[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]


 
    HEARING TO REVIEW ECONOMIC CONDITIONS FACING THE DAIRY INDUSTRY

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

                                HEARINGS

                               BEFORE THE

                            SUBCOMMITTEE ON
                     LIVESTOCK, DAIRY, AND POULTRY

                                 OF THE

                        COMMITTEE ON AGRICULTURE
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                         JULY 14, 21, 28, 2009

                               __________

                           Serial No. 111-24


          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,            FRANK D. LUCAS, Oklahoma, Ranking 
    Vice Chairman                    Minority Member
MIKE McINTYRE, North Carolina        BOB GOODLATTE, Virginia
LEONARD L. BOSWELL, Iowa             JERRY MORAN, Kansas
JOE BACA, California                 TIMOTHY V. JOHNSON, Illinois
DENNIS A. CARDOZA, California        SAM GRAVES, Missouri
DAVID SCOTT, Georgia                 MIKE ROGERS, Alabama
JIM MARSHALL, Georgia                STEVE KING, Iowa
STEPHANIE HERSETH SANDLIN, South     RANDY NEUGEBAUER, Texas
Dakota                               K. MICHAEL CONAWAY, Texas
HENRY CUELLAR, Texas                 JEFF FORTENBERRY, Nebraska
JIM COSTA, California                JEAN SCHMIDT, Ohio
BRAD ELLSWORTH, Indiana              ADRIAN SMITH, Nebraska
TIMOTHY J. WALZ, Minnesota           ROBERT E. LATTA, Ohio
STEVE KAGEN, Wisconsin               DAVID P. ROE, Tennessee
KURT SCHRADER, Oregon                BLAINE LUETKEMEYER, Missouri
DEBORAH L. HALVORSON, Illinois       GLENN THOMPSON, Pennsylvania
KATHLEEN A. DAHLKEMPER,              BILL CASSIDY, Louisiana
Pennsylvania                         CYNTHIA M. LUMMIS, Wyoming
ERIC J.J. MASSA, New York
BOBBY BRIGHT, Alabama
BETSY MARKEY, Colorado
FRANK KRATOVIL, Jr., Maryland
MARK H. SCHAUER, Michigan
LARRY KISSELL, North Carolina
JOHN A. BOCCIERI, Ohio
SCOTT MURPHY, New York
EARL POMEROY, North Dakota
TRAVIS W. CHILDERS, Mississippi
WALT MINNICK, Idaho

                                 ______

                           Professional Staff

                    Robert L. Larew, Chief of Staff

                     Andrew W. Baker, Chief Counsel

                 April Slayton, Communications Director

                 Nicole Scott, Minority Staff Director

                                 ______

             Subcommittee on Livestock, Dairy, and Poultry

                     DAVID SCOTT, Georgia, Chairman

JIM COSTA, California                RANDY NEUGEBAUER, Texas,  Ranking 
STEVE KAGEN, Wisconsin               Minority Member
FRANK KRATOVIL, Jr., Maryland        BOB GOODLATTE, Virginia
TIM HOLDEN, Pennsylvania             MIKE ROGERS, Alabama
LEONARD L. BOSWELL, Iowa             STEVE KING, Iowa
JOE BACA, California                 K. MICHAEL CONAWAY, Texas
DENNIS A. CARDOZA, California        ADRIAN SMITH, Nebraska
BETSY MARKEY, Colorado               DAVID P. ROE, Tennessee
SCOTT MURPHY, New York
WALT MINNICK, Idaho

              Chandler Goule, Subcommittee Staff Director

                                  (ii)


                             C O N T E N T S

                              ----------                              
                                                                   Page

                        Thursday, July 14, 2009

Murphy, Hon. Scott, a Representative in Congress from New York, 
  submitted statement............................................    99
Neugebauer, Hon. Randy, a Representative in Congress from Texas, 
  opening statement..............................................     2
Peterson, Hon. Collin C., a Representative in Congress from 
  Minnesota, opening statement...................................    22
    Prepared statement...........................................     4
Scott, Hon. David, a Representative in Congress from Georgia, 
  opening statement..............................................     1
    Prepared statement...........................................     2
    Submitted letters............................................    89
Thompson, Hon. Glenn, a Representative in Congress from 
  Pennsylvania, submitted letter.................................    98

                               Witnesses

Courtney, Hon. Joe, a Representative in Congress from Connecticut     5
    Prepared statement...........................................     6
Welch, Hon. Peter, a Representative in Congress from Vermont.....     7
    Prepared statement...........................................    10
    Submitted statements.........................................   101
Miller, James ``Jim'' W., Under Secretary for Farm and Foreign 
  Agricultural Services, U.S. Department of Agriculture, 
  Washington, D.C................................................    14
    Prepared statement...........................................    16
Kruse, Paul W., President and CEO, Blue Bell Creameries, L.P.; 
  Chairman, International Dairy Foods Association, Brenham, TX...    43
    Prepared statement...........................................    45
Wakefield, Tom, Member, Board of Directors, National Milk 
  Producers Federation; Co-Owner, J.T.J. Wakefield Farms, Inc., 
  Bedford, PA....................................................    52
    Prepared statement...........................................    54
Bouma, Brad, President, Select Milk Producers, Inc., Plainview, 
  TX.............................................................    58
    Prepared statement...........................................    59
Souza, Ray, President, Board of Directors, Western United 
  Dairymen; Operator, Mel-Delin Dairy, Turlock, CA; on behalf of 
  California Daries, Inc.........................................    63
    Prepared statement...........................................    66

                           Submitted Material

Dairy Farmers of America, submitted statement....................   104
Etka, Steven, Coordinator, Midwest Dairy Coalition, submitted 
  statement......................................................   106
National Farmers Union, submitted statement......................   108

                         Tuesday, July 21, 2009

Baca, Hon. Joe, a Representative in Congress from California, 
  prepared statement.............................................   118
Kagen, Hon. Steve, a Representative in Congress from Wisconsin, 
  prepared statement.............................................   119
Neugebauer, Hon. Randy, a Representative in Congress from Texas, 
  opening statement..............................................   116
Peterson, Hon. Collin C., a Representative in Congress from 
  Minnesota, opening statement...................................   117
    Prepared statement...........................................   117
Thompson, Hon. Glenn, a Representative in Congress from 
  Pennsylvania, prepared statement...............................   119
Scott, Hon. David, a Representative in Congress from Georgia, 
  opening statement..............................................   115

                               Witnesses

Welch, Ed, President and CEO, Associated Milk Producers Inc., New 
  Ulm, MN; on behalf of Midwest Dairy Coalition..................   120
    Prepared statement...........................................   122
Plourd, Philip G., President, Blimling and Associates, Inc./Roger 
  W. Blimling, Inc., Cottage Grove, WI...........................   125
    Prepared statement...........................................   126
Williams, J. Everett, President, Georgia Milk Producers, Inc., 
  Madison, GA....................................................   131
    Prepared statement...........................................   132
    Supplementary material.......................................   171
Rozwadowski, Paul J., Chairman, Dairy Subcommittee, National 
  Family Farm Coalition; Dairy Farmer, Stanley, WI...............   134
    Prepared statement...........................................   136
Hoese, Scott, President, Carver County Farmers Union; Dairy 
  Farmer, Mayer, MN; on behalf of National Farmers Union.........   140
    Prepared statement...........................................   142
DeJong, Donald A., Owner and Manager, Northside Farms, LLC; Owner 
  and CEO, AgriVision Farm Management, LLC; Owner and Manager, 
  Natural Prairie Dairy Farms, LLC; Owner and Manager, DJ Farms, 
  Ltd., Dalhart, TX..............................................   150
    Prepared statement...........................................   151

                           Submitted Material

Submitted questions..............................................   171

                         Tuesday, July 28, 2009

Baca, Hon. Joe, a Representative in Congress from California, 
  prepared statement.............................................   177
Costa, Hon. Jim, a Representative in Congress from California, 
  submitted material.............................................   243
Neugebauer, Hon. Randy, a Representative in Congress from Texas, 
  opening statement..............................................   174
Peterson, Hon. Collin C., a Representative in Congress from 
  Minnesota, opening statement...................................   175
    Prepared statement...........................................   176
Scott, Hon. David, a Representative in Congress from Georgia, 
  opening statement..............................................   173
    Prepared statement...........................................   174

                               Witnesses

Lang, Craig, President, Iowa Farm Bureau Federation; Member, 
  Board of Directors, American Farm Bureau Federation, Brooklyn, 
  IA.............................................................   178
    Prepared statement...........................................   179
Bostwick, W. Anthony, CEO, Braum's Ice Cream and Dairy Stores, 
  Oklahoma City, OK; on behalf of American Independent Dairy 
  Alliance.......................................................   185
    Prepared statement...........................................   186
Contente, Joaquin, President, California Farmers Union, Hanford, 
  CA; on behalf of National Farmers Union........................   188
    Prepared statement...........................................   190
Guterbock, D.V.M., M.S., Walter M., Livestock Manager, Columbia 
  River Dairy and Sixmile Land and Cattle Company, Boardman, OR..   195
    Prepared statement...........................................   197
Hughes, J.D., Melissa L., General Counsel, CROPP Cooperative 
  (Coulee Region Organic Produce Pool), LaFarge, WI..............   201
    Prepared statement...........................................   203
Cook, Jr., Gordon M., Member, Board of Directors, Holstein 
  Association USA, Inc.; Dairy Producer, Hadley, MA..............   207
    Prepared statement...........................................   208
Suber, Thomas M., President, U.S. Dairy Export Council, 
  Arlington, VA..................................................   212
    Prepared statement...........................................   214


    HEARING TO REVIEW ECONOMIC CONDITIONS FACING THE DAIRY INDUSTRY

                              ----------                              


                         TUESDAY, JULY 14, 2009

                  House of Representatives,
     Subcommittee on Livestock, Dairy, and Poultry,
                                  Committee on Agriculture,
                                                   Washington, D.C.
    The Subcommittee met, pursuant to call, at 10:10 a.m., in 
Room 1300, Longworth House Office Building, Hon. David Scott 
[Chairman of the Subcommittee] presiding.
    Members present: Representatives Scott, Costa, Kagen, 
Kratovil, Holden, Boswell, Cardoza, Markey, Murphy, Minnick, 
Peterson (ex officio), Neugebauer, Goodlatte, Conaway, Smith, 
Roe, and Thompson.
    Staff present: Alejandra Gonzalez-Arias, Chandler Goule, 
Tyler Jameson, John Konya, Scott Kuschmider, James Ryder, 
Rebekah Solem, John Goldberg, and Jamie Mitchell.

  OPENING STATEMENT OF HON. DAVID SCOTT, A REPRESENTATIVE IN 
                     CONGRESS FROM GEORGIA

    The Chairman. Good morning, everybody. This hearing will 
come to order.
    The gentleman from Pennsylvania, Mr. Thompson, is not a 
Member of the Subcommittee but has joined us today. I have 
consulted with the Ranking Member, and we are pleased to 
welcome Mr. Thompson to have him join in the questioning of 
witnesses.
    Good to have you, Mr. Thompson, thank you.
    I would like to first of all state how important this 
hearing is, how timely it is, and how badly we want to help our 
dairy farmers in an extraordinary time of great need. And I 
would like to welcome everybody to the Subcommittee on 
Livestock, Dairy, and Poultry.
    I very much appreciate each of you taking time out during a 
very busy week to help us examine the economic conditions 
facing the dairy industry, for they are very, very severe, and 
we certainly want to help in every way we can.
    I welcome all our panelists to the Subcommittee, and in 
particular, our colleagues Joe Courtney and Peter Welch. Good 
to have you with us, and we look forward to hearing your 
thoughts on the issues before us today.
    In my years of service on the Agriculture Committee, I have 
been more of an observer than an active participant on some of 
the many issues under our Committee's jurisdiction, with the 
exception of perhaps poultry issues, which are near and dear to 
the hearts of all of us, and, especially, my State of Georgia. 
So needless to say, I was not quite prepared for all the 
complexities of the issues surrounding the dairy industry.
    But I have learned very quickly. I have studied the issues 
very diligently, and I have found out that there was no issue 
in Congress that Members felt as strongly about, or were as 
willing to bend my ear about, than the dairy policy.
    So I wanted to hold this hearing to serve as a forum for 
all of our Members to air their concerns, for us to really 
examine the depth and the breadth of policy issues surrounding 
the dairy industry. World wholesale dairy prices have reached 
their lowest level in 5 years. Make no mistake, I do not intend 
to say that we can solve all of the problems facing the dairy 
industry in the course of this one hearing. There are going to 
be other hearings. Indeed, that would be a Herculean feat of 
strength.
    Instead, it is my intention that we begin to closely 
examine both the short-term problems, the short-term patches, 
and the long-term adjustments that are needed to bring the 
whole of the dairy industry, from the farm to the table, back 
to profitability. That is our aim.
    And as I alluded to earlier, there is no shortage of 
opinions on how to do this, but I hope to examine most if not 
all of them today. The dairy industry deserves this and the 
American people deserves this.
    [The prepared statement of Mr. Scott follows:]

 Prepared Statement of Hon. David Scott, a Representative in Congress 
                              from Georgia
    I would like to welcome everyone once again to the Subcommittee on 
Livestock, Dairy, and Poultry. I very much appreciate you all taking 
time out during a very busy week to help us examine the economic 
conditions of the dairy industry. I welcome all of our panelists to the 
Subcommittee and in particular our colleagues Joe Courtney and Peter 
Welch, and I look forward to hearing their thoughts on the issues 
before us today.
    In my years of service on the Agriculture Committee, I have been 
more of an observer than an active participant on some of issues under 
this Subcommittee's jurisdiction; with the exception perhaps of poultry 
issues, which are near and dear to the heart of Georgians. So needless 
to say I was not quite prepared for the complexities of issues 
surrounding the dairy industry. I found out very quickly that there was 
no issue in Congress that Members felt as strongly about, or were as 
willing to bend my ear about, as dairy policy. So I wanted to hold this 
hearing to serve as a forum for Members to air their concerns and to 
examine the width and breadth of policy issues surrounding the dairy 
industry.
    Make no mistake; I do not intend to solve all of the problems 
facing the dairy industry in the course of this one hearing. Indeed 
that would require Herculean feats of strength. Instead it is my 
intention that we begin to more closely examine both the short term 
problems, short term patches and long-term adjustments that are needed 
to bring the whole of the dairy industry, from farm to table, back to 
profitability. As I alluded to earlier there is no shortage of opinions 
on how to do this, and I hope to examine most if not all of them today.

    The Chairman. I yield to my Ranking Member, Mr. Neugebauer.

OPENING STATEMENT OF HON. RANDY NEUGEBAUER, A REPRESENTATIVE IN 
                      CONGRESS FROM TEXAS

    Mr. Neugebauer. Well, thank you, Chairman Scott, for 
calling this timely and important hearing to review the current 
economic conditions in the dairy industry.
    My district in west Texas is one of the fastest growing 
dairy regions in the country. Large and mid-sized dairies have 
found west Texas to be very suitable for milk production. Many 
of these producers have contacted me and explained the current 
economic conditions that they face.
    Today, we will be hearing from one of the producers in my 
district. He is Mr. Brad Bouma, who operates a dairy in 
Plainview, Texas. He also serves as President of Select Milk 
Producers, Inc., a dairy cooperative serving Texas, New Mexico, 
Oklahoma, Colorado and Kansas. Mr. Bouma is the owner and 
operator, with his family, of a five generation dairy farm.
    I asked Mr. Bouma to come today and talk about how 
producers in my district are doing with the current economic 
conditions. I am sure his story will be similar to many of the 
producers in the country who are trying to ride out the current 
economic conditions that include low farm prices for milk, high 
feed costs and fuel costs.
    I wonder if the dairy farmers are excited about our new 
cap-and-tax bill passed last month to bring higher fuel and 
energy costs their way.
    I look forward to hearing from USDA Under Secretary Jim 
Miller. Specifically, I would like to ask about the Dairy 
Export Incentive Program, which has been reactivated, and the 
Dairy Product Price Support Program, which also likewise falls 
under his jurisdiction.
    I understand that other countries are also taking actions 
to keep their respective dairy industries competitive in 
international markets, and I hope he will give us some 
perspective on what actions they are taking. Likewise, I would 
like to hear the Administration's perspective on export 
subsidies, in general, and how we will deal with this issue 
moving forward.
    In a recent event in New Hampshire, I believe that 
Secretary Vilsack stated that in the next 10 days he will 
present a plan to allow cashed-strapped dairy farmers to take 
out loans with low interest rates and flexible payback plans. 
He also said he is putting together a commission to review the 
Federal milk pricing system. I am interested in hearing more 
details from Under Secretary Miller regarding that statement.
    The third panel of this hearing should be equally 
insightful, as we will hear from various industry 
representatives. I am particularly interested in their views 
and hope they will give a perspective on how current policies 
are working. Hopefully they will help us determine how we got 
here and what actions should legitimately be considered, moving 
forward, to help the industry.
    Thank you again, Mr. Chairman, for calling this hearing. I 
am certain that my colleagues will have many other questions, 
and I will look forward to those discussions today.
    The Chairman. Thank you very much, Ranking Member. I 
appreciate that.
     At this point, the chair would like to enter three letters 
for the record concerning the domestic dairy industry that the 
Committee on Agriculture has sent to Secretary Vilsack, and I 
would like to insert them for the record in today's hearing.
    The first letter is from the Family Farm Coalition and 
other organizations on dairy concerns. The second letter is 
from the Congress to USDA, and the third letter is to the 
Honorable Tom Vilsack, Secretary of Agriculture, from the 
Committee on Agriculture.
    [The documents referred to are located on p. 89.]
    The chair would also like to request of our Members that 
they submit their opening statements for the record so the 
witnesses may begin their testimony, and we want to ensure that 
there is ample time for questions at that time.
    [The prepared statement of Mr. Peterson follows:]

  Prepared Statement of Hon. Collin C. Peterson, a Representative in 
                        Congress from Minnesota

    I want to thank Chairman Scott and Subcommittee Ranking Member 
Randy Neugebauer for their work in calling today's timely hearing and 
for their leadership on this Subcommittee. This is one of several 
hearings this Committee will call on the dairy industry. Today we will 
examine the current economic conditions that have placed severe 
financial pressures on many producers, as well as recent responses and 
what we might see in the future.
    Dairy farmers across the country are struggling to survive because 
of low prices and too much product on the market. The prices they are 
receiving for milk are not keeping up with ever-increasing production 
costs. The all-milk price peaked just above $22 per hundredweight in 
the fall and early winter of 2007, and then began a period of decline 
before bottoming out around $11 in the very early months of 2009. 
However, during this time, feed costs rose rapidly and kept climbing. 
While feed costs have started to fall, they have not done so fast 
enough to offset the drop in the price of milk.
    Weak demand, particularly in the export market, and an expansion of 
supply due to high prices in 2008, are the prime causes of the glut of 
milk on the market. The result is the loss of some small to medium 
sized farms, leaving many to wonder if only the largest farms will have 
the ability to get through the tough times.
    This fall, the combination of slowing feed prices and an increase 
in the milk price is expected to get dairy farmers to a break-even milk 
price. USDA's Farm and Foreign Agricultural Services Under Secretary 
Jim Miller is here to get into the specifics of the market situation as 
well as the Department's responses to the situation, and I welcome him 
before this Committee today.
    In that vein, I want to thank Secretary Vilsack and the 
Administration for the steps they have taken to support U.S. dairy 
farmers. In May, the Secretary announced his decision to use the Dairy 
Export Incentive Program (DEIP) to assist U.S. dairy farmers who are up 
against heavily subsidized foreign producers.
    The $110 million worth of DEIP purchases will help manage the 
surplus and continue to develop markets for U.S. dairy products abroad.
    Likewise, in March, the USDA announced plans to purchase about 200 
million pounds of nonfat dry milk for domestic feeding programs. This 
action was an obvious win-win situation for producers and consumers 
alike, given the record number of Americans who have qualified for 
nutrition program benefits because of the challenging economic times of 
the last year.
    I strongly encouraged USDA to take both of these actions, and I 
want to thank them for their responsiveness. I made clear during 
regular conversations with Secretary Vilsack that these actions to help 
struggling dairy farmers would have strong bipartisan support here on 
the Hill, and I'm glad he took our suggestions to heart.
    So it should be no surprise to the Secretary that we have 
additional thoughts for action. Yesterday, our Committee sent USDA a 
letter to improve the Dairy Product Price Support Program to 
temporarily raise Commodity Credit Corporation purchase prices and to 
harmonize standards with those used in commercial sales on the Chicago 
Mercantile Exchange. These steps will help bolster and stabilize the 
price of milk.
    I look forward to hearing from our colleagues, Representatives Joe 
Courtney of Connecticut and Peter Welch of Vermont, about steps they 
have tried to take to help their dairy farmers weather the storm.
    And I also look forward to the testimony from groups representing 
the supply chain.
    Thank you again, Chairman Scott and Ranking Member Neugebauer for 
your leadership. I yield back my time.

    The Chairman. So without delay, we will get started with 
our first panel. We would like to welcome our first panel of 
witnesses to the table.
    First we have the Honorable Joe Courtney. He is a Member of 
Congress from the Second District of Connecticut. Good having 
you here, Joe.
    And we have the Honorable Peter Welch, who is a Member of 
Congress from Vermont at large.
    Mr. Courtney, we will begin with you.

    STATEMENT OF THE HON. JOE COURTNEY, A REPRESENTATIVE IN 
                   CONGRESS FROM CONNECTICUT

    Mr. Courtney. Thank you, Mr. Scott, and thank you, Mr. 
Neugebauer, for holding this hearing. Obviously, it is another 
example of your commitment and leadership in terms of dealing 
with the challenges that face dairy in the U.S., and that 
commitment actually extended back last year. When the farm bill 
was put together this Committee led the way, with Mr. 
Peterson's assistance, to extend the MILC subsidy program, 
which obviously was a high priority for dairy farmers all 
across the country, and, for the first time, included input 
costs in terms of calculating the formula which, again, coming 
from a high-cost part of the country in the Northeast, it was 
an important modification to the program. Congresswoman Rosa 
DeLauro, obviously, was working hard from the appropriations 
side to make sure that that formula was better in tune with the 
challenges that, again, face different regions in the country.
    I would actually note that when the farm bill was passed, 
we were at a point in the U.S. economy where farms, where dairy 
was bringing in about $18 per hundredweight. Obviously, the 
world has changed dramatically since enactment of the farm 
bill. The prices have collapsed, as was indicated in your 
opening statements.
    Exports have collapsed. Again, at the time the farm bill 
was passed, ten percent of America's dairy products were being 
exported abroad. That has fallen by half. Only five percent of 
U.S. dairy is now being exported. And the combination of the 
world economy falling, the national economy being in recession, 
has been a perfect storm for dairy farmers all across the 
country.
    Peter and I come from the Northeast, but we have had many 
conversations with Members from California to Maine who have 
dairy in their district, this is a national problem, and it is 
a national crisis.
    As the Chairman indicated, there are definitely lots of 
ideas out there and lots of solutions. What I would just say is 
that clearly some of these are long-term structural changes 
about whether we need to have some form of a price support 
system for dairy. That obviously is an interesting and 
important issue that we need to debate as a country.
    But the fact of the matter is, we are at a point today, 
July 14th, where dairy farmers are out there borrowing money to 
pay operating costs for their farms. And that is a death spiral 
for a lot of farms, particularly small farms. We have lost ten 
percent of our farms in the State of Connecticut, again, not a 
state usually associated with dairy, but the fact is eastern 
Connecticut is a part of our state which retains its rural and 
dairy heritage.
    But it is at grave risk today because, as I said, these 
folks are in a death spiral. And offering more loans, low-
interest loans, really is not a solution for these folks who 
are facing this type of death spiral.
    Again, they are selling milk today at $12 a hundredweight 
compared to $18 when the farm bill was passed. And the MILC 
subsidy program is just incapable of dealing with that large of 
a spread in terms of their costs and the price that they are 
taking in.
    Again, we have been trying, Peter and I, over the last few 
months, through the stimulus bill, the 2009 Agriculture 
appropriations bill, and through the 2010 Agriculture 
appropriations bill to see if there is an avenue to get 
temporary relief, whether it is increasing the amount of 
support on a temporary basis in the MILC Subsidy Program, 
whether the Department of Agriculture would consider raising 
some of the basic support prices.
    But the fact is that we need to have a short-term answer to 
what people are facing today as they get up. Peter can describe 
the grave problem that exists in the State of Vermont where the 
Department of Agriculture actually has a suicide hotline for 
dairy farmers who are facing, again, these almost unbearable 
stresses and challenges.
    I would conclude by saying that in this morning's news, 
there are press reports that Goldman Sachs is reporting close 
to $4 billion quarterly profit. People are very excited and 
happy about that, and certainly we like to see success.
    But I think it is important for this Congress to recognize 
that that would not have happened if there had not been massive 
government intervention from the last quarter of 2008 through 
the first quarter. They received TARP funds, they received 
derivative payments from AIG--who also received TARP funds--and 
they received massive help from the FDIC.
    It is a hard argument, and it is a hard situation for us to 
go back to districts, where dairy farmers have been rebuffed at 
every attempt to try and get that same type of short-term 
relief, and for them to see this sort of entity that received 
massive government help now taking a victory lap. The dairy 
industry of this country is really shut out in terms of being 
able to get that same type of response and action from 
Washington, D.C.
    I hope, again, with your leadership and this Committee's 
long record of support and commitment to dairy farmers that we 
are going to see that type of action and that type of help for 
a critical part of the American economy.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Courtney follows:]

 Prepared Statement of Hon. Joe Courtney, a Representative in Congress 
                            from Connecticut

    Chairman Scott, Ranking Member Neugebauer, I want to thank you for 
holding these hearings today on the crisis that is occurring in our 
dairy industry. This is a crisis that affects all of us, not just our 
dairy farmers. While they feel the brunt of the sharp decline in dairy 
prices, our constituents from all walks of life are not immune to its 
effects.
    As many of you know, I introduced a resolution last month in 
support of the goals of National Dairy Month. The point of this 
resolution was not only to support our dairy farmers and the dairy 
industry during national dairy month, but to raise awareness about the 
state of our nation's dairy industry.
    As the Committee is aware, dairy farmers are in crisis mode. A 
perfect storm has hit the industry. Exports are down, feed and fuel 
costs are skyrocketing and prices are plummeting. While we accomplished 
a great deal in the passage of the 2008 Farm Bill, and much credit is 
due to Chairman Scott, Chairman Peterson and the rest of the 
Agriculture Committee for their hard work, we have seen prices for 
dairy drop off significantly since that time. In May 2008, when the 
farm bill became law, the all-milk price in the Boston zone was $18.18 
per hundredweight. One year later, in May 2009, the price was $12.18. I 
don't need to tell the Committee what they already know--dairy farmers 
can't survive with prices that low.
    Like farmers in all industries, dairy farmers are also coping with 
tighter credit markets, infrastructure that is crumbling and becoming 
more expensive to repair or replace, and an economy that is 
unforgiving. The economic downturn has hit dairy in many ways. A sharp 
decline in the disposable income of families across the country has led 
to less family outings for ice cream and less pizza deliveries. While 
this may seem trivial to you or I, it is no laughing matter for our 
farmers who provide the milk that makes ice cream or the cheese used by 
the local pizza place.
    In my State of Connecticut, dairy farmers are a dying breed. Since 
2007 we have lost well over 10% of our dairy farms. The loss of these 
farms not only hurts the families that for generations have owned and 
operated these farms, it hurts everyone. It hurts the communities where 
these farms operated. It hurts the truckers who deliver the milk to the 
processors and then on to the market. It hurts the companies that 
bottle this milk and it hurts average citizens who have come to rely on 
locally produced milk.
    In Connecticut we have a cooperative known as the ``Farmer's Cow'', 
a group of local dairy farms that have banded together to market their 
milk and other products. People in my district know these farmers 
personally. They go to church with them, their children go to school 
and play little league together and they have come to rely on the milk 
they produce. I've met with these farmers on numerous occasions, 
visited their farms and listened to their struggles. I want them to 
survive, but unless we provide additional support to these farmers
    As many of you may know, Connecticut is a state where open space 
comes at a premium. However, my district is home to a region known as 
the Quinebaug-Shetucket Heritage Corridor. This area is better known as 
the Last Green Valley, the last undeveloped region of the East Coast 
between Boston and Washington D.C. Why is that the case--dairy farms. 
Dairy farms make up 70% of Connecticut's open space. They ensure that 
the rural character of New England is something that is not just read 
about in history books, but is something that is enjoyed for 
generations to come.
    There is some good news. Secretary Vilsack has used his authority 
to make bulk purchases of dairy products for use in Federal nutrition 
programs. He has also recently used the Dairy Export Incentive Program 
which provides incentive payments to U.S. dairy exporters to counter 
foreign dairy subsidies and to develop markets for U.S. dairy products 
abroad. These actions are important and help to reduce the surplus that 
is helping to drive prices down, but direct aid is necessary.
    I urge the Committee to consider all options with regards to 
providing support for dairy farmers. This means looking at direct 
support through increases in Milk Income Loss Contract (MILC) payments, 
supply management, adjustments to the Federal milk marketing order, 
export assistance and reconsideration of our trade policies with 
regards to casein and milk protein concentrates. We need not only the 
short term solutions that will provide immediate relief, but long term 
solutions that will ensure the viability of this industry for years to 
come. As I have stated, many dairy farmers have not been able to 
survive this crisis, and each day that passes without action by 
Congress will lead to more farms closing their barn doors. Before an 
entire industry and way of life disappears, we must act.
    I want to again thank the Chairman and distinguished Members of 
this Committee for holding this hearing.

    The Chairman. Mr. Welch.

STATEMENT OF THE HON. PETER WELCH, A REPRESENTATIVE IN CONGRESS 
                          FROM VERMONT

    Mr. Welch. Thank you very much, Chairman Scott and Ranking 
Member Neugebauer, for inviting Joe and I to testify before 
your Committee. I want to thank the Committee Members. This 
hearing indicates that you recognize the great peril that is 
facing the dairy industry.
    In Vermont our dairy farmers are the best among us. And 
throughout Vermont's history, dairy has played a vital role in 
shaping our state's economy, its infrastructure, its culture 
and its landscape. And for just as long, dairy farmers in 
Vermont have labored in an incredibly challenging industry with 
extraordinary economic risk and uncertain reward.
    We know the volatility in milk prices has long plagued our 
farmers, but today the crisis is like it has never been before. 
The prices have fallen to record lows, even as production 
costs, as you know, have risen to record highs and is pushing 
scores of farms out of business.
    In the past 5 years alone, Vermont has lost 250 dairy 
farms; 32 of those farms have been shuttered since the start of 
this year alone. The depth of the crisis in Vermont cannot be 
understated, and I share that with Representatives in dairy 
districts across the country.
    Our state's dairy industry is literally on the brink of 
collapse. With dairy representing 70 percent of Vermont's 
agricultural economy, we could very well see a wholesale 
failure of our entire ag infrastructure, forcing out of 
business feed dealers, equipment suppliers, processing plants, 
farm creditors and many more.
    The human cost of this economic tragedy can be seen in the 
faces of folks like Bob and Beth Kennett. They purchased 
Liberty Hill Farm in Rochester, Vermont, a little ways from 
where I live in Hartland. They bought it 30 years ago, and they 
have watched as neighbor after neighbor has shuttered their 
farm and sold off their herds. Fifty farms populated the upper 
White River Valley community by the Kennetts in 1960; eleven 
remained in 1979, and today the Kennetts are the only family 
still left in business.
    Like many Vermont families, the Kennetts had hoped to pass 
their farm on to their kids, Tom and David, who were raised at 
Liberty Hill. Both earned college degrees in agriculture before 
moving back to Rochester to raise their own families on the 
farm. Together the Kennetts expanded their operation from 50 to 
120 cows and pursued innovative opportunities. They are very, 
very smart, like opening an agri-tourism guest lodge. But 
despite their efforts, their hard work, their know-how, the 
family now finds itself saddled with loans and losing money 
with, literally, every passing day. They just don't know how 
much longer they are going to be able to hang on.
    Unfortunately, Vermont is awash, Mr. Chairman, with stories 
like the Kennetts. And as farmers cope with mounting losses, 
the psychological impact is beginning to show. And as Joe just 
said, we have a hotline, literally, in Vermont to help farmers 
who are just dealing with this extraordinary pressure of seeing 
their life of work go down the drain. And beyond the tremendous 
suffering borne by farmers themselves, the impact of closing a 
farm on its surrounding community and local economy is very 
significant. Vermont businesses, with a stake in dairy, 
reported $426 million in sales in 2001, employed 7,800 workers. 
And according to the Vermont Department of Agriculture, 96 
percent of supplies used on dairy farms are purchased locally. 
It is the way we are going to get our economy going again.
    Saving Vermont and New England's dairy industry will 
require immediate action and long-term reforms. The most 
immediate assistance we can provide dairy farmers to survive 
the current crisis is a Milk Income Loss Contract increase. And 
this program, in this Committee of course, was instrumental, 
very instrumental in getting it passed. It helps provide a 
cushion when the price of milk goes way down.
    And with farmers now spending about $19 in Vermont to 
produce a hundredweight, getting paid less than $12 for every 
hundredweight, MILC payments of between $2 and $3 are simply 
not enough to keep them afloat.
    I have been working with many of my colleagues, including 
Mr. Courtney, about seeking an increase in MILC payments to get 
us through this temporary crisis. The Northeast Association of 
State Departments of Agriculture wrote to Congress in April 
asking that we raise the MILC payment from 45 percent to 79 
percent and revisit the current cap of 2.9 billion pounds of 
annual production.
    I support this proposal as a short-term solution to help 
put money back in the pockets of farmers until prices increase.
    But as we treat the short-term symptoms of price 
volatility, we must develop a long-term solution to the 
problem, one that works in west Texas as well as in the 
northeast kingdom of Vermont, one that works for a 5,000 cow 
farm as well as a 100 cow farm. We have to find what is common 
in the interest of these farmers in its price stability.
    Last year producers were paid an average of $18.09; this 
year the price is down to $11.06. These constant price swings 
make dairy farming a challenging and sometimes impossible 
enterprise. And most producers I have spoken with have candidly 
told me that they would rather make less during the boom years 
in exchange for price stability.
    And the question many of us asked was posed by Mr. 
Courtney. If our ag folks, working in dairy and in other 
agriculture sectors, producing local food--which this country 
needs--producing food that we can export--which our economy 
needs--why is it we can't have a policy that helps them 
succeed? Why is it that we can't have a policy where we provide 
short-term aid when, through no fault of their own, these are 
the hardest working people among us, when through no fault of 
their own, they get savaged by the collapse in the price.
    And if we can do it for Wall Street--and we should, when 
that is necessary--to keep the economy going and to protect the 
middle class, we can certainly find a way to do it for our 
farmers.
    Once again, I thank this Committee for holding this 
hearing. I really do. This is the most important hearing that 
is occurring this day in Congress.
    And, Mr. Courtney and I want to work with you and Mr. 
Peterson to see what it is we can do to help our farmers, our 
dairy farmers get through the short-term crisis, and then have 
a policy for the long term that is going to make it possible 
for our dairy farmers large and small to be successful.
    [The prepared statement of Mr. Welch follows:]

 Prepared Statement of Hon. Peter Welch, a Representative in Congress 
                              from Vermont



 Well, let me thank the both of you for your expert testimony. You have 
 done an extraordinarily good job of accurately describing the urgency 
 and, unfortunately, the desperation that many of our farmers and milk 
    producers find themselves in.And I can assure you that I have been 
moved by your testimony, and we are going to do something to help. We 
have to find a way in which we can respond quickly, as well as put 
things in motion that can help over the long term.
    I was particularly interested in your Milk Income Loss Contract 
idea, Mr. Welch. I think that is something we certainly can look at, 
but we do want to get to price stability.
    So, Mr. Courtney and Mr. Welch, we thank you very much. You have 
been very helpful to the Committee. Thank you.
    Now we are going to move to our next panel, and we will welcome 
James Miller, who is the Under Secretary of Agriculture, Farm and 
Foreign Agriculture Services for the United States Department of 
Agriculture.
    Mr. Miller, we will begin when you are ready.

              STATEMENT OF JAMES ``JIM'' W. MILLER, UNDER
 SECRETARY FOR FARM AND FOREIGN AGRICULTURAL SERVICES, U.S. DEPARTMENT 
                            OF AGRICULTURE,
                            WASHINGTON, D.C.

