
you said earlier that you want to be responsive to the cost 
issues based on consumer demand, we don't want to price the 
product out of reach and lower the amount of consumption, but 
by the same token, I am amazed at the difference in the price 
in this organic milk. You get grandchildren, you notice those 
kind of things and the price of other mile, so there is 
selective ability to absorb what seems to be unusual prices 
versus normal prices. Any comment?
    Mr. Hitchell. Well, sir, I can tell you a little bit about 
organic milk in the fact that the regulation that USDA sets up 
makes it a time consuming process for a dairy farmer to become 
regulated to become certified organic, plus all of the feed has 
to be certified organic and the cost of that is significantly 
higher, hence the cost of organic milk is significantly higher 
than the traditional milk that we have in our stores.
    Mr. Hayes. Need to put our marketing expert, Mr. Ahelm, on 
that. People know that they are willing to pay it. The same 
thing is true for milk, right, Mr. Ahelm? Mr. Chairman, I will 
let him go here. I yield back.
    Mr. Boswell. Thank you. Since I am a little bit out of 
order, I am going to go ahead and continue out of order and 
recognize my colleague from Iowa, Mr. King. Thank you for 
joining us.

   OPENING STATEMENT OF HON. STEVE KING, A REPRESENTATIVE IN 
                       CONGRESS FROM IOWA

    Mr. King. Thank you, Mr. Chairman. I appreciate you holding 
this hearing and an opportunity to work together here as 
Iowans. So perhaps I will just turn my first inquiry to one of 
your constituents and that would be Mr. Erickson. If I could 
pose a question, in the district that Chairman Boswell 
represents, there is a newspaper there that published an 
article on forward contracting and milk not that long ago and 
although I turn to that paper for advice continually, I wonder 
if you could give me some advice in response to the implication 
in that story which would say that, by my reference, that the 
reason processors want the right to forward contract is because 
they want the right to pay below minimum price. It seemed to be 
the theme in that article. Would you care to respond to that, 
Mr. Erickson?
    Mr. Erickson. Representative King, Mr. Wells knows a little 
bit more about that, since he was involved in the pilot 
program, but I will tell you that our end result is not to--we 
need a joint relationship with the dairy farmer. Our end result 
isn't to drive them out of business. Forward contracting 
enables them to have the expectation of what their product will 
garner and they can plan accordingly. If you took a long enough 
timeframe, you would show that the highs and the lows would 
even out and their average price would be the same under both 
systems.
    Mr. King. I thank you. Mr. Wells.
    Mr. Wells. Well, from our standpoint, we think the article 
got some things wrong. Generally, it was a good article, but 
there were a few things that were not quite correct in there. 
Forward contracting is not about procuring milk below the 
minimum price. Contracting is about stabilizing the milk price. 
And some of the questions earlier about the difference between 
the finished product and the raw product price, I don't know 
that finished product prices are so high so much as they are so 
unstable; they fluctuate and raw milk prices do, too.
    So forward contracting is a huge business tool that is very 
effective in taking some of the peaks and valleys off those 
price variations over time and you work within a tighter range, 
have better control of your costs and it is a great business 
strategy. It is a proven winner and it works. The pilot program 
of 2000 to 2004 is a perfect example. It was very successful in 
Iowa. And we are asking for permanent, long-term authority to 
be able, for proprietary processors, such as ourselves, to be 
able to forward contract.
    Mr. King. Thank you, Mr. Wells. Would it be fair to draw a 
conclusion that forward contracting is an important risk 
management tool throughout all agriculture production and that 
is a benefit to the producer, as well as a processor?
    Mr. Wells. Yes, it would be. Absolutely. It is a good 
program all the way around. It finds win/win solutions versus 
well, the current system, which we don't feel all the 
stakeholders are represented and do not have an opportunity to 
participate in the current system as fully as should be to find 
good long-term solutions.
    Mr. King. And if I might ask you to speculate a little bit 
here, then. If we had had this forward contracting in place, 
let us just say for a generation so that it would have had an 
opportunity to mature, and the industry had had an opportunity 
to mature simultaneously. I talk sometimes about economic 
evolution, how things take place, because of the environment 
that you are in. If you go back and rewind, say, 25 years into 
an environment that had forward contracting, how would you 
speculate that the milk production and processing industry 
could look differently or would look differently today?
    Mr. Wells. I would think it would be a much more stable 
system. I would think that it would be more satisfaction and 
less disagreement and controversy within the industry, itself. 
I think the industry would be more representative of consumer 