    Mr. Miller. Thank you very much, Chairman Scott, Ranking Member 
Neugebauer, Members of the Subcommittee. It is a pleasure and a great 
opportunity to be with you today to discuss the dairy situation, and 
the many USDA programs we are utilizing to respond to the sharp 
downturn in the milk and dairy product markets.
    I am going to summarize the written statement that we submitted to 
the Subcommittee. I will note that we have revised some of the data 
points in that, based on the most recent world agriculture supply-and-
demand estimates that were issued just last Friday, but those estimates 
were made after we submitted the testimony. And as I said, I will try 
to keep my testimony brief so we have the maximum amount of time for 
discussion of these serious issues.
    As you are all very much aware, the dairy industry has been one of 
the hardest hit sectors in agriculture this past year. Producers have 
been caught between very high input costs and, certainly, very 
depressed market prices.
    So to begin, I would like to provide a brief economic backdrop to 
the dramatic downturn that we are seeing in the dairy sector.
    The monthly all-milk price peaked in the third quarter of calendar 
year 2007 at a record $21.70 per hundredweight. Through 2008, milk 
prices remained relatively strong, averaging $18.41 per hundredweight, 
which is the second highest annual average price on record. However, as 
you all are well aware, this spring many dairy producers were receiving 
less than $12 per hundredweight.
    Meanwhile, over the first two quarters of 2009, the milk-to-feed 
price ratio, which is a measure of the profitability of producing milk, 
was the lowest in over 25 years. USDA's most recent world agriculture 
supply-and-demand estimates, the WASDE, project that the 2009 all-milk 
price will decline by 34 percent compared to 2008, to an average of 
about $12 per hundredweight, the lowest annual price increase for milk 
since 1979.
    Further, the Economic Research Service data indicates that dairy 
farmers are among the most highly leveraged. Across all agricultural 
sectors, dairy ranks third in the average debt-to-asset ratio behind 
poultry and hogs.
    In response to record high milk prices in 2007 and 2008, our dairy 
sector expanded its herd size by over 200,000 cows from the end of 2006 
through the second quarter in 2008.
    However, by the end of this year, we expect a reduction in total 
dairy herd size of about 138,000 head. This reduction in herd size, 
when coupled with the actions we are taking under the 2008 Farm Bill 
programs for dairy, will help balance supply and demand.
    The July estimate for the 2010 production year project an average 
all-milk price of about $15.35 per hundredweight for next year, so we 
are projecting that we will gradually begin to work our way out of this 
very serious price program.
    In terms of exports, an issue that was raised by your colleagues 
just a few moments ago, dairy exports, as they noted, have declined 
very sharply in recent months after reaching a record $4 billion in 
Fiscal Year 2008. For 2009, the value of U.S. dairy product exports are 
forecast to drop by over 40 percent to about $2.3 billion.
    Now, there are many factors that affect our dairy exports and 
contribute to the current low export demand, and these include, 
certainly, the global economic recession. But they also include the 
reactivation of the European Union's export subsidies that began last 
January, and also the increased value of the dollar in overseas 
markets.
    Let me now turn to the safety net programs that we have in place to 
help our dairy producers. In addition to our FSA loan programs, the 
Livestock Gross Margin Insurance program for Dairy and the Federal Milk 
Marketing Order, which is a marketing program administered by the 
Agricultural Marketing Service, USDA administers three key safety net 
programs that are providing assistance to our dairy producers. I would 
like to spend a couple of minutes discussing these programs in greater 
depth.
    First, the Dairy Product Price Support Program: This program 
supports the prices of nonfat dry milk, cheddar cheese, and butter as 
specified in the 2008 Farm Bill. From October 1, 2008 to date, USDA has 
purchased 272 million pounds of nonfat dry milk and 4.6 million pounds 
of butter under this program.
    Since the first day of this calendar year, we have purchased 170 
million of that 272 million pounds of nonfat dry milk. We expect 
through the rest of this fiscal year to purchase an additional 40 to 50 
million pounds of nonfat dry milk.
    On March 26, Secretary Vilsack announced that approximately 200 
million pounds of nonfat dry milk would be further processed or 
bartered for dairy products to be used in our domestic and 
international feeding programs.
    This is just one example of USDA fulfilling its dual mission of 
supporting our producers, while at the same time working domestically 
and globally to help alleviate hunger.
    The 2000 Farm Bill also modified and reauthorized the Milk Income 
Loss Contract Program, which provides countercyclical payments to 
producers in times of low dairy price and high feed costs. The MILC 
payments began in April to compensate producers for the low prices and 
high feed costs that occurred in February. MILC payments have continued 
each month since that point, and we expect to continue making MILC 
payments through the balance of this fiscal year.
    As of July 10th of this year, over $511 million has been issued to 
dairy producers through the MILC Program. We expect total outlays 
through Fiscal Year 2009 will be about $900 million under this program 
alone.
    A question was raised concerning the Dairy Export Incentive 
Program. On May 22nd of this year, USDA announced a reactivation of the 
Dairy Export Incentive Program, known as DEIP, to help regain U.S. 
market share and challenge the subsidized competition from the European 
Union in many of our key markets overseas.
    For the 2008-2009 WTO year that ended on June 30, USDA awarded 
export incentives for over 20,000 metric tons of nonfat dry milk, 
nearly 1,900 metric tons of butter fat and nearly 152 metric tons of 
cheese, at a cost to the Treasury of just over $4 million.
    We have announced our intention to continue this program. And just 
last evening, I approved a new DEIP sale for about 500 metric tons of 
nonfat dry milk. These exports will be consumed overseas, while the 
purchases under our Price Support Program may, in fact, continue in 
storage at government expense.
    I recognize that the decisions that we make here in Washington 
affect the livelihood of America's farmers and ranchers, and I am 
committed to working with Members of this Subcommittee and your 
colleagues to help ensure that we meet the needs of U.S. dairy 
producers.
    I really appreciate the opportunity to testify before the 
Subcommittee today, and I am willing to respond to any questions that 
the Members may have.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Miller follows:]

Prepared Statement of James ``Jim'' W. Miller, Under Secretary for Farm 
  and Foreign Agricultural Services, U.S. Department of Agriculture, 
                            Washington, D.C.

    Chairman Scott, Ranking Member Neugebauer, and distinguished 
members of the Subcommittee, I appreciate the opportunity to discuss 
the dairy market and programs delivered by my mission area in the U.S. 
Department of Agriculture (USDA). As Under Secretary for Farm and 
Foreign Agricultural Services (FFAS), I oversee three agencies: the 
Farm Service Agency (FSA), the Foreign Agricultural Service (FAS), and 
the Risk Management Agency (RMA). I would like to take this opportunity 
to provide you an update on the dairy market situation, our forecasts 
for the dairy market through the end of the calendar year, and my 
mission area's response to the sharp downturn in milk and dairy 
products markets. I will also provide information on the activities of 
our sister agencies, the Food and Nutrition Service and the 
Agricultural Marketing Service.

The Dairy Market Situation
    The dairy industry has been one of the hardest hit sectors in 
agriculture in the past year, with producers caught between high feed 
and other costs and depressed output prices. We have heard many 
personal stories from dairy producers who are in desperate financial 
straits. The Secretary's office alone has received hundreds of letters 
and calls from dairy producers who are in need of help. The Secretary 
has personally discussed with numerous dairy farmers the poor dairy 
situation and listened as they related the fears they have about the 
loss of their way of life. He has traveled to many states to hear 
directly from dairy farmers, implemented a series of policies to assist 
these producers, and made efforts to communicate what help is available 
from USDA.

Prices, Input Costs, and Income
    I'd like to provide a bit of an economic backdrop to the dramatic 
downturn in the dairy sector. The monthly all-milk price peaked in the 
July-September period of 2007 at a record $21.70 per hundredweight 
(cwt) and averaged a record high of $19.21 for all of 2007. In 2008, 
the farm-level milk prices remained strong with the all-milk price 
averaging $18.41 per cwt, the second highest on record. However, 
average feed costs increased about 35 percent in 2008, and energy costs 
increased by 30 percent.
    This spring, producers were receiving less than $12 per cwt. 
Meanwhile, the milk/feed price ratio, a measure of the profitability of 
producing milk, was the lowest in over 25 years in the first and second 
quarters of 2009. Feed costs which traditionally have comprised about 
\1/2\ of variable operating costs, are expected to decline about 15 
percent in calendar 2009. At the same time, USDA projects that the all-
milk price will decline by 34 percent in calendar 2009, to an average 
of $12.15 per cwt--the lowest average annual price received by farmers 
for milk since 1979.
    Cash receipts from milk marketings jumped to a record $35.5 billion 
in 2007, dropping slightly to $34.8 billion in 2008. While cash 
receipts remained relatively steady in 2008, USDA's Economic Research 
Service (ERS) reported this past December that high feed costs reduced 
net cash income for dairy producers by an estimated 40 percent. For 
2009, cash receipts are expected to fall by over \1/3\ to $23 billion. 
With feed costs now accounting for 70 to 80 percent of variable 
operating costs in recent months, dairy producers are facing financial 
hardship.
    Further, ERS data indicate that dairy farms are among the most 
highly leveraged in U.S. agriculture: about 70 percent of dairy farms 
use debt, compared to about 30 percent of beef and 50 percent of cash 
grain farms. Some of the largest dairy farms are the most heavily 
indebted. Across all sectors in agriculture, dairy ranks third in the 
average debt to asset ratio, behind poultry and hogs. The financial 
crisis has made the credit needs of dairy producers all the more 
pressing.

Herd Size
    In response to record high milk prices and above average returns in 
2007 and 2008, the U.S. dairy sector expanded rapidly through the 
second quarter of 2008 to accommodate growing domestic and foreign 
demand for dairy products. Cow numbers increased from 9.13 million at 
the end of 2006 to a peak of 9.34 million in July 2008. Cow numbers 
remained steady during the second half of 2008 despite the 
deteriorating market outlook, as above average returns in previous 
months led farmers to bring additional heifers into the breeding herd.
    Producers are responding to the current depressed market situation 
by reducing herd numbers. Cow numbers dropped below a year ago in March 
2009 and are expected to average 145,000 lower in 2009 than in 2008. 
Much of the recent reduction in cow numbers has come in the far western 
states, where producers tend to have lower overall costs but higher 
feed costs per cwt of milk produced because they are farthest from 
major grain producing areas. ERS publishes milk cost of production 
estimates by state. As an example, for May 2009, California costs for 
feed were $12.19 per cwt of milk produced. In contrast, the California 
all-milk price reported by the National Agricultural Statistics Service 
(NASS) for May was $10.53 per cwt. In a relative sense, New York and 
Wisconsin fared somewhat better. In New York, feed costs were $10.67 
per cwt, while the all-milk price was $11.90. In Wisconsin, feed costs 
in May were $8.38 per cwt, while the all-milk price there was $11.60.

Demand
    Dairy product exports have declined sharply in recent months after 
reaching a record $4 billion in FY 2008. In FY 2009, the value of U.S. 
dairy product exports is forecast to drop to $2.3 billion. Cheese 
exports in April 2009 were down nearly \1/2\ from their April 2008 
peak. Butter exports have fallen more than 80 percent from their August 
2008 peak, and nonfat dry milk/skim milk powder exports are off more 
than 70 percent from their May-June 2008 peak.
    There are many factors contributing to lower demand and the decline 
in farm-level milk prices. Drought in New Zealand and Australia 
contributed to record high international prices for dairy products in 
2007 and 2008, boosting U.S. dairy product exports. More normal weather 
has returned to both of those countries leading to increased milk 
production globally. The global recession, the melamine scare in China, 
European Union export subsidies, and increases in the value of the 
dollar have also lowered the demand for U.S. dairy products in world 
markets. At home, the economic crisis and, until recently, record high 
retail dairy product prices, have curtailed domestic demand for dairy 
products.

Outlook for 2010
    Milk production is forecast to fall by 1.3 percent in 2009 and an 
additional 0.6 percent in 2010. Cow numbers are forecast to drop to 
8.89 million by December 2010. Reduced production, an improved economy, 
and lower retail dairy product prices are expected to lead to a gradual 
increase in milk prices and improved returns later this year and into 
next year. USDA is currently forecasting the all-milk price to average 
$11.60 per cwt in the third quarter and $13.10 in the fourth quarter. 
For all of 2010, we are projecting an all-milk price of $15.60.
USDA Safety Net Programs
    USDA is currently operating four safety net programs that provide 
assistance to help producers through this difficult time.

Dairy Product Price Support Program
    I'd like to first discuss the Dairy Product Price Support Program 
(DPPSP), which helps support prices and farm incomes. The Food, 
Conservation, and Energy Act of 2008, commonly referred to as the 2008 
Farm Bill, requires the Secretary to operate the DPPSP in a 
fundamentally different manner than under the 2002 Farm Bill. Under the 
new farm bill, the Commodity Credit Corporation (CCC) now supports the 
prices of cheddar cheese, butter, and nonfat dry milk by purchasing 
these products per minimum price levels for each commodity that are set 
in the 2008 Farm Bill. In contrast, the 2002 Farm Bill required the 
Secretary to support the price of milk at $9.90 per cwt by purchasing 
butter, cheese, and nonfat dry milk. To fulfill this mandate, the CCC 
established purchase prices for butter, cheddar cheese, and nonfat dry 
milk.
    From October 1, 2008 to date, USDA has purchased 272 million pounds 
of nonfat dry milk and 4.6 million pounds of butter under this program 
thus far. During the first six months of 2009, USDA has purchased 170 
million pounds of nonfat dry milk, the equivalent of about 30 percent 
of production. USDA expects CCC to be offered an additional 40 million 
pounds of nonfat dry milk during the remainder of calendar 2009. We 
have not purchased any cheese at this time. The wholesale prices for 
cheddar cheese and nonfat dry milk are near support levels of $1.13 per 
pound (40 pound blocks) and $0.80 per pound, respectively. The 
wholesale price of butter is currently about $0.15 per pound above the 
CCC purchase price of $1.05.
    As many of you are aware, the Secretary announced on March 26, 2009 
that approximately 200 million pounds of nonfat dry milk would be 
further processed or bartered for dairy products for use in domestic 
and international feeding programs. The nonfat dry milk is being 
further processed or bartered into value-added products, such as 
instantized nonfat dry milk, ultra high temperature milk, cheese, and 
ready-to-eat milk-based soups. To date, the Food and Nutrition Service 
(FNS) has received orders for approximately 30 million pounds of ultra 
high temperature milk for the National School Lunch Program and the 
Emergency Food Assistance Program, and has bartered for over 22 million 
pounds of assorted cheeses. These foods will go a long way towards 
feeding American school children and alleviating the difficulties of 
those affected by the economic crisis.
    This is just one example of USDA fulfilling its dual-mission of 
supporting American agriculture--in this case, the dairy market--
through market support programs, and working to alleviate hunger by 
distributing those same dairy products through domestic and 
international nutrition assistance programs. In fact, in Fiscal Year 
2008, approximately $9.6 billion in USDA funds were spent on dairy 
products ultimately used in the United States, through a combination of 
purchases made through, or used for, programs such as the Supplemental 
Nutrition Assistance Program (formerly the Food Stamp Program), the 
National School Lunch Program, and the Supplemental Nutrition 
Assistance Program for Women, Infants and Children.

Milk Income Loss Contract Program
    In order to provide assistance as quickly as possible to dairy 
producers, FSA published regulations re-authorizing the revised Milk 
Income Loss Contract (MILC) program on December 4, 2008. The 2008 Farm 
Bill modified and re-authorized the Milk Income Loss Contract (MILC) 
program which provides countercyclical payments to producers in times 
of low prices. Under the MILC program, direct payments are provided to 
dairy producers in all states if the monthly Class I price in Boston is 
below $16.94 per cwt. The 2008 Farm Bill increased the payment trigger 
of $16.94 during January 1, 2008 through August 31, 2012 if the 
National Average Dairy Feed Ration Cost exceeds $7.35 per cwt. In 
addition, the farm bill increased the annual production eligible for 
payment from 2.4 million pounds to 2.985 million pounds during October 
1, 2008 through August 31, 2012, and increased the payment factor from 
0.34 to 0.45. The Farm Service Agency (FSA) began sign-up for the new 
MILC program on December 22, 2008 and sign-up will continue through the 
program's expiration date, September 30, 2012.
    Declining milk prices caused the Boston Class I price in February 
2009 to fall below $16.94, triggering MILC payments. USDA began 
distributing MILC payments in early April after the information needed 
to adjust the $16.94 trigger price for feed costs became available and 
the final payment rate was calculated. The MILC payment rate, including 
the feed cost adjuster, is set at $1.51 per cwt for milk marketed in 
February, $2.01 for milk marketed in March, $1.59 for milk marketed in 
April, and $1.47 for milk marketed in May. The MILC payment rate, 
unadjusted for feed costs, for milk marketed in June is $1.62 per cwt 
and for milk marketed in July is $1.54 per cwt. For the February 
through May period, the feed cost adjuster added about $0.15 per cwt, 
on average, to the MILC payment rate.
    MILC payments are likely to continue for the next several months. 
If current futures price levels are realized in cash markets, MILC 
payments will be triggered for the months of August through November. 
Futures suggest that milk prices will be strong enough to avoid 
triggering MILC payments in December and succeeding months. As of June 
30, 2009, over $450 million had been issued to dairy producers through 
the MILC program. During FY 2009, USDA expects to issue about $900 
million in MILe payments.

Dairy Export Incentive Program
    On May 22, 2009, USDA announced the reactivation of the Dairy 
Export Incentive Program (DEIP) with allocations for the export of 
68,201 metric tons of nonfat dry milk, 21,097 metric tons of butterfat, 
and 3,030 metric tons of cheese. The above quantities reflect the 
maximum volume of dairy products the U.S. is allowed to export with 
subsidies consistent with the U.S.'s World Trade Organization (WTO) 
commitments. The DEIP, reauthorized under the 2008 Farm Bill, helps 
U.S. exporters meet prevailing world prices and encourages the 
development of international export markets in areas where U.S. dairy 
products are not competitive due to subsidized dairy products from 
other countries. As of June 30, USDA had announced awards for 20,025 
metric tons of nonfat dry milk, 1,862 metric tons of butterfat, and 152 
metric tons of cheese under the 2008/2009 DEIP allocations announced on 
May 22. Although these awards are less than the quantities that were 
allowed under WTO commitments, they are largely reflective of the trade 
opportunities that existed during the five weeks that the program was 
in operation for the 2008/2009 year. The Foreign Agricultural Service 
(FAS) awarded bonuses for 97 percent of the nonfat dry milk volume 
submitted by exporters.
    On July 6, 2009, USDA announced the initial tranche of DEIP 
allocations for the July 2009-June 2010 year. This initial tranche was 
announced at quantity levels equivalent to the uncommitted balances 
remaining as of June 30, 2009. Those quantities are 48,176 metric tons 
of nonfat dry milk, 19,235 metric tons of butterfat and 2,878 metric 
tons of cheese. These quantities will count against the 2009/2010 U.S. 
WTO commitment levels.
    As I indicated earlier, a sharp reversal has occurred in the 
outlook for global dairy markets. The volume of U.S. exports of nonfat 
dry milk during the January to April 2009 period dropped by 52 percent 
in comparison to the same period last year. Further, the value of U.S. 
dairy exports in FY 2009 is expected to fall by 43 percent to $2.3 
billion. In addition, there is no indication that the European Union 
(EU) is prepared to stop providing export subsidies for its dairy 
products. In fact, the EU has been progressively increasing its subsidy 
rates since reactivating export subsidies in January 2009.
    As of June 30, total subsidy obligations for nonfat dry milk 
totaled just over $4 million to support 20,000 metric tons of exports 
under DEIP. We have calculated that to remove the same quantity from 
the domestic market under the Dairy Product Price Support Program would 
cost over $35 million. In addition, our exports will be consumed while 
DPPSP purchases may continue in storage. Thus, as intended, DEIP is 
reducing costs to the U.S. Government while providing assistance to the 
U.S. dairy industry, which has seen its international competitiveness 
continue to be adversely impacted by the use of direct export subsidies 
by the EU.

Liyestock Gross Margin-Dairy
    In addition to these programs, the Livestock Gross Margin-Dairy 
insurance program, or LGM-Dairy, protects dairy farmers against loss of 
gross margin, which is the market value of milk minus feed costs. This 
new insurance program, which was approved by the Federal Crop Insurance 
Corporation board of directors in mid-2007, uses the Chicago Mercantile 
Exchange Group futures prices for corn, soybean meal, and Class III 
milk to determine the expected gross margin and the actual gross 
margin. The indemnity paid to the policyholder at the end of the 11 
month insurance period is the difference between the gross margin 
guarantee and the actual gross margin (if the difference is positive).
    The LGM-Dairy insurance policy is customizable to fit any size 
farm. LGM-Dairy is also considered a bundled-option insurance, like 
buying both a call option to limit higher feed costs and a put option 
to set a floor on milk prices. The policy capacity is up to 240,000 
hundred-weight per year. Dairy producers in 36 states are eligible for 
LGM-Dairy insurance.

The Federal Milk Marketing Order System
    I would also like to talk briefly about the Federal Milk Marketing 
Order (FMMO) program administered by USDA's Agricultural Marketing 
Service. The FMMO program, is not a price or income support program, 
but a marketing program that helps establish a competitive balance 
between the many dairy farmers and the relatively few buyers of their 
basic commodity--raw milk. The FMMO program sets up a classified 
pricing system, establishes minimum class prices, and pools all 
revenues within the defined regional area. The primary objective of the 
program is to assure that fluid milk processors (bottlers) have an 
adequate supply at reasonable prices to meet their needs.
    In 2008, about 61 percent of U.S. milk marketings were sold to 
handlers regulated by FMMOs, and less than 40 percent of that is used 
by bottlers and classified as Class I. A major milk market outside of 
the Federal order system is the State of California, with its own 
regulatory system similar to a FMMO. Other unregulated western states 
include Idaho, Montana, Nevada, Wyoming, and Utah. Like California, 
Montana and Nevada also have state programs.
    It has been suggested that the FMMO program has the authority 
(specifically 7 U.S.C. Section 608c(18)) to raise minimum milk prices 
when feed prices rise, regardless of other factors. FMMOs cannot set 
minimum prices and have above the relative market value of the products 
of milk. FMMOs have no mechanism to provide additional dollars to 
handlers above those received from the market in order to pay farmers 
more than the minimum market value of milk. Thus, raising minimum milk 
prices above market-justified levels would likely result in fluid milk 
processors taking less milk or reducing over-order premiums. It would 
also result in manufacturing milk plants withdrawing from FMMO pools to 
avoid paying prices they cannot recoup from the marketplace.
    Section 608c(18) has long been viewed by the courts as the 
procedure by which the Secretary establishes and adjusts minimum 
prices. Through a public hearing, the Secretary evaluates the marketing 
conditions in an area and considers the price of feeds, the available 
supply of feeds, and other economic conditions that affect the market 
supply and demand for milk and its products in the marketing area. 
Based upon these factors, the Secretary sets milk prices that are 
reflective of all the economic inputs to ensure a sufficient supply of 
milk.

Moving Into the Future
    I recognize the decisions that we make in Washington affect the 
livelihood of America's farmers and ranchers and we are committed to 
ensuring that we work together to help meet the needs of U.S. dairy 
producers. As I indicated earlier in my remarks, the plight of dairy 
producers is very serious.
    I appreciate the opportunity to testify before this Subcommittee 
today, and I look forward to working with you, Mr. Chairman, Mr. 
Ranking Member, and all the Members of this Subcommittee as we continue 
our hard work to ensure that USDA is responsive to the needs of the 
dairy sector. This concludes my statement. I will be glad to answer 
questions you may have.

    The Chairman. Thank you, Mr. Miller, I appreciate your 
testimony.
    I will start the round of questioning off.
    My first question is, many producers feel that milk protein 
concentrates are entering into this country and are a main 
cause for our lower dairy prices.
    Can you tell us how much milk protein concentrate comes 
into this country each year and how does that affect the 
overall dairy price for domestic producers?
    Mr. Miller. Well, so far for 2009--and this is from January 
through May of this year--U.S. imports of milk protein 
concentrates are up about 3.1 percent and totaled about 20,600 
metric tons. However, that needs to be put in the context of 
the overall importation of both MPCs as well as casein and 
caseinates, which are other dairy proteins. And over that same 
period, the imports of the total complex of those proteins are 
down about 16.7 percent. So MPCs have gone up, but the overall 
level of imports have gone down.
    Given the wide range of moves for MPCs, we believe that it 
is not only difficult, but questionable, to argue that MPCs, at 
least by themselves, are having a significant impact on dairy 
prices, and particularly for this year, where we are expecting 
an overall reduction of imports in that protein complex from 
the dairy industry. We believe that that direct impact on dairy 
prices is probably not the significant cause for the very steep 
reduction that we have seen in dairy prices and the economic 
distress that the industry is facing.
    The Chairman. Let me ask you this as a follow-up. You have 
heard the testimony of our two colleagues that were just before 
us from Vermont and Connecticut, Mr. Courtney and Mr. Welch. 
And they were very descriptive in terms of the desperation of 
these farmers.
    Do you agree with their assessment of how bad the situation 
is?
    Mr. Miller. Mr. Chairman, I do. This has been devastating 
to farmers, dairy farmers all across the country. The Secretary 
has personally spoken with a number of dairy producers on a 
variety of occasions, both when he is here in Washington and 
they have come to town, as well as during his travels out into 
the countryside. And I can certainly convey to you that I am 
concerned, and the Secretary is significantly concerned about 
the state of the dairy industry. And, as I indicated, we 
certainly look forward to working with you to find some way to 
provide both a relief in the shorter term for that industry, as 
well as work with you, as was indicated by your colleagues, to 
see if there is a more appropriate longer-term solution to the 
situation that confronts this industry.
    The Chairman. And what do you recommend as the most 
significant thing we can do short term, right now, to help 
dairy farmers?
    Mr. Miller. In the immediate term--and the Secretary 
alluded to this during one of his trips out into the 
countryside--first of all, in terms of the three support 
programs or safety net programs that I discussed, I believe we 
have been extremely aggressive in trying to utilize those 
programs to help alleviate the stress, and I believe, in fact, 
that that has helped.
    Having said that, we know that dairy prices remain 
depressed and the economic stress continues in the dairy 
industry. But certainly our purchases under the Dairy Product 
Price Support Program have been significant, and we expect that 
they will remain significant down the road.
    We have fully implemented the MILC program as it was 
designed in the 2008 Farm Bill, and we are expecting to 
continue to make MILC payments throughout the rest of the year, 
and they will continue to make a significant amount of infusion 
of cash into the dairy industry.
    And as I have indicated, we have continued to reactivate 
the DEIP program. And while that is undergoing a rather 
constant review, we will continue to utilize that program.
    Also, the Secretary has indicated that we are going to look 
at all of our authorities in terms of trying to find a way to 
help provide additional credit, or relieve some of the credit 
problems, that are faced by this highly leveraged sector of 
American agriculture.
    The Chairman. All right. Let me just ask you this, because 
the Secretary has the authority--does he not, under the 1937 
Agricultural Marketing Act--to institute an emergency floor 
price, if necessary, to take into account farmers' cost of 
production? Farmers are currently seeing prices below cost of 
production for their milk. So is the USDA, the United States 
Department of Agriculture, considering using this existing 
authority?
    Mr. Miller. Mr. Chairman, the authority that you are 
referencing deals with the Federal Milk Marketing Order, which 
is generally viewed as a marketing program. And if, in fact, 
USDA was to establish under that program a different floor 
price for milk, it could be very disruptive to the operation of 
the Federal Milk Marketing Order Program in terms of the 
stability that that provides for producers and processors, and, 
in fact, could drive some entities out of Federal Milk 
Marketing Order.
    In addition, I think we have to recognize that a very 
significant number of dairy production states do not 
participate in the Federal Milk Marketing Order, which creates 
some additional difficulties in that regard.
    Having said that, we do have other programs that are in 
place, including the Dairy Product Price Support Program, in 
which we can in fact purchase products. As I noted we have been 
doing this, which may be a more appropriate program to utilize 
if we are looking to support the basic prices of the dairy 
products consistent with the 2008 Farm Bill.
    The Chairman. Thank you very much. We have our Chairman 
with us, Chairman Peterson, and I would like to recognize you 
for an opening statement at this time.

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

    Mr. Peterson. Thank, Mr. Chairman, thank you and the 
Ranking Member for your leadership in calling this hearing.
    I thank you, Mr. Miller. I haven't seen you since you have 
been elevated to your position. We appreciate having you over 
there, and I want to have you tell the Secretary we have been 
appreciative of him being responsive to the requests that we 
have made of the Administration to help us with this dairy 
situation where they can. So we recognize that.
    I have had lots and lots of discussions with Members of 
Congress and people in the industry over the last number of 
months. It is a tough time in dairy all over the country, and I 
appreciate the Chairman having this hearing today.
    But I would respectfully suggest to the Chairman that I 
think that, in my opinion, this should just be the start of us 
looking into this situation. I would like him to look at his 
schedule and see if there is a possibility of doing maybe a 
couple more hearings before we leave in August, so we could 
bring in all the national groups and all the different folks 
that are involved in this to look at the issues and to see if 
people have solutions that might be viable, and if there is 
something we can rally around.
    Although, having served on this Subcommittee for a long 
time, and struggling to understand this issue, it is 
complicated and very regional, and it has been made worse by 
these trade agreements that we have entered into that have tied 
our hands, so we can't do maybe what we should do. And I think 
all of these things need to be looked at.
    But I would suggest that, first of all, we try to get all 
the general farm groups in here and have them, as a 
representative of a national constituency, see if they have 
something where they have come together. I think we should 
examine all these trade agreements and how this is impacting 
prices. You know, we should look at the order system and how 
that is impacting the situation. And potentially, the question 
I get all the time: Why, when milk prices have collapsed, 
haven't we seen a corresponding reduction in retail prices?
    So there is no end of things that could be looked at here. 
But I would suggest that we try to get as many people involved 
in this as possible, try to have this as open as possible.
    We have had a lot of discussions. You have been in those 
discussions with me and others. But, it is more important we 
have this out in public, so people can be involved and see what 
is going on and understand that this Committee has been 
engaged, and will stay engaged and try to figure out some way 
to help the people in this industry.
    Again, I appreciate your having this hearing today.
    The Chairman. I thank you so much, Mr. Chairman.
    And as we speak, we are already moving to get a couple of 
more hearings before we get to the break.
    And you can see by the Chairman's comments how serious we 
take this issue. And this Subcommittee and the whole 
Agriculture Committee and the Congress, for that matter, is 
determined to get help to our dairy farmers as quickly as we 
possibly can. And in order to do that, we have to get all the 
players here before the Committee so we can hear from 
everybody, so we can make the most intelligent and the most 
impactful decisions and get the help to the dairy farmers as 
quickly as we can.
    Thank you very much, Mr. Chairman. Now we turn to our 
Ranking Member, Mr. Neugebauer.
    Mr. Neugebauer. Thank you, Chairman Scott. Mr. Miller, 
thank you for being here. I enjoyed our visit recently.
    You heard a number of my colleagues talk about, and you are 
going to hear other panelists talk about, the cost of the 
inputs in relationship to the cost of the product. The inputs 
are rising and, unfortunately, the price of the milk has been 
falling.
    And so, given this current economic environment for the 
milk industry and really all across agriculture, recently the 
Speaker insisted that this body take up a bill that some would 
say would dramatically increase the cost of energy in this 
country, thereby increasing the cost of inputs for farmers and 
dairy farmers and, really, businesses all across America.
    What is the position of the USDA? Is this a good time for 
Congress to be raising the cost of energy and inputs for the 
dairy industry?
    Mr. Miller. Mr. Neugebauer, certainly the dairy industry 
has been faced with significantly increased cost. A big part of 
the current issue that they are facing in terms of those costs 
have been the costs of purchased feed ingredients. Naturally, 
that also does in some way reflect energy costs.
    In addition, dairies are big consumers of energy as well. 
But the real challenge is finding a balance between the prices 
received in the marketplace and stimulating growth in that 
marketplace in a way that those costs, whatever they may be, 
can be fully covered, and hopefully that the dairy industry can 
return to profitability as soon as is possible.
    I think we would expect that while we look at issues 
concerning climate, as well as the President's initiatives 
concerning a rapid expansion of renewable energy, that is going 
to create significant opportunities in production agriculture. 
Through those opportunities, we believe that all sectors of 
agriculture, including the dairy industry----
    Mr. Neugebauer. Mr. Secretary, I have a limited amount of 
time.
    Mr. Miller. Sure.
    Mr. Neugebauer. But I am going to ask you, yes or no, is 
this a good time to increase the cost of energy for dairy?
    Mr. Miller. Well, I don't expect that the legislation is 
going to be passed immediately.
    Mr. Neugebauer. Just yes or no, is it a good time to 
increase the cost of energy----
    Mr. Miller. We would prefer to see more consistent energy 
prices, certainly.
    Mr. Neugebauer. I am going to take that as a no.
    I want to move forward on something about the Dairy Export 
Incentive Program and, really, 5 months before the USDA began 
to revive that process, the European Union had already begun to 
subsidize many of their producers.
    And I guess the question I have is, are we about to enter 
into a war here where we are going to see the European Union 
increase their subsidies, and are there limits in our WTO 
agreement as to how far those countries and the European Union 
can continue--or the maximum amount that they can subsidize 
those.
    Mr. Miller. Under the WTO, both the United States and the 
European Union have limits in both the tonnage and the amount 
of funding that can be spent on those programs.
    Unfortunately, in terms of our ability to go head to head 
with the European Union, the commitments for the United States 
are significantly smaller than they are for the Europeans.
    So in terms of a trade war, as you characterized it, 
Congressman, we do not have the same capacity to continue to 
provide that assistance to our export market that the Europeans 
do in fact have. But I can assure you we were very aggressive 
in the 5 weeks or so that we operated the DEIP program in the 
2008-2009 year. And as I indicated, we are continuing the 
program now as we move into the next WTO year under the subsidy 
program.
    Mr. Neugebauer. I understand you have allocated the 
remaining 2009 to 2010; is that correct?
    Mr. Miller. What we are doing, because this program is 
constantly under review with the Administration, is there has 
been an agreement of the various departments and agencies that 
have an interest in our Dairy Export Program to continue the 
program, allow us to utilize up to the amount that was 
available in 2008 and 2009 that we did not utilize, as we go 
through the review to determine what the outcome of DEIP will 
be, going forward.
    So the program is still operational. And, as I said, we are 
aggressively seeking those markets where we can challenge the 
Europeans to regain market share in our key markets overseas.
    Mr. Neugebauer. Do you think that there are some ways that 
we can work with the European Union to begin to minimize--it 
sounds like we got out-traded on all these support tariffs. Is 
there a way for us to enter negotiations where we don't, in 
fact, end up in some kind of a trade war over milk?
    Mr. Miller. We have certainly indicated our willingness to 
discuss with the European Union the possibility of both the 
U.S. and the EU backing off of the export subsidy issue. 
Obviously, a number of our trading partners and trade 
competitors also would like to see that action and, of course, 
the whole issue of export subsidies is a key issue in the WTO 
negotiations.
    The Chairman. Thank you very much, Mr. Neugebauer.
    We will now hear from the gentleman from California, Mr. 
Costa.
    Mr. Costa. Thank you very much, Chairman Scott. I want to 
thank you for holding this very important hearing, and I want 
to thank Chairman Peterson for his earlier comments.
    The dairy industry in the United States is in meltdown, 
let's make no mistake about that. It began first in California 
last fall, and it has spread throughout the entire country.
    To follow up on Chairman Peterson's suggestion with 
Chairman Scott, I do urge both of you that we follow up, and 
this be the beginning, as was stated, of a continuum of 
hearings to really look at not only the fact-finding on what we 
do in the near term to bring relief--I have had two suicides in 
the San Joaquin Valley and areas among dairymen that 
Congressman Cardoza, Nunes and I represent, and we have no 
outlook for how it can improve. So I would suggest that we, Mr. 
Chairman, follow up and continue to work on this, because the 
long term is essential for the vitality of the dairy industry 
in the United States.
    The Chairman. Well, I can assure you we would definitely be 
doing that, Mr. Costa. It is a very serious problem. We take it 
seriously, and we are going to get the dairy farmers' help as 
quickly as we can.
    Mr. Costa. I would like to submit comments by the 
California Dairies Inc., and the Milk Producers Council, as 
well as the Dairy Disaster Resolution that was approved in 
Kings County, in my district and neighboring Tulare County, and 
similar resolutions adopted by Merced County in Congressman 
Cardoza's district, and the City of Hanford, also in my 
district, for the record.
    [The document referred to, California Dairy Resolution, is 
located on p. 193.]
    The Chairman. Yes. Without objection, we accept that.
    Mr. Costa. Thank you very much, Mr. Chairman. I have a lot 
of questions, I want to go quickly here.
    I have asked a number of dairymen--I meet with dairymen a 
couple of times a month. And it is a very difficult challenge 
that they are facing, input costs at $9 to $10 per 
hundredweight in California. I mean, the costs they are 
receiving for their milk at $9 to $10 per hundredweight and 
their input costs are $17R per hundred weight, you can't stay 
in a business like that very long.
    From Mr. Watt, he asked me to ask you, Mr. Miller, with 
what the cost of production for the operations of the dairies 
going broke, your moving product into the CCC forces costly 
repackaging of product from commercial packaging, none of which 
is accounted for in the support price.
    Do you agree that a better Federal Dairy Price Support 
Program should be updated to account for the production costs?
    Mr. Miller. Well, production costs are certainly a key 
issue in this problem. But looking at the packaging issue, USDA 
has explored whether our purchases should be repackaged in a 
different format in order to make those products that we are 
storing more comparable to what happens in the commercial 
market.
    Our review of that situation, because in fact we are 
storing these products, some of which will likely store for a 
significant amount of time, do not really lend themselves to 
changing the packaging because of the deterioration of the 
product itself and that potential high cost to the government.
    Mr. Costa. Well, I would suggest we follow up on that.
    Let me move over to another area that is troubling. The 
Chicago Mercantile Exchange Program, there was a CAO report in 
2007 that says only a few players sell cheese on the market, 
and there really is belief that it is prone to price 
manipulation. That the price discovery mechanism should be 
reformed so that it is more effective and transparent.
    Do you agree, and is the Department taking a look at this?
    Mr. Miller. Well, the issue there is really not one that is 
fully under the jurisdiction of the Department. However, having 
said that, I think it is in all our best interests that these 
markets operate in the most transparent fashion possible, and 
that we try to ensure that there is no way for those markets to 
be manipulated. And certainly in our conversations with the 
Commodity Futures Trading Commission, which does regulate those 
markets, we certainly do encourage them to see that we do not 
have manipulation.
    Mr. Costa. Well, I think more needs to be followed up in 
that area.
    But let me move to the longer term, thinking out of the 
box, because some of us are trying to work with reforming the 
Federal Order and looking at whether or not a state like 
California, which is the number one dairy producing state in 
the nation--a lot of people don't think of California as a 
dairy state, but we are and we are the largest--on how we could 
make the Federal Order and maybe provide incentive for 
California to join the Federal Order to think out of the box.
    Mr. Steve Maddox, who is a very effective producer in my 
area, says we need a new out-of-the-box look for long-term 
corrections in dairy policy to ensure our industry's survival. 
Stalling for better days and cutting around the edges and 
arguing that the replacement--rearranging the chairs on the 
Titanic, so to speak, is not going to be a solution.
    Every program that you have stated in your testimony that 
we have implemented has done nothing to change the prices from 
the $9 to $10 per hundredweight. What is your suggestion on the 
long term?
    I know my time has run out, Mr. Chairman.
    Mr. Miller. Well, let me respond just briefly, Mr. Costa. I 
think the Secretary would agree with you and your constituents 
that we probably do need to take a longer term view of what 
isn't appropriate and what can be an effective dairy policy in 
the United States. The farm bill provided for a commission to 
review the Federal Milk Marketing Order system subject to the 
availability of funding, which we have yet to see.
    However, in addition to that, the Secretary has announced 
that he is very interested in doing the kind of review that you 
may be suggesting, both in terms of what we may be able to 
begin to do internally, and then the prospect of broadening 
that to be able to entertain ideas from the widest possible 
number of stakeholders.
    The Chairman. Thank you very much.
    Mr. Costa. Thank you, Mr. Chairman.
    The Chairman. Thank you, Mr. Costa.
    Now, the gentleman from Pennsylvania, Mr. Thompson.
    Mr. Thompson. I want to thank the Chairman and the Ranking 
Member and all the Members of the Subcommittee for 
participating in this Committee. I am a Member of the full 
Agriculture Committee. I, unfortunately, don't sit on this 
Subcommittee. I am pleased for a chance to weigh in.
    Agriculture is my home State of Pennsylvania's number one 
industry and dairy is a leading sector. And, frankly, like 
probably most Members here, I am contacted regularly by dairy 
farmers in my district who are struggling just to break even.
    And I want to share just a very quick note that I received 
just at the end of last week that came from my district here to 
my attention, from Diane Heckman. Jim and Diane Heckman are 
dairy farmers, lifelong dairy farmers in one of the valleys I 
represent.
    And it says, ``June 22, 2009, GT, while it has finally come 
to almost the end of the farm, we had a small amount of money 
back, and we have been using that to help pay the bills. But it 
is now gone. There is nothing left. And if something isn't done 
about the milk prices, we are going to have to sell the cows 
and the farm. I haven't told Jim yet, and I don't know how I am 
going to tell him. I am sitting here crying as I write this 
letter.''
    ``Please, please, do what you can to help with the damn 
milk prices. I am just sick that it has come to this, and this 
has hit many, many family farms.''
    And it is signed Diane Heckman.
    So certainly I really appreciate this hearing.
    I think in terms of dairy and our food, our greatest--we 
have a lot of threats to our national security, but keeping our 
dairy farmers, keeping our family farms is what we can do most 
about our national security in terms of food security.
    Mr. Under Secretary, I really appreciate you being here. I 
wanted to--there has been a lot of pieces of legislation that 
have been introduced over the years, aiming to implement a 
mechanism for mandating supply. There is a bill in the Senate 
right now; it is very similar to the Canadian dairy system, and 
I wanted to see what your view was on the kind of system that 
implements a mechanism for mandating supply.
    Mr. Miller. Again, you are looking at something that 
probably should be part of a longer-term solution to the dairy 
situation that we face currently; and that would be a very 
significant departure from the types of dairy policy that we 
have had historically in this country.
    Again, I understand that legislation has been introduced. 
It is quite likely it is something that should be part of an 
agenda to discuss how we move forward with dairy policy and 
what is appropriate. So we certainly would welcome the 
opportunity to continue to engage in the discussion of that 
idea, as well as many others that have been proposed, and see 
if we can find an appropriate policy for the dairy industry in 
the United States.
    Mr. Thompson. Well, I appreciate your opening comments, 
really laying out kind of a beginning road map on a short term 
to address the crisis that we are in right now; because if we 
lose farms, to get them back will be next to impossible. So I 
appreciate that.
    I wanted to focus just my final question on that long term 
that you alluded to. I am amazed at a lot of contrasts. One of 
the contrasts, like the bottled water industry which--they are 
a free market-driven system that flourishes. Very profitable. 
People are getting very wealthy and very successful.
    Then we have the poverty of the dairy industry which has 
been weighted under this pricing system that I am still 
struggling to fully understand it. And I wanted to see, what 
long-term focus thoughts do you have on milk pricing for 
changing that?
    Mr. Miller. Well, there are a number of opportunities out 
there to discuss longer-term changes in our dairy policy. Mr. 
Costa and I were discussing just prior to the hearing--and this 
is just a personal comment, but it seems to me that what we 
have seen in the dairy industry has not only spread between the 
highs of the dairy market which we experienced only a short 
time ago, a matter of months ago, and the lows that we are 
experiencing now have gotten to be more extreme with greater 
volatility. And the period of time which we have relatively 
good price or good returns to the dairy industry versus those 
periods of time when the returns may, in fact, be inadequate 
seem to be compressed.
    So we have both greater price volatility, it seems, as well 
as a situation where we move through those periods of 
volatility much more quickly. That makes it extremely difficult 
for farmers and ranchers and dairy producers to plan on 
anything. It also makes it difficult for the processors, many 
of which are cooperatives and owned by those same dairy 
farmers, to plan effectively into the future.
    So we certainly welcome the suggestion of Chairman Peterson 
and Chairman Scott to begin a dialogue about a--what might be a 
more effective, long-term dairy policy and certainly would 
offer to participate in that dialogue as the Members would deem 
appropriate.
    Mr. Thompson. Thank you, Mr. Secretary.
    Mr. Chairman, with your indulgence, I would like to enter 
into the record the letter that I have read.
    [The document referred to is located on p. 98.]
    The Chairman. Yes.
    Mr. Thompson. Thank you.
    The Chairman. The gentleman from California, Mr. Cardoza.
    Mr. Cardoza. Thank you, Mr. Chairman. I really appreciate 
the fact that you have had this hearing today--held it. I 
appreciate your commitment, along with Chairman--Mr. Peterson 
to continue, and not just to stop today, but really get to the 
bottom of what is going on here.
    If I could, Mr. Chairman, I would like to submit for the 
record my opening statement and I will save everybody from 
having it read.
    Mr. Miller, thank you for being here and thank you for 
helping us as you have been able to do. Obviously, the price of 
pork program isn't working as it was intended.
    We never anticipated that there would be these catastrophic 
losses that are affecting our dairymen. Certainly farmers are 
used to boom-and-bust cycles; but this one seems to be so 
profound that it can just put vast numbers of the dairy 
industry out of business. And I specifically want to talk, that 
even though when cheese prices have been below support prices 
for weeks now, I don't believe that the Administration has 
purchased--or the CCC has purchased any cheese.
    Several industry organizations have offered a few 
suggestions and put them in writing to the Secretary on how to 
address this, ranging from raising purchase prices, to 
loosening grading and inspection standards to that of 
commercial trade, and that of using product immediately in food 
aid programs.
    From your perspective, sir, what changes are needed to make 
the program better in order to ensure that the safety networks 
work as intended? And then I will follow up with some other 
questions.
    Mr. Miller. Well, thank you, Mr. Cardoza.
    In terms of the dairy product price support system, it is 
certainly working in terms of the actual administration of the 
program. We have been buying significant quantities of nonfat 
dry milk from the market because prices have been depressed. We 
have found ways to move a fairly significant quantity of that 
into our domestic nutrition and international food assistance 
programs, as a way to take some of that stock that we would 
otherwise be storing actually off the market and have that 
product consumed in a way that does not compete directly with 
commercial sales.
    So, the issue is not whether the program can work, but 
really the issue is one of--is that, in and of itself, adequate 
to solve the dairy cost price squeeze that we are facing 
currently? I don't think we have any particular estimates of 
what would happen if we had not had that purchase program in 
terms of dairy prices. But we have done a significant amount 
with that program, and as I indicated, we have also expended 
millions of dollars and expect that by the end of the fiscal 
year we will have expended about $900 million in our 
countercyclical support program.
    So in that regard, I think the programs are working. But I 
probably would agree with many Members of the Committee who 
suggested at the time that these programs were put into the 
2008 Farm Bill that we weren't expecting this kind of situation 
to hit this sector of agriculture.
    Mr. Cardoza. Certainly not with the rapidity in which it 
took place.
    Mr. Miller. No. But--I also think we all have to put this 
somewhat in context and it difficult to do during these very 
difficult times. But we also have to weigh what are going to be 
the budgetary costs of modifying the current program either in 
the short term or the long term, and that is obviously a 
consideration that weighs on the minds of everyone in this 
room.
    Mr. Cardoza. There are 27 Blue Dogs on this Committee, and 
it certainly does weigh on this Committee when we talk about 
the financial situation. I notice that the Administration has 
not purchased any cheese. As I recall from my days in 
California as Chairman of the Agriculture Committee, the cheese 
price has a very big determining effect of what the price of 
milk ultimately is.
    Can you tell me what the impediments are for purchasing of 
cheese and why the Administration hasn't purchased any to date?
    Mr. Miller. I guess the simple answer to that difficult 
question is, we are not being offered cheese to purchase even 
though, as you indicate, in some instances the price of cheese 
may be below the purchase price. It was the minimum purchase 
price that was established in the 2008 Farm Bill.
    Others have suggested that part of the issue there is a 
packaging issue, which I discussed briefly earlier in the 
question-and-answer period, and that is a difficult issue for 
USDA because when we purchase any of these products, we are not 
expecting that we are going to be able to immediately turn 
those around and put them back into the commercial market. So 
we need to package things in ways that we can store them, 
potentially, for several years.
    One final comment in terms of the issue on cheese, and it 
goes back to converting the nonfat dry milk that we have 
purchased under the Dairy Product Price Support Program, as we 
are looking to move some of that product into our Domestic 
Nutrition Program, we are bartering certain amounts, quantities 
of nonfat dry milk, for specialty cheeses. So in that regard, 
indirectly we are, in fact, taking some cheese off the market.
    Mr. Cardoza. Thank you, sir. I look forward to working with 
you more on that question.
    The Chairman. Thank you very much.
    Mr. Conaway, you are next--from Texas.
    Mr. Conaway. Thank you, Mr. Chairman. I don't have a lot to 
contribute to the solution side.
    Mr. Miller, what is the shortfall if we take total milk 
produced versus the $7 or $8 per pound differential between 
feed costs and what I heard talked about, $17 versus the sales 
price of $10? How much money are we talking about if we had to 
come up with that to make all these dairy farmers whole on the 
decisions they made to leverage at 70 percent, to increase the 
herd sizes during good times?
    What is the nut for 2009?
    Mr. Miller. Let me consult with some of my experts here 
just a moment.
    Mr. Conaway. While that is going on--they will give you an 
answer.
    Mr. Miller. Just a rough, back-of-the-envelope estimate, 
somewhere probably around $7 billion.
    Mr. Conaway. It is $7 billion? Okay. Mr. Cardoza, that had 
to get your attention.
    What--prices are in the $3.20 per gallon at retail; what 
would that translate to if we were to get milk prices up and--
assuming all of that translated into money going directly to 
the farmers as opposed to throughout the train, what would a 
gallon of milk cost to maybe everybody whole without Federal 
intervention? A gallon?
    While they are coming up with that, I will finish off.
    Go ahead. Do you have a number?
    Mr. Miller. About $1.20 a gallon. That is to get a producer 
price of around $14, $15 a hundredweight. So if the producer 
price was going to need to be higher, then the price per gallon 
of milk would have to rise as well.
    Mr. Conaway. So to get up to the $17 or $18 of input----
    Mr. Miller. It would be significantly higher.
    Mr. Conaway. Why have alfalfa costs gone up so high? 
Alfalfa is the main food input for dairies, I guess.
    Mr. Miller. Why have the feed costs gone up so high, sir?
    I think what we saw last year--and we have to recognize 
that increasingly dairies are not raising the same level of 
their own individual farm feedstocks as they have in the past, 
so a lot of that was being purchased. In the last year we saw 
record high prices for many of the feed ingredients that go 
into the dairy ration of corn, soybeans, for example.
    Interestingly, many dairy producers now contract for 
several months in advance for their feed inputs. Some of that 
could be done even a year in advance, either through cash 
contracts or futures contracts, and they were doing that when 
commodities, feed commodities, were extremely high priced. So 
many of them--even though feed commodities have now come down 
somewhat, they are still experiencing the results of actually 
trying to hedge their feed costs with an expectation that those 
prices could go higher.
    Mr. Conaway. All of those sound like traditional business 
risk decisions that every business has some similar kind of 
exposure to, that sometimes you are on the right side of a 
price going up and sometimes you are on the wrong side.
    Any of those things that are going on in the arena that are 
exacerbated by public policy that we need to look at? None of 
us are prophetic enough to know when prices are going to go up 
or down. Is there anything in the system that means that the 
policy that we are operating under makes those circumstances 
worse?
    Mr. Miller. Well, we do need to explore some new ideas in 
terms of public policy, given the volatility that we are seeing 
not only in the dairy industry, but in the grain markets.
    Mr. Conaway. One of the frustrations I have with all the 
soul searching is, we all talk about new ideas and a better way 
forward, and long term and short term. We are all talking at 
about 50,000 feet, and there is no specificity to anything that 
is being suggested at this point in time. So I would hope to be 
a part of the process that actually gets to the specifics, as 
opposed to just swapping slobber back with each other about how 
wonderful we are, about how much we care and all those kinds of 
things, and we don't do anything.
    I am a CPA by trade, and so I pretend to get to numbers, as 
opposed to just bragging on the Chairman as we should, and 
bragging on the Ranking Member as we should, and bragging on 
each other as we should, and bragging on you and all that kind 
of stuff. It is very frustrating, I suspect, to the guys out 
there, like the lady in the letter from GT, that hear all this 
pontificating and no action.
    So I look forward to yielding back my time. Pardon my rant.
    The Chairman. Thank you so much.
    We will now hear from the gentleman from--Mr. Minnick of 
Idaho.
    Mr. Minnick. Mr. Miller, my state, Idaho, became the third 
largest dairy state last year. Many farmers, dairymen moving 
from Mr. Costa's, Mr. Cardoza's and other California districts 
because of the cost of feed. And these same folks are now in 
the same desperate shape my colleagues have described because 
of feed costs relative to the price of, primarily, milk.
    I was curious. In your written statement, you estimated 
that about--the average herd's size--not the average herd size, 
but the total number of dairy cows were going to go down 
145,000 this year on average. I am curious as to what the 
impact of that at year-end is going to be on milk costs as you 
and your economists have looked at it.
    What is the reduction going to be from the beginning of the 
year to the end of the year, and what do you think that 
reduction is going to do to the average cost of milk?
    Mr. Miller. Well, first of all, we do have a revised 
number. I believe my submitted statement suggested that the 
size of the dairy herd had declined about 145,000 head; the 
most recent data indicate it is about 138,000 head nationally, 
just a small adjustment. Obviously, by reducing the size of the 
dairy herd, that will help bring back a better supply and 
demand balance to the market, and we believe that that, coupled 
with other activities that we are engaged in, such as the Dairy 
Product Price Support Program such as the use of our Dairy 
Export Incentive Program, that we will next year see gradually 
improving prices and returns to dairy producers.
    I don't think at this point, while we have projections of 
what prices might be for the various feed crops that are a key 
part of the dairy price structure, that is going to vary 
significantly from one part of the country to another and, 
obviously, can very significantly even from one dairy farm to 
another.
    Mr. Minnick. Like Mr. Conaway, I believe in free market 
solutions. And if part of the solution is to reduce the size of 
the--the herd size, is that going to be enough by itself by 
year-end to make the production of milk at least a break-even 
proposition? Because a lot of my farmers don't have another 12 
months; they may have 6 months, but if the price does not rise 
to the point where they can afford to feed their herds by year-
end, a lot of them are going to be out of business.
    So I am really interested in the next 6 months and what 
your estimate at that point in time might be, given the dynamic 
of rapidly reducing herd size.
    Mr. Miller. Our estimates currently are that we will, 
particularly as we get into the early part of 2010, begin to 
see improving returns to dairy producers. I think the question 
is, how quickly will those dairy prices respond, and how high 
will they go so the producers can begin recovering their cash 
cost of producing milk. And, again, reduction in herd size will 
help in achieving that balance in the short term. Hopefully, 
that, coupled with the tools that we do have available and that 
the Department is implementing, will provide some additional 
economic security to those dairy producers.
    But make no mistake, this is an extremely difficult time. 
While we would like to believe that the dairy market situation 
has bottomed out--and we believe that we have or are close to 
it--it is going to take some time for these markets to recover, 
for prices to get to the levels where dairy producers are, 
first of all, covering their cash costs and, second, returning 
to profitability. It is not going to happen immediately and the 
reduction in herd size is not going to happen immediately.
    Mr. Minnick. So you are not estimating we are about to 
break even by year-end?
    Mr. Miller. No, sir, I am not at this point.
    Mr. Minnick. Then I would suggest that we need to do 
something, because our dairymen are not going to survive until 
the gradual improvement in market conditions sometime in the 
next year that you are prophesying solves the problems. So we 
had better come up with some additional measures in the 
interim.
    The Chairman. Thank you very much, Mr. Minnick.
    Now, Mr. Roe of Tennessee.
    Mr. Roe. Thank you, Mr. Chairman.
    I met with a group of dairy farmers not long ago in my 
district, about 60 of them; and 2 decades ago, we had 50 in one 
county, we have one now. The largest population county in my 
district, Sullivan County, we four dairy farmers. I don't think 
we will have any if this keeps on much longer, and certainly by 
the end of the year.
    One of the things that you and I have talked on the phone 
about and my concern--Mr. Chairman, you brought out a very, 
very important point a minute ago that this can't go on. We 
have all 12 counties in my district that are certified as 
droughts, and right now--the farm bill was passed last year, 
and I know Mr. Miller has been working hard on this, but we 
have farmers that might survive if they can get the funds from 
the drought insurance that they have.
    That might not happen until 2010. We don't know when that 
will happen, and they are desperate right now for that. They 
have already paid the insurance for it. My concern is, if we 
don't do something very quickly, we are going to wipe out the 
dairy industry in this country.
    I think you made one of the best points so far. And so what 
do we do on, for instance, being able to implement? The 
government moves so slow and these folks are running out of 
money. If you are running a dairy farm at a negative $25,000 a 
month, you are not going to go very long.
    I think our small farmers--certainly in Tennessee where we 
are, what they see is that the larger ones are going to put 
them out of business, have deeper pockets.
    Mr. Miller. Congressman, as we have discussed, we have 
taken steps to expedite the implementation of the disaster 
programs, and, particularly, the disaster programs that affect 
the livestock industry.
    We have just begun this week the sign-up for the Livestock 
Indemnity Program. The Livestock Forage Program, which is a 
drought-related feed assistance program, and the Emergency 
Livestock Assistance Program are both currently being reviewed 
by the Office of General Counsel at USDA.
    So, again, we are moving ahead as expeditiously as possible 
to make those programs available. And part and parcel of this 
issue--while, certainly, these programs have been delayed far 
longer than I would have preferred in terms of implementation, 
we need to move ahead. We certainly need, once we have these 
regulations cleared, to ensure that farmers and their creditors 
know what these programs may provide, so even prior to being 
able to make payments--which is a challenge that we face at 
USDA because of our IT systems--at least make information 
available to producers so they can begin estimating what their 
benefits might be.
    Mr. Roe. You and I have talked about that. I think if you 
and I made a salary that we made in 1979, today we couldn't pay 
our bills. That is what these farmers are faced with, a price 
that these dairymen are faced with, a price from 30 years ago, 
trying to pay bills today. And it is impossible.
    I think as we reduce herd size, the dairymen gets about 
40 cents, maybe 45 cents on a good day, per pound. Would it 
make sense to look at subsidizing that? I know the cattlemen 
might not like that, because the cattlemen are also worried 
about dumping all this dairy herd and lowering the price of 
their product. What do you do with that? They sell those 
cattle, those 144,000 you talked about, basically at a loss, 
and then you just lose less money. You don't make any money 
doing that.
    Mr. Miller. I think you raise a very serious issue. There 
really is a dilemma that confronts the dairy industry and, more 
broadly, the beef cattle industry because most of these cows 
that are being taken out of production are going to find their 
way to the slaughterhouse. So that is, in fact, a dilemma that 
this Committee has faced in the past when there were policies 
to begin reducing dairy herd size. And it is somewhat of an 
issue that is faced currently, although the scale at which the 
dairy herd size is being reduced and the speed with which that 
reduction is occurring, there probably is a better opportunity 
to gradually feed those surplus milk cows into the market than 
if there was just a wholesale program to take significant 
numbers of cows out of dairy production and, in effect, drop 
them into the beef market.
    Mr. Roe. Just very quickly. If you were the dictator, if 
you were the czar, what would you do right now?
    Mr. Miller. I would have higher prices for milk and lower 
consumer prices.
    Mr. Roe. That sound goods. Thanks. So would everybody.
    And I would like to win the lottery. How do you do that?
    Mr. Miller. It is difficult. I know it is frustrating for 
dairy producers. It is certainly frustrating for us at USDA 
and, I know, equally frustrating for you as policymakers to end 
up in this situation. It is dire.
    And we are using the tools that we have available to us in 
the 2008 Farm Bill. I believe we are using them aggressively, 
and unfortunately, the problem would be worse, probably, if we 
weren't doing this.
    But that isn't an answer to the question.
    Mr. Roe. Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Now the gentleman from New York, Mr. Murphy.
    Mr. Murphy. Thank you, Mr. Chairman. And thanks for having 
this hearing. I want to stay on the same topic we have been 
talking about with Mr. Conaway, and Mr. Roe, and with Mr. 
Minnick.
    Where is the equilibrium point right now? It sounds like we 
have about 9.2 million cows in the herd. We peaked at 9.35, and 
you say we are down 150,000. Is that about where we are, about 
9.2 million?
    Mr. Miller. That is where we will be, we believe, at the 
end of the year.
    Mr. Murphy. Where are we right now?
    Mr. Miller. We are at about 9.2 now. We will be down around 
a little closer to nine at the end of the year.
    Mr. Murphy. Where do we think the equilibrium is? We have a 
$7 billion differential this year between costs and revenues. 
Where is the equilibrium for the herd?
    Mr. Miller. We think we will be closer to equilibrium at 
the end of the year. Once we get around nine million, we are 
going to start, we believe, seeing prices improve. And while it 
takes time for these things to work themselves through the 
marketplace, we believe that the average price for milk next 
year is going to be in excess of $15 in terms of cash costs. 
Assuming we don't see a significant shock in the input markets, 
then we think we are going to be fairly close to that 
equilibrium.
    Mr. Murphy. But if we had nine million herd--nine million 
head today, we would have, roughly, equilibrium today?
    Mr. Miller. We would be moving toward equilibrium much more 
quickly.
    Mr. Murphy. How many head of cattle are slaughtered in the 
beef industry every month? Any idea?
    Mr. Miller. My experts tell me about 600,000.
    Mr. Murphy. So if we took 200,000 head out now, that would 
be material. But if you took it out over 3 or 4 months, it is 
fairly immaterial.
    What can we do? Because, to me, price supports for $7 
billion seems like a crazy idea to leave us in the same place 
we are in right now. We may have to do some of that in this 
emergency, but if 200,000 head of cattle coming out is enough 
to get us to equilibrium, where my farmers can do their work 
and break even, they would be very happy with that.
    Is there a mechanism that we can activate now to start 
taking those 200,000 head of cattle out? Because that seems 
like a pretty simple solution, something we could do fairly 
quickly over a few months.
    Obviously, we don't want to destroy the beef cattle 
industry. But it is a small number in the great scheme of 
things, and I can't imagine that is anywhere near $7 billion 
and then let the market balance itself out.
    Is there a mechanism out there for us to do that?
    Mr. Miller. USDA has very limited authority in terms of 
being able to do that. But I am not saying that we are 
completely without authority.
    The big issue with any sort of dairy herd buyout is, first 
of all, the impact that you have directly on the dairy 
industry, which we are suggesting would be positive by reducing 
the----
    Mr. Murphy. We think it is going to happen anyway by the 
end of the year.
    Mr. Miller. And it is happening and there are programs to 
encourage--the CWT Program is running, and I would have to 
assume that it is at least one significant factor in the 
reduction of herd side in addition to just the general economic 
situation. But we do have to be cognizant of how that does 
affect the beef market.
    I think we are all aware, while dairy is in a very serious 
situation, the livestock sector in this country is not 
extremely healthy to begin with. We have significant problems 
in hogs and poultry, and I don't think beef producers are just 
jumping up and down and thrilled with what they are receiving.
    So it is a delicate balance. It is a question of finding 
the appropriate authorities if you wish to do this. And then, 
certainly, again it is a question of the cost.
    Mr. Murphy. What are the authorities we would use to do 
that in the short term?
    Mr. Miller. In terms of USDA, we have very limited 
authority to actually engage in that type of a purchase 
program. However, in consultation with a number of people, 
there may--and I am saying ``may''--be able to provide at least 
some financial assistance through credit programs that could 
potentially augment the efforts of others to reduce the herd 
size.
    Mr. Murphy. Is there anybody besides the CWT Program out 
there kind of orderly reducing the herd size?
    Mr. Miller. Not that I am aware of, sir, in terms of an 
organized effort. Obviously, the market situation is causing a 
number of dairy producers to begin liquidation of their herds, 
whether it is through the CWT Program or otherwise.
    Mr. Murphy. I would love to work with you more on this, 
because we should be more orderly about it and get it done 
sooner, so that we don't just wait to see everybody starve to 
death across the whole country. Instead, we can be more orderly 
about it and get it done in a fashion that is going to be more 
humane to everybody. It doesn't seem like very far to go to get 
us back into balance.
    And thank you, Mr. Chairman.
    The Chairman. I thank the gentleman.
    The gentleman from Virginia, Mr. Goodlatte.
    Mr. Goodlatte. Thank you, Mr. Chairman. And I want to thank 
you for holding this hearing. It is a very important issue for 
not just dairy farmers in my district and elsewhere around the 
country who are suffering, but good dairy policy is important 
for hundreds of millions of consumers in the country as well.
    I want to follow up on a question that Mr. Roe asked and 
ask you why it is taking so long for the Department to make 
some of the payments that need to be made? For example, on 
drought disaster losses that occurred last year and the year 
before--thankfully, we are out of that situation right now in 
the East, but we went through a few years where we had some 
serious problems and some of our farmers still haven't been 
paid.
    Mr. Miller. Quite frankly, Congressman, the effort to draft 
the regulations for the Livestock Forage Program, which is the 
drought feed assistance program for the livestock industry, 
really only began in earnest earlier this spring, even though 
the farm bill was passed a year ago.
    What we have done in terms of trying to expedite----
    Mr. Goodlatte. Go ahead. You were getting right to my 
question with what you are doing to speed that up.
    Mr. Miller. In terms of trying to expedite the 
implementation of the disaster program, we took action to 
divide it into its components, so we could move each component 
through the USDA process, and the rest of the Administration's 
process more quickly, rather than trying to package the bundle 
of five programs together.
    As I indicated, the Livestock Feed Program is currently 
under review by our Office of General Counsel. It will move 
from there to our budget and policy----
    Mr. Goodlatte. When do you think you could expect----
    Mr. Miller. We expect we will have it out of the Department 
sometime this summer. We will then go to OMB for their review, 
and hopefully, if that----
    Mr. Goodlatte. Is anybody talking to OMB about how urgent 
it is?
    Mr. Miller. We have conversations with OMB on a regular 
basis.
    Mr. Goodlatte. Is there any way we can begin their process 
in terms of ramping up, so as soon as you have your report to 
them, they can take it and run with it and get it done in a few 
days? It is ridiculous to recognize a disaster and then have a 
bureaucratic process that goes on for, now, nearly a year after 
the farm bill was passed and still nothing for farmers.
    Mr. Miller. Well, as you are aware, I cannot commit to what 
OMB's schedule might look like. But we do have----
    Mr. Goodlatte. The Department has held it to this point. 
And at this point, we are many, many months into addressing 
something that the Congress voted to address a long time ago.
    Mr. Miller. No. I understand and appreciate that.
    We are having conversations with OMB. They are aware it is 
coming. They did expedite consideration of the Livestock 
Indemnity Program and actually got that program approved in 
what I think is probably very quickly by OMB standards.
    So, hopefully, we can continue----
    Mr. Goodlatte. Let me just urge you to continue down the 
track as quickly as you can, and go to another subject that was 
raised by the Ranking Member. And I want to express great 
concern.
    We have in this country a dairy policy that is badly in 
need of overhaul. The changed conditions that this industry 
faces, milk can be preserved longer and transported, as a 
result, greater distances, and the traditional way of looking 
at the markets and so on is a problem.
    I have struggled with that with my dairy farmers in 
Virginia, who ship their milk greater and greater and greater 
distances primarily because of the nature of this policy and 
the way it works. I believe that needs to be overhauled.
    But I am also very concerned about the direction that our 
government is taking in terms of increasing the input costs to 
dairy farmers. By far, the two largest input costs they face 
are feed and fuel. And those two things are being very 
detrimentally influenced by policies that--as you correctly 
noted, some won't take effect for a while. But nonetheless, the 
effect that they will have is not good for the long-term future 
of dairy farmers and others that could be in effect right now 
that aren't--for example, a national energy policy that would 
cause increased domestic production of all sources of energy.
    We want to develop new technology, but the cap-and-tax 
legislation that the Congress passed a few weeks ago, I think 
ignores the need to increase domestic production of oil and 
natural gas and nuclear power and so on. And that is a problem.
    But something of even greater immediate concern is the fact 
that the Administration is considering increasing the ethanol 
mandate for gasoline to 15 percent, and that will also be of 
grave concern to dairy farmers and anybody else who has 
livestock that they have to feed. It is going to increase what 
the government is mandating goes to other sectors, and that 
means they are going to have to pay higher prices for their 
corn and other feed.
    Is the Department of Agriculture taking any steps to 
communicate with these other agencies to attempt to get some 
sanity in terms of what price effect this is going to have for 
our livestock producer, especially dairy farmers?
    Thank you, Mr. Chairman, for your forbearance.
    The Chairman. Very quickly, if you can, Mr. Miller.
    Mr. Miller. Yes, we constantly are having dialogue with 
other agencies and Departments concerning the implications and 
decisions that are made in other parts of Washington, D.C., how 
those affect American agriculture. And I can assure you that 
Secretary Vilsack is not at all shy about discussing 
agricultural issues with his counterparts and colleagues.
    Mr. Goodlatte. What is he telling them?
    The Chairman. The gentleman from Iowa, Mr. Boswell.
    Mr. Boswell. Thank you. Thank you very much. I appreciate 
you being here, and what you bring to the table.
    A lot of discussion, a lot of questions about responses. 
Why don't you just, the best you can--I will give you 2 minutes 
to turn around and talk to your experts.
    What can we do here to help expedite getting some relief 
out to our dairy farmers? What can we do? What tool do you not 
have in your toolbox, Mr. Under Secretary, that you can put the 
bee on--and I think you get a lot of support from everybody in 
this room--what can we do that would get some relief out there 
really quick?
    Mr. Miller. I think in the short term, and one of the 
efforts we are undertaking in the very short term--and it is 
not a long-term solution, but that is to review the full range 
of creditor options that we have not only with FSA, the credit 
programs that are administered within my mission area, but also 
looking throughout other agencies within the Department to see 
if they have programs that we could either utilize or adapt to 
help resolve this current situation.
    As I indicated, the dairy industry is very highly 
leveraged. That is creating a significant amount of stress on 
dairy farmers currently. Anything that we can do to help 
address that, both with our direct borrowers, as well as 
others.
    Mr. Boswell. I understand that, Mr. Secretary, and I have 
confidence in you, and I have a lot of confidence in your boss. 
I hope you are actually on 24/7 down there.
    What can we do that is already here? I hope you are already 
doing that. And only you would know that. But I still think 
there could be--maybe there is not--there could be something, 
and you could say if this Committee would get something going. 
And we surprise ourselves around here sometimes; sometimes we 
can pass something pretty quick.
    And there is desperation out there. When there is 
desperation out there, if there is a desperate move we can do, 
I say, do it. And those of you who are working with it the 
closest--we have heard this testimony. I go back and I talk to 
my people.
    But it is a desperate situation, and you know it is.
    Mr. Miller. We agree it is an extremely difficult 
situation. We believe we are utilizing the authorities that we 
have that were provided to us in the 2008 Farm Bill. And as I 
indicated, we certainly are willing to collaborate with the 
Committee in terms of any other legislative authorities they 
may wish to consider.
    Mr. Boswell. We are ready to consider anything. We would 
like to get some relief out there. We are asking our experts 
from your shop to help us if you can.
    I don't want to just persist on that, Mr. Chairman. But I 
think there is a real willingness here. And I think the 
Chairman said in his opening remarks and the Chairman of the 
full Committee, everybody. So if we can, tell us, and we will 
try. Thank you.
    The Chairman. Thank you so much.
    We will now go to the gentleman from Wisconsin, Mr. Kagen.
    Mr. Kagen. Thank you, Mr. Chairman, for calling this very 
important and critical hearing today.
    Thank you, Mr. Miller, for attending and bringing to the 
table what you can.
    Wisconsin is the dairyland of America, and we hope to--
intend to succeed. But it is very tough to succeed when our 
feed costs from May of this year, $8.38, and we are getting 
paid about $11.60. So 70 to 80 percent of our income goes to 
just feeding the animals. So many of our farmers in Wisconsin, 
like across the country, are going under water.
    They are paying off their bills today with money they made 
5 or 10 or 15 years ago. So the young startup, the young 
farmers, who don't have a lot of capital reserves, are going to 
be the first to go.
    So in January, I had a conversation with the Secretary and 
we had a conversation about whether or not the herd should be 
thinned. It was a strategic decision by the Department not to 
thin the herd, not to seek a reduction of 200,000 or 300,000 
head. Instead, the DEIP Program, the Dairy Export Incentive 
Program, was being promoted. I think, to a degree, that program 
has not succeeded thus far.
    You also just testified that the credit market, the 
overarching problem we have globally with our global recession 
is part of the problem.
    So let me ask you this. Isn't it time that the dairy 
producers of this country began to have a compensation method 
that somehow tied itself, not to the cost of feed or not to the 
cost of Class I Boston milk, but rather the cost at the grocery 
store? Because somebody is still making money, it is just not 
the dairy farmer.
    Mr. Miller. Well, sir, that is certainly an interesting 
idea; and again I would indicate that as Congress wants to 
consider a new approach to dairy policy, we are certainly 
willing and would be happy to collaborate with you and any 
other Members of the Subcommittee that would like to discuss 
these options, going forward.
    I think it is obvious to the Secretary that we do, in fact, 
need to have that type of a discussion.
    Mr. Kagen. A previous question was posed to you about the 
purchase of cheese on the CME and other dairy products: Is the 
Secretary ready to pull the trigger and purchase some cheese to 
absorb some of that material, and also boost the price?
    Mr. Miller. That offer under the Dairy Product Price 
Support Program is out there. And so, to the extent that cheese 
manufacturers would wish to sell cheese inventories to USDA, we 
are certainly in the position, at the prices that are 
identified in the 2008 Farm Bill, to make those purchases. And 
as I indicated, quite likely those purchases may, in fact, be 
required to remain in storage for some period of time until we 
can find adequate avenues to remove them--hopefully, in a way 
that is not directly competing with the commercial market, or 
at least not until the commercial market recovers to the extent 
that we are not only exacerbating the current situation.
    Mr. Kagen. Is it correct, then, that it would be your 
testimony that until the global demand, the foreign demand, for 
dairy products increases, that the price will continue to be 
where it is?
    Mr. Miller. We expect that with the adjustments that have 
been made, including the projected reduction in the dairy herd, 
the activities that we have been utilizing to remove product 
from the market and move it into basically noncommercial 
chains, the activities of the Dairy Export Incentive Program, 
will, in fact, result next year in an improved market price 
situation for dairy producers.
    What we are looking at is probably something in the range 
of around a 25 percent improvement in the dairy market, 
something projected now at over $15 a hundredweight. So that is 
a pretty significant improvement.
    Would we like to see improvement occur sooner? Would we 
like the dairy situation to be resolved earlier? Of course, we 
would. I think everyone in this room would like to see that 
happen. But, again, we do have a limited range of tools; but, 
we are aggressively using those tools that we have.
    Mr. Kagen. Well, the dairy farmers of Wisconsin appreciate 
your effort, and they would also appreciate it if this Congress 
would work together, across party lines, to succeed in 
fashioning a health care reform legislation that would lower 
the cost of health care because the two costs--the two costs 
that are most at producing the overhead on the farm today are 
not just energy, but also health care--not the subject of this 
hearing, however.
    And I yield back my time.
    The Chairman. Thank you, Mr. Kagen.
    Now I would like to recognize the gentleman from New York.
    Mr. Murphy. Thank you, Mr. Chairman. I just wanted to, for 
the record, add a letter from the New York State Department of 
Agriculture and Markets with respect to the dairy crisis.
    The Chairman. So moved and so accepted.
    The Chairman. Let me just conclude the questioning. I have 
just a couple of questions.
    Mr. Miller, can you tell us about any specific plans that 
you and the Department have to ease the operating credit crunch 
for dairy farmers? And specifically, what safeguards are you 
considering to keep any action you take from delaying the 
supply correction that needs to occur?
    Mr. Miller. Well, Mr. Chairman, through the supplemental 
appropriations bill, we did finally receive an additional 
infusion of capital that we are able to use for the credit 
programs that are administered by the Farm Service Agency.
    We are aggressively engaging in an effort with our 
borrowers to make sure that they understand the complete range 
of opportunities that are available to them as they go through 
these stressful times. That can involve some restructuring of 
loans, it can involve some adjustment of interest rates and a 
number of things. So we are aggressively doing an outreach 
program that we hope to be able to communicate with them 
directly in the very near future.
    We will also be communicating with our county FSA offices 
and do as much as we can to make sure that dairy farmers and 
others that are eligible to consider these options are fully 
apprised of what they can do.
    We are also beginning to work with the private sector 
lender, the Farm Credit System and commercial bankers to see 
how we may work together, because we also do loan guaranty 
programs with many of those lenders. We may work together to 
also provide some relief to these farmers that really are up 
against the wall in terms of their ability to borrow money to 
get through this period of time. So, again, it could be an 
extension of the credit terms. It could be adjustments in 
interest rates. It could be taking a look at the principal.
    The Chairman. Can funds from section 32 be used for dairy 
farmers?
    Mr. Miller. Typically, section 32 funds have been utilized 
to provide support for those sectors of agriculture that are 
not eligible for price support activities. So they have been 
used for pork and a number of specialty crops.
    The Chairman. Let me just ask you this in concluding, 
because I am sure you ascertain that there is a sense of 
urgency on this Committee to do something quickly to help the 
dairy farmers; I would like to know your opinion.
    Do you think we can accomplish that strictly by--
administratively, or do you see a need for legislation?
    Mr. Miller. As I indicated, we have been very aggressive at 
utilizing the tools that we have at our disposal, that were 
provided by the farm bill, in terms of the safety net 
operations, as well as in terms of pursuing additional sales 
that do not compete in the available commercial market for U.S. 
dairy producers.
    So we do need to consider, are these authorities going to 
be adequate to address this situation both in the short term 
and looking forward?
    The Chairman. So, let me be clear, you are saying in your 
opinion that we do need a legislative package?
    Mr. Miller. I think we need to sit down and consider what 
else could be done to help address this situation, with the 
goal also to reducing the types of volatility that have gotten 
us into this position to begin with.
    The Chairman. Mr. Miller, thank you very much. You have 
been very helpful. We appreciate your expert testimony. I am 
sure you realize the seriousness of this issue, and our desire 
on this Committee to move quickly, as quickly as we can, to get 
assistance to our dairy farmers.
    Mr. Costa. Mr. Chairman?
    The Chairman. Yes.
    Mr. Costa. I know we are moving on to the next panel, but 
hopefully, other questions that we have we can submit to 
Secretary Miller for follow-up. And, to your point about 
raising the question; because clearly, the tools that they have 
at hand are not working. And with your leadership and with 
Chairman Peterson on how we move forward is going to be 
critical.
    And we certainly want Secretary Vilsack--I know he is 
coming out with an announcement later this week on some 
additional actions that include the commission that we created 
last year in the 2008 Farm Bill, that I initiated, to look at 
overhauling the entire Federal order and how we make it 
relevant to the current market pricing in this country. It is 
something that we are all going to be very interested in.
    So I thank the Chairman. And we look forward to you 
answering those questions that we submit to you in a timely 
fashion.
    Mr. Miller. Mr. Costa, we will be pleased to respond to any 
questions that you or your colleagues will submit, and will try 
to get a response back to just as quickly as we can.
    The Chairman. Thank you so much, Mr. Miller.
    The Chairman. And now we will hear from our third panel of 
witnesses and our final panel.
    And we are very pleased to welcome you. Thank you all very 
much for coming. We are very pleased to have you, and let me 
introduce each one of you.
    First, we have Mr. Paul Kruse, the CEO and President of 
Blue Bell Creameries on behalf of the International Dairy Foods 
Association of Brenham, Texas.
    Welcome, Mr. Kruse. Glad to have you.
    Mr. Kruse. Thank you, Mr. Chairman.
    The Chairman. We have Mr. Tom Wakefield, the National Milk 
Producers Federation of Bedford, Pennsylvania.
    Welcome, Mr. Wakefield.
    Mr. Wakefield. Thank you, Mr. Chairman.
    The Chairman. We have Mr. Brad Bouma, President of Select 
Milk Producers, Inc., of Plainview, Texas.
    Good to have you, Mr. Bouma.
    He is not here yet?
    Mr. Conaway. He went to the bathroom.
    The Chairman. We will welcome him when he returns. Thank 
you. 
    And we have Mr. Ray Souza, President of the Western United 
Dairyman, Turlock, California.
    Mr. Kruse, we will begin with you.