needs because, again, by allowing all stakeholders to 
participate in the solution to problems we can better focus on 
consumer needs. It seems like our current system is pretty well 
supply side focused and I think we need to represent and 
understand what do our consumers consider to be valuable and 
what do they want when they buy our products? How can we value-
add our products in industry and by having the entire industry 
participating in solutions to our industry problems, we will be 
better consumer focused. I think we will be more stable, more 
consistent and I think it will be just a happier industry all 
the way around.
    Mr. King. I thank you, Mr. Wells. I thank all the 
panelists. Mr. Chairman, I yield back.
    Mr. Boswell. Thank you very much. I guess many of you have 
discussed or made comment about having some kind of a 
commission to study this versus, perhaps, having us do it on 
this panel up here on this side, and I think there can be some 
merit to that. I am going to address this to you, Warren. How 
would you construct this commission? Who would be the 
participants in this commission? And I will let the rest of you 
join in as you lead off.
    Mr. Erickson. Mr. Chairman, I believe the commission should 
be as diverse as possible with respect to having some 
processors, some producers, USDA officials and experts in the 
industry so that we can get different perspectives. I think it 
should be regionally diverse, too, because we have talked about 
the divisiveness that can come with the different regions 
pitted against each other.
    Mr. Boswell. Well, you heard what Mr. Costa had to say 
before he left about their 11 month effort in California, which 
is a big operation out there, as we all know.
    Mr. Erickson. Yes. And while that was not heartening, I 
believe that we did find some consensus today in that the USDA 
framework that is in place is quite complex, archaic and 
unresponsive, so I think in that framework, if you put this 
commission together, perhaps if it is diverse enough, we could 
come to a better conclusion.
    Mr. Boswell. Thank you. Anybody else want to comment or add 
to?
    Mr. Reidy. Mr. Chairman, I might just add that I think you 
need to have the highest level of expertise in the industry on 
this commission, people who truly do thoroughly understand the 
challenges with these Federal Milk Marketing Orders. I think, 
as Mr. Erickson talked about, you do need the regional 
representation as well as across the industry in terms of just 
the diversity of the production operations that we have here at 
the panel. I think you need to take that into mind, too. Thank 
you.
    Mr. Wells. From my perspective, Mr. Chairman, I would just 
add when the current system was put together, I don't believe 
that cooperatives owned or operated processing plants. Today, 
through evolution of time, the cooperatives do own a number of 
processing plants and we find ourselves competing with them 
more than ever before. That is again why I advocate a broader, 
more representative role for the entire industry in the 
decision making process. Cooperatives today can forward 
contract. We think that is a competitive advantage that they 
have that we proprietary processors do not have and we would 
like to level the playing field. And we are hoping that that 
commission can do that.
    Mr. Ahelm. Speaking of forward contracting, I think it 
needs to be clearly understood that it is an option, not a 
mandate, except we are denied the option currently. The blue 
ribbon committee is very important. I think it is essential 
that it not only reports back to Congress, but it reports also 
to the Secretary of Agriculture because certainly, the efforts 
on both venues are extremely important as far as the way it 
impacts dairy farmers and processors.
    Mr. Hitchell. Mr. Chairman, in light of my earlier 
comments, I would also say that it would be a good idea if we 
could find some consumer groups to participate, as well, since 
as we have said, without them we don't have an industry, so it 
would be helpful to have some consumers to be on this blue 
ribbon commission to let them know and have their input on how 
we price their milk and dairy products they consume every day.
    Mr. Boswell. Well, thank you very much. It has been a long 
morning, but it is past morning. We appreciate your taking the 
time and coming and talking to us and you pointed out, we have 
got some work to do. I think it is correct to say that back in 
the 1985 Farm Bill a commission was established and just what 
came out of that I don't know, but that doesn't mean we can't 
give that reconsideration. So I thank you for coming; I 
appreciate it very much and we will be keeping in touch with 
you and see if we can't do something that is correct, so that 
will be our bill. By the rules of the Committee, the record for 
today's hearing will remain open for 10 days to receive 
additional material and supplemental responses from witnesses. 
Any question posted by members of this panel? This hearing of 
the Subcommittee of Livestock, Dairy, and Poultry is adjourned.
    [Whereupon, at 1:20 p.m., the Subcommittee was adjourned.]
    [Material submitted for inclusion in the record follows:]
      
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