   STATEMENT OF PAUL W. KRUSE, PRESIDENT AND CEO, BLUE BELL 
     CREAMERIES, L.P.; CHAIRMAN, INTERNATIONAL DAIRY FOODS 
                    ASSOCIATION, BRENHAM, TX

    Mr. Kruse. Thank you, Mr. Chairman and Members of the 
Subcommittee. I appreciate the opportunity to be here today. I 
am Paul Kruse and I am CEO of Blue Bell Creameries, which is 
based in Brenham, Texas. We are an ice cream producer and we 
distribute over the southern part of the United States.
    I am proud to have a facility in your district, Mr. 
Chairman, as well as the Ranking Member's district.
    As Chairman of the International Dairy Foods Association, I 
am speaking on behalf of its 220 dairy processing members. They 
represent about 85 percent of the milk, cultured products, 
cheese and frozen desserts that are produced and marketed in 
the United States. Our members employ around 120,000 employees.
    Very clearly, we are aware dairy farmers have been hit hard 
by this economy. This concerns us greatly. The partnership that 
the dairy farmers have with us as milk manufacturers is 
critical to the overall success of the industry.
    The policies you create here affect this partnership in 
good ways as well as bad ways. I know we are talking a lot 
about short-term assistance, and that is probably necessary, 
but we think it is vital to look at whether our existing, 
outdated programs that we are living under contributed to the 
financial problems the dairy farmers are experiencing today.
    You know, the U.S. is a very efficient dairy-producing 
place. Production has grown from around 120 billion pounds in 
1975 to right at around 190 billion pounds in 2008. We are good 
at that, and we do it very, very well.
    You know, if you go back 70 years when the Federal order 
system kind of kicked in: 4.6 million dairy farms, today 
67,000; there were 22,000 dairy plants, today there are 1,200 
in the United States.
    On the demand side, 45 percent of the domestic milk goes 
into cheese; about 30 percent goes into the bottled milk as 
fluid milk; about ten percent goes into my favorite, which is 
ice cream; and the remaining 15 percent goes into butter and, 
typically, powder.
    We have seen the population in the U.S. drinking less and 
less fluid milk, but on the other side we have seen demand for 
cheese up strongly, and that is where the big growth has been 
in the use of milk.
    We feel, as an industry, we can capture more of this growth 
and increase the demand for milk if we avoid the temptation to 
put a Band Aid on an old system and consider--we need to look 
and consider long-term approaches that will allow us to 
innovate and grow as an industry.
    It has been talked about here: Our industry has a long 
history of price volatility. Five years ago, farm milk prices 
and dairy product prices were at record highs. Then we got 
around to record low prices in 2006. Then, obviously, in 2007 
and into 2008, very, very historic high prices; and now we have 
dropped off to some of the lowest farm milk prices in recent 
history.
    Price volatility makes it very difficult for folks in our 
industry to plan any long-term investments. It makes it 
difficult to capture any new markets for dairy products and 
hold on to them, or to compete with other commodities in foods 
that have less volatility. Unlike virtually all the other 
commodity groups, dairy lacks adequate price discovery and risk 
management tools.
    I am aware that the dairy farmers are locking in their feed 
costs--or many of them should be--but obviously not locking in 
their milk price. Why, for instance, can I, as an ice cream 
producer, lock in numerous years of fixed pricing on vanilla 
flavoring, forward contracting for that, but yet my biggest 
input cost, milk, is not forward contracted?
    We would like to examine why USDA's wide array of risk 
management products, such as the Livestock Gross Margin 
Insurance Program, is underutilized in the dairy industry. 
There are some calls in the industry to manage the supply or to 
limit milk production, even suggesting a new tax on milk. These 
programs have the potential to artificially raise the domestic 
price, drive people away from that to other options that they 
have, and really limit our industry's ability to modernize, 
innovate and grow.
    IDFA believes that increasing demand for dairy products, 
not decreasing production, is the best way to maintain a 
healthy dairy industry. Before the economic downturn, we were 
great at exporting; about ten percent of the milk went out of 
the country, about five percent came in as imports. When the 
world economy turns around--I think we produce more milk from 
cows than any other country, and we are very well suited to 
take advantage of that.
    New products that have come onto the market, we need to 
respond to. There are protein-enhanced waters, sports drinks, 
power bars, coffee drinks, cake mixes, just to name a few, 
crackers that are utilizing a lot of the MPCs. We need to 
change our approach to that.
    The Dairy Product Price Support System encourages, for 
instance, plants to produce the nonfat dry milk, and it is not 
really the big thing in demand. These milk protein concentrates 
are probably something that are going to continue and are 
ending up in a lot of food. There are huge investments to be 
made in doing that, and a lot of the programs work against 
stability so that these people know where they are at.
    Really, this Subcommittee will and can have a profound 
influence on the future of our dairy industry. On behalf of all 
the IDFA members, I would ask you to make some forward-looking 
changes to our regulations that allow for investment and 
innovation. This will ensure a healthy and expanding dairy 
industry both for the dairy farmers and the processors. And we 
are in the boat together.
    Thank you. And I will be happy to answer any questions if 
possible.
    [The prepared statement of Mr. Kruse follows:]

   Prepared Statement of Paul W. Kruse, President and CEO, Blue Bell
  Creameries, L.P.; Chairman, International Dairy Foods Association, 
                              Brenham, TX

    Mr. Chairman and Members of the Subcommittee, thank you for the 
opportunity to appear before you today. I am Paul Kruse, the CEO and 
President of Blue Bell Creameries based in Brenham, Texas. We have 
facilities across 18 states in the South and Southeast United States 
including the districts of Chairman David Scott, and Subcommittee 
Ranking Member Randy Neugebauer. Blue Bell has been in business since 
1907. Today the company manufactures a full line of ice cream products 
and is recognized as the third largest ice cream brand in the United 
States.
    I am speaking today as Chairman of the International Dairy Foods 
Association. IDFA's 220 dairy processing members run more than 600 
plant operations, and range from large multi-national organizations to 
single-plant companies. Together they represent more than 85 percent of 
the milk, cultured products, cheese and frozen desserts that are 
produced and marketed in the United States.
    Today I would like to discuss the status of the dairy industry in 
the United States, some the trends that have brought us to where we are 
today and our industry's enormous opportunity for growth.
    Many in the dairy industry are facing some very difficult times. 
Yet, we urge this Committee to avoid establishing new programs that 
will limit our industry's ability to grow. It is more appropriate to 
first examine our existing dairy programs. Are these outdated programs 
actually contributing to the problem? Can we find some better long term 
programs that help farmers and that will help our industry to meet its 
potential for growth?
    Dairy remains a key component of our nation's agriculture industry. 
Nationwide, the dairy industry employs hundreds of thousands of people 
on farms, in processing plants, through marketing and transportation, 
in retail stores and in companies that supply inputs to the dairy 
industry. Dairy processors are in the middle of this equation. We 
depend on our dairy farmers and cooperatives for a reliable and high-
quality milk supply to make our products. We have developed tremendous 
trust and reliance in these relationships. At the same time, our 
customers depend on us to deliver the nutritious and delicious products 
they want.
    There is not a dairy product manufacturer in this country who takes 
for granted the great resource we have in our U.S. milk supply or the 
dairy farmers and their families and cooperatives that make it 
possible. This partnership between milk producers and milk 
manufacturers is critical, and the policies and programs that you 
consider here on Capitol Hill can affect that partnership in both 
positive and negative ways.

Today's Dairy Industry
    There are different ways of measuring how farm milk is used, but 
roughly 45 percent of domestic milk production is used for cheese; 30 
percent for fluid, or beverage milk and ten percent for frozen products 
like my favorite dairy product, ice cream. The remaining 15 percent is 
used for butter, nonfat dry milk and other products.
    Although nearly every state, including Alaska and Hawaii, has at 
least a few dairy farmers, nearly \3/4\ of our nation's milk production 
currently comes from the top ten dairy states of California, Wisconsin, 
Idaho, New York, Pennsylvania, Minnesota, Michigan, Texas, New Mexico 
and Washington.
    Dairy processors, as one would expect, are clustered in these same 
areas. As an industry, dairy processors directly employ over 120,000 
people. Regional growth in milk production is now most often driven by 
a dairy processor's decision to build a new plant or increase capacity 
in an existing one.
    Decades ago, most dairy products were only marketed locally or 
regionally, but with advances in transportation and efficiencies in 
production, most of our dairy products are now marketed regionally and 
nationally. In addition, a growing global market has increased demand 
for products such as milk powders that can be easily incorporated into 
many other food products.
    The dairy industry is defined by a few fundamental trends that 
often explain governmental policy towards the industry.

   The number of dairy farms has decreased dramatically over 
        the last several decades. When Federal dairy programs were 
        first established some 70 years ago, there were over 4.6 
        million dairy farms and 22,000 dairy plants to serve our 
        population of 132 million people (1940 data). We now have 
        around 67,000 dairy farms, and about 1,200 dairy plants to 
        support nearly 300 million people. Most states have witnessed a 
        constant and steady decline in the number of dairy farms and 
        dairy plants over several decades.

   The majority of milk production has moved from small dairy 
        farms to large ones. In 2008, almost 59 percent of farm milk 
        production came from only five percent of our dairy farms, 
        those with over 500 cows. In 1940, less than one percent of 
        farms had 30 or more dairy cows, and over 90 percent of milk 
        production came from farms with fewer than 30 cows. The rapid 
        growth of the nation's dairy industry over the past few 
        decades, especially in the Western states but a trend 
        everywhere in the country, is almost entirely due to the 
        development of very large dairy farms of 5,000, 10,000 or even 
        15,000 cows.

Number of Dairy Farms by Herd Size




   For decades, these changes in the dairy farm sector, 
        combined with an overall decline in per capita consumption of 
        all milk and dairy products, limited overall growth in the 
        industry. Total U.S. milk production was held to around 120 
        billion pounds between 1940 and 1975. Since then, milk 
        production has soared and continues to grow annually.

Total Milk Production




   While farm milk production has increased dramatically, the 
        percent used in fluid dairy products fell from nearly 49 
        percent in 1973 to barely 30 percent in 2007. Annual fluid milk 
        consumption has fallen from 30 gallons per person in the early 
        1970s to barely 20 gallons per person today. With population 
        growth, this means that total fluid milk sales in the United 
        States have been stagnant for decades.

Percent of U.S. farm milk production sold as fluid dairy products




   Cheese sales, however, have significantly increased and 
        accounted for nearly all of the growth in total dairy sales 
        over the past few decades. Per capita frozen dairy product 
        production has declined over the past 15 years, from nearly 30 
        pounds in 1994 to around 24 pounds today, but total production 
        has remained relatively steady in recent years thanks to 
        population growth.

Dairy Lacks Risk Management Tools
    This is a difficult time for many in the dairy industry, and I 
would urge this Committee to avoid quick fixes and consider longer term 
approaches to address our current situation. Here's why.
    Milk price cycles are not unexpected. In fact, the U.S. dairy 
industry has a long history of price cycles. Agricultural price swings 
are nothing new for any commodity, but other sectors have well 
established risk management tools that are used frequently by all 
market participants. The same cannot be said for dairy.
    Just 5 years ago, farm milk and dairy product prices soared to then 
record-high levels where they stayed throughout 2004 and 2005. But that 
2 year period of high prices was followed by low prices in 2006. 
Starting in 2007, the pattern repeated itself. The record high prices 
in 2007-2008 have been followed by the low farm milk prices seen so far 
this year.

All-Milk Price Since 2000




    Without adequate price discovery and risk management tools, every 
segment of our industry suffers through the price swings, especially 
the small producers and small processors. Price volatility makes it 
very difficult to plan for long term industry infrastructure 
investments, to capture and keep new markets for dairy products, and to 
compete with other commodities and foods that have less volatility. 
Unfortunately, milk price regulations inhibit the use of risk 
management tools in dairy.
    IDFA recognizes that price volatility is a serious problem for 
everyone in the dairy industry. We salute the Obama Administration for 
developing credit programs that can assist dairy farmers through 
downward swings and expanding insurance programs like the ``Livestock 
Gross Margin Insurance Program''. We recommend that this Committee 
formally review how extensively this program and other risk management 
tools are utilized by the dairy industry.
    IDFA also supports providing dairy farmers with risk management 
tools such as the forward contracting program that was reinstated by 
the 2008 Farm Bill. Forward contracting is one of the most important 
tools that dairy farmers, processors and manufacturers can use to 
mitigate price swings. This chart, which uses data that the United 
States Department of Agriculture collected during the forward 
contracting pilot program, illustrates how risk management tools can be 
effectively used.
    Some segments of the industry have offered options to address price 
volatility that will ultimately compound the negative aspects of our 
current dairy policies rather than eliminate fundamental weaknesses. 
The Holstein Association USA, for example, has proposed limiting milk 
supply by taxing increases in production. This proposal would not only 
penalize many dairy producers all over the country, it will also 
artificially raise domestic milk prices and make U.S. dairy products 
less competitive on world markets.
Market Based Risk Management




    Taxing new milk production also will limit the industry's ability 
to modernize, innovate and grow. Dairy manufacturing facilities have 
been built and modernized in many parts of the country where dairy 
production is growing. Taxing increased milk production will limit 
investments into new plants anywhere in the country because the 
infrastructure investments require increased milk supply. Instead of 
rising to the challenge of capturing new domestic and international 
markets, the Holstein Association USA plan will penalize areas of the 
country that are increasing production and those areas that are 
attempting to revitalize their dairy sectors.
    Programs that manage supply or limit milk production would raise 
milk and dairy product prices and drive domestic consumers to less 
costly and often less nutritious foods. Propping up domestic milk 
prices to levels above world market prices surely would cause the U.S. 
dairy industry to lose enormous opportunities for export growth and to 
open our markets to increased imports. Jobs that could be created here 
in the United States would be going elsewhere. At IDFA, we believe that 
increasing demand for dairy products is the best way to maintain a 
health dairy industry.

Consumers Are Buying Less Dairy, Export Sales Are Off
    Although too much supply has been tagged by many as the root of our 
current low farm milk prices woes, it is more complicated than that. 
The current economic downturn has greatly affected domestic and global 
demand for dairy products.
    The chart below shows that demand for dairy products started to 
slow down in 2008 and actually decreased in the fourth quarter compared 
to the same period a year earlier. This decrease has continued so far 
in 2009.
Percent change in total dairy solids vs. same period 1 year ago
(sum of milkfat and nonfat solids)




    The same negative economic forces we see in our domestic markets 
have led to the decline this year for U.S. dairy product exports. Our 
dairy exports increased to record levels in recent years, but have 
since dropped precipitously. The volatile and complicated pricing 
system, and the standards of identity that are outdated and not in sync 
with international demand, will continue to stymie our ability to 
retain and capture even larger segments of the growing international 
market.
    In 2003, the United States imported a greater quantity of dairy 
products than we exported, and much of those exports were only possible 
due to subsidies under the Dairy Export Incentive Program. By 2008, the 
total quantity of U.S. dairy product exports had more than doubled, 
without any export subsidies. The U.S. Dairy Export Council estimated 
that in 2008 the United States exported more than ten percent of its 
milk production as dairy products, while imports have remained around 
five percent of domestic dairy product demand in recent years.
Import/Export Quantity (billion lbs)



Potential for Growth--Focus on Demand for Dairy
    There is good news on the horizon, however. Once the economy begins 
to rebound, expanding middle-class populations in many nations, 
particularly in Asia, will help to increase worldwide demand for dairy 
products. The United States, which already produces more cow milk than 
any other country, is uniquely positioned to capture these rapidly 
growing markets. Other major dairy exporting areas, such as the 
European Union, New Zealand and Australia, are held back in some way. 
Relatively new entrants to the world's dairy markets, such as 
Argentina, Paraguay and the Ukraine, are still in the early stages of 
growing their industries.
    Innovative dairy companies around the world have developed new 
dairy ingredients that are increasingly used in popular products, such 
as protein enhanced waters, sports drinks, power bars, coffee drinks, 
cake mixes and crackers, to name a few. Even traditional dairy products 
are diversifying to meet consumer demand for non-traditional 
attributes, such as new sizes, flavoring, shelf stability and 
functionality. Although it is important to the health of consumers, as 
well as the industry for Americans, to increase consumption of milk and 
our traditional dairy products, it is equally as important for our 
industry to meet the growing consumer demand for new and enhanced dairy 
products. While our U.S. industry has begun this process, our new 
products lag behind other countries.

Current Dairy Programs Limit Growth and Investment
    In many ways, our existing dairy programs stand in the way of our 
industry's ability to fully take advantage of our trading opportunities 
and to respond to our competition for new food products here in the 
United States. Most current dairy programs significantly distort the 
market for dairy products and limit our industry's growth. At the same 
time, our existing dairy programs have done nothing to smooth the 
volatility of milk prices.
    Our current policies encourage plants to produce nonfat dry milk, 
even as few food processors want to use that product. On the other 
hand, there is growing demand for products like milk protein 
concentrates which many food processors now source from other countries 
because the United States does not produce near enough. This Committee 
should consider the reasons why we see continued investment in plants 
to produce nonfat dry milk and not the specialized milk proteins 
demanded by today's marketplace. Another problem with the Dairy Product 
Price Support program is that it has the unintended consequence of 
making our products less competitive on world markets.
    There is a growing consensus in the dairy industry that the Federal 
Milk Marketing Order system needs to be significantly overhauled. The 
rigid, complex formulas used to determine minimum milk prices are the 
source of a long list of egregious problems, such as preventing milk 
from moving efficiently to its highest value. By that I mean, we should 
respond to consumer demand, not the artificial price formulas, to 
determine how milk is valued.
    The Federal orders limit new investments into the dairy industry by 
creating unnecessary financial risks for many dairy manufacturing 
plants. By limiting the returns on investment through the pricing 
structure, the Federal orders have a major impact the location of plant 
infrastructure, and the type of dairy products that are manufactured. 
There is a built-in disincentive to manufacture high-value dairy 
protein ingredients, such as whey protein isolates and milk protein 
concentrates that are increasingly being used in cutting-edge domestic 
consumer products like energy bars and sports drinks. The pricing 
formulas require manufacturers of these new products to pay prices that 
are based on the wholesale prices of dry whey and nonfat dry milk, 
completely different products with a different value in the marketplace 
compared to dairy protein ingredients.
    To emphasize this point, there is potential for significant new 
demand for milk, if dairy plants invest in the infrastructure to make 
the innovative, value-added, dairy ingredients that are so much in 
demand today. But because of our regulated pricing system that uses 
nonfat dry milk and other products to set prices, the return on the 
investment in the processing technology is very risky. Innovation is 
stymied by our system of milk price regulations. The result is less 
milk demand, less domestic milk used and lower prices to farmers.

It's Time for Change
    The policies being considered by this Subcommittee have a profound 
influence on the future of our dairy industry. If you choose to limit 
supply and guarantee high farm milk prices, our dairy industry will 
likely stop growing and slowly decline as domestic and world markets 
are captured by our competitors. On the other hand, if you choose to 
review and reform the current outdated dairy programs, you can provide 
the environment for a healthy and expanding dairy industry, for both 
dairy farmers and processors.
    With the right policies and programs in place, the dairy industry 
will be able to retain and gain customers, both here and abroad, by 
providing traditional and innovative products that address nutritional 
needs, meet changing consumer lifestyles and plumb new purchasing 
power.

    The Chairman. Thank you, Mr. Kruse. And I agree with you. 
Ice cream is my favorite and Blue Bell is a wonderful ice 
cream. I love it.
    We will now have a--I missed your introduction, Mr. Bouma. 
I hope I pronounced that correctly. If not, please correct me.
    Mr. Bouma. It is Bouma, sir.
    The Chairman. Bouma, thank you--President of Select Milk 
Producers, Inc., from Plainview, Texas. Welcome.
    Now we will hear from Mr. Wakefield, National Milk 
Producers Federation of Bedford, Pennsylvania.

          STATEMENT OF TOM WAKEFIELD, MEMBER, BOARD OF
DIRECTORS, NATIONAL MILK PRODUCERS FEDERATION; CO-OWNER, J.T.J. 
               WAKEFIELD FARMS, INC., BEDFORD, PA

    Mr. Wakefield. Mr. Chairman, Ranking Member and Members of 
the Committee, thank you for the opportunity to testify on the 
critical state of America's dairy industry.
    My name is Tom Wakefield, and I am a dairy farmer from 
Bedford, Pennsylvania. I serve on the board of directors for my 
cooperative, Land O' Lakes, and for the National Milk Producers 
Federation. It is as a representative of National Milk that I 
appear today.
    First, I would like to express our deep appreciation to the 
many Members of this Committee for working with the 
Administration by urging the effective use of the 2008 Farm 
Bill tools at USDA's disposal for assisting dairy farmers. We 
are fortunate to have many great allies in Congress, as well as 
a good friend in Secretary Vilsack, as we work to combat this 
terrible time in our industry.
    Dairy farmers are currently experiencing unprecedented 
financial catastrophe. The sudden loss in late 2008 of a large 
portion of our export market has thrown our industry into a 
supply-demand imbalance of a magnitude never before 
experienced.
    From January through May of this year, the U.S. all-milk 
price averaged almost $5 per hundredweight, below the U.S. 
average cash cost of milk production. This cost dairy producers 
billions in lost equity in just those 5 months alone. It is 
widely recognized that we need a combination of approaches to 
deal with the current situation in the future for our industry.
    We need to address not only the underlying problems that 
caused this crisis, but also the many factors that have 
contributed to its depth and duration to avoid a recurrence in 
the future.
    Towards that end, as the only organization representing 
dairy producers from coast to coast, National Milk has created 
a strategic planning task force. The goal of this task force is 
to develop a long-term strategic plan for consideration by the 
National Milk Producers Federation board of directors, which 
will have a positive impact on the various factors influencing 
both supply and demand for milk and dairy products. Our desire 
is to build a consensus across the country about the underlying 
factors affecting producer prices, and to examine ways in which 
the producer community can realistically work to address those 
factors.
    The task force is getting input from a wide range of 
producer groups as well as from dairy farmers directly. We 
believe this is the best way for the producer community to 
develop a plan for the future which can be embraced across the 
many dairy-producing regions of America. While the long-term 
planning process is underway, actions are needed to try to 
deliver short-term relief to dairy producers to see them 
through the current crisis, and to bolster demand domestically 
and internationally for U.S. dairy products.
    To do our part to address the immediate crisis, National 
Milk has been attacking the supply-demand imbalance directly at 
its roots by removing dairy cows from the national herd through 
the CWT program. More than 150,000 producing cows have been 
removed through the two most recent rounds of CWT herd 
retirements. Subsequent rounds will follow soon.
    Given the magnitude of this problem, however, we also need 
continued active involvement from the Administration.
    We ask for this Committee's support in urging USDA to 
employ three important tools at its disposal to address the 
current situation.
    One, USDA should temporarily increase the CCC purchase 
prices for cheese and nonfat dry milk under the Dairy Product 
Price Support Program and offer to purchase cheese that meets 
the commercial standards.
    Number two, we greatly appreciate the recent USDA DEIP 
announcement making sufficient quantities for the 2009-2010 
allotments available for use. Swift action to use the remainder 
of the current year's permitted quantities is needed to 
minimize the maximum impact.
    And, finally, continued usage of the Food and Nutrition 
Service and section 32 funds to purchase dairy commodities for 
use in feeding programs is needed. These useful tools help 
identify much needed support to dairy producers while also 
helping to feed the many hungry families throughout our 
country.
    We hope that through continued industry self-help actions 
such as CWT, we can bolster the effectiveness of the tools USDA 
can bring to bear on the problem to jointly address the 
suffering in the dairy producer community.
    National Milk looks forward to working with the Members of 
this Committee on best use of existing USDA programs and 
authority to address this crisis in the near term.
    We also would be pleased to provide additional information 
at a later date regarding the producer-driven outcome of our 
strategic planning task force once it develops a longer term 
plan to help ensure that we do not find ourselves back in this 
similar situation any time soon.
    Thank you.
    [The prepared statement of Mr. Wakefield follows:]

    Prepared Statement of Tom Wakefield, Member, Board of Directors,
 National Milk Producers Federation; Co-Owner, J.T.J. Wakefield Farms, 
                           Inc., Bedford, PA

    Mr. Chairman, Ranking Member and Members of the Committee: thank 
you for the opportunity to testify on the critical state of America's 
dairy industry. My name is Tom Wakefield and I am a dairy farmer from 
Bedford, Pennsylvania. My brother, Jim, and I own and operate J.T.J. 
Wakefield Farms, Inc. with the help of family members. My nephew, 
Scott, works full-time on the farm and my sons, JT and Thad, work part-
time, as they are a junior and freshman respectively at Penn State 
University. We milk 150 cows and crop a total of 600 acres, which 
includes corn, soybeans, alfalfa and barley.
    I am on the Board of Directors for my cooperative, Land O' Lakes 
and I also serve on the Board of Directors for the National Milk 
Producers Federation (NMPF). NMPF develops and carries out policies 
that advance the well being of dairy producers and the cooperatives 
they own. The members of NMPF's 31 cooperatives produce the majority of 
the U.S. milk supply, making NMPF the voice of more than 40,000 dairy 
producers on Capitol Hill and with government agencies, and I am 
offering this testimony on their behalf.
    First, I would like to express the dairy producer community's 
strong appreciation to the many Members of this Committee, as well as 
several other Members of Congress who have been devoted to the health 
of the dairy industry in their district or state, and who have worked 
with the Administration to try to effectively use the tools at USDA's 
disposal in an effort to preserve our nation's dairy farms during this 
period of widespread economic hardship. Congress put in place several 
measures in the 2008 Farm Bill that USDA has the authority to use to 
try to address this problem. We have been fortunate to have good 
partners in many in Congress and in Secretary Vilsack in trying to find 
ways to best utilize those programs during this historically trying 
time for our industry. These very useful measures have helped to blunt 
the impact of the crisis currently facing U.S. dairy farmers.
Economic Crisis:
    U.S. dairy farmers are currently experiencing an unprecedented 
financial catastrophe. The sudden loss in late 2008 of export market-
based demand equivalent to about three percent of domestic milk 
production has thrown the industry into a supply-demand imbalance of 
magnitude never before experienced. During January through May this 
year, the U.S. average all-milk price reported by USDA/NASS has 
averaged $4.80 per cwt. below the U.S. average cash cost of milk 
production, as reported by USDA/ERS. As a result, approximately $3.9 
billion of dairy producer equity has been lost during these 5 months. 
More recently, the milk-feed price ratio for both May and June (which 
remained the same for both months) was at its lowest level since the 
current form of that calculation was created in 1985. The chart below 
demonstrates visually just how extreme the discrepancy between milk 
prices and input costs is currently and in comparison to recent years. 



    Some have claimed that the problems we face are a result of a surge 
in unrestricted imports, particularly Milk Protein Concentrates (MPCs) 
and casein products, two tariff loop-hole avenues that importers have 
made strong use of in recent years. NMPF has long called for 
establishing tariff-rate quotas on MPC and casein, in keeping with our 
WTO rights and obligations. However, it is important to set the record 
straight regarding the cause of the problem we are now facing in order 
to develop the best response tools to address it in both the short and 
long term.
    The truth is that we have not seen a significant surge in imported 
dairy products into the U.S. Imports of MPCs through April are up 
slightly at 3% over last year, although this is a small change. By the 
official import data, imports of caseins are actually down somewhat 
from the same period in 2008. Imports of other notable dairy products 
such as butterfat (up 40% from a relatively small 2008 volume) and 
cheeses (down 7%) face limitations due to existing tariff-rate quotas. 
NMPF continues to support the creation of TRQs for loop-hole products 
such as MPC and casein and it is essential that we zealously enforce 
importers to comply with U.S. standards and trade obligations; however 
imports are not the cause of the problem we are facing. Stepping 
blindly back from active engagement in trade and from the global market 
would do more to harm the future prospects for our industry than to 
help them.
    The chart below depicts the U.S. dairy trade balance on a milk 
solids basis as a percentage of U.S. milk production. The chart shows 
that on a total milk solids basis in 2009 year-to-date, imports of 
dairy products are actually down compared to recent years. What is 
particularly notable--and the largest cause of the current economic 
crisis facing our industry--is the steep drop in exports from 2008 to 
2009, driven by a much lower global demand and larger supplies from 
exporters that are moving aggressively to push their own products off 
their shores at whatever price necessary. 



    These dire conditions have caused many in our producer community to 
begin to cast about for various solutions to this problem. As a 
national organization representing dairy producers throughout America, 
NMPF is keen to ensure that we spend our industry's and our 
government's valuable time and energy pursuing only realistic and 
rational proposals that would appropriately address the situation we 
are now facing.
    Towards that end, NMPF has created a Strategic Planning Task Force 
to build consensus across the dairy producer community with respect to 
the underlying factors affecting producer prices and to examine ways in 
which the producer community can realistically work to address those 
factors. The goal of this Task Force is to analyze and develop a long-
term strategic plan for consideration by the NMPF Board of Directors 
which will have a positive impact on the various factors influencing 
both supply and demand for milk and dairy products.
    Through a round of listening sessions, the Task Force will bring in 
organized producer groups representing different segments and 
constituencies all across the country to obtain widespread input and 
access to the best ideas. Individual cooperatives have also been 
invited to provide proposals to the Task Force for consideration and 
review. Following its meetings with the various dairy producer 
organizations, the Task Force will analyze and discuss the many 
proposals and options, and ultimately develop recommendations for the 
NMPF Board of Directors. We believe this is the best way to get input 
from the producer community in order to develop a plan for the future 
which can be embraced across the many dairy-producing regions of 
America.
    While that long-term planning process is underway, however, actions 
are needed in the interim to address the significant economic plight of 
dairy producers on an immediate basis. A combination of several 
measures is needed to try to deliver short-term relief to dairy 
producers to see them through the current crisis and to bolster demand 
domestically and internationally for U.S. dairy products.
    To do our part to address the immediate crisis facing the industry, 
the National Milk Producers Federation, through its CWT program, has 
been attacking the supply-demand imbalance directly at its roots, by 
removing dairy cows from the national herd. Dairy producers have spent 
$115 million of their own hard-earned money this year on our most 
recent herd retirement program, the largest one in CWT's history, and 
are prepared to spend up to $160 million more in subsequent rounds of 
our program in the near future. More than 150,000 producing cows have 
been removed through the two most recent rounds of CWT dairy herd 
retirements, and subsequent rounds will follow soon.
    Given the magnitude of this situation, however, we also need 
continued active involvement from the Administration to help see 
America's dairy farmers through this crisis in the short-term so that 
our industry can make better and more sustainable plans for the future. 
It is because of this that NMPF has recently asked USDA to temporarily 
increase the CCC purchase prices for cheese and nonfat dry milk under 
the Dairy Product Price Support Program and that USDA offer to purchase 
cheese that meets commercial standards (Chicago Mercantile Exchange or 
NASS reporting standards), which could be immediately used in food 
assistance programs.
    Mindful of the budgetary pressures facing our nation, we proposed 
that the higher CCC purchase prices be put in place for only 3 months 
and be set at the levels NMPF originally proposed for the DPPSP program 
in the 2008 Farm Bill: $1.19 per pound for block cheese, $1.16 per 
pound for barrel cheese, and $0.84 per pound for nonfat dry milk. As 
this Committee is well aware, such an action is expressly authorized by 
the 2008 Farm Bill which merely directs USDA to purchase those products 
at prices ``not less than'' those specified in the legislation. We are 
thankful that Congress had the foresight to allow USDA the leeway to 
set higher purchase levels if they were determined to be necessary. If 
both the price increases and the equally important commercial cheese 
standard proposal were put in place during July through September, they 
would prevent the loss of approximately $235 million in U.S. dairy 
producer income during that period.
    An equally important measure is the use of our WTO-authorized, 
Dairy Export Incentive Program (DEIP). NMPF is urging USDA to build on 
the positive step taken in May to announce the 2008-2009 Dairy Export 
Incentive Program (DEIP) by moving quickly to open the 2009-2010 DEIP 
year for bidding. We are appreciative of the step USDA took early last 
week to announce the full allocations for the current DEIP year and 
hope to see the critical next step of opening the bidding process to 
use the entire amount of the allocations soon thereafter. Full use of 
DEIP, which would be facilitated through allowing the maximum time 
period possible for submission of bids in the current 2009-2010 
marketing year, has the potential to move the equivalent of more than 
1.5 billion pounds of milk to overseas markets. This would be a strong 
positive step towards alleviating considerable pressure on U.S. markets 
and the DPPSP.
    In addition, we applaud the steps that USDA has taken to use Food 
and Nutrition Service funds to purchase dairy commodities for use in 
the feeding programs so much in demand in these currently challenging 
economic times. This is a useful tool to help provide much-needed 
support to dairy producers while also helping to feed the many hungry 
families throughout our country. The use of Section 32 funds, once they 
are provided to USDA through the current appropriations process, would 
also help significantly to achieve these same goals.
    We ask the Members of this Committee to join with us and our fellow 
dairy farmers across this country in calling on USDA to use those tools 
already at its disposal in order to help dairy men and women make it 
through this historic economic catastrophe. We hope that through 
continued industry actions such as CWT, we can bolster the 
effectiveness of the programs USDA can bring to bear on the problem to 
jointly address the suffering in the dairy producer community.
    NMPF looks forward to working with the Members of this Committee on 
the best use of existing USDA programs and authority to address this 
crisis in the near-term. We also would be pleased to provide additional 
information at a later date on the producer-driven outcome of our 
Strategic Planning Task Force once it develops a longer term plan for 
how to help ensure that we do not find ourselves back in a similar 
situation any time soon.
    Thank you.

    The Chairman. Thank you.
    Mr. Bouma.

  STATEMENT OF BRAD BOUMA, PRESIDENT, SELECT MILK PRODUCERS, 
                      INC., PLAINVIEW, TX

    Mr. Bouma. Thank you, Mr. Chairman, Ranking Member. I 
appreciate the opportunity to be here today. I represent Select 
Milk Producers. I am the President of the Board of Directors of 
Select Milk Producers. I am a member of Continental Dairy 
Products in the Upper Midwest in Indiana and Michigan. And I 
serve on the Greater Southwest Agency, which markets all of the 
milk in Texas and New Mexico combined.
    I am a fifth-generation dairy farmer. My sons are at home 
in Texas today taking care of the farm, and my partner is in 
Indiana taking care of that one.
    We find ourselves in a perfect storm in this industry. And 
it has been alluded to by numerous testimonies prior to mine, 
so I won't spend a lot of time going there. But with the 
reduction of five or six percent of our export market, along 
with the strengthening of the U.S. dollar and many factors that 
play into consumption--of the worldwide consumption of dairy 
products, that, alongside high input costs, have created a 
perfect storm in our industry.
    We fully believe, and I fully believe, that our support 
price system as we know it today is antiquated. I agree with 
Mr. Kruse's comments. We create a powder today that can't be 
sold in the world market as it is. Mr. Costa alluded to it. We 
alluded to the cheese specifications that can't be marketed in 
the world market today.
    We have a make-allowance system within this that takes into 
consideration the cost to produce cheese or the cost to produce 
powdered milk that goes into this price formula, which allows 
older, antiquated processing facilities to still be profitable 
in this country, and is a detriment to newer, more innovative 
processing facilities being built.
    Our actual cash support price for powder today is stated as 
$9.90 by the Secretary. Our actual returns are about $9.35, if 
you look at the make-allowance and the adjustments that have 
been made in it in the last couple of years. If we are looking 
for immediate relief as far as dollars are concerned, within 
the realm of what the Secretary can do, $9.90 would be an 
immediate--that stated support price would be immediate in that 
respect.
    The truth of the matter is the world market for powder is 
65 cents or 70 cents today, maybe 75 cents on its best day. It 
is rising a little bit. Whey proteins are rising. But we still 
subsidize our product 90 cents in this country, and we wind up 
taking this product and storing it in warehouses all over the 
country.
    We store the butter in caves all over the country, while 
the rest of the world puts its product out there and clears its 
market. We have become the balancer for the world's commodity 
products in cheese and butter and powder, while our competitors 
in the world market are keeping their markets cleared at 
10 cents or 15 cents below ours.
    What happens in this process is now that once we do make 
this recovery and once these 150,000--which we really believe 
needs to be 300,000--cows are ultimately out of the herd, that 
when we do make this recovery, we as a country now have to chew 
through this balancing process that has been stacked up and 
others have alluded to. And this will wind up back in the 
cheese vat, and it will wind up back in the processing of 
American cheese products, and it will continue to inhibit the 
recovery of the farm price on the farm milk products.
    We firmly believe that if the Administration and this 
Congress wants to be involved in that, then create a program of 
insurance or create a program comparable to corn and beans that 
allows those prices to fluctuate with seed and meat prices and 
world prices and be cleared. And instead of using the dollars 
to store powdered milk in warehouses and butter in caves, put 
the program back into an LDP program, or some type of insurance 
program, back to the dairy industry.
    For us to compile these massive inventories during this 
time is just a detriment to us on the backside of this bell 
curve as we come out of these times, and will be in this case 
as well.
    Second, folks talk about supply management. Our friends in 
Canada's system has been brought up. Supply management works in 
Canada because they are neighbors of the United States of 
America, and we are a free market.
    We can't send milk there. They send their excess dairy 
cattle and heifers here. We purchase them.
    If we have a free market trader next door, we can balance 
on them, then supply management will work here.
    If we can restrict this market to a domestic market only 
through some supply management vehicle, everybody in this room 
will be back here asking for tariffs against MPCs and 
caseinates and things that are now working their way, at a 
world market price, back into our domestic market.
    The crisis in the country today is human. It doesn't make 
any difference if you milk 100 cows or 3,000 cows. At $100 plus 
a cow month in losses cannot be tolerated by this industry. But 
putting temporary Band-Aids on long-term problems on how we 
price milk in this world, and how we continue to access our 
portion of the world market is not a solution to what we are 
after today.
    We need long-term solutions for our industry to be viable 
and continue. Thank you.
    [The prepared statement of Mr. Bouma follows:]

  Prepared Statement of Brad Bouma, President, Select Milk Producers, 
                          Inc., Plainview, TX

    Mr. Chairman, on behalf of Select Milk Producers, Inc. and 
Continental Dairy Products, Inc., thank you for giving us this 
opportunity to discuss with you the economic conditions that face dairy 
today with a focus on the opportunities and challenges ahead for this 
industry.
    My name is Brad Bouma. I and my wife Barb live in Plainview, Texas 
where we operate an integrated dairy farm. With the addition of our 
sons Brandon and Brent to the management team, we represent five 
generations of dairy farming that began in The Netherlands. I also 
partner in a dairy farm in NW Indiana and am the operating partner in a 
commercial dairy heifer feedlot in Hale Center, Texas.
    I serve as President of Select Milk Producers, Inc., my marketing 
cooperative and as a Member of the Board of Directors of Greater 
Southwest Agency. I am a member of Continental Dairy Products which 
markets my Indiana farm milk. I also serve on the Board of Directors of 
First National Bank, El Paso.
    Select Milk is a milk marketing cooperative with members in New 
Mexico, Texas, Oklahoma, and Kansas. The Greater Southwest Agency is a 
cooperative of four cooperatives--Dairy Farmers of America, Lone Star 
Milk Producers, Zia Milk Producers, and Select. The annual deliveries 
by members of GSA would qualify it, if a state, as the third largest 
milk producing state after California and Wisconsin. What makes it 
unique is that virtually all of the milk produced in that region is 
jointly marketed in a highly coordinated fashion so as to deliver milk 
to the customers in the most cost effective manner and provide benefits 
to the producers supplying that market.
    GSA has brought producers less costs in marketing their milk 
through greater efficiencies in hauling, testing, and pricing. By 
working with other producers and gaining the trust of our buyers, GSA 
has succeeded in managing the milk marketing in that region for a 
decade without the need for a single milk marketing order hearing for 
Southwest Milk Marketing Area issues. No other order can say that.
    GSA balances the milk in the region and fairly handles the details 
associated with allocating the costs of such balancing. GSA is a 
partner in one of the largest cheese plants in the world, Southwest 
Cheese located in Clovis, New Mexico. We continue to research new plant 
and partnership opportunities that will make our co-ops more efficient 
and competitive in the world market.
    Continental Dairy Products, Inc. is a milk marketing cooperative 
with members in Michigan, Ohio, and Indiana. The milk of Continental's 
members supplies customers in the Mideast, Appalachian, and Southeast 
marketing orders. Due to its high quality feed, abundant fresh water, 
good dairying climate, and proximity to the major markets of the United 
States, that region of the country along with the Upper Midwest are 
poised for further growth.
    Though using different legal entities to maximize tax, estate 
planning, and other business goals, all of the farms that are part of 
Select and Continental are owned and operated by families just as I and 
my family do.
    The farms in the SW are typically some of the largest in the world. 
However, the size of the farm will not define the successful dairies of 
the future. As we discuss the future we all must get away from the 
``large and small'' debate. Rather we must channel our resources in the 
direction of what it takes to compete in today's world market. Farmers, 
regardless of size, in the USA can and must produce the highest quality 
milk possible. We have been the World's leader in high quality, 
affordable food stuffs and we must enhance this position. Size of dairy 
farm does not change that.
    With the goal of moving as a world leader here some of the 
challenges facing the dairy industry.
    Animal ID is important. The degree of traceability from farm to the 
store must be transparent to assure our customers that we provide the 
safest food available. We support animal ID.
    We must engage in on-farm energy audits and research all 
alternative on-farm energy sources available. Members of our 
cooperative have invested heavily in and currently are operating 
numerous methane digesters powering electric generators for use on our 
farms in Indiana; they are studying a solar alternative in Texas; and 
are very close to successfully compressing methane gas into compressed 
natural gas (CNG) that will power our truck fleets.
    By employing these technologies and recycling the by-product of the 
manure processing we are able to shrink our carbon footprint 
tremendously.
    This combination of harvesting energy from the farm and use of the 
remaining nutrients as fertilizer, we will create a ``sustainability 
model'' that is world class. The size of the dairy farm has no effect 
on the above opportunities if we as a nation put in place the proper 
incentives.
    The current economic depression in dairy farming will result in 
major changes in the location and method of dairy farming. The business 
model that called for only owning the dairy and buying inputs, one of 
the most popular in the West, is failing those who relied upon it. This 
crisis has proven that successful dairymen must be further integrated 
with their feed supply. The owners and operators of these farms and 
their successors will necessarily have to be more efficient and located 
more strategically to sources of feed, water, and markets.
    As serious as this economic situation is, and it is very serious, 
there is little than can be done now to alleviate it. It simply must 
pass. At the same time we certainly appreciate the efforts of the 
Secretary to increase purchases of dairy products. Realistically we do 
not see that as a long term program. There is only so much domestic 
demand whether through government or consumer purchases. It is the drop 
in exports which has reduced demand below our supply. It is increasing 
exports that promises a brighter future.
    This crisis has shown the need for better price risk management by 
dairy farmers. Those dairymen who weather this storm the best will be, 
for the most part, those who had the foresight to manage their price 
risk before the markets failed. Though such practices did not ``lock in 
a profit'' in every case, each of them certainly were able to fix their 
losses to a level which could be weathered. As the industry moves 
forward the need for and use of the price risk management tools will 
increase.
    There are other changes occurring in the dairy industry not driven 
by the depression. One of those is the growth in consumption of organic 
milk. The USDA's organic certification program has been a major boost 
to this sector by assuring consumers that the organic label means that 
the products contained in the package are produced in a way that 
minimizes or eliminates pesticides, herbicides and other chemicals in 
the food supply.
    Select and Continental members with farms in Texas and Indiana are 
one of the major suppliers of organic milk. Though not at the steep 
curve experienced in recent years, we expect this sector to continue to 
grow. Some of these sales are additional milk sales and, as such, 
increase demand for dairy products.
    To further increase demand, Select has invested millions of dollars 
over the last decade to develop innovative products which would 
increase sales of dairy products, not cannibalize other milk sales. 
Through patented technology, Select has developed the means to create 
``designer milks''. High quality milk fresh from the farm goes through 
several filtration processes separating the fat from the protein from 
the sugars from the calcium and other solids from the water. These then 
are recombined in different ratios to provide a different profile of 
milk. The double sugar, lactose, is converted to two simple sugars, 
glucose and galactose. These sugars are sweeter than lactose and thus 
the carbohydrates in the drinks can be reduced while maintaining the 
same sweetness of milk.
    For 5 years HEB has been marketing one such milk in Texas This 
designer milk, called Mootopia, has more protein and more calcium (all 
fresh from cow's milk) but with fewer carbohydrates. This lactose free 
milk still tastes the same sweetness as regular milk.
    We have also recently introduced a new designer milk called 
Athlete's Honey Milk. This product delivers more milk protein with 
natural honey added. The result is a restorative drink with natural 
carbohydrates and proteins to aid individuals after biking, running, 
rowing, or other physical activities. With our food scientist in Idaho 
we continue to look for other ways to provide quality food products for 
consumers using milk.
    Without doubt the single most important Federal program in dairy 
today is the milk marketing order program. Since its inception, this 
program has succeeded in developing a great industry.
    The fundamental part of the FMMO program is minimum pricing. Since 
the late 1990's USDA has relied in part or in whole on product formulas 
for pricing milk. These product to price formulas prices use surveyed 
commodity product prices, make allowances, and yields to determine the 
milk value.
    Despite this long term use of such formulas, there has not been the 
kind of on going systematic research and study of what the yields and 
make allowances should be to derive a fair price. Instead the 
Department has relied upon public testimony from those who would 
benefit the most from lower milk prices. The result is a hodgepodge of 
a system that surveys product prices of one subset of the commodity, 
uses make allowances from plants making other products, and yields 
which have never been supported in any study.
    More importantly, this pricing method has had the effect of forcing 
prices down on dairymen. The current make allowances reward plant 
inefficiencies by shifting them to producers. It is ironic that at this 
time when many dairy farmers receive less money for their milk than the 
cost of the feed that went into them, plants that use that milk remain 
profitable. Considering the formulas are designed to do this, it is not 
surprising, nor is it consistent with the spirit of the AMAA.
    A recent decision on make allowances shows the Department's refusal 
to even think in terms of what it costs a dairyman to produce milk. In 
the recent farm bill, the Secretary was required to determine cost of 
production in the marketing areas and consider these factors in 
changing make allowances. The Department failed to do any of that when 
it substantially reduced producer milk prices. This is unfortunate. 
While we certainly do not want prices for milk linked to cost of 
production, certainly the Department must show that it knows whether or 
not current price levels are sufficient for a significant portion of 
dairy farmers to profitably produce milk. Complying with the law would 
be the first step.
    In any event, this end product pricing must end and end soon. The 
four classes of milk need to be replaced with a much simpler one price 
discovery system with two classes of milk-bottled and everything else. 
The system would allow plants and producers negotiate competitive 
prices for milk used in manufacturing. These prices would be surveyed 
and used to establish minimum prices for Class I. Plants in combination 
with their producer suppliers would be free to price and market dairy 
products to the world.
    We are working with NMPF and IDFA and others to develop a 
competitive pricing series that lets the market place tells us the 
value of milk. This will bring an end to the product formulas and the 
contentious hearings that they bring.
    The farm bill also modified procedures for amending marketing 
orders. The first hearing after these took effect was one involving a 
few changes to some Class I pricing in southern counties of the Mideast 
Order. It was a very simple issue with a few players and took a few 
days. The new rule changes worked fine in that environment and 
successfully brought a rulemaking proceeding within a tolerable time 
frame.
    Broader, national hearings, do not easily fit into the strictures 
of these new mandated time lines. Select and Continental recently 
participated in the first national hearing called under these new 
rules. The producer handler hearing was held to consider twenty-nine 
proposals which requested 159 amendments to the marketing orders.
    To meet the hearing deadlines imposed by the farm bill, the hearing 
on producer handler exemptions was held in one location, Cincinnati, 
and went 12 long days, some of them until 9 p.m. The transcript is 
nearly 4,000 pages with over 100 plus official notice of numerous other 
collections of dairy statistics. The witnesses numbered over forty.
    The hearing was handled superbly by ALJ Jill Clifton and Dairy 
Programs provided responses to large data requests by the participants. 
The transcript, professionally done, is among the best of any FMMO 
hearing in memory. Briefs are due this Friday.
    Such mandated compression of a formal rulemaking of such a 
magnitude has not come without cost. First, for the participants, not 
just the professionals, but witnesses, affected dairy farmers and 
processors, and government employees it required nearly 3 week absences 
from families and jobs. The speed at which the hearing was called and 
held also impaired the ability to provide the kind of testimony and 
evidence that would help in making the decision better founded. Having 
it in only one location, made necessary because of the time limits, 
denied some parties the opportunity to participate because of distance.
    In the past, during the time leading up to the hearing and during 
the hearing itself, parties begin to compromise positions and 
coordinate and coalesce around just a few proposals. This assists 
everyone in making much more focused record, briefs, and decision. The 
short time frame made that opportunity unavailable. The intense hearing 
schedule left little time to prepare witnesses and even less time for 
participants to discuss compromise.
    For the Department to meet its own deadlines, it has restricted 
public participation by denying the use of e-mails or faxes to present 
positions and has effectively shut off the use of the Postal Service to 
deliver comments. In the past e-mailed or faxed comments or comments 
postmarked on the due date were timely. For this hearing only physical 
copies delivered to the hearing clerk in D.C. will be timely. This can 
be accomplished only by having someone physically come to D.C. to make 
the filing or rely on expensive delivery services. While for the 
professionals involved in this process, it is an inconvenience, for 
producers and consumers it is a barrier to participation that is simply 
unacceptable. This should not happen in the future.
    One thing that did assist the industry and the Department in 
holding this hearing in the short time frame was that the issue was 
well understood by the industry, long debated, and all parties could 
marshal the resources necessary quickly. In future hearings involving 
novel issues or facts, this may not be the case. Under the new regime 
it is possible for a party to do massive research and preparation for 
major proposals and wait until it is ready to make that presentation. 
While it was able to dictate the time, the Department and all of the 
respondents will be forced to do so with immovable deadlines ahead. The 
potential for serious sandbagging is now present.
    Overall the changes are beneficial by providing the industry with 
timely decisions. The Department is committed to complying with the 
law. On the other hand, we would recommend that the Department be given 
some ability to exercise discretion for cause in adjusting the 
deadlines to adapt to the nature and magnitude of the issues being 
addressed at the hearing. In the case of major rule changes, such as 
proposals for competitive pricing, it will be necessary to allow 
greater preparation time for all participants as well as response by 
the Department.
    Another long time dairy program is the Dairy Price Support Program. 
It has outlived its usefulness. The current method of marketing NFMP by 
large co-ops has made CCC the price support program for the rest of the 
world. It keeps U.S. powder in the United States at higher than market 
prices allowing other world players to grow demand for their products. 
The large inventories of powder will dampen prices for dairy farmers 
for some time. The program also takes away market signals to producers 
to produce less.
    In connection with the FMMO pricing, we need to replace both the 
DPSP and end product pricing. It creates unneeded incentives to build 
plants and make product for which the demand is cyclical.
    The protection that DPSP used to provide can be done with new 
programs such as non-recourse loans, expansion of the Livestock Gross 
Margin program, or a loan deficiency payment program for dairy.
    In response to today's crisis there is a call for the U.S. to 
implement some form of supply management. We oppose that. Base programs 
and production controls have not worked anywhere else in the world. 
Europe's base plan is in shambles and on farm prices are the lowest in 
decades, with farmers protesting all over the Continent. Canada's 
system keeps production volumes matched with domestic usage. This only 
works if you have in place tight tariff controls on imports. If we 
attempt to shrink U.S. milk production to equal domestic consumption, 
imports of MPC, caseinates, and milk fat will pour into our country 
further eroding our own internal market. We will not only lose our 
place in the world market, we'll lose more and more of our market at 
home as well.
    The issue of climate change legislation is challenging. We do not 
have any answers but would note that we have been working for years to 
reduce our carbon footprint through innovative methods of handling and 
using our manure. We appreciate the Chairman's successful efforts in 
protecting early innovators and leaving the oversight of agriculture 
under the USDA.
    As this Committee knows, high prices for corn and soybeans as well 
as fuel further reduce margins already low due to the low milk prices. 
A significant part of these higher commodity prices are due to 
excessive speculation in the exchanges. We applaud Chairman Peterson 
and the Committee's efforts at working to reign in this improper 
speculation.
    As populations grow, the need grows to move more and more product. 
The time has come to increase the size of trucks hauling milk to reduce 
fuel usage, reduce emissions and meet the needs of a growing market for 
food and other products. We ask the Members support for changes in the 
Federal Highway Reauthorization Act to allow states to authorize the 
use of six-axle, 97,000 pound tractor semi-trailers on the Interstate 
Highway System. We commonly move milk in the Southwest to the fluid 
markets in eastern and southern Texas over 500 miles. Giving states 
like Texas the option would reduce fuel consumption and costs for 
producers, processors and consumers.
    The need for a comprehensive change in immigration to allow a guest 
worker program usable by dairy farmers is long overdue. Any help by 
this Committee and its Members in that regard would be appreciated.
    America has historically been the world's source of high quality 
affordable, accessible food. If we are to maintain this position we 
must do the following things:

    A. We must create incentives for our farmers, large and small, 
        through performance based tax incentives to develop and 
        implement the technologies create energy on farm. These include 
        capturing methane gas that powers generators that create the 
        electricity for the farm or nearby communities, converting 
        excess methane to CNG to power farm machinery and 
        transportation of milk, implementing wind and solar power 
        options. Good old American ingenuity will create the most 
        sustainable and competitive dairy industry in the world if we 
        put our ag dollars to work in the right areas.

    We must overhaul our pricing and safety net systems to allow our 
        industry to compete on the world stage.

    We must let market forces work. Less, not more, government 
        involvement is needed to make the dairy industry the best in 
        the world.

    Thank you.

    The Chairman. Thank you, Mr. Bouma.
    Now, Mr. Ray Souza, President of Western United Dairymen.

          STATEMENT OF RAY SOUZA, PRESIDENT, BOARD OF
DIRECTORS, WESTERN UNITED DAIRYMEN; OPERATOR, MEL-DELIN DAIRY, 
       TURLOCK, CA; ON BEHALF OF CALIFORNIA DARIES, INC.

    Mr. Souza. Good afternoon. Thank you, Chairman Scott, 
Ranking Member Neugebauer, and the rest of the Members of the 
Committee. I appreciate this opportunity to testify before you 
here today.
    My name is Ray Souza. My wife and I have operated Mel-Delin 
Dairy for over 40 years. The milking herd today is about the 
size of the average size dairy in California.
    I am currently the President of Western United's Board of 
Directors, representing 1,100 of the 1,700 dairy families in 
California. I am also a member of CDI, California Dairies, 
Inc., which is the second largest cooperative in California.
    We have heard a lot of testimony today, and I wanted to put 
things in more of a personal level and give you an example of 
two different dairy families.
    The Linhares family has been in the dairy business for over 
100 years. They were recently recognized by our city during the 
centennial as the oldest continuing agricultural operation in 
our region. Three weeks ago they were milking cows. The three 
most recent generations are still active in the dairy farm. Of 
course, the previous have passed on, with the grandson hoping 
to take over the operation.
    At a meeting they had between the family, they came to the 
conclusion that they were weeding through their equity so 
quickly that they could no longer sustain their operation. They 
felt they had to dissolve their operation so that they would 
have something to pass on to the next generation. That farm is 
now out of business.
    The other example is a young man who, through hard work 
with his family a year ago, was able to raise enough capital to 
be able to buy a dairy farm. He entered in that dairy farm with 
a 50 percent deposit on the farm, half of the cows paid for the 
day he entered. Of course, the banks were lined up and 
everybody wanted to do business with the young man.
    In the last 10 months, his equity has evaporated to 
nothing. Today he is insolvent after working all those years to 
put that kind of a deposit on that kind of a herd. He also will 
soon be out of business.
    We have had a record fall in prices. I have had heard $12 
milk today, and I have heard $10 milk. I wish we were that 
fortunate. We have been dealing with an all-milk price in the 
$9 range since the first of the year, and there doesn't appear 
to be much of a chance for a short-term recovery.
    The value of our herd is diminished now. We have lost in 
the value of the herd $2.6 million, and that is just the dairy 
herd in California alone.
    Our equity has dropped by half, and yet we continue to 
borrow and to continue to leverage on the remaining half at the 
cost of nearly $100 per cow per month. That is a cash cost of 
$100 per cow per month.
    These long-term negative prices have us to the point where 
it is not only affecting the dairy farmers, our ag lenders are 
now beginning to feel the crunch. They are having their own 
problems. Our feed companies are beginning to be denied credit. 
And in San Joaquin Valley, most of the milk in California is 
produced in San Joaquin Valley, we have a 20 percent, nearly 
now 20 percent unemployment. These are jobs not only for the 
dairymen, but for the residents of our valley that are highly 
critical. They are highly necessary.
    We thought 2006 was a bad year when we lost $3.36 a 
hundredweight. Today we are at a $9 loss per hundredweight. 
High feed costs--all of you have heard all of this before--
continue to create problems for the dairy business. There is 
very little good news.
    So what we did in December as an organization, we formed a 
task force to look at some of these problems. We put together 
three different groups. It is a comprehensive group 
representing producers, processors, cooperatives and their 
accountants.
    We have had a number of meetings to address some of these 
issues, and some of the things that we have come up with is 
that we also believe we need a short-term solution. As someone 
said in that meeting, when your house is in on fire it is not 
time to cut the lawn.
    We do have a long-term goal in mind, too, including once we 
get past this crisis, because we think it is going to take 
time, study and analysis to put long-term programs together.
    We have looked at and I will talk about some of the 
existing programs. The Dairy Price Support Program: Today's 
price actually paid to farmers of this program is about 20 
percent less than it was 25 years ago. We must ask ourselves: 
Is it even relevant any longer?
    The members of our group--of this task force that have met 
have also felt that we need to do something regarding the 
grading system either through moving to a CME grading system, a 
commercial grade, or to increase the support to at least cover 
the costs of the additional requirements for the CCC purchase 
grading requirements.
    The Dairy Export Incentive Program: We would like to thank 
the Members of this Committee that worked so hard in getting 
that program back in place and making it active. It has also 
provided a significant savings. We shouldn't forget that. It is 
much better to pay 10 cents for the DEIP than it is to put 
80 cents of that product in the CCC.
    The issues before us are critical, and we need to move 
quickly. The working group supports the DEIP. CDI is one of 
the--we are also working with CDI and the CWT program. CDI, we 
do belong to CDI and support the work of the CWT and feel that 
that is held at wholesome near-term potential. We applaud 
USDA's efforts to address the credit barrier, but we recognize 
that additional debt without price recovery will provide very 
little benefit to the producers without some type of program to 
bring the price back to the producers.
    I see I am running out of time, so I will cut my testimony 
short.
    I will conclude. I want to thank, again, the Committee for 
having this meeting, this hearing, and we will certainly work 
with all the Members on anything we can do.
    I do want to suggest one more thing, our support program 
that has been working, we do support the idea of expanding some 
of the Feeding and Nutrition Programs. We think that probably 
has the greatest potential of a quick recovery for our price as 
we can move some cheese into the direct market. Over the short-
term program, a 60 day program we think, with proper funding, I 
think it has a couple of benefits. One, it could also provide 
some savings to the Federal Government in the near term as 
well. So I would be glad to talk to you about that at a later 
date.
    With that, I will conclude my testimony.
    [The prepared statement of Mr. Souza follows:]

Prepared Statement of Ray Souza, President, Board of Directors, Western 
 United Dairymen; Operator, Mel-Delin Dairy, Turlock, CA; on Behalf of 
                        California Daries, Inc.

    Good morning. Thank you Chairman Scott, Ranking Member Neugebauer 
and the rest of the Members of the Subcommittee for holding this 
hearing. I appreciate the opportunity to provide testimony regarding 
the current state of the economy for dairy producers and to add some 
thoughts on potential short- and long-term solutions for our industry.
    My name is Ray Souza, and my wife Lynette and I have operated Mel-
Delin Dairy outside Turlock, California for more than 40 years. I 
started as a teenager with a 4-H cow I purchased at the local auction 
and my family and I have made our living milking cows ever since. The 
milking herd today is roughly the average size for the state of 
California at about 900 head.
    I currently serve as President of the Board of Directors of Western 
United Dairymen. Western United represents 1,100 of the 1,700 dairy 
farm families in the state of California. And I want to emphasize that 
word family. Even though we are known as a large herd state, I can't 
think of a dairy that isn't owned and operated by a family.
    We are members of the second-largest milk marketing cooperative in 
the country, California Dairies, Inc., and with our emphasis on 
purebred cattle I am a member of the Holstein Association of America 
for more years than I care to think about going back to that original 
4-H cow. We have been fortunate to have some success in breeding 
registered Holsteins and merchandising genetics that have been in 
demand in the breed.
    Today's economic situation in the dairy industry in California is, 
in a word, dire. In fact, I'll go back to that point about dairy 
families. A fifth-generation dairy farm family, my neighbors the 
Linhares, just sold their cows in the last round of CWT herd 
retirement. Just a few days ago, three generations were operating that 
farm. Today, after cows have been milked on that farm for 112 years, 
that family has left the business saying there is simply no way they 
could justify continuing to erode the equity they have built through 
five generations of caring for cows and working the land.

  I. An economic snapshot of the California dairy industry.

    A. Ruinous negative operating margins.

     Farm milk prices and feed commodity prices tend to be 
            cyclical in nature. However, producers have never witnessed 
            such dramatically low milk prices combined with 
            skyrocketing production costs. The milk price/feed cost 
            ratio is the lowest in history.

     The price paid producers for milk has been half what it 
            costs to produce the milk for nearly 6 months. Dairy 
            families are losing what took them years and even 
            generations to build.

     The industry has experienced periods of low prices before. 
            However, production costs (especially for California 
            dairymen) have been on a steady upward climb--up 37% in 
            California in just the last 3 years.

     The following chart, compiled with data from the 
            California Department of Food and Agriculture, compares net 
            operating margins from 2001 through 2008 and year-to-date 
            for this year. While the last really bad year on the dairy 
            farm, 2006, showed margins resulting in a loss of $3.30 per 
            hundredweight, the negative margins year-to-date in 2009 
            are nearly three times larger.

            
            

etc.    B. Monthly milk price v. input costs 2008-2009 and near-term 
        projections.

        
        

     Production costs posted a slight decrease from 4th qtr 
            2008 to 1st qtr 2009 due to a slight decrease in feed 
            costs. However, COP figures are not expected to decline by 
            any significant amount as we move forward. Even though feed 
            commodity prices have come down a bit in the last week or 
            so, prices are still far above historic averages.

     California producers typically do not grow all their feed 
            and have to pay additional transportation costs to haul in 
            feed for their cows.

     At the same time, all other costs of doing business in 
            California have increased. Additional environmental costs 
            are mounting each year as producers work to meet new waste 
            discharge requirements, for example.

            
            

     The California milk pricing system responds more quickly 
            to current market conditions because it corresponds to the 
            Chicago Mercantile Exchange. In contrast, price reporting 
            procedures for the Federal Milk Marketing Orders usually 
            result in a 1 or 2 month delay.

    D. Outlook for the remainder of 2009.

     Producers had been holding out hope that the lowest point 
            was reached in May. However, prices have since moved even 
            lower.

     Futures prices have also moved much lower over the last 
            month or so. While some recovery is expected by the end of 
            the summer, very few analysts expect a significant 
            improvement in prices.

     Prices are not expected to rebound until 2010. At the 
            current negative margins, a significant number of producers 
            will go out of business before that point.

     Those left standing will have a huge debt load to work 
            through. It may take years of higher prices for the 
            industry to recover.

    E. The dairy economic safety net is stretched flat on the ground.

     The Dairy Product Price Support Program (DPSP) is a long-
            standing program that is intended to benefit both producers 
            when prices are declining and consumers when prices are 
            rising. It also benefits all producers in the country 
            equally without regard to herd size or farm location. Yet 
            at its current product purchase price levels the program is 
            wholly inadequate considering the dramatic rise in input 
            costs for farmers in the past 3 years. Prices have also 
            fallen below support due to lack of flexibility in the 
            program. USDA must be provided the authority to increase 
            prices at least temporarily to cover the initial costs 
            associated with processing to Commodity Credit Corporation 
            (CCC) standards. For example, cheese has been below support 
            on and off (and continuously since mid-June) yet not a 
            pound of cheese has been sold to the CCC. Manufacturers 
            participating in the California industry working group have 
            pointed to inspection and grading standards as the major 
            obstacle. USDA could address this by aligning their product 
            standards with those of the commercial market. The industry 
            working group has also written a letter to Secretary 
            Vilsack in support of an increase in purchase price levels 
            as proposed by National Milk Producers Federation.

     Milk Income Loss Contract (MILC) Program--while the 
            payment helps pay some bills, the program will delay the 
            supply reduction that must come since signs of a recovery 
            in the worldwide economy, and the return of export demand 
            for U.S. dairy products that will accompany it, have not 
            yet appeared on the near-term horizon. Unfortunately, the 
            annual production cap of 2.985 million pounds of milk 
            eligible for payment results in a program with only 
            regional benefits. And the duration of this milk price 
            crisis has turned what is intended to be a temporary life 
            jacket for producers in rough economic waters into a long-
            term program with market-distorting effects that continue 
            to delay the recovery that is so desperately needed by all 
            dairy producers in all regions of the country.

     Dairy Export Incentive Program (DEIP)--I'd like to thank 
            the many Members of the House Agriculture Committee for 
            their help in securing implementation of the DEIP by USDA. 
            I would also like to point out, the DEIP program is a good 
            deal for the Federal treasury. A 10 cents bonus to move a 
            pound of nonfat dry milk to a foreign customer sure beats 
            an 80 cents/lb CCC purchase.

  II. Steps the industry has taken to address the crisis.

    A. Western United Dairymen organized and hosted three industry 
        listening sessions earlier this year. The purpose was to 
        identify both short- and long-term solutions to the economic 
        conditions in the industry. All producers in the state were 
        invited and more than 200 took advantage of the opportunity at 
        each meeting to provide input on issues such as supply 
        management, Federal and state milk marketing regulatory policy 
        and global markets and industry innovation.

    B. At the conclusion of the series of three meetings, an industry 
        working group was formed to analyze the ideas presented and 
        provide recommendations going forward. Two meetings have 
        already been held, with the working group taking the lead on 
        requesting economic analysis of a supply management plan and 
        agreement on recommendations for additional ways to address the 
        milk price crisis.

    C. Since early January, California dairy producers and their 
        organizations have worked hard and have had the support of 
        nearly every other dairy producer group in the country as well 
        as many Members of the California Congressional delegation in 
        helping to persuade the USDA to implement the DEIP. Again, we 
        say thank you to all the industry partners in that successful 
        effort and to the Secretary, the Chairman and Ranking Member of 
        this Committee as well as the many Members of the Agriculture 
        Committee for your help.

    D. Supported the industry push to have the new Agriculture 
        Secretary use all existing authority to increase demand for 
        dairy products--that effort has shown some success, as well, as 
        donations to domestic and international feeding programs were 
        announced very quickly after the crisis began.

    E. Cooperatives Working Together (CWT)--California dairy producers 
        have been early and consistent supporters of the industry-
        directed and -funded supply balancing program managed by 
        National Milk Producers Federation. California Dairies, Inc. is 
        a funding organization in CWT on behalf of its entire 
        membership and Western United Dairymen continues promoting the 
        program to individual dairy producers whose milk marketing 
        organizations are not members. The high percentage of milk 
        produced in California that is covered by contributions to CWT 
        demonstrates the commitment of our producers to the concept of 
        a progressive industry supply-balancing self-help program.

  III. Additional suggestions for short-term action.

    A. DEIP--the Secretary has announced allocations for the new 
        program fiscal year in amounts equal to the unused allocations 
        from 2008-2009. That is a helpful start and for that we say 
        thank you again to the Secretary and to all those who helped 
        make the case. Invitations for offers must still be announced, 
        however, and dairy farmers look forward to that in the very 
        near future. It also looks relatively sure that the remaining 
        allocations for this fiscal year will be helpful and the 
        organizations I represent here today look forward to working 
        with the Committee and the Secretary to make that happen.

    B. Farm Credit--dairy farmers find themselves in a no-win situation 
        in which they are unable to do the very thing that usually 
        helps reverse a period of negative operating margins--they need 
        to cull cows. But their lenders are operating in a new day as 
        well and there isn't the flexibility the banker once had to 
        stick with even their best customers during a period of losses. 
        The fact is, cows are worth about \1/3\ less than they were a 
        year ago and that erodes a financial statement in a hurry. And 
        if a dairyman culls cows in order to pay bills, that can have a 
        negative effect on the ability to borrow operating capital. I 
        am happy to hear from several USDA officials that the 
        Department is looking for ways to temporarily ease the dairy 
        farm credit crunch. Cows, facilities and land are a dairy 
        farmer's 401(k) plan. The value of cows on dairy farms has 
        dropped by more than \1/3\. Cows and bred heifers are worth 
        $1,000 less than just 6 months ago. Newborn calves have dropped 
        in value by $400 per head. The decline in the value of cattle 
        amounts to a drop in dairy farmer equity of $2.6 billion in 
        California alone. The farmers who do survive must borrow 
        against that remaining equity. That additional debt load will 
        reduce the competitiveness of U.S. dairy farmers in global 
        markets for the next several years.

  IV. Potential long-term solutions.

    A. Supply Management Proposals--the industry task force that was 
        appointed to examine producer input from the three listening 
        sessions held earlier this year has received and reviewed a 
        proposal for a legislated supply management proposal known as 
        the Holstein Association Dairy Price Stabilization Plan. The 
        task force acknowledged the significant producer interest in a 
        supply management plan and listed some questions to be 
        addressed. The Western United Dairymen Board of Directors 
        extended an invitation for, and received, a briefing on the 
        plan from leading proponents. The Western United Board has 
        endorsed the concept and joins the task force members in posing 
        some questions that must be addressed if producers are to be 
        brought together to pursue legislation.

    B. Fluid Milk Standards--several organizations offered a proposal 
        during the last farm bill debate to raise nutrition standards 
        in fluid milk nationwide. Interest in that proposal remains, 
        due to the potential impact it could have on the need to 
        balance supply and demand. This would benefit consumers by 
        helping alleviate the calcium crisis, it would reduce CCC 
        expenditures in the DPSP and the improved price stability would 
        benefit farmers.

    C. Industry Self-Help--California dairy producers look forward to 
        participating in a nationwide effort to identify long-term 
        solutions to the current economic crisis. There may be much 
        more that could be done in producer-funded and directed efforts 
        at demand building and market balancing, for example.

    Again, Mr. Chairman, thank you for holding this hearing and for 
extending an invitation to hear from a California farmer. I am aware, 
and our organizations have worked hard to inform other dairy producers 
in the state, that you have been hearing often and loud from the 
Members of this Committee who come from California. I thank them for 
their persistence and I thank you for listening to them and working 
with them. I look forward to answering your questions.

    The Chairman. I thank you very much.
    I thank each of you for your testimony. I will begin the 
first round of questioning here.
    Mr. Souza, you had mentioned in your testimony a moment 
ago, $100 per cow per month.
    Mr. Souza. Yes.
    The Chairman. What does that constitute, again? That cost, 
a lot of that cost goes to----
    Mr. Souza. That is actual cash loss. By the time you pay 
the feed, the vet, the labor, your facility, operating your 
facility, it is about $100 per cow short per month. I 
personally have talked to a dairyman who is milking 1,000 cows, 
and he tells me he is actually going into his credit line, 
taking out $100,000 a month just to meet his obligations.
    The Chairman. That is an amazing figure there. It is $1,200 
per year per cow that they are losing every year. And how many 
cows--I mean, was this gentleman----
    Mr. Souza. Well, he is milking 1,000 cows so it would be 
$1.2 million by the end of the year. But I don't want to 
overlook the fact that already in equity loss in my particular 
herd, I am down about $1.5 million. So you add that on to the 
cash loss, and you can see that you are not going to be in 
business very long.
    The Chairman. Let me just ask the entire panel, you may 
each want to weigh in on this, if you have a different opinion 
than the others. But there has been a lot of discussion lately 
about supply management that different dairy organizations have 
proposed.
    What is each of your opinions on this option as a 
management tool to help stabilize prices?
    Mr. Kruse. I am obviously very negative on it. I think it 
doesn't allow increases where industry is located to process 
milk. A lot of times they will go there when you are looking 
for additional milk, but yet there is going to be in essence a 
penalty or cap.
    It also stymies production in states where we need 
production; I mean in smaller states or the southeastern 
states. So I do not foresee that as an advantage of something 
that is forward-looking.
    The Chairman. Mr. Wakefield, do you agree with that or have 
another opinion?
    Mr. Wakefield. If you listen in the country to the 
producers, there are a larger number of producers today looking 
at that as an option. However, National Milk will have a task 
force put together to look at the various options. There are a 
lot of questions that need to be answered as in exports, 
imports, and some of the workings. We are not prepared to be in 
favor or against the program at this time.
    The Chairman. So you are neutral. Okay.
    Mr. Bouma.
    Mr. Bouma. As per our testimony, sir, we are very opposed 
to any supply management concepts. One, again, we feel that we 
will again have imports on our shores as we constrict ourselves 
to a domestic market.
    And, second, I will allude to Mr. Kruse's statement. For 
instance, the Southeast, your great State of Georgia, we supply 
a lot of milk in west Texas that winds up in Georgia every 
day--140, 150 loads of milk a year during late summer and 
fall--and have an ongoing agreement with the Southeast, with 
the cooperatives in the Southeast, to supply that milk because 
of the shrinking number of dairy cows and the growing 
population.
    And supply management around the country over that will 
make it harder and harder for us to transport milk where it is 
needed, and where it is short in this country.
    The Chairman. Yes. Mr. Souza.
    Mr. Souza. Yes, our organization has taken the position 
that we support the concept of supply management. But we feel, 
as other members feel, that it requires further analysis. I 
think with our trade issues and the trade loss that we deal 
with today that it poses real challenges to a supply management 
program.
    Our concern is we feel we have to be very cautious in our 
approach here. If we are to legislate something, it should be 
very detailed. We are concerned that we could enter into an 
agreement that could have unintended consequences.
    Without addressing the import situation, we could simply 
just not--if we replace the reduction in supply with imports, 
we won't substantially raise the price, but we could possibly 
be giving away our market share. I think it is important that 
we consider our market share when we are looking at any type of 
supply management program.
    The Chairman. Let me ask you about this, each of you. Do 
you think that moving towards a single nationwide marketing 
order could help create some stability in the dairy industry?
    Mr. Bouma. Sure. I believe that definitely could help. I 
believe that we need to move towards a two class system of milk 
in this country: one being fluid milk that is put into a bottle 
and consumed in ice cream and soft products and things on a 
daily basis; and a second one being cheese, butter and powder, 
which our Federal Government participates in allowing them to 
work at world prices and. If need be, develop some other type 
of safety net for the industry so that we can get our product 
offshore and compete in the world market.
    But to do what we did today with a four class system and 
store the product and restore the balance in the world will not 
work out for the long term.
    The Chairman. All right. Anyone else have a difference of 
opinion?
    Mr. Wakefield. Currently we are not in favor of the one 
working system. However, we are working with the Federal Orders 
to make changes within the Federal Orders in the different 
regions, because there are many regions that are different and 
need to be addressed as a region.
    The Chairman. Okay. Very fine.
    Mr. Kruse. I would say, as to what Mr. Bouma said, it has 
been discussed in our organization and there is considerable 
support for going, perhaps, to a two class system, a Class I 
and a manufacturing milk class.
    The Chairman. One, all right. Mr. Souza.
    Mr. Souza. We have had long discussions regarding this, as 
you probably know. At our task force meetings, we feel that the 
Federal Orders, as are currently written, certainly wouldn't do 
anything for California. We also have the problem within the 
Federal Order system of folks not joining the Orders or, as we 
say in California, depooling and pulling out of the system. I 
think it addresses two things. The Federal Order system 
obviously needs to be looked at again. We need to keep people 
in the Federal Order system.
    It has to be attractive enough to keep those people, who 
are not currently regulated, in their regulated system and also 
attract enough to draw California into that same system. And it 
currently doesn't meet those challenges.
    The Chairman. Thank you. We will now turn to the gentleman 
from Texas, the Ranking Member, Mr. Neugebauer.
    Mr. Neugebauer. Thank you, Mr. Chairman. One of the things 
that we have heard repeatedly this morning is we have too much 
milk now, and the price is low. And supply management has been 
brought up, reducing the number of herds.
    And one of the things that kind of makes me begin to wonder 
is the current way we do milk, encouraging oversupply and 
overproduction in some periods of times, and then that is 
causing the market to have these wide swings, and then we have 
a period where the prices are low and that hurts everyone.
    I believe that the market, the free market system basically 
is supply management if allowed to perform in an open and 
transparent way.
    I guess the question I have to the panel: Are the current 
policies that we have for milk now contributing somewhat to 
these wide vacillations in prices, and should we really rethink 
the way we are doing that?
    Mr. Bouma. I would start with you.
    Mr. Bouma. It does, and especially when milk is short. Milk 
is short worldwide. Our support program has no bearing on the 
value.
    When Class III, when the equivalent of CME price for cheese 
milk 18 months ago was $17 or $18, $1.14 pound of cheese--$9.90 
or $9.40 Class IV powder price had no effect on it.
    As we swing down here in this perfect storm to these 
extremely low prices where we are putting product into support, 
we will definitely lengthen the bottom of this economic trough, 
this economic bell curve that we are in, with our support price 
balancing the world's powder market.
    Our competitors in Australia, New Zealand and Europe are 
getting their product out of their countries. And as soon as 
this thing turns, they will be in a much better position to 
take advantage of the economic turn that the Secretary was 
talking about.
    Whereas in this country, we put all this product back, we 
have to chew through it before the producer is going to realize 
it. So definitely more of a down cycle of the economic bell 
curve than the upside.
    Mr. Neugebauer. Mr. Wakefield.
    Mr. Wakefield. I agree, it is more on the downside than the 
upside.
    As far as overproduction, we were not in an overproduction 
mode. We were merely mirroring the export market and supplying 
an export market that when the economy went south, we got 
caught in it. It is no fault of any American farmer that we are 
in the position we are in.
    It just happens that the world economy went south and so 
did our market. And so now we are dealing with extra milk on 
the market that we had a market for.
    And so in this business--in a factory you can turn off the 
lights and shut down the electricity for a couple of weeks and 
wait for things to happen, and then start back up. This is a 
24/7 job and you can't sort of turn it off and then hope that 
in 2 weeks it is going to be better. It just doesn't work that 
way.
    Mr. Neugebauer. Mr. Kruse.
    Mr. Kruse. The volatility in price is good for no one. It 
really creates problems. And we have seen it over the history, 
just as long as I have been in the dairy business, just the ups 
and downs. You know, that is an excellent argument for using 
risk management tools and flatten this thing out if that is 
what it takes.
    That is what we did when we were able to--for all of our 
major ingredients is manage that risk. We look for win/win 
situations with suppliers. I don't want an advantage for any 
one of them, because it is not going to last. And so you work 
out what is equitable for them and for us. And if you are both 
efficient, that relationship works and it works long term.
    So in some form or fashion, we are going to have to get 
into that risk management to knock this out.
    Mr. Neugebauer. And I like the risk management better than 
the subsidy piece of it, because then that allows people to 
take whatever share of the risk they want to take.
    Whatever kinds of tools would be better or what kinds of 
tools for risk management aren't available now that could 
possibly--need to be looked at?
    Mr. Kruse. I think in the written testimony, there is talk 
about this gross margin, the livestock matter. But we had 
forward-contracting in dairy from 2000 to 2004. There was a lot 
of consternation about it, but apparently it averaged--it 
pretty much approximated the price that was out there or what 
was contracted for.
    And so I know in the 2008 Farm Bill we are looking at it 
again. It does not cover Class I, which is the bottled milk. 
But we have to investigate why there is not good price 
discovery in the dairy markets.
    Mr. Neugebauer. Mr. Bouma.
    Mr. Bouma. If I might, the price Mr. Kruse alluded to is 
exactly it. And when we create this economy we have in these 
surpluses we have with a product that we can't even sell 
overseas, with respect to what is made, we taint the price 
discovery process.
    The CME works fine. I hedge corn, I hedge beans, and I 
actually hedge milk. But the milk part of this price is skewed 
by the economic obstacles that we put within the system. And if 
we cleared that and truly had an economic system that sent 
clear price discovery signals to the marketplace, we should be 
able to use the CME to hedge milk just as well as any other 
product.
    The Chairman. Thank you, Mr. Bouma, Mr. Neugebauer. Now Mr. 
Costa from California.
    Mr. Costa. Mr. Chairman, with your permission I would like 
to defer to my colleague, who has another committee meeting, 
Mr. Cardoza, and then I will take my subsequent turn.
    The Chairman. So recognized.
    Mr. Cardoza. Thank you, Mr. Costa and Mr. Chairman. I 
appreciate your indulgence.
    Mr. Souza, thank you for traveling here. The plight of 
California dairy farmers has been well documented, and you have 
been working diligently with your organization to try and 
correct it.
    I would like to point out for the Committee that they may 
not know, because the California Order changes more rapidly 
than the Federal Order, that California has actually been in 
crisis for a longer period of time than the rest of the country 
has. In fact, when I saw this coming, I went--and Mr. Costa as 
well--went around to a lot of our colleagues to warn the rest 
of the country that this was going to be coming down the pike. 
In fact, we were accurate in that assessment, to no one's good 
fortune.
    Mr. Souza, I understand that California dairymen are going 
to have a difficult time taking advantage of the conservation 
and renewable energy incentives that we have worked so hard to 
put in the farm bill this past year when the Committee did its 
work. And so if you could comment on why that is and what the 
relationship is between farmers and those programs, and the 
problems that the dairy subtitle is causing the farm bill.
    Mr. Souza. Unfortunately, with the current prices we are 
suffering, we are having to make choices with what we are going 
to do and what we are not going to do. As you know, Mr. 
Cardoza, California is the most highly regulated state when it 
comes to environmental regulations. Those funds are very, very 
important to us in California for our existence.
    The problem is there simply isn't enough money. The EQIP 
Program is a matching fund program. Even at 50 percent, you 
still have to come up with the other 50 percent to access those 
programs. And, currently I know that I have talked to many, 
many dairymen that are going into their offices and talking to 
their conservation people and asking them how they can extend 
the implementation of their programs, because they can simply 
not afford to pay the half that they need to pay to use those 
programs.
    Mr. Cardoza. Mr. Chairman, if we could communicate with our 
colleagues on the Committee, the bigger Committee, about this 
question, I think it is something that our greater Agriculture 
Committee is going to have to examine, because it is certainly 
not the intention, when we passed the farm bill, of not 
allowing them to comply. This is one of the most important 
areas that a lot of us fought for in the farm bill, and it 
needs a lot more examination.
    The Chairman. That is a very good point, Mr. Cardoza. We 
will certainly do that.
    Mr. Cardoza. Thank you.
    Mr. Souza, the Department has a set of plans to offer 
assistance to dairy farmers with difficulty obtaining operating 
credit. Do you have any thoughts on the potential for that kind 
of program along those lines?
    Mr. Souza. Well, we certainly do applaud the Department's 
efforts. But to simply continue to extend credit to an industry 
that is not able to pay their bills now would just simply 
create a problem where we are digging ourselves in a deeper 
hole. I think the idea of extended credit is fine, but it needs 
to work in conjunction with some type of price recovery program 
at the same time.
    Mr. Cardoza. I totally agree. That is why I raised the 
issue.
    Mr. Souza. One of the concerns I have is just down the 
road, just to create additional debt, we are really creating a 
less efficient industry. We heard a lot of talk about 
competitive and international competition. As our farmers 
increase their debt, increase their leveraging, increase the 
amount of money they have to pay to the bank to become a less 
efficient industry, and at some point in time we will become--
we are less competitive today than we were a year ago.
    Mr. Cardoza. Mr. Souza, Mr. Conaway mentioned earlier there 
was a total aggregate deficit of a $7 billion loss. One of the 
things that I think I would like to have all of the panelists 
talk about is how just a little bit of a supply increase--when 
we saw exports fall, the prices plummeted--and just a little 
bit of an expansion of shortage will make prices go up, quite 
volatile.
    So $7 billion may not really--a little bit of purchasing, a 
little bit of adjustment can have a big impact on dairy 
farmers' profits.
    And I would like to open that up for the panel. Mr. Souza, 
if you would start.
    Mr. Souza. We agree. There was a discussion earlier on the 
supply management program. And we actually contracted with Dr. 
Rich Sexton, who was an economist at Cal Davis, University of 
California at Davis, to do some of that work. And he talks 
about exactly what you are talking about.
    A one percent change in the supply can create a dramatic 
difference in the price. So I think that your point is well 
taken. It doesn't take a lot of milk to turn this thing around.
    The problem that we have now is that we have an unusual 
situation. This is historic. This is an anomaly. We have had--
our markets crashed so quickly, we as an industry don't have 
the ability to react as a fellow that is selling bottled water. 
It takes 2 years to get a calf into that milking barn. We 
create a huge inertia; and to slow this bus down, it takes 
time. We don't have that capability.
    And with the rapid loss of the markets, we built up some 
surpluses. We need to get rid of that surplus to get a response 
in the price system.
    Now we have talked about powder a lot, but we need to be 
talking about cheese as well. There seems to be a significant 
number in cheese that is being reported, and there are rumors 
that there are maybe additional amounts of cheese out there. We 
need to get our arms around that and respond to that cheese 
problem we have right now as our industry is slowing down.
    California's production--you must remember, California's 
production has dropped now, what, 8 of the last 9 months. And 
we are substantially below where we were a couple of years ago, 
so we are responding.
    Mr. Cardoza. Thank you, Mr. Souza. I would love to hear 
from the other panelists, but I am going to let the Chairman 
decide how to handle that. Thank you.
    The Chairman. Thank you. Mr. Conaway, the gentleman from 
Texas.
    Mr. Conaway. Thank you, gentlemen, for being here. Dennis, 
I think the net would be more like nine million. If we have 
nine billion cows and collectively are losing $1,000 a year per 
cow, that would be about $9 billion short.
    Mr. Cardoza. However you slice it, Mr. Conaway, it is a bad 
situation.
    Mr. Conaway. Yes. Intuitively I am struggling with a small 
drop in demand having this dramatic of an impact on the price 
and what factors make that happen. I was interested in Mr. 
Wakefield and Mr. Souza both saying that your trade 
organizations have task forces in place.
    What is the time frame for completing the work that you 
might bring--that you hopefully would present some new ideas 
for policymakers to consider?
    Mr. Wakefield. I am not sure of the time frame, but we will 
be meeting--the task force will be meeting next week in Chicago 
to get started. There is a 2 day session then to meet with 
other organizations. Sometime in the fall we hope to have 
everything put together.
    Mr. Conaway. Mr. Souza, how about your task force?
    Mr. Souza. As I mentioned earlier, we have a pretty much 
broad-based task force. And two of the members of the task 
force are having their own private meetings, and we expect them 
to come to our next meeting, which we think will be in about 3 
weeks, to report on what they are doing in their meetings.
    We hope to have something--we are right today, as we speak, 
we are primarily focused on this current crisis of what we can 
do so we can have some members left to talk about a long-term 
program.
    Mr. Conaway. What is it about the dairy industry that 
contributed to this, to the heavy debt load? Why is it that you 
have--you are more leveraged than other aspects of the 
agriculture business, 70 percent leveraged. What is it about 
the dairy that does that?
    Mr. Bouma.
    Mr. Bouma. First of all, all animal production agriculture 
carries a greater leverage than just average agriculture, 
whether that is pork, or cattle, or poultry. The leverage this 
time around is created by the anomaly that Mr. Souza alluded 
to.
    And to go back to a typical sweat, boom, and bust cycle 
like Mr. Kruse talked about, we typically talk about 1.5 
percent to two percent milk in this nation being in surplus 
that will drive a price up or down. That is typical. We have to 
deal with--and there is a 6 to 8 month period of time when that 
will correct itself in that 1.5 percent.
    Today, by losing five percent of our export market, five or 
six percent, we tripled or quadrupled the typical surplus.
    Mr. Conaway. Is it five percent of the export market or 
five percent total that is exported today?
    Mr. Bouma. No. We were exporting 11 percent of our product 
a year ago. We are exporting five percent today, so there is 
six percent additional milk in the United States today.
    Mr. Conaway. Okay. Thank you.
    Mr. Bouma. Which goes back to this 300,000 cows that I 
think we need to get rid of, and that is what has created this 
crisis.
    Now the leverage side that created this perfect storm of 
$100 a cow a month, which you did the math on correctly, is the 
erosion of our balance sheet. You had a Holstein dairy cow that 
was worth $2,000 12 months ago, she is worth $1,200 today.
    In these small cycle cyclical swings of 1.5 percent or two 
percent, our balance sheet erosion was not that significant. 
And as we turn back out of these cycles, you would again gain 
some equity in your balance sheet and be able to operate 
through this. But this mass erosion of the balance sheet within 
the industry is unprecedented today.
    Mr. Conaway. I am sympathetic to the idea that you can't--
that cow has to be milked every day, whether you sell the milk 
or not. She is going to get milked every day.
    The industry I am most familiar with, the oil and gas 
business, this time last year we had over 1,900 rigs running in 
the United States. Today there are less than 670 rigs running 
today--what the price has done from the peaks last year to 
where they are right now.
    So their circumstances are difficult and hard, and they 
have stories, Mr. Souza, very similar to yours, where folks 
have lost everything they had because they took business risks 
that they believed were appropriate at the point in time they 
had to take it.
    Knowing that you had that inertia or that momentum built up 
about the cycle, how you bring new cows into the production 
stream, how does the system protect itself? Are there some 
tools that you need that we could help with that would allow 
you to recognize that you aren't particularly responsive in the 
short term, given that you have a herd, and it has got to be 
milked, and that milk disposed of in some fashion.
    Is there something that can be done to acknowledge that and 
deal with that reality?
    Mr. Souza. As Mr. Bouma mentioned, something that is this 
quick and this dramatic, we need to get rid of cows. We need to 
reduce the cows, and the CWT program certainly has helped.
    That is, at this particular point, we have no history with 
this. We have never dealt with anything like this before. So it 
is pretty difficult to come up with a short-term program. We do 
know--I do believe, though, that we need something to bridge 
the cows we leave. We need a bridge to get there.
    The biggest impact we have right now, as production is 
beginning to stabilize, and actually drop off in certain 
regions, we have this surplus of cheese out there that the 
buyers simply don't feel that they need to buy because they see 
this large cloud looming over our head.
    That product, that cheese product, has to be removed. That 
has to get into the market system, and there are ways of doing 
it.
    Mr. Conaway. Thank you, Mr. Chairman.
    The Chairman. Thank you. And thank you. The gentleman from 
California, Mr. Costa.
    Mr. Costa. Thank you very much, Mr. Chairman. Mr. Ray 
Souza, you and I have known each other for over 20 years, 
about.
    Mr. Souza. I am only 19.
    Mr. Costa. Well, we are not that old. But your family and 
my family have been in the California dairy business for three 
generations.
    Mr. Souza. Yes.
    Mr. Costa. Have you ever seen it this bad?
    Mr. Souza. Mr. Costa, I have never seen anything even close 
to this. I thought 2006 was the end of the world and that was a 
$3.30 loss. Today is triple that.
    Mr. Costa. I mean, we could lose 20 or 25 percent of the 
dairy industry in California--I don't know what the estimates 
would be nationwide--if we are not able to respond in the short 
term and in the longer term, in my view.
    Let me ask you a couple of questions as it relates--
California, our export market--our largest is Mexico and, of 
course, Asia was a growing market until the economic downturn 
prior to the melamine scandal in China.
    What do you think we need to do to try to regain those 
markets?
    Mr. Souza. Well, part of it is just the world economy that 
is going to need to recover to some degree. But I do believe in 
California we need to become more innovative. The markets are 
there. It is clear to us, the McKenzie Report told us--the 
McKenzie Report was a report that was developed by the 
California Milk Advisory Board to kind of give us an idea of 
what the future looked like. Because of our position on the 
West Coast, we are going to become an exporting state.
    Our markets are going to be Mexico and the Asian market. We 
need to get more involved, we need to become more innovative, 
and we need to put people there in order to open up those 
markets.
    Mr. Costa. But it is just not California. And of course the 
DEIP program, we are going to extend that another quarter. But 
our exports were 11 percent of our total production just a 
while ago, and now it is down to seven percent. I mean, that is 
a significant swing when you look at the total production.
    Mr. Souza. Right.
    Mr. Costa. So that is an area we are going to have to focus 
on. But how to compete with countries like New Zealand that are 
able to produce milk at $9, $10 a hundredweight is very 
problematic when you look at the trade agreements that we have 
that Chairman Peterson mentioned earlier.
    Mr. Souza. I agree with you, Mr. Costa. One of the things 
hopefully that will come out of our group and National Milk's 
group is how we better access those markets.
    Mr. Costa. We talked about this earlier, and I want some of 
the gentlemen to comment on this because I am puzzled. I think 
we have to restructure the entire Federal Order. I think we 
have to put in incentives. I would like to see California join 
the Federal Order if the incentives are put in place, because 
it is the largest milk production area.
    But explain to me equilibrium. We talked about equilibrium. 
We want to get down below nine million milking cows in the 
country. But we have over four million replacement heifers with 
same-sex semen. I mean, explain to me how this is going to--how 
we are not going to be back within the box within a period of 2 
years.
    I mean, you can't cull enough of your older cows to put you 
back in the same box that we are in today in overproduction.
    Anyone got an answer?
    Mr. Bouma. That certainly is a dilemma, sir. Whether we 
export those heifers, a good number--we are the largest 
exporter of dairy cattle in the world as well. I don't know if 
we can export our way beyond that system.
    I would guess that we are going somewhat by 8.8 or nine 
million cows before this crisis is over, just due to economic 
attrition. So some of those----
    Mr. Costa. But do you agree with the four million 
replacement heifers as an accurate number?
    Mr. Bouma. That is the number that is being professed 
around the country at this time. So I have no reason to----
    Mr. Costa. The two other gentlemen, before my time is up, 
got any answers to this?
    Mr. Kruse. Well, I am not a dairyman, but earlier in this 
year, the predictions that I was reading, we needed to lose 
500,000 cows. And that is assuming things kind of settle down. 
But I don't know that the economy has gotten any better. But I 
just think we are just milking too many cows.
    Mr. Costa. No. Let me suggest to you, because you all 
talked about your task force--I know there are a lot of things 
going on regionally around the country, but dairy producers 
have to get together. I mean, we can take action, and we can 
make a big difference here in terms of legislation, as the 
Chairman suggested. But, frankly, if we are going to continue 
to have the infighting take place in the dairy producers around 
the country and on a regional basis, I don't have to tell any 
of the four of you, it is going to be darn difficult--my father 
would have a different term back home--to get anything done. 
You understand that?
    Mr. Wakefield. Absolutely. And that is the goal of the task 
force that we have put together: to bring unity and to bring 
one message to your group as we try to fix this situation.
    Mr. Costa. I mean, this is equivalent maybe, Mr. Chairman, 
to trying to achieve peace in the Middle East. I am not sure. 
But it is a difficult task and you dairymen, producers and the 
processors, need to come together.
    The Chairman. Thank you, Mr. Costa, I appreciate it.
    Now, the gentleman from Pennsylvania, Mr. Thompson.
    Mr. Thompson. Thank you, Mr. Chairman.
    A question for the whole panel. Five months prior to USDA 
reviving the Dairy Export Incentive Program, the European Union 
began subsidizing their dairy exports. Is there any reason to 
believe that if the U.S. were to make a good-faith offer to 
cease our use of this export subsidy tool, that the EU would 
take similar action? Any thoughts?
    Mr. Souza. I will start off, I suppose. I don't believe, 
based on history, we could expect that. As you know, the 
Europeans are having their troubles as well. They are driving 
their tractors under the Arc de Triomphe. I think there is 
enough political pressure that they wouldn't--I don't think you 
would see them respond in that way.
    Mr. Bouma. The European Union has lowered their subsidies 
through the past years through trade agreements and through 
things that have come down online. But they have been much more 
heavily subsidized than the U.S. industry. And immediately--
like you say--5 months prior to us, went back into the subsidy 
level to even a greater than our DEIP program allows us. So I 
would find that very hard to believe that we would sit down and 
be able to negotiate some equivalent in that.
    Mr. Thompson. Thank you. Okay. For the three dairy farmers, 
USDA and the Under Secretary, we talked about a lot of ideas, 
but the primary relief, it sounded like, was extending 
temporary credit, essentially helping our family farmers go 
further into debt. And I don't know how much relief that is in 
the big picture. The biggest problem our family farms are 
facing is that negative balance sheet financially.
    You know, just recently, with Speaker Pelosi's leadership, 
we rammed through legislation that would dramatically increase 
energy costs for all Americans. Now, considering the current 
economic conditions facing dairy farmers, do your 
representative organizations believe that Congress should enact 
legislation that further increases input costs to dairy 
farmers, keeping in mind it is that balance sheet that they are 
struggling with?
    Mr. Bouma. No, sir, we don't. We are very happy or very 
thankful that we were able to keep the agriculture portion of 
that under the guidance of Mr. Peterson's Committee and your 
all's Committee. We see that as a real victory for agriculture 
in this. But the long-term ramifications today indicate that 
increases, our input costs, are going to detrimental to us.
    Mr. Thompson. Any other opinions?
    Mr. Souza. I would mirror Mr. Bouma's comments, I agree 
with them entirely. Our membership absolutely would not stand 
for the additional increase. They cannot handle the costs they 
have now.
    Mr. Wakefield. I agree.
    Mr. Thompson. Mr. Wakefield, it is good to have a 
Pennsylvania dairy farmer here. I want to thank the whole 
panel, but I want to thank you for making that trip from 
Bedford down to Washington.
    I wanted to seek your opinion on how could the current 
situation of low prices be corrected?
    Mr. Wakefield. What it comes down to is getting supply in 
correction with demand, and creating more demand for our 
products, not only here but around the world.
    As you know, we have the CWT program which has helped. When 
it comes down to it, the American public is not going out for 
dinner today at restaurants. Restaurant sales are off. That 
affects our business as far as cheese and sauces and dairy 
products.
    So we have a problem not only of an exporting situation, 
but also within our own country we have people that do not have 
the means, or feel they don't have the means, to go out for 
dinner as they did in the past, which is hurting another 
industry.
    So it isn't--this situation has affected everybody. How we 
can improve it, I guess only the Lord knows, more than I do.
    Mr. Thompson. Just real quick, I only have about 30 seconds 
here, what has your experience been in terms of the market 
response to the DEIP program, or the food programs using 
surplus supply?
    Mr. Wakefield. It is on the short term--we have to 
understand that the program has only been in effect for, what, 
2 months now. It has moved, it has dumped--it is the beginning 
and it is definitely going to be a help. I see no reason not to 
continue it.
    However, it isn't a quick fix. It isn't going to change the 
market real fast. But something has to happen to change the 
market, and this program will help start the change.
    Mr. Thompson. Thank you, Mr. Chairman.
    The Chairman. Thank you. Mr. Murphy, the gentleman from New 
York.
    Mr. Murphy. Thank you, Mr. Chairman.
    Mr. Bouma, I apologize, I had to step out and take another 
meeting. But you were commenting as I walked in that you 
thought we might need to take out about 300,000 cows to reach 
equilibrium.
    Mr. Bouma. Yes, sir. I think my colleagues from California 
would agree with me as well.
    Mr. Murphy. So if that is the order of magnitude--and to me 
I like market solutions to most problems. It seems like our 
problem, as Mr. Wakefield was saying right now, is we have more 
milk than we have people to buy it. So we would like to reduce 
that supply, but it is a tricky thing to get any one person to 
act to take out a few cattle out of their herd.
    But what would it cost us to take 300,000 cows out of the 
herd right now? What is the rough cost for something like that? 
I heard you reference earlier $1,200 a head?
    Mr. Bouma. Yes, probably $1,000-$1,200 a head.
    Mr. Murphy. Is what a cow is worth right now?
    Mr. Bouma. Right.
    Mr. Murphy. And you would have slaughter costs that would 
offset some of that?
    Mr. Bouma. It would offset it about $400-$500 a cow.
    Mr. Murphy. So something less than $1,000.
    Mr. Bouma. Somewhere in that general range, $800 to a 
$1,000 a cow, which is what the CWT bids work out.
    Mr. Murphy. That is what it works out to be.
    Mr. Bouma. Right. It should work out to $1,300 or $1,400 a 
cow.
    Mr. Murphy. So does that seem like a reasonable solution to 
the three of you for how to get out of this mess that we are in 
right now?
    Mr. Wakefield. I think it is a short-term solution to a 
long-term problem.
    Mr. Murphy. Okay. That is a short-term solution. And the 
long-term problem is people are just going to bring those cows 
right back on and we are going to have too many again?
    Mr. Wakefield. I would hope not. You know, as was mentioned 
earlier about these same sex-semen heifers, same sex-semen is a 
good technology, and it is a tool, and it needs to be used as a 
tool and not just to run rampant.
    Mr. Costa. If the gentleman would yield, you should 
explain. I am not sure everybody understands what same-sex 
semen is as a genetic tool. It is amazing.
    Mr. Wakefield. Basically by using the technology, the rate 
of having heifer calves goes from basically 50 percent to 90 
percent, so you can increase a herd really fast, your genetics 
in a very short time, guaranteeing that you will basically get 
90 percent heifer calves.
    It is a technology that you should use on your best animals 
and heifers. And it is a good way to grow your business 
internally. That way, you know what your genetics are. As I 
said, it is a great technology.
    And as we go down the road another 40 or 50 years, I won't 
be here, but the world population is going to double, and we 
are going have to feed that population. And that technology 
will help do that. And there are other technologies that are 
out there that are available to the dairy industry.
    We have been a very--an industry that has used technology. 
We have been very efficient and our efficiency is probably one 
of the detriments as to why we are here. We are too efficient, 
if that is possible.
    Mr. Murphy. Mr. Souza or Mr. Bouma, on the issue of doing a 
herd culling right now, your thoughts?
    Mr. Bouma. You know, any--I hate to say this at the stake 
of dairymen that are leaving the industry every day, and we are 
all losing a lot money. But as we have these conversations, and 
as the financial industries within this country to lend us 
money hear at these hearings and these discussions, they say 
well, if we keep this guy around a month or 2 longer, he will 
wind up on this program that is being talked about.
    And what we do is extend the bottom of this economic bell 
curve, even having these discussions today. And as we extend 
that bell curve, those of us that hopefully do survive this 
downturn chew up a couple more million dollars.
    Mr. Murphy. So you think it is going to happen naturally. 
Let some people go out of business and it will settle itself.
    Mr. Bouma. CWT is working, and the more that we leave the 
market to the market, the better off we will be.
    Mr. Murphy. I follow that.
    Mr. Souza. Okay, I will take a shot at that.
    Mr. Murphy. Thank you.
    Mr. Souza. There are many, many dairymen today that are 
looking for a way out. There is no way out. They don't have 
enough equity except to pay the bank that they owe now. A 
program like that would have the potential of helping those 
people exit the business with some dignity and with the ability 
of leaving, at least, with no debt.
    I think it would help move the program quicker. I think we 
can get back into alignment quicker. And I agree with Mr. 
Wakefield that it is a short-term solution. But right now we 
need a short-term solution. To do a long-term policy change, we 
need an analysis and plenty of industry input to make a major 
policy shift into this industry.
    Mr. Murphy. Okay. I am intrigued by your answer, because it 
makes perfect sense. And I guess my goal in doing something 
like that would be to accelerate the bottom so that everybody 
doesn't bleed to death before we finally get to the bottom and 
reach equilibrium. But it is interesting that you would 
actually go the opposite direction and keep people bleeding for 
longer, which is clearly an unintended consequence, so 
something to keep in mind. Thank you.
    Mr. Bouma. And even DEIP and some of the programs that we 
have implemented now, if they are implemented on the back side 
of the curve, they will get you out of the curve much quicker. 
If they are implemented on the front side of the bottom curve, 
they will just extend the curve, because folks continue to 
think there is some hope.
    Mr. Souza. Can I go to that point just quickly? An example 
that Mr. Bouma has been talking about, the CWP program has been 
very successful, but it took some time to get it to move. To do 
that, if you follow the cull numbers, the cow slaughter 
numbers, they actually flattened out for a time while everybody 
was waiting for the CWP program to be used.
    The Chairman. All right. Mr. Roe, the gentleman from 
Tennessee.
    Mr. Roe. I am sorry I missed some of the testimony for 
another meeting. But just a couple of questions that I think 
the farmers in my area are going to ask is that, with a comment 
we have just heard here, is that it looks like the big 
producers are able to hang on with more equity. The smaller 
producers, like in my area, are going to go out, because they 
don't have the deep pockets, and the small guy will go.
    Just a comment about that. I mean, from what I heard, that 
is sort of what I heard you all saying.
    Mr. Bouma. If I may, I don't believe I said that. Actually 
there are a lot of small producers in the country today that 
are in a better position to withstand this downturn than the 
large producers, solely because they typically have a larger 
landmass per cow than do a lot of large dairies in the West. 
They are all losing $100 to $150 a cow a month. I don't care if 
you are in Pennsylvania, Tennessee, Texas or California, that 
is going on.
    But as we cycle back out of this crisis, those with larger 
landmasses of production, agriculture, growing their own crops, 
better diversification, which historically has been the small 
producer, he is in a position to recover out of this better 
than the large producers who have eroded their cow balance 
sheet because all they have is cows.
    Mr. Roe. Do you have any--just a comment--I don't really 
know the answer to this either. What is the reason, do you 
think, that milk consumption has gone down? I have read all of 
your all's testimony. And it was clear it dropped 30 to 40 
percent in the last few decades. Any comments about that?
    Mr. Souza. He is talking about fluid milk?
    Mr. Roe. Fluid milk.
    Mr. Souza. Or total dairy products?
    Mr. Roe. Fluid milk.
    Mr. Souza. The total dairy products have actually been 
reasonably stable. The fluid milk consumption has dropped in 
certain regions. Actually in California, fluid milk consumption 
is up this year nearly five percent. And again, this is social 
changes. Restaurants typically don't serve milk, don't serve 
lower-fat milks. There are other beverage choices. And as more 
and more people eat out, that consumption has probably trailed 
right along with that about the same percentage.
    Mr. Roe. It is just cultural is what you are saying?
    Mr. Souza. Yes.
    Mr. Kruse. I think there is tremendous competition for that 
customer. There are many more things out there that people can 
drink now as opposed to milk. When I was growing up, that was 
one of the things that we did drink.
    Mr. Roe. And this may have been answered earlier, but what 
percent--and I never did get the answer from Mr. Miller. I 
don't think it was ever specifically asked. But in the EU, what 
subsidy per hundredweight do they have for their milk as 
opposed to what we have in this country? There seems to be in 
Europe, France, Germany and the EU more of a subsidy on the 
exports. Is that correct or not? I may be wrong.
    Mr. Bouma. Historically there has been considerably more. 
They have actually reduced their subsidy levels over the past 4 
or 5 years as the EU has evolved. They were the first to jump 
back and raise those subsidy levels here 6 or 8 months ago, 
ahead of our DEIP program and things, to try to move their 
surplus product offshore. To be able to tell you the exact 
ratio compared to ours is--I don't know the number, but I do 
know the number per hundredweight--the value per hundredweight 
of milk in the EU today is the cheapest it has been since the 
1960s or 1970s as well.
    Mr. Roe. Same ratios we have here. I appreciate your 
testimony. We have, as you do in your areas--and I read with 
great detail Mr. Wakefield's testimony. And it very much 
mirrored all of the farmers in our area. And we appreciate 
anything, any help or advice you all can give us to help these 
farmers right now. They are in desperate shape. Thank you, Mr. 
Chairman.
    The Chairman. Thank you, Mr. Roe. And let me just--as we 
prepare to conclude--did you have another question, Mr. 
Neugebauer?
    Mr. Neugebauer. Mr. Chairman, I think a good point was 
made; that we had a MILC hearing with no milk. So I would 
suggest, as Chairman Peterson indicated and you indicated, we 
are going to have more MILC hearings in the future, and maybe a 
little ice cream as well to go along with that, so we can 
really fully debate and discuss this very important issue.
    I am being somewhat facetious and this is a serious 
problem. I think we had some great testimony today. And I think 
that we need to continue that because one of the things that I 
think we all want to do is bring some permanent solutions to 
make the system better, make it work for everybody in the chain 
from the producer to the consumer.
    So I look forward to having future discussions and I want 
to thank our panelists. I think we had some very good 
panelists. I found it very informative and I learned a lot more 
today. I thank you for your leadership in calling this hearing.
    The Chairman. Well, thank you. And while I appreciate the 
whole Committee's involvement in this, the real urgency that we 
have in this--but just before we close, I wanted to get a 
clearer understanding of what the CWT, this Cooperative Working 
Together Program. It would be helpful if we knew exactly how 
does it work, because there has been some criticism saying that 
it doesn't really help because producers just buy more cows and 
start over after being bought out. Is that an accurate 
criticism?
    Mr. Wakefield, would you respond too that?
    Mr. Wakefield. The program is set up and it is supported by 
the dairy producers, and the only way that you can participate 
in the CWT program is to support the program at 10 cents per 
hundredweight. You can participate in the program, be selected, 
and you can go back into the program in previous buyouts.
    The current buyout has stipulated that anyone who has 
participated in the past cannot participate in the future; that 
is, you cannot be in the program, sell your animal, go back in 
the business, and then get back in the program and be bought 
out again. You cannot do that.
    So anybody that is in the program currently, if they went 
back in the business, they would have to have rocks in their 
head, the way the situation is now. I was born and raised on a 
dairy farm, went to college, and have been involved since the 
early 1970s. And I have never seen it this bad, ever. And it is 
not pleasant to go home and talk to your neighbors. And we are 
all in the same boat.
    In fact, one of my friends from California, I talked to him 
the other day and he said the new term out there is burnout--
what is your burn rate, how fast are you burning through your 
equity? So you call your bank and say, how many more days do I 
have left?
    The CWT program, as I stated, is--the cooperative is 
working together. Two-thirds of the members of the cooperative, 
which is basically 70 percent of the MILC, are participating in 
the CWT program. It is run by a very small staff and it has 
been effective. Mr. Scott Brown has done work with this 
Committee from the University of Missouri. He has done studies 
for the CWT program and it has been effective.
    The Chairman. Thank you.
    One final thing for you, Mr. Bouma. You mentioned that the 
Greater Southwest Agency has succeeded in managing milk 
marketing in their region without the need for MILC marketing 
or a hearing for southwest MILC marketing area issues. Do your 
members supply-manage on the side to help keep their supply and 
demand in balance?
    Mr. Bouma. No, sir. We actually have been in the forefront 
of developing plants, profitable plants, cheese plants. We have 
a new facility on a drawing board that should be on line, 
hopefully, in 2011. And we have been working to develop our 
markets which works in your part of the country.
    We work very closely with all of the cooperatives in the 
area. We all sit in the same room on a monthly basis, and we 
understand what our production coming at us is, and how we need 
to work through the marketplace to manage that production. We 
have no supply management, but we are definitely in the market 
development business, and we are working diligently to create 
products that will work in the world market and can be marketed 
as such.
    When you have complete cooperation of producers from 
Florida, all the way back to the Texas, New Mexico State line, 
you can sit in the room and discuss how this milk needs to move 
versus having Federal Order hearings and trying to find ways to 
raise differentials, or put in hauling credits, or do different 
things. And we have been very successful in doing that and also 
in working with our colleagues in the Southeast as we have 
accomplished that.
    The Chairman. Very good. Listen. Let me thank everyone. 
This has been an extraordinary hearing. We have spent over 3 
hours in this hearing today, uninterrupted too. But this is 
very, very serious, very urgent. We are committed to getting 
help to the dairy farmers and the entire dairy industry as 
quickly as we can.
    We will be having other hearings within the coming weeks. 
As the Chairman said, both he and I are working cohesively 
together to try to get all of the actors, all of the 
participants, all of the voices heard, so that we can then take 
this information and move forward. And I do believe it will be 
both administratively with the Obama Administration and the 
Department of Agriculture increasing their efforts, and there 
is more I feel that they can do.
    And, of course, there is certainly a movement to get 
legislative remedies as well. But whatever it takes, this 
Committee is devoted and committed to bringing help to our 
dairy industry. It needs it badly and we are committed to doing 
so.
    And with that, this hearing is adjourned. Under the rules 
of the Committee, the record of today's hearing will remain 
open for 10 calendar days to receive additional material and 
supplementary written responses from the witnesses to any 
questions posed by a Member to the panel.
    This hearing of the Subcommittee on Livestock, Dairy, and 
Poultry is adjourned. Thank you.
    [Whereupon, at 1:15 p.m., the Subcommittee was adjourned.]
    [Material submitted for inclusion in the record follows:]
      
                 Submitted Letters by Hon. David Scott
July 13, 2009

Hon. Tom Vilsack,
Secretary,
Department of Agriculture,
Washington, D.C.

    Dear Mr. Secretary:

    Thank you for your efforts this year to help alleviate the effects 
of the continuing dairy crisis. The Department of Agriculture dairy 
product purchases along with the utilization of the Dairy Export 
Incentive Program (DEIP) have been necessary and appreciated.
    However, since January of this year, dairy product prices have 
continued to decline, and at times dropped below price support levels, 
directly affecting the milk prices paid to dairy farmers.
    We urge you to take all steps at your disposal to improve the 
effectiveness of the Dairy Product Price Support Program (DPPSP) to 
bolster the price of milk. In authorizing the program, Congress 
provided flexibility to allow the USDA the leeway to set higher 
purchase price levels when necessary: Using the farm bill authority, we 
encourage you to temporarily raise Commodity Credit Corporation (CCC) 
purchase prices, in a manner consistent with pay-as-you-go policies, 
for the DPPSP.
    In addition, we urge you to take all practical steps to harmonize 
CCC dairy product packaging and grading standards with those used in 
commercial sales on the Chicago Mercantile Exchange (CME). Differences 
between CCC and CME standards make dairy product manufacturers 
reluctant to sell surplus product to the CCC, even when such sales 
would help stabilize milk prices.
    As you know, a new World Trade Organization (WTO) accounting period 
begins on July 1, 2009. We understand that due to the short time frame 
between when DEIP became operational and June 30, 2009, the full 
allocation for the year just ended wasn't able to be used. However, the 
complete allocation allowed under WTO obligations for the trade year 
that began July 1, can be fully utilized to help the domestic dairy 
industry if an announcement is made soon.
    Additionally, food banks, feeding programs and other domestic 
nutrition programs continue to run short on dairy products. We urge you 
to use the Department's available authorities to address these enduring 
needs.
    Should you have any questions please do not hesitate to contact 
Chandler Goule, Staff Director, Subcommittee on Livestock, Dairy, and 
Poultry at [Redacted] or [Redacted].
            Sincerely,

            
            
Tom Vilsack,Secretary,
Department of Agriculture,
Washington, D.C.

    Dear Mr. Secretary:

    A serious imbalance in the domestic dairy industry presents an 
imminent threat to the economic stability and welfare of American dairy 
farmers. In spite of industry-led efforts to balance supply, the 
overall state of the economy has reduced demand for dairy foods, 
resulting in an estimated 2009 surplus of 6.5 billion pounds.
    Exacerbating product surpluses is a price-cost squeeze, with milk 
prices declining and feed costs rising. The all-milk price received by 
farmers averaged $15.90 per hundredweight in December, down more than 
25 percent from a year earlier nationwide, and 33 percent lower in 
California, according to USDA data. Milk prices will likely be 
considerably below these levels in the coming months in the Northeast, 
Northwest, Southeast, Upper Midwest, and Southwest as well, if no 
action is taken. During the same period, feed costs jumped. The price 
of alfalfa, for example, rose 15 percent to $155 per ton. Feed costs 
have moderated in recent months, but not enough to offset the drop in 
milk prices.
    Simultaneous to low prices and the national economic recession, 
federal feeding and nutrition programs are at record-high enrollments. 
As you know, more than 31 million people qualified for benefits under 
the Supplemental Nutrition Assistance Program (SNAP) in the latter part 
of 2008. In addition, free and reduced-price school lunch program 
participation is an unprecedented 18.4 million children.
    In light of the disturbing evidence, and consistent with the 
authority granted the Secretary under Section 5 of the Commodity Credit 
Corporation Charter Act and Section 32 of the Act of August 24, 1935 
(P.L. 74-320 as amended), we respectfully urge you make generous 
purchases of dairy products as soon as possible for use in federal 
nutrition programs. As we work to address long-term solutions to 
overproduction, your quick action to remove surpluses from the market 
is critical to ease the immediate crisis and continue to provide 
wholesome and nutritious products for school children, the elderly and 
others in need.
    Thank you for your prompt attention and consideration of this 
request.
            Sincerely,

            
            
David Scott,Chairman,

Hon. Randy Neugebauer,
Ranking Minority Member,

Subcommittee on Livestock, Dairy, and Poultry,
Committee on Agriculture,
Washington, D.C.

    Dear Representative:

    America's dairy farmers are facing an unprecedented economic 
crisis. Tens of thousands of independent producers are at risk of 
losing their livelihoods if this crisis remains ignored, while 
consumers across the country risk having no local sources of fresh 
dairy.

    Dairy farmers are losing an estimated $200 per cow each month. 
Producers are receiving as little as $9 for a hundredweight (cwt) of 
fluid milk, while their cost of production ranges from $18-$27 per cwt. 
If trends continue, we may immediately lose up to 20,000 of our 
nation's 60,000 family dairies and billions of dollars from our rural 
economies, which are already hurting during this economic recession.
    Today's dairy crisis is not just the result of overproduction or a 
sudden decline in demand spurred by the global recession. Dairy farmers 
have been hit with a disastrous combination of factors beyond their 
control. The price of milk paid to farmers collapsed a record 30 
percent in January 2009 alone and 50 percent since July 2008, the 
result of a volatile pricing system that is easily manipulated by a few 
corporate players. Meanwhile, farmers are struggling to pay bills from 
record high production costs, adequate credit is increasingly difficult 
to access, milk substitute imports are rising without regulation, and 
catastrophic drought and other natural disasters are devastating many 
areas of the nation.
    For the imperative survival of tens of thousands of dairy farmers, 
the price of milk paid to farmers must be changed to reflect their cost 
of production. At a minimum, a floor price of $18 per cwt should be 
instituted immediately. Under Section 608c(18) of the Agricultural 
Marketing Agreement Act of 1937, the Secretary of Agriculture is 
required to adjust farm milk price to ``reflect the price of feeds, the 
available supplies of feeds, and other economic conditions which affect 
market supply and demand for milk and its products.'' Congress must 
urge the Secretary of Agriculture to use this authority now.
    Not only are farmers missing out but consumers are, as well. Since 
the early 1980s, the spread between farm milk price and retail milk 
price has steadily widened without any public benefit. Despite today's 
unprecedented collapse in farm milk price, the retail price for 
consumers has barely budged. To make matters worse, the 2009 first 
quarter earnings by the top dairy processors showed a substantial 
increase in profits over the same period in 2008.
    If the crisis continues, we risk the dire situation of entire 
states devoid of a single dairy, therefore forced to rely on factory 
farms and imported milk substitutes and dairy products that compromise 
public and environmental health and safety. A stable network of local 
dairy farms is essential for communities to provide their residents 
with access to safe, healthful food. Furthermore, local dairies are a 
productive and beneficial way to preserve farmland and open space. 
Fighting on behalf of America's dairy farmer is a matter of food 
security, farm security and, ultimately, national security.
    The crisis in dairy is not about farmers producing too much milk; 
it is about unregulated and unnecessary imports. This crisis is not 
about a decline in demand; it is about ineffective policies leading to 
unfair, easily manipulated pricing formulas and extremely volatile, 
unpredictable markets. We know that setting an emergency floor price 
for farm milk will not address all the problems that led to the current 
crisis, but it may be the only way to keep thousands of dairy farmers 
on the land this year.
    You have the power and the responsibility to lead Congress in 
changing the fate of countless hardworking men and women for a better 
system and a fair deal. The situation is dire, the impacts are 
widespread, and farmers and consumers need you to do the right thing 
right now.
            Sincerely,

American Agriculture Movement Inc.;
American Agriculture Movement of Arkansas;
American Corn Growers Association;
Alabama Sustainable Agriculture Network;
Alaska Farmers Union;
American Corn Growers Association;
California Dairy Campaign;
California Farmers Union;
Community Alliance with Family Farmers (CA);
Community Farm Alliance (KY);
Family Farm Defenders;
Farm Aid;
Farmworker Association of Florida;
Federation of Southern Cooperatives/Land Assistance Fund;
Food & Water Watch;
Food Democracy Now!;
Food First/Institute for Food and Development Policy;
Iowa Citizens for Community Improvement;
Iowa Farmers Union;
Land Stewardship Project;
Michigan Farmers Union;
Minnesota Farmers Union;
Minnesota Food Association;
Missouri Rural Crisis Center;
Montana Farmers Union;
National Family Farm Coalition;
National Farmers Organization;
National Farmers Union;
National Latino Farmers & Ranchers Trade Association;
Nebraska Farmers Union;
Nebraska Women Involved in Farm Economics;
New England Farmers Union;
New Entry Sustainable Farming Project (MA);
North Dakota Farmers Union;
Ohio Ecological Food & Farm Association;
Ohio Farmers Union;
Operation Spring Plant (NC);
Oregon Farmers Union;
Organic Consumers Association;
Pennsylvania Farmers Union;
Pennsylvania Association for Sustainable Agriculture;
Physicians for Social Responsibility, Oregon Chapter;
Rocky Mountain Farmers Union;
Rural Advancement Fund (NC);
Rural Coalition/Coalici"n Rural;
Rural Vermont;
Seven Generations Ahead (IL);
Slow Food USA;
Soybean Producers of America;
Sustainable Food Center (TX);
Texas Farmers Union;
The Cornucopia Institute;
The Rodale Institute;
The Second Chance Foundation (NY);
Washington Farmers Union;
Women Involved in Farm Economics;
World Hunger Year.

    For more information, please contact Hilde Steffey at 617-354-2922 
or [email protected].

CC: Members of House Agricultural Committee.
 Submitted Statement by Hon. Glenn Thompson; on Behalf of Diane Heckman





July 17, 2009

    Honorable Congressmen Peterson and Scott,

    Thank you for accepting written testimony on the situation of the 
dairy industry in the nation. As Secretary of Agriculture for Vermont, 
I am deeply concerned for our state's dairy farm families and the rural 
communities and economies of our state. I would like to reference the 
accurate and excellent testimony of Congressman Welch from Vermont to 
this Subcommittee on the dairy situation--I will echo Congressman Welch 
and provide further information for your consideration.
    Vermont's dairy farms are an economic engine for our state. Vermont 
is a milk exporting state due to our relatively small population, fewer 
than 675,000 people, and large number of dairy farms--1,046 as of July 
1, 2009. Vermont is an exporter of unprocessed fluid milk and fully 
processed dairy products to southern New England and many other East 
Coast states. The sale of unprocessed milk brings over $1 million per 
day into the State of Vermont. These funds are spent by dairy farmers 
in their rural communities and provide jobs in transportation and 
processing in Vermont. Due to extremely low milk prices our rural 
communities are suffering right along with our dairy farm families.
    With the decline in milk prices, the average size Vermont dairy 
farm is receiving over $100,000 less income this year. Multiplied by 
Vermont's total number of farms, the decline in income projected for 
Vermont dairy farms in 2009 is over $116 million. This represents money 
that will not be circulated in local economies--the vet will go unpaid, 
the feed dealer will go unpaid, the fertilizer dealer will go unpaid, 
no new equipment can be purchased and so on. Farmers are proud and want 
to pay their bills but the deep decline in milk prices is making that 
impossible at this time.
    Added to this issue is the current credit crisis. Many of Vermont's 
agriculture related businesses, such as feed and fertilizer dealers, 
are unable to extend the same credit terms to dairy farmers that they 
have in the past. These related businesses are unable to obtain credit 
from their primary lenders to be able to extend credit to dairy 
farmers. One fertilizer dealer in Vermont had to go from 12 months for 
repayment with interest to 90 days for repayment in 2009 due to a lack 
of credit from their lending institution. When the extension of credit 
to dairy farmers from these businesses ends, large numbers of dairy 
farmer operations will be forced to cease operating, changing forever 
the working landscape.
    Many in our state have concluded that Vermont's dairy farmers need 
to diversify their operations to be less reliant on the price of milk 
for their livelihood. I have been contacted by a dairy farmer that also 
raises 500 turkeys for Thanksgiving and produces 1,000 gallons of maple 
syrup a year, harvests trees for lumber and pulp wood from the farm's 
woodlot as well as milking 65 cows--a truly diversified operation. This 
farmer is extremely concerned. Due to the overall economic downturn, 
many avenues used to generate additional income have dried up. Sales of 
maple syrup are flat, sales of logs and pulp wood are non-existent and 
this farmer is worried that the turkeys he is raising for Thanksgiving 
will not sell due to the overall poor economy. Many dairy farmers are 
diversified but even with this diversification, it's the low price they 
are receiving for their milk that could very possibly put them out of 
business. This particular farmer estimates that he needs $5 to $6 more 
dollars per hundredweight to break even. Work harder. be more efficient 
and diversify is still no guarantee of success when milk prices tumble 
to rock bottom.
    Saving Vermont's and New England's dairy industry will require both 
immediate action and long-term reforms. The most immediate assistance 
we can provide dairy farmers to survive the current crisis is an 
increase in Milk Income Loss Contract (MILC) payments. While MILC has 
helped ward off full-scale disaster so far, the disparity between the 
price of milk and the cost of production warrants a reevaluation of its 
payment formula. With farmers spending nearly $19 and earning back less 
than $12 for every hundredweight they produce, MILC payments between $2 
and $3 are simply not enough to keep them in business.
    I and several of my colleagues have been advocating for an increase 
in MILC payments since this crisis began. The Northeast Association of 
State Departments of Agriculture wrote to Congress in April asking that 
the MILC payment rate be raised from 45 percent to 79 percent and to 
revisit the current cap of 2.95 billion pounds of annual production. I 
support this proposal as a short term solution to help put money back 
in the pockets of producers until prices recover. I realize there is a 
reluctance to re-open the 2008 Farm Bill, but I would urge the Chairman 
and the Committee to recognize the extreme nature of this crisis and to 
make an exception.
    Secretary of Agriculture Tom Vilsack is considering increasing the 
Dairy Price Support Program from its current level of $9.90 per 
hundredweight. In the last farm bill, the Dairy Price Support Program 
was changed to allow adjustment of individual prices for products 
involved in the program under Authority of the Secretary. Increasing 
the Dairy Price Support Program to $12 equivalent price as suggested by 
Senators Leahy and Kohl (and other Senators) would bring immediate 
relief to dairy farm families across the nation.
    I would like you to consider working with USDA through the Federal 
Order System to increase Class I differentials. Class I Differentials 
have not been raised, in the majority of Federal Orders, since the year 
2000 when the new system of milk pricing was introduced. Congress was 
intimately involved in the reforms to the Federal Order System that 
were implemented in 2000. The current Class I differentials do not take 
into account the rapid increase in transportation costs due to 
increased fuel costs or the affect of the ethanol boom on dairy grain 
costs. These increases in fuel costs have been directly bourne by dairy 
farmers through fuel surcharges from haulers that are not covered by 
the purchasers of the milk in many cases. Increased feed costs due to 
the increased use of corn for ethanol production has also hit dairy 
farmers hard. Increasing the Class I differentials in all Federal 
Orders would assist in covering the increased cost in fuel, offsetting 
or eliminating fuel surcharges to dairy farmers and providing an 
enhanced milk check to assist in covering increased feed costs.
    I would like to encourage the House Agriculture Subcommittee on 
Livestock, Dairy, and Poultry to consider setting a floor under the 
Class I mover as a method to increase income to dairy farmers. The 
floor under the Class I mover, at a minimum, should equal the current 
trigger price for the MILC program at $13.69/cwt. This figure was set 
in 2001 when the MILC was enacted and has not been adjusted for 
inflation. The rate of $13.69 should be indexed to the rate of 
inflation since 2001 and then used as the Class I Floor for the MILC 
program.
    The Northeast states began working jointly on dairy issues with the 
formation of the Northeast Dairy Leadership Team through an MOU between 
New York, Pennsylvania and Vermont. All Northeast states work together 
through the Northeast Association of the State Departments of 
Agriculture. There may be several opportunities for the states across 
the country to work together more closely on dairy pricing issues but 
authority is needed from Congress on this issue. I would encourage you 
to consider the potential of regional food security by the states 
working together to set milk prices that could reflect supply and 
demand in their regions.
    I would like to thank you for the opportunity to provide testimony 
to the House Agriculture Subcommittee on Livestock, Dairy, and Poultry 
on the current dairy crisis in the State of Vermont and some possible 
short-term solutions to this devastating issue.
            Sincerely,

            
            
                                 ______
                                 
 Submitted Statement by Hon. Peter Welch; on Behalf of Kylie Quesnel, 
                  Perry Brook Dairy, Orleans, Vermont
    Our parents started farming soon after high school. They left our 
grandfathers farm and went on their own renting stalls from a local 
farmer to gain equity and cow numbers until they could rent their own 
facility. In 1988, with our cow numbers at 300, we had outgrown the 
rented facility. My Dad and Mom (Lorenzo and Amy) purchased Perry Brook 
Dairy. They took out a loan to build a new state of the art barn and 
milking parlor. Our family moved and started on a journey that would 
eventually lead to the three of us children returning to the farm.
    In 2003, Kylie graduated from Cornell with seven great job offers 
but after careful thought, decided to return home to the farm. With a 
degree in animal science and half of my credits in business I decided 
that joining the family business would be the best use of my degree and 
allow me the greatest speed for advancing my own career. In 2004, 
Kirstin graduated from Cornell and took a job with Elanco and worked in 
the Midwest until she decided to return home in 2007. Also in 2007, Jed 
returned home to join the business with a degree from Northwestern. All 
three of us decided that we had different interests within our business 
and felt that we would have a better chance at success if we farmed 
together versus separately. While this has been a good decision for 
managing our dairy, it has limited us and forced us to assume at times 
greater risk because when milk price has dropped, we are only eligible 
for MILC for 6 weeks of production because of our size. We currently 
milk 950 high production cows with nearly 2,000 total head.
    Last March, I applied for a young farmer loan through FSA and 
purchased the farm next door on my own. This purchase allowed us to 
bring our heifer's home from the heifer grower to save some expense. I 
had hoped to milk cows on that dairy as well. As the milk price 
plummeted, my business plan changed and now my farm only houses 
heifers.
    At this time our dairy is highly leveraged. We are just coming off 
from a new purchase that required large amounts of capital. As milk 
price has dropped our goals and plans have been put on the back burner 
and we now sit waiting for this storm to change. Our gross income is 
down nearly $1 million in the first part of the year. The average cost 
of production in our area is $17.88/cwt and our last advance check was 
$10.50/cwt. We received $51,000 through the MILC program to compare 
with a loss of $1mil or .20/cwt annual production.
    We have worked so hard this year to hold onto our business. We have 
sold two of our farms this spring at a loss to reduce our monthly 
payments to keep the heart of our farm going. We have sunk below the 
equity level acceptable for Farm Credit to continue to extend us 
operating money. We have concern about where our relationship with Farm 
Credit is going although we have always made our payments they have 
made us aware that we are a concern for them. With FSA not having money 
at this time, we have found ourselves unable to borrow money to keep 
our business afloat. Obtaining credit is essential for our business and 
at this time we struggle to find where that credit will come from.
    We are working with the power company each month to keep the power 
on in the barns and in all of the farm housing. Our family has not 
taken a paycheck from the dairy since last fall and has been forced to 
discontinue our health insurance because of the lack of dollars to pay 
for it. We do not qualify for the state health insurance at this time 
either. In order to qualify we must go without insurance for a complete 
year and then reapply. We have had to let three employees go and cut 
costs everywhere. We want to farm, we believe in producing a healthy 
product for consumers. We are one of the largest employers in our town 
and have forsaken our own income to keep our employees wages as steady 
as possible. Our industry needs a lifeline. Our family contributes to 
our community through volunteering as 4-H leaders and hosting non-farm 
children through the summer on the dairy, we are on the Otter Creek 
Conservation Board, are on the farm bureau board and have a progressive 
summer internship program for college students. In our industry we 
serve on many different boards and young farmer groups and are well 
regarded among our peers. We also are proud to keep our land open to 
VAST trail system and hiking/ATV trails. Our success helps our 
community and we are playing with all chips in. We are at a critical 
breaking point and the toll that this stress is playing on us 
personally is very difficult. We watch our dad's health deteriorate. 
The stress of our situation has caused depression and anxiety in our 
family. Each day that goes by we continue to navigate through these 
difficult times and rely on a failing market we are less sure about our 
future. In our situation, liquidation is not possible. We would not 
likely receive enough money through liquidation to cover our expense 
and walking away would leave all five of us along with ten employees 
homeless and with no savings or retirement. We have discussed all 
possibilities and feel that the consequences of bankruptcy for our 
community and our family would be devastating. We feel that our 
business ceasing would consequently mean the elimination of one of the 
vets in our county and potentially have a terrible affect on the local 
feed companies and suppliers that we have worked with for many years.
    My siblings and I would like the opportunity to purchase the 
remainder of our parents business but without major change in income, 
we would never make it. We share with you our story but recognize that 
our story is being repeated all across our country and we send a 
desperate cry to leadership, please help our industry, we are the 
fabric of the American dream and such an important part of our great 
country's landscape. We need safe food in America and our family wants 
to be a there to meet that need!
    If you have ideas for our personal situation, please feel free to 
share them with 802-989-0400! We will also continue to share our ideas 
for industry solutions with your office.
                                 ______
                                 
            Submitted Statement by Dairy Farmers of America

    Thank you for the opportunity to submit comments. Dairy Farmers of 
America is a national cooperative owned by nearly 18,000 dairy farm 
members in 48 states. The members of DFA produce approximately 20 
percent of the nation's milk supply.
    The economic crisis facing the dairy industry is unprecedented. 
During the last twelve months, billions of dollars in equity have been 
lost by the U.S. dairy industry. Family farms, in all geographies of 
the U.S. and of all sizes, are on the brink of collapse. The intensity 
of the crisis has escalated during 2009. During January through April 
this year, the U.S. average all-milk price reported by USDA/NASS has 
averaged $4.80 per cwt. below the U.S. average cash cost of milk 
production, as reported by USDA/ERS. Extrapolated across U.S. milk 
production during the first 4 months of 2009, the loss would be in 
excess of $3 billion. More recently, May's milk-feed index rate was at 
its lowest level since that calculation was created over 2 decades ago 
and milk prices have dipped further downward this month. This financial 
loss leads to the loss of small businesses, jobs in rural America, and 
a shrinking tax base for schools and public services.
Factors Contributing to Today's Crisis






    1. Cooperatives Working Together (CWT) is an industry initiative 
        funded by approximately \2/3\ of this nation's dairy farmers 
        with the goal of increasing exports of dairy products to meet 
        growing international demand and managing excess production of 
        milk. On July 10, CWT announced the second Herd Retirement 
        Program this year designed to reduce milk production. The first 
        program reduced milk production by 1.96 billion pounds on an 
        annual basis.

    2. USDA has implemented the Dairy Export Incentive Program (DEIP). 
        This program was announced on May 22 and resulted in the 
        commitment to export 48.6 million pounds of dairy products 
        through June 30, the end of the DEIP marketing year. Secretary 
        Vilsack has announced the remaining DEIP volumes would be 
        eligible for bonuses during the 2009-2010 marketing year. DEIP 
        has the ability to subsidize exports of:

     150 million pounds of nonfat dry milk.

     22 million pounds of butter.

     6.7 million pounds of cheese.

      These product volumes represent approximately 1.5 billion pounds 
            of milk. DFA members are very appreciative to the 
            Administration and Sec. Vilsack for making the DEIP program 
            available to export dairy products in an environment with a 
            short-term decline in global demand.

    3. USDA feeding and nutrition programs announced by Sec. Vilsack 
        have the capability to use dairy products equivalent to 
        approximately 2 billion pounds of milk. We urge full use of 
        this very beneficial program to assist needy consumers as well 
        as dairy farmers.

    4. DFA has supported the National Milk Producers Federation (NMPF) 
        request to provide for sales of cheese to the Commodity Credit 
        Corporation (CCC) which meet packaging specifications commonly 
        accepted in commercial channels.

    5. DFA has also supported the NMPF request to increase the level of 
        the Price Support Program for a temporary 3 month period to 
        immediately increase dairy farmer income.

    6. DFA supports increased dairy purchases for distribution through 
        USDA nutrition programs.

    7. DFA's Board of Directors established a new Price Stabilization 
        Study Committee to draft guiding principles for the 
        organization to use in discussion of long-term solutions to 
        today's situation.

    8. NMPF has created a Task Force that is charged with seeking long-
        term solutions to the margin volatility faced by U.S. dairy 
        farmers.

    Despite these short-term and long-term initiatives, market 
conditions continue to be bleak for the dairy industry. Farm level 
prices for June continue to be near historic lows, and based on current 
commodity prices, the hope of recovery in July or August gets weaker 
with each passing day.
    We are very concerned that milk supplies will decline dramatically 
due to the loss of equity on dairy farms and little sign of a 
turnaround. It is likely that many dairies will decide to liquidate 
rather than store a year's supply of silage beginning in September. 
Additionally, this crisis is so severe and of such duration that farm 
lending institutions will likely withhold additional credit for many 
dairy farmers, causing them to go out of business. A likely scenario 
suggests a significant reduction in milk production coinciding with an 
improving domestic and global economy. As the economy improves demand 
for dairy products and exports will increase. However, reductions in 
milk supply will likely result in dairy product shortages causing dairy 
prices to approach or exceed previous record levels. This will create 
consumer resistance to higher prices and reductions in demand that will 
lead to a continuation of brutal cycles.
    The dairy sector has a history of identifying programs to help 
dairymen and women through difficult times. Next week, the industry, 
under the leadership and guidance of the National Milk Producers 
Federation (NMPF) will be reviewing and discussing policy proposals in 
an effort to bring a policy recommendation to Congress. DFA is 
supportive of this process and is eager to identify policy options 
which will decrease volatility in milk prices in the future and bring 
stability to our sector. Following this process, we hope to work with 
Congress to make the necessary changes to Federal dairy policy in order 
to allow the dairy sector to thrive.
    Thank you for allowing Dairy Farmers of America to submit comments 
on this important issue. We look forward to working with Congress and 
others in the industry to make positive changes for the dairy industry.
                                 ______
                                 
    Submitted Statement by Steven Etka, Coordinator, Midwest Dairy 
                               Coalition

    Chairman Scott, Ranking Member Neugebauer, Members of the 
Subcommittee:

    Thank you for holding this hearing today to discuss the economic 
conditions facing the dairy industry. My name is Steven Etka, and I am 
the Coordinator and Washington Representative for the Midwest Dairy 
Coalition.
    The Midwest Dairy Coalition is an alliance of dairy cooperatives, 
associations and state agencies working together to provide an Upper 
Midwest voice on Federal dairy policy issues. Our membership includes 
Associated Milk Producers, Inc., Bongards' Creamery, Cooperative 
Network, Family Dairies USA, First District Association, Manitowoc Milk 
Producers Association, Mid-west Dairymen's Company, Milwaukee 
Cooperative Milk Producers, and the Wisconsin Department of 
Agriculture, Trade and Consumer Protection.
    As suggested by the title of this hearing, the dairy economy is in 
crisis. Milk prices have fallen farther than expected, and the recovery 
has been slower than anticipated. In June of 2008, the Class III milk 
price was $20.25 per hundredweight. One year later, the June 2009 Class 
III price is $9.97 per hundredweight. Dairy product prices have dipped 
below support levels repeatedly since January of this year. With milk 
prices paid to farmers less than half of what they were a year ago, the 
economic stress in dairy-dependent regions like the Upper Midwest is 
severe. This economic pain is being felt in all regions of the country.
    The downturn in dairy is as bad as it has been probably since the 
depression, primarily because of general economic conditions that drive 
down both domestic and export demand. The financial crisis also spills 
over into farm lending in general and dairy specifically. As the down 
cycle continues, bankers increasingly hold the key to whether some 
great farmers will be able to continue in business. Consistent 
anecdotal evidence suggests that dairy farmers are losing about $100 
per cow per month. When this happens, dairy farmers either bleed their 
equity or borrow, which is not currently an option due to financial 
markets. Literally the milk production infrastructure in the U.S. is at 
stake. Recovery and TARP monies might be used to make a difference in 
the short run if bold and innovative solutions are tried.
    It is with this background that we offer the following suggestions.

Milk Income Loss Contract (MILC) Program and Dairy Product Price 
        Support Program (DPPSP): Changes Need to Improve Effectiveness
    Without a doubt, the economic safety net provided by the Milk 
Income Loss Contract (MILC) Program has provided significant financial 
assistance to dairy farmers nationwide during times of low prices. The 
direct assistance provided the MILC program has benefits community 
wide, as the dollars multiple several times over throughout these 
dairy-dependent local economies.
    The MILC Program was first authorized in the 2002 Farm Bill. The 
modifications made in the 2008 Farm Bill to add a feed-cost adjuster 
and to restore the original 45 percent payment rate have provided 
meaningful enhancements to the program. The Midwest Dairy Coalition 
worked hard for and has strongly supported the MILC program in both the 
2002 and 2008 Farm Bill deliberations.
    Unfortunately, the current dairy price chasm that we're 
experiencing suggests that the MILC program by itself is not 
sufficient. The price dairy farmers are receiving for their milk is so 
far below the cost of production that they are losing thousands of 
dollars a month, even with the MILC program assistance. Congress should 
consider a temporary increase in the 45 percent MILC payment rate to 
address the emergency price situation.
    As originally envisioned, the MILC program was intended to be a 
partner to the Milk Price Support Program, which was modified by the 
2008 Farm Bill to become the Dairy Product Price Support Program 
(DPPSP). The two programs working together, in theory, would provide 
the assistance and stability to allow viable dairy producers to weather 
the storm of low price cycles. But the theory remains untested, because 
the DPPSP is not fully functioning, leaving the MILC program to do all 
of the heavily lifting by itself, a burden it is not able nor was it 
designed to bear.
    Therefore, we are urging the Secretary to take the following 
immediate remedial actions to bring the DPPSP back to life and serve 
its intended purpose:

(1) Increase the Commodity Credit Corporation (CCC) purchase prices for 
        butter, powder and cheese
    The 2008 Farm Bill sets minimum CCC purchase prices levels for 
butter, powder and cheese, but provides flexibility for those prices to 
be increased above those levels when necessary. We are urging the 
Secretary to take immediate action to increase the price support levels 
to reflect the additional costs that dairy product manufacturers face 
when selling product to the CCC relative to commercial sales.

(2) Restore Pre-2009 Policy of Paying a Premium Price for Consumer-
        Ready, Valued-Added Products in Packaging More Readily Usable 
        in USDA Nutrition Programs and Food Donation programs.
    Historically, CCC has paid a premium price under the DPPSP to 
purchase more consumer-ready value-added dairy products, such as 
pasteurized processed cheese in 2 or 5 pound boxes, because they are 
more readily used in USDA Nutrition and Food Donation Programs, and do 
not require further processing, as do large cheese blocks and barrels.
    However, in January of 2009, just as milk prices were collapsing, 
the Bush Administration issued a notice to dairy product manufacturers 
informing them that the policy of purchasing these value-added products 
was ending. Unfortunately, the current Administration has continued 
this policy.
    We are urging that USDA reinstate its pre-2009 policy of paying a 
premium prices for value-added, ready-to-use dairy products, such as 
pasteurized processed cheese. This will not only help stabilize milk 
prices, but will also help meet the growing needs of the food donation 
programs during this time of high demand. To the extent that there is 
any question about USDA's authority to continue this practice under the 
revamped statutory authority for the price support program, we believe 
that the DPPSP authority can be married with that of the CCC Charter 
Act of 1933 to address these concerns.

(3) CCC Should be an Active Buyer of Dairy Products on the CME at 
        Established Price Support Levels
    For reasons described below, many dairy product manufacturers are 
reluctant to sell product to the CCC. We are urging the CCC to become 
an active buyer of dairy products on the CME at the established price 
support levels, instead of the current practice of being a passive 
buyer of dairy products by simply offering to buy product at the 
established CCC purchase price. Because the CME prices are used widely 
as a benchmark price for off-market dairy product sales, we believe 
that the CCC's active participation in the CME would significantly 
enhance the effectiveness of the DPPSP. We believe the Secretary has 
the authority to buy products for CCC directly on the CME if 
administratively he waives the CCC product and packaging specifications 
which are outdated, impractical and costly.

(4) Take All Practical Actions Available to Harmonize CCC Packaging and 
        Grading Standards with Commercial Standards Set by the Chicago 
        Mercantile Exchange (CME)
    Currently, CCC packaging and grading standards differ from 
commercial standards established by the Chicago Mercantile Exchange 
(CME). Therefore, manufacturers are reluctant to sell product to the 
CCC because they have to change their manufacturing procedures in order 
to address those standards. Because of the discrepancies between CCC 
and CME standards, and periodic delays in receiving payment the CCC, 
there are additional costs associated with selling product to the CCC. 
We are urging USDA to undertake a full review of their dairy product 
packaging and grading standards, in dialogue with the dairy industry, 
to investigate practical ways to harmonize CCC standards with those 
used for commercial sales.

Additional Efforts Necessary to Purchase Cheese for USDA Nutrition and 
        Food Donation Programs
    USDA has taken action to use existing CCC stocks of nonfat dry milk 
for food donation programs. This will be helpful in the long-run to 
prevent excessive stocks from hanging over the market, so we appreciate 
the Secretary's efforts in this regard. According to food aid 
organizations such as Second Harvest, food pantry demand is up very 
significantly from 1 year ago. Dairy products can provide healthful 
food to children and families in need.
    However, we believe that USDA should take additional action to use 
all authorities at the Secretary's disposal to make purchases of cheese 
products directly off the market for use in USDA Nutrition and Food 
Donation Programs. Direct purchases off the market will not only have 
the most direct and immediate effect in stabilizing milk and dairy 
product prices, but will help address the humanitarian food needs for 
low-income populations.

Federal Milk Marketing Order Reform
    The dairy farmers and industry leaders of the Upper Midwest have 
long voiced concerns about the discriminatory pricing policies inherent 
to the Federal milk marketing order system. It is widely documented 
that the bias of the current system toward Class I (fluid) milk has a 
downward effect on the value of milk used for manufacturing. For 
regions like the Upper Midwest, where 85-90 percent of the milk is used 
for manufactured dairy products, this discrimination is of great 
concern. In addition, as Class I utilization percentages nationwide 
continue to decline, the outdated Class I bias of the FMMO system must 
be revisited. We look forward to working with the Committee and USDA to 
reform the system in favor a more coherent approach to milk pricing.

Trade Issues
    We greatly appreciate the Secretary's recent announcement of the 
DEIP allocation for the 2009-2010 marketing year, and urge quick action 
to fill these allocations. The delay in announcement of the 2008-2009 
DEIP allocations caused much of this allocation to go unfilled, which 
is a regrettable lost opportunity to help stabilize milk prices. 
Hopefully, the 2009-2010 experience will be more positive.
    In the world of dairy, small imbalances in supply and demand result 
in large changes in milk prices. We cannot ignore the fact that dairy 
imports and exports play a role in that overall supply-demand equation. 
The strong milk prices of 2007 and 2008 were driven in large part by 
tight supplies of dairy products in the world market, and a related 
surge in U.S. dairy exports. The milk price crash of 2009 was related 
in part to the loss of those markets. The unique, high world market 
price situation of 2007 and 2008 allowed the U.S. to take advantage of 
the export market at prices that were profitable to U.S. dairy farmers. 
However, in general, world market dairy prices are often below the U.S. 
cost of production. While we should look for ways to expand our export 
opportunities, it defeats the purpose if those markets come at prices 
that are unsustainable to U.S. dairy farmers.
    There have been times in the last decade were dairy product imports 
have significantly affected domestic price levels. There continue to be 
dairy product import categories, such as milk protein concentrates 
(MPCs), for which there are no limits. Whenever U.S. dairy prices start 
to recover, our market will once again be vulnerable to lower-priced 
MPC imports from our competitors. The Midwest Dairy Coalition continues 
to support efforts to establish tariff rate quotas on MPC imports, to 
bring about greater consistency with import rules in place for other 
dairy products, and to close the loopholes that have encouraged 
circumvention of those rules.

Long-Term Solutions Needed to Address Wide Price Volatility
    While immediate action is needed to address the current milk price 
crisis, the current situation has sparked an industry-wide discussion 
about long-term solutions to prevent the wide volatility in milk 
prices. The bottom end of the wide price swings of the last decade have 
been disastrous for dairy farmers, and the high ends of the price 
cycles are leading dairy product users to seek out alternatives and 
reduce their use of dairy products, with long-term effects on dairy 
demand. Indeed, neither side of these wide price swings is beneficial 
to dairy farmers.
    Many plans are being discussed in the industry to institute long-
term policies to prevent the type of price crisis we are now 
experiencing from ever occurring again. While there is no national 
consensus of the best approach to achieve this goal, we strongly urge 
the Committee and the Secretary of Agriculture to assist the industry 
in these efforts to develop and analyze options for the long-term 
viability of dairy farming in this country.
    Thank you for the opportunity to submit this testimony.
                                 ______
                                 
             Submitted Statement by National Farmers Union

    National Farmers Union (NFU), a nationwide organization 
representing more than 250,000 farm, ranch and rural residents, submits 
the following testimony for the record.
    Since the peak of dairy market prices in 2008, the market has 
precipitously collapsed to historic low levels and is now well below 
the cost of production. NFU has long supported a comprehensive dairy 
policy that accounts for dairy profitability, income stabilization, 
limitation on imports, competitive markets and supply-inventory 
management.
    Dairy farmers of all sizes and across all regions of the country 
are continuing to battle an unprecedented economic disaster. From coast 
to coast, today's situation is untenable. Equity has been rapidly 
disappearing, market prices are not rising above 1970 levels and 
creditors are cutting off producers--yet there is no relief in sight. 
National Farmers Union has worked throughout the past seven months to 
construct workable and immediate solutions for producers. Today's 
hearing will provide the subcommittee with input on the economic 
conditions facing the dairy processing industry. This NFU testimony 
aims to provide solutions for dairy producers, who are going broke as a 
result of failed federal dairy policies.
    The NFU board recently voted to encourage Congress to pass a dairy 
stimulus package to provide an adequate safety net for producers in 
addition to establishing an inventory management program. Furthermore, 
the board expressed support for the concept of the Federal Milk 
Marketing Improvement Act of 2009. Most importantly, the board 
expressed the need for producers to receive an immediate financial 
lifeline to sustain their livelihoods through this unprecedented 
situation.
    Time is of the essence for these producers. Many continue to lose 
$100-$200 per dairy cow per month. Regardless of operation size, many 
producers have been issued notice from feed suppliers that they will no 
longer receive feed, and creditors across the country are terminating 
lending. This situation is having a ripple effect across rural America, 
devastating rural citizens and further weakening the nation's already 
ailing economy.
    America's dairy farmers are some of the hardest working individuals 
feeding our nation and the world. Congress, the administration and the 
American public must not wait any longer in offering these individuals 
a lifeline.
    In 2007, NFU hosted a dairy summit of producer-based organizations 
to seek solutions, both long and short term, for dairy producers. The 
following three principles were identified and agreed to by 
participating organizations:

   Return on investment greater than cost of production, PLUS a 
        profit from the market;

   Reform of the Federal Milk Marketing Order system; and

   Restoring competition to a non-competitive dairy market.

    While no single action by Congress or the administration will 
immediately resolve today's crisis, a suite of options does exist to 
ensure producers will survive this devastating economic period. Options 
to achieve the above mentioned principles are outlined below, 
categorized by short-term action and long-term action:

Short Term Options:
   Establish safety net support price that is fair and 
        equitable to all producers--Establish an emergency Class III 
        floor price of $18/cwt by existing authorities of the Secretary 
        for a period of 6-9 months. During this period, USDA should 
        launch the FMMO review as established in 2008 Farm Bill. 
        Additionally, we support efforts to launch an investigation at 
        the CFTC into potential manipulation at the CME;

   Continue countercyclical MILC safety net--Approve Sen. 
        Gillibrand's legislation to double MILC payment rate (S. 1398);

   Eliminate make allowance. If not eliminated, make it 
        variable and tied to producers' cost of production;

   Require the NASS survey to be audited periodically;

   Maintain standards of identity on dairy products and move to 
        increase fat content standards in fluid milk;

   Deploy low-interest and emergency loans, including a 
        foreclosure mitigation program to stem the tide of loan 
        foreclosures;

   Product purchase for donations to food banks and other 
        nutrition programs;

   Allow producers to label milk as free of artificial growth 
        hormones;

   Accurate recording and publishing of import data from ERS; 
        and

   Ensure imported dairy protein blended products are accounted 
        for and categorized appropriately according to the common or 
        commercial meaning of the term ``milk protein concentrate'', 
        not allowed to disguise skim milk powder MPC to avoid tariffs 
        and the tariff rate quota.

Long Term Options
   Efficient transmission of price signals should be 
        established. Today's market is non-functioning with imbalance 
        of buyers/sellers;

   Pass the Milk Import Tariff Equity Act to address unlimited 
        imports flooding U.S. domestic market.

   Include CA and all regions/areas in the FMMO;

   Correct pooling/de-pooling provisions in the FMMO;

   Eliminate bloc voting;

   Allow ``no'' vote on amendments, yet maintain FMMO;

   Do not place financial burden of transportation onto 
        producers;

   Establish three-part pricing formula to include: cost of 
        production, Consumer Price Index and Chicago Mercantile 
        Exchange;

   Resolve distribution and supply management challenges;

   Repeal forward contracting authority;

   Support funding for academic antitrust research;

   Intensify review process for proposed dairy mergers;

   Promote smaller coops and increase oversight of coop 
        management to ensure interests of producers are met;

   Passage of S. 889; and

   Eliminate authority for dairy import promotion assessments.

    National Farmers Union has written to Congress and the 
administration calling for action in response to the dairy crisis. 
Included with this testimony is a copy of these letters. Our producer 
members are prepared to engage in immediate conversations with members 
of this subcommittee and any member of Congress willing to help resolve 
today's crisis and ensure a similar situation is not repeated in the 
future.

                              Attachment 1

June 3, 2009

Hon. Tom Vilsack,
Secretary,
Department of Agriculture,
Washington, D.C.

    Dear Secretary Vilsack:

    As the dairy market collapse spreads throughout the dairy industry 
and impacts producers across the country, it is critical for immediate 
action to occur. With demand shrinking, market prices collapsing, input 
costs increasing and reduced credit available, dairy farmers are facing 
a unique set of challenges on multiple fronts. While the dairy sector 
is not unique in its economic struggles, the immediacy of the market 
collapse requires creative policy solutions.
    On behalf of National Farmers Union's (NFU) independent dairy 
farmers nationwide, I write to thank you for the initiatives the 
department has taken thus far to address the dairy crisis. I call upon 
you for additional help to resolve the immediate situation and 
proactively create workable policy options for the future. Your March 
26, 2009 announcement to disperse 200 million pounds of nonfat dry milk 
(NFDM) for domestic feeding programs and expeditiously release Milk 
Income Loss Contract (MILC) program payments was welcome news for dairy 
producers. Unfortunately the severity of today's situation requires 
additional action.
    Each month NFU tracks and publishes the farmer's share of the 
retail food dollar. Our latest data shows consumers paying $4.99 for a 
pound of cheddar cheese while the farmer receives less than $1.00; 
farmers receive $0.97 out of the $2.99 consumers pay for a gallon of 
fat free milk. At a time when more consumers are eating at home, 
thereby increasing retail dairy product sales, producers are losing 
money on every gallon of milk sold. To make the situation more painful, 
producers read media stories of double-digit profit margins for dairy 
processing companies.
    NFU has called upon Congress to convene hearings to reexamine the 
impact of food prices on American families. Twelve months ago, food 
processing companies were quick to point the finger at higher 
agricultural commodity prices as the cause of increased retail food 
prices. Since commodity prices have collapsed and retail food prices 
have not tracked in similar fashion, a full examination is long 
overdue.
    Furthermore, the discussion of unfettered imports has not been 
given adequate attention when evaluating the current crisis. For many 
years, NFU has supported closing the milk protein concentrate (MPC) and 
casein loophole created by the Uruguay Round agreement, which allows 
for the importation of MPC and casein tariff-free. Without question, 
the overflow of imported, ultra-filtered dried protein product 
displaces American-produced milk in the production of dairy products. 
MPC was a relatively new product during Uruguay Round negotiations and 
after implementation of World Trade Organization (WTO) rules in 1995 
became commercially viable.
    Additionally, a lack of enforcement by the U.S. Customs Service has 
allowed dairy protein blends to be imported in circumvention of U.S. 
tariffs and tariff-rate quotas. Much of the imported dairy protein 
blended products are essentially equivalent to skim milk powder and do 
not satisfy the common or commercial meaning of the term ``milk protein 
concentrate.'' Therefore, they should be subject to tariff provisions 
covering powdered milk imports. Moreover, a 2001 Government 
Accountability Office (GAO) report stated ultra-filtered milk is not 
nutritionally equivalent to fluid milk nor has the product undergone 
mandatory safety tests under the Food and Drug Administration's 
``Generally Recognized as Safe'' rules. The impact of imports must 
become a central part of the discussion when trying to address today's 
crisis.
    During NFU's annual meeting, our member-delegates approved a 
special resolution focused on the dairy crisis. The resolution called 
on Congress and USDA to take all appropriate actions to sustain family 
dairy farmers through this period of economic uncertainty. Below are 
the specific requests to USDA:

   Immediate implementation of the 2008 Farm Bill provisions 
        related to the FMMO system to increase efficiency and be more 
        responsible to the market, including a USDA study and report on 
        the impact of misreporting of nonfat dry milk prices on federal 
        order minimum prices; and a FMMO commission to evaluate current 
        federal and state milk pricing regulations to provide 
        recommendations for changes to Congress and USDA;

   Establishment of a dairy price support program that accounts 
        for the total cost of production. The structure of the program 
        should allow producers to sell milk at a reasonable profit 
        without building government stocks of products;

   Auditing and enforcing the current definition of milk as 
        related to standardized cheese and yogurt;

   Immediate oversight of the dairy product pricing system to 
        ensure transparency, fairness and competitive markets;

   Accurate recording and publishing of import data from ERS;

   Purchases of domestic dairy product and hamburger by the 
        U.S. Department of Agriculture for domestic and international 
        nutrition programs; and

   Immediate release of the MILC payments due to producers.

    The special policy resolution further called on Congress to do the 
following:

   Make low-interest and emergency loans available, including a 
        foreclosure mitigation program, to stem the tide of loan 
        foreclosures as a result of the current economic climate;

   Eliminate authority for dairy forward contracting, which 
        allows processors to shift all economic risk onto producers, 
        encourages vertical integration of America's dairy production 
        and dismantles of the Federal Milk Marketing Order (FMMO) 
        system;

   Eliminate authority for collection of dairy promotion 
        program assessments from importers;

   Pass legislation closing the MPC and casein loophole as 
        established during the Uruguay Round; and

   Oppose efforts that would prohibit producers from labeling 
        milk as free of artificial growth hormones.

    More than 150 individuals gathered on May 30 in Manchester, Iowa to 
rally for higher milk prices for producers. The event was held to draw 
attention to the ongoing crisis for dairy producers. As evidenced by 
the well attended Iowa rally, the economic impact is not isolated to 
the dairy industry. The multiplier effect throughout a rural community 
is severe when any producer is forced out of business. Since June is 
nationally recognized as ``Dairy Month'', I urge you to continue to do 
all you can to help stem the tide for America's dairy producers.
    Again, I thank you for your continued commitment to addressing the 
dairy crisis and hope we can work collaboratively to protect 
independent family dairy farmers.
            Sincerely,

Roger Johnson, President,
National Farmers Union.

cc:
Senate Agriculture, Nutrition and Forestry Members,
House Committee on Agriculture Members.

                              Attachment 2

June 22, 2009




Hon. Tom Harkin,                     Hon. Collin C. Peterson,
Chairman,                            Chairman,
Agriculture, Nutrition and Forestry  Committee on Agriculture,
 Committee,                          United States House of
                                      Representatives;
United States Senate;

Hon. Saxby Chambliss,                Hon. Frank D. Lucas,
Ranking Minority Member,             Ranking Minority Member,
Agriculture, Nutrition and Forestry  Committee on Agriculture,
 Committee;                          United States House of
United States Senate,                 Representatives,
                                     Washington, D.C.
Washington, D.C.;



    Dear Chairmen Harkin and Peterson and Ranking Members Chambliss and 
Lucas:

    Dairy farmers of all sizes and across all regions of the country 
are facing an unprecedented disaster. From Minnesota to California and 
Texas to Vermont, the current situation is untenable. Equity is rapidly 
disappearing, market prices remain at 1970 levels, creditors are 
cutting off producers--yet there is no relief in sight. The National 
Farmers Union (NFU) board of directors met late last week to discuss 
the current dairy crisis and seek workable and immediate solutions.
    The NFU board voted to encourage Congress to pass a dairy stimulus 
package to provide an adequate safety net for producers in addition to 
establishing an inventory management program. Furthermore, the board 
expressed support for the concept of the Federal Milk Marketing 
Improvement Act of 2009. Most importantly, the board expressed the need 
for producers to receive an immediate financial lifeline to sustain 
their livelihoods through this unprecedented situation.
    In March, NFU member-delegates approved a special policy resolution 
focused on the dairy crisis. The resolution called on Congress and USDA 
to take all appropriate actions to sustain family dairy farmers through 
this period of economic uncertainty. Below are the specific requests to 
Congress:

   Make low-interest and emergency loans available, including a 
        foreclosure mitigation program, to stem the tide of loan 
        foreclosures as a result of the current economic climate;

   Eliminate authority for dairy forward contracting, which 
        allows processors to shift all economic risk onto producers, 
        encourages vertical integration of America's dairy production 
        and dismantles the Federal Milk Marketing Order (FMMO) system;

   Eliminate authority for collection of dairy promotion 
        program assessments from importers;

   Pass legislation closing the MPC and casein loophole as 
        established during the Uruguay Round; and

   Oppose efforts that would prohibit producers from labeling 
        milk as free of artificial growth hormones.

    The special policy resolution called on USDA to do the following:

   Immediate implementation of the 2008 Farm Bill provisions 
        related to the FMMO system to increase efficiency and be more 
        responsible to the market, including a USDA study and report on 
        the impact of misreporting of nonfat dry milk prices on federal 
        order minimum prices; and a FMMO commission to evaluate current 
        federal and state milk pricing regulations to provide 
        recommendations for changes to Congress and USDA;

   Establishment of a dairy price support program that accounts 
        for the total cost of production. The structure of the program 
        should allow producers to sell milk at a reasonable profit 
        without building government stocks of products;

   Auditing and enforcing the current definition of milk as 
        related to standardized cheese and yogurt;

   Immediate oversight of the dairy product pricing system to 
        ensure transparency, fairness and competitive markets;

   Accurate recording and publishing of import data from ERS;

   Purchases of domestic dairy product and hamburger by USDA 
        for domestic and international nutrition programs; and

   Immediate release of the MILC payments due to producers.

    Time is of the essence for these producers. Many continue to lose 
$100-$200 per dairy cow per month. Regardless of operation size, many 
producers have been issued notice from feed suppliers that they will no 
longer receive feed and creditors across the country are terminating 
lending. America's dairy farmers are some of the hardest working 
individuals feeding our nation and the world. Congress, the 
Administration and the American public must not wait any longer in 
offering these individuals a lifeline.
            Sincerely,

            
            

cc:
Senate Agriculture, Nutrition and Forestry Members,
House Committee on Agriculture Members.


    HEARING TO REVIEW ECONOMIC CONDITIONS FACING THE DAIRY INDUSTRY

                              ----------                              


                         TUESDAY, JULY 21, 2009

                  House of Representatives,
     Subcommittee on Livestock, Dairy, and Poultry,
                                  Committee on Agriculture,
                                                   Washington, D.C.

    The Subcommittee met, pursuant to call, at 11:10 a.m., in 
Room 1300 of the Longworth House Office Building, Hon. David 
Scott [Chairman of the Subcommittee] presiding.
    Members present: Representatives Scott, Kagen, Boswell, 
Cardoza, Murphy, Minnick, Peterson (ex officio), Neugebauer, 
Goodlatte, Conaway, Smith, Roe, and Thompson.
    Staff present: Claiborn Crain, Alejandra Gonzalez-Arias, 
Chandler Goule, Tyler Jameson, John Konya, Scott Kuschmider, 
James Ryder, April Slayton, Debbie Smith, Rebekah Solem, Mike 
Dunlap, and John Goldberg.

  OPENING STATEMENT OF HON. DAVID SCOTT, A REPRESENTATIVE IN 
                     CONGRESS FROM GEORGIA

    The Chairman. This hearing of Livestock, Dairy, and Poultry 
to review economic conditions in the dairy industry, part two, 
will come to order.
    First, let me say welcome to all of you to the second part 
of our Subcommittee's examination of the current crisis in the 
dairy industry. As always, I appreciate everyone attending and 
I look forward to hearing additional perspectives and exploring 
further ideas for reform of, and assistance to, the dairy 
sector.
    Now, we all recognize the importance of the dairy industry 
to this nation and to the world. Just yesterday in fact, I and 
other Members of this Committee and other Members of Congress 
went on the floor and were speaking about the dairy industry in 
support of a resolution proclaiming June to be National Dairy 
Month. And likewise, I am relatively certain that we all agree 
that the economic situation in this iconic American industry is 
dire, and it must be addressed quickly as was evidenced by last 
week's hearing on this topic. However, there is no shortage of 
opinions regarding the causes of this current crisis, and as 
such, naturally there is a wide range of views on what we need 
to do to remedy this situation. Therefore, it is imperative 
that we use these hearings over the next few weeks to develop 
some consensus, some way we can all come together as quickly as 
we can on a way forward to help this industry both in the short 
term and the long term to maintain the viability of the entire 
industry. This is a very, very dire situation.
    And by ``we'' of course, I mean us in Congress as the 
policymakers, I mean the Administration in the form of the 
United States Department of Agriculture, but most importantly, 
it is the industry itself, a very complex industry with 
differing opinions. The old traditional divisions between 
regions, herd sizes, between processors and producers, between 
importers and exporters, have only served to deepen and 
perpetuate this crisis. We must move beyond these differences 
in order to develop new and innovative policies that benefit 
the whole dairy industry and not simply one state, or one 
region, or one sector.
    At last week's hearing, many Member of this Subcommittee, 
as well as many of our witnesses expressed a profound desire to 
move beyond generalities and platitudes, to roll up their 
sleeves and begin the dirty and necessary work of developing 
new, effective, short-term assistance mechanisms and long-term 
support programs. Some even expressed exasperation that this 
hasn't been done yet. What I will say to my colleagues, our 
witnesses and anyone within earshot that anyone and everyone 
who has specific ideas about reform is welcome to present them 
to this Subcommittee at any point, at any time. If anyone was 
waiting for some clear signal that it is time to begin, this is 
the clear signal. The time is now. So I urge everyone to come 
to the table with your ideas and desires, make them plain, 
become ready to give as much as you are ready to receive 
because compromise, careful consideration will be essential to 
creating new dairy policy that benefits everyone. That is the 
goal and helps us to avoid the types of situations we find 
ourselves in at the present. We can do this.
    I will certainly be doing my part as the Subcommittee 
Chairman, and each Member of this Committee will be doing their 
part. I will personally push the United States Department of 
Agriculture to use its available tools, and it has some, in its 
belt to help this industry in the short term. I have already 
communicated with Secretary Vilsack to increase the 
Department's loan guarantees to dairy farmers, and I have asked 
him to increase the Department's purchase of products off the 
market. This is an important first step. And in fact, I and 
many others have sent repeated letters to the Secretary on 
these very issues. But this gives us something to begin the 
process of helping.
    And with that, now I will turn to my Ranking Member, Mr. 
Neugebauer, who I know shares my desires to seek solutions to 
the problems before us today, and is working hard as all of us 
are, for any opening statement he wishes to make.

OPENING STATEMENT OF HON. RANDY NEUGEBAUER, A REPRESENTATIVE IN 
                      CONGRESS FROM TEXAS

    Mr. Neugebauer. Well, thank you, Chairman Scott, for 
calling this second hearing to review the current economic 
conditions of the dairy industry.
    The hearing we had a week ago served as a great starting 
point for the Subcommittee in understanding the current dairy 
policies, and how they are helping or hurting producers during 
the current market conditions. I expect the panel for today's 
hearing will build on what I learned last week and offer some 
further explanations. I am sure our witnesses will again have a 
degree of variability in their thinking on what is the best fix 
or the best appropriate action for us to take. Our witnesses 
last week were very informative with testimony and subsequent 
discussions that have transpired thereafter. One of the things 
I look forward to hearing today is some of the tools that 
producers are using for risk management in trying to deal with 
the volatility in the marketplace, and if there are tools that 
are available, what would those tools need to be. I look 
forward to hearing from our panel today and thank each and 
every one of you for taking time out, and Mr. Chairman, again, 
thank you for calling this second hearing on the dairy 
industry.
    The Chairman. Thank you very much, Ranking Member.
    And now we will hear from our distinguished Chairman, Mr. 
Peterson, who has been providing sterling leadership on this 
issue. Chairman Peterson.

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

    Mr. Peterson. Thank you, Mr. Chairman, and the Ranking 
Member, Mr. Neugebauer, and we appreciate your leadership and 
we expect great things out of you between your leadership, the 
rest of the Committee Members, and the folks we have here 
today. We expect you to come up with a solution that doesn't 
cost any money, that gets milk back up to at least $15 or 
higher and that is all sweetness and light.
    The Chairman. We will do our best, Mr. Chairman.
    Mr. Peterson. But as someone who has served as Ranking 
Member for many years on this Subcommittee, I know the 
challenges that you have before you, and a lot of people have 
been looking at different ideas to try to deal with this. We 
haven't hit the magic sweet spot yet, but we are going to keep 
working on this and, as you said very well, it is an extremely 
difficult situation.
    Now, we have been in problems before, we have been at $10 
milk before, but not for this period of time. We have had some 
things that have happened here, put together with the recession 
not in the United States, but around the world and this 
difficult situation.
    I want to welcome, there are a couple Minnesotans here 
today, Scott Hoese, who is the President of the Farmers Union 
in Carver County. Welcome to the Committee. And also Mr. Welch, 
who heads up the AMPI in New Ulm, Minnesota, right outside my 
district. I had a chance to go over and visit with them on more 
than one occasion. They do a great job for us over there. So 
welcome to the Committee, both of you, and the other witnesses. 
I look forward to testimony and I apologize, I have to head out 
here in a little bit and go talk to the soybean growers and see 
what they are up to.
    Thank you, Mr. Chairman. I yield back.
    [The prepared statement of Mr. Peterson follows:]

  Prepared Statement of Hon. Collin C. Peterson, a Representative in 
                        Congress from Minnesota

    I will be brief since we have several witnesses today. I want to 
thank Chairman Scott and Ranking Member Neugebauer for their leadership 
on this issue and for agreeing to call additional hearings on the 
economic conditions facing the dairy industry before we adjourn for the 
August recess. I thought last week's hearing was instructive and I 
think it is vital we hear from as many different groups of people as we 
can and keep this issue at the forefront.
    Fluid milk prices have fallen faster, and farther, than at any time 
since the Great Depression. As a result, farmers large and small have 
said they are in dire financial straits. We heard last week about the 
kinds of measures that have been taken in communities where dairy 
producers work and live, including things like counseling and suicide 
prevention services.
    The problems affecting dairy farmers today are hitting producers of 
every size, in every region, regardless of their business structure. To 
show that this is a national and not a regional issue, we have dairy 
farmers from all across the country before us today, including one from 
my home state, Mr. Scott Hoese from Mayer, Minnesota, President of the 
Carver County Farmers Union.
    Last week we had USDA Under Secretary Miller here to talk about the 
agency's role in responding to this crisis and I thanked him for the 
steps USDA has already taken to support U.S. dairy farmers. USDA 
already has bought nonfat dry milk and authorized export subsidies, but 
one thing we heard from producers last week--and what I imagine we 
might hear today--is that many of them are going to need more help if 
they want to stave off bankruptcy.
    I said last week that I think USDA is about at the end of the road 
in doing what they can to help the industry. We have given away too 
much in these trade agreements and have asked our dairy producers to 
depend on an export market that cannot be counted on, as has been shown 
with the plunge in worldwide demand following the global recession.
    I hope these hearings can help us rally around some alternatives 
that appeal to all producers nationwide. And that is important for both 
the short- and long-term because one thing we don't need is to have the 
kind of regional conflicts that have splintered the dairy community in 
the past. I've seen that we are heading that way and that's something 
we've got to stop, because a $10 per-hundredweight milk price is not a 
help to anybody, whether you are big or small, or whether you are in 
New Hampshire or in central California.
    I appreciate today's witnesses being here today and lending their 
voice to this timely debate.
    I thank you again, Chairman Scott, and Ranking Member Neugebauer, 
for calling today's hearing, and I yield back my time.

    The Chairman. Thank you, Mr. Chairman. I appreciate that.
    The chair would request that other Members submit their 
opening statements for the record so that witnesses may begin 
their testimony and to ensure that we have ample time for 
questions.
    [The prepared statements of Messers. Baca, Kagen, and 
Thompson follow:]

Prepared Statement of Hon. Joe Baca, a Representative in Congress from 
                               California

    Chairman Scott and Ranking Member Neugebauer:

    I am pleased to be here today to discuss the current economic 
conditions facing the dairy industry--and what steps, if any, the 
Federal Government should take to stabilize the dairy market.
    I thank the Chairman and Ranking Member for convening this hearing 
and hope we will be able to gain valuable insight into this critical 
issue.
    I also want to thank all our witnesses for coming here today--and 
taking time from their schedule to help us in Congress hear the 
perspective of the dairy industry on how to tackle the current crisis.
    Everyone in this room understands the important work America's 
dairy farmers do, and the vital need to keep the dairy industry healthy 
and prosperous.
    When agricultural markets fluctuate, there is a direct and 
significant impact on our nation's food supply--and thus the health and 
nutrition of virtually every American.
    In my own Congressional District in the Inland Empire of 
California--dairy is a significant agricultural and economic product.
    As Members of the Subcommittee on Livestock, Dairy, and Poultry, it 
is vitally important that we gather as much information on this subject 
as possible.
    America's dairy industry must remain strong and secure.
    We must be willing to work together on this issue. The USDA, 
industry groups, the Federal and state governments all play an 
important role in stabilizing our markets.
    I look forward to hearing from our witnesses today and again thank 
the Chairman and Ranking Member for their leadership.
    Thank you.
                                 ______
                                 
 Prepared Statement of Hon. Steve Kagen, a Representative in Congress 
                             from Wisconsin

    Mr. Chairman,

    Thank you for holding this important series of hearings on the 
economic conditions facing the dairy industry.
    As many of you know, Wisconsin is famous for its cheese. While this 
is just one of the dairy products my state produces, it is evident from 
this well-deserved reputation that the dairy industry plays a central 
role in Wisconsin. According to the Wisconsin Agricultural Statistic 
Service, the State of Wisconsin has over 13,000 licensed herds and over 
one million dairy cows. Wisconsin also produced over 2.2 billion pounds 
of milk in May 2009. I assert with some understatement that dairy is a 
prime economic engine for my state.
    The problems facing the dairy industry go beyond the extreme drop 
in prices we've seen between the record highs of 2008 and today. Were 
it simply that prices have decreased, I believe that the dairymen in 
Wisconsin would adapt as they have during prior lulls in prices. 
However, we are also experiencing a period of high input costs, 
particularly feed costs. In Wisconsin, feed costs for May 2009 were 
$8.38 per cwt. when the all-milk price in Wisconsin for May 2009 was 
$11.60. This dramatic ratio underscores the difficulty farmers across 
the nation face in trying to remain solvent during this economic 
crisis.
    While I am pleased by the improvements we made in the 2008 Farm 
Bill by tying MILC payments to feed prices, and the Secretary's recent 
utilization of the Dairy Export Incentive Program, it is clear that 
there is more that needs to be done. For example, I hope this Committee 
will investigate a temporary increase in the MILC payment rate until 
prices rise. I also would encourage the Secretary to increase the 
Commodity Credit Corporation (CCC) purchase price for butter powder and 
cheese.
    These are just two suggestions, and I look forward to hearing from 
our witnesses on other solutions to the dairy crisis. We must continue 
to support our dairy industry. If farms go under, they will not return. 
Dairy is critical to our economy and to our future. I look forward to 
working with the Chairman and the entire Committee to meet the needs of 
our constituents.
    Thank you, and I yield back the balance of my time.
                                 ______
                                 
Prepared Statement of Hon. Glenn Thompson, a Representative in Congress 
                           from Pennsylvania

    Chairman Scott, Ranking Member Neugebauer:

    I appreciate you holding a second hearing on this very important 
issue. While I'm not a Member of the Subcommittee, I again thank you 
both for allowing my participation in this extremely critical hearing.
    I represent about 22% of the Commonwealth of Pennsylvania, where 
agriculture--and the dairy industry in particular--is extremely 
important to our rural economy.
    Like all of the Members of the Committee present at the hearing, 
many of the dairy farmers in my district are struggling just to keep 
themselves from going bankrupt. This has for some time been much more 
than simply depressed prices. This is a real crisis; and this is a 
complicated crisis, which is threatening the survival of many dairy 
farmers, not just in my district, but across the country.
    I am grateful for this hearing, and I again appreciate the 
opportunity to discuss the causes of this predicament and what steps 
Congress can take to best address it. Sincere thanks to the witnesses 
for attending and I look forward to working with the Committee on this 
vital issue in the future.

    The Chairman. When we get to the questioning period, this 
Subcommittee will follow the leadership of the Chairman and the 
full Committee and moving away from as people appear. We will 
call upon people according to seniority as the main Chairman 
does. Is that all right with you, Mr. Conaway.
    Mr. Conaway. Let us change it back.
    Mr. Peterson. No, I haven't changed it back yet. It is 
still a work in progress. We will see how it goes.
    The Chairman. As the Chairman leads, we shall follow. That 
is a good policy to have here. So we will follow that procedure 
going by seniority until further notice.
    I ask unanimous consent that Mr. Thompson be permitted to 
sit and participate in today's hearing. Good to have you back, 
Mr. Thompson, and thank you for your participation on the floor 
with our bill. I thought we had a good debate.
    Let me first welcome our panel of distinguished witnesses 
to the table. First, we have Mr. Ed Welch, who is President and 
CEO of Associated Milk Producers Inc. on behalf of the Midwest 
Dairy Coalition of New Ulm, Minnesota. Thank you, and welcome, 
Mr. Welch. Next we have Mr. Phil Plourd, who is President of 
Blimling and Associates Inc., Roger M. Blimling Inc. of Cottage 
Grove, Wisconsin. Good to have you, Mr. Plourd. Thank you. Mr. 
Everett Williams, dairy farmer and President of the Georgia 
Milk Producers, Inc. from Madison, Georgia, my home state, the 
greatest state in the Union. Good to have you with us, Mr. 
Williams. Mr. Paul Rozwadowski, dairy farmer and Dairy 
Subcommittee Chairman of the National Family Farm Coalition of 
Stanley, Wisconsin. Good to have you with us, Paul. Mr. Scott 
Hoese, President, Carver County Farmers Union on behalf of the 
National Farmers Union from Mayer, Minnesota, and Mr. Donald 
DeJong, dairy farmer, Hartley, Texas. Mr. Welch, we will begin 
with you.

           STATEMENT OF ED WELCH, PRESIDENT AND CEO,
        ASSOCIATED MILK PRODUCERS INC., NEW ULM, MN; ON
             BEHALF OF THE MIDWEST DAIRY COALITION

    Mr. Welch. Thank you, Chairman Scott and Ranking Member 
Neugebauer, Members of the Subcommittee. I appreciate the 
Committee's invitation for me to present my views on the 
economic conditions facing the dairy industry. My name is Ed 
Welch and I am the President and Chief Executive Officer of 
Associated Milk Producers Incorporated, a milk marketing 
cooperative based in New Ulm, Minnesota. I am testifying today 
on behalf of the Midwest Dairy Coalition, an alliance of dairy 
cooperatives, associations and state agencies working together 
to provide an upper Midwest voice on Federal dairy policy 
issues.
    As suggested by the title of this hearing, the dairy 
economy is in crisis. Milk prices have fallen farther than 
expected and the recovery has been slower than anticipated. 
Prices paid to dairy farmers are less than half of what they 
were a year ago. The economic stress in the dairy-dependent 
regions like the upper Midwest, as in all dairy regions, is 
severe. Consistent anecdotal evidence suggests dairy farmers 
are losing $100 per cow each month. At that rate, dairy farmers 
are bleeding equity and rapidly increasing debt. Many say the 
downturn in the dairy economy is as bad as it has been since 
the Depression. Given the general economic conditions and the 
driving down of both domestic and export demand, I can see how 
this is true. It is with this background that we offer the 
following suggestions separated into short- and long-term 
solutions.
    First, I thank you for including the MILC, Milk Income Loss 
Contract Program, in the 2008 Farm Bill. Adding the feed-cost 
adjuster to the program and restoring the original 45 percent 
payment rate provided meaningful enhancement. Without a doubt, 
the economic safety net provided by the MILC program has 
provided significant financial assistance to dairy farmers 
nationwide during this time of low prices.
    Unfortunately, MILC alone isn't enough. That reality brings 
me to the first short-term solution Congress should consider, a 
temporary increase in the 45 percent payment rate to address 
the emergency price situation. The MILC program was intended to 
be a partner to the Milk Price Support Program, which was 
modified in the 2008 Farm Bill to become the Dairy Product 
Price Support Program. The two programs working together in 
theory provide assistance and stability to allow dairy 
producers to weather low-price cycles, but the theory remains 
untested because the product price support program is not fully 
functioning.
    Another short-term step should be urging the U.S. Secretary 
of Agriculture to take immediate steps to bring the support 
program back to life. I would suggest four steps. First, 
increase the price of dairy products purchased through the 
Dairy Product Price Support Program. The 2008 Farm Bill sets 
minimum CCC purchase price levels for butter, powder and cheese 
but provides flexibility for those prices to be increased above 
those levels when necessary. We urge the Secretary to take 
immediate action to increase the price support levels of these 
products. Second, restore the CCC's ability to purchase 
pasteurized processed cheese and other value-added products 
under the support program. These products could easily be used 
in domestic nutrition programs. Third, enable the CCC to be an 
active buyer of dairy products on the CME. This would prevent 
prices from falling below the support level. Finally, make 
dairy product packaging standards consistent whether selling to 
the CCC or the CME. This move would make it easier for dairy 
product manufacturers to utilize the price support system. 
Taking these steps would make the Dairy Product Price Support 
Program more effective, working in tandem with the Milk Income 
Loss Contract Program. Improvements to both programs could 
provide necessary short-term fixes to this dairy economy.
    Long term, we must address the extreme volatility in milk 
pricing. To reference an earlier point, the Class III milk 
price was $20.25 per hundredweight in June of 2008. One year 
later today, it is $9.97 per hundredweight. The bottom end of 
that price swing of the last decade has been disastrous for 
dairy farmers. The high end of the cycle is leaving dairy users 
to seek non-dairy alternatives and reduce their use of dairy 
products in general. This will have a negative long-term effect 
on dairy demand. Indeed, neither side of these wide price 
swings is beneficial to the dairy industry.
    We strongly urge the Committee and Secretary to assist the 
industry in developing and analyzing options for the long-term 
viability of dairy farms in this country. That may include 
limited imports of products such as milk protein concentrated 
in butter fat for which there are no current limits at this 
time. Whenever domestic dairy prices begin to recover, our 
market is always vulnerable to these low-priced imports.
    In closing, I want to thank the Committee for holding this 
hearing on the dairy crisis. I will be happy to answer any 
questions or provide any additional information that you may 
want.
    [The prepared statement of Mr. Welch follows:]

  Prepared Statement of Ed Welch, President and CEO, Associated Milk 
   Producers Inc., New Ulm, MN; on Behalf of Midwest Dairy Coalition

    Chairman Scott, Ranking Member Neugebauer, Members of the 
Subcommittee:

    Thank you for holding this hearing today to discuss the economic 
conditions facing the dairy industry. My name is Ed Welch and I am the 
President and Chief Executive Officer of Associated Milk Producers Inc. 
(AMPI). AMPI is a dairy marketing cooperative with 3,500 member farms, 
5.8 billion pounds of milk and $1.7 billion in annual sales. Members 
operate dairy farms located throughout the upper Midwest States of 
Wisconsin, Minnesota, Iowa, Nebraska, South Dakota and North Dakota. 
They own 14 manufacturing plants and market a full line of consumer-
packaged dairy products.
    I am testifying today on behalf of the Midwest Dairy Coalition, an 
alliance of dairy cooperatives, associations and state agencies working 
together to provide an upper Midwest voice on Federal dairy policy 
issues. Members include AMPI, Bongards' Creameries, Cooperative 
Network, Family Dairies USA, First District Association, Manitowoc Milk 
Producers Association, Mid-west Dairymen's Company, Milwaukee 
Cooperative Milk Producers, and the Wisconsin Department of 
Agriculture, Trade and Consumer Protection.
    As suggested by the title of this hearing, the dairy economy is in 
crisis. Milk prices have fallen farther than expected, and the recovery 
has been slower than anticipated. In June of 2008, the Class III milk 
price was $20.25 per hundredweight. One year later, the June 2009 Class 
III price is $9.97 per hundredweight. Dairy product prices have dipped 
below support levels repeatedly since January of this year. With milk 
prices paid to farmers less than half of what they were a year ago, the 
economic stress in dairy-dependent regions like the upper Midwest is 
severe. This economic pain is being felt in all regions of the country.
    The downturn in dairy is as bad as it has been probably since the 
depression, primarily because of general economic conditions that drive 
down both domestic and export demand. The financial crisis also spills 
over into farm lending in general, and dairy specifically. As the down 
cycle continues, bankers increasingly hold the key to whether some 
farmers will be able to continue in business. Consistent anecdotal 
evidence suggests that dairy farmers are losing about $100 per cow per 
month. When this happens, dairy farmers either bleed their equity or 
borrow, which is not currently an option due to financial markets. 
Literally the milk production infrastructure in the U.S. is at stake. 
Recovery and TARP monies might be used to make a difference in the 
short run if bold and innovative solutions are tried.
    It is with this background that we offer the following suggestions.

Milk Income Loss Contract (MILC) Program and Dairy Product Price 
        Support Program (DPPSP): Changes Needed to Improve 
        Effectiveness
    Without a doubt, the economic safety net provided by the Milk 
Income Loss Contract (MILC) program has provided significant financial 
assistance to dairy farmers nationwide during times of low prices. The 
direct assistance provided the MILC program has benefits community 
wide, as the dollars multiply throughout dairy-dependent local 
economies.
    The MILC Program was first authorized in the 2002 Farm Bill. The 
modifications made in the 2008 Farm Bill to add a feed-cost adjuster 
and restore the original 45 percent payment rate have provided 
meaningful enhancements to the program. The Midwest Dairy Coalition 
worked hard for and has strongly supported the MILC program in both the 
2002 and 2008 Farm Bill deliberations.
    Unfortunately, the current dairy price chasm that we're 
experiencing suggests that the MILC program by itself is not 
sufficient. The price dairy farmers are receiving for their milk is so 
far below the cost of production that they are losing thousands of 
dollars a month, even with the MILC program assistance. Congress should 
consider a temporary increase in the 45 percent MILC payment rate to 
address the emergency price situation.
    As originally envisioned, the MILC program was intended to be a 
partner to the Milk Price Support Program, which was modified by the 
2008 Farm Bill to become the Dairy Product Price Support Program 
(DPPSP). The two programs working together, in theory, would provide 
assistance and stability to allow viable dairy producers to weather the 
storm of low-price cycles. But the theory remains untested, because the 
DPPSP is not fully functioning, leaving the MILC program to do all of 
the heavy lifting by itself--a burden it is not able, nor was it 
designed, to bear.
    Therefore, we are urging the U.S. Secretary of Agriculture to take 
the following immediate, remedial actions to bring the DPPSP back to 
life and serve its intended purpose:

(1) Increase the Commodity Credit Corporation (CCC) purchase prices for 
        butter, powder and cheese.
    The 2008 Farm Bill sets minimum CCC purchase prices levels for 
butter, powder and cheese, but provides flexibility for those prices to 
be increased above those levels when necessary. We are urging the 
Secretary to take immediate action to increase the price support levels 
to reflect the additional costs that dairy product manufacturers face 
when selling product to the CCC relative to commercial sales.

(2) Restore the pre-2009 policy of paying a premium price for consumer-
        packaged products that are more readily usable in USDA 
        nutrition and food donation programs.
    Historically, CCC has paid a premium price under the DPPSP to 
purchase more consumer-packaged dairy products, such as pasteurized 
processed cheese in 2 or 5 pound boxes. They are more readily used in 
USDA nutrition and food donation programs and do not require further 
processing, as do large cheese blocks and barrels.
    However, in January of 2009, just as milk prices were collapsing, 
the Bush Administration issued a notice to dairy product manufacturers 
informing them that the policy of purchasing consumer-packaged, value-
added products was ending. Unfortunately, the current Administration 
has continued this policy.
    We are urging the USDA to reinstate its pre-2009 policy of paying a 
premium price for consumer-packaged, value-added dairy products such as 
pasteurized processed cheese. This will help stabilize milk prices and 
the growing needs of food donation programs. If there question about 
USDA's authority to continue this practice under the revamped statutory 
authority for the price support program, we believe the DPPSP authority 
can be married with that of the CCC Charter Act of 1933 to address 
these concerns.

(3) CCC should be an active buyer of dairy products on the Chicago 
        Mercantile Exchange (CME) at established price support levels.
    For reasons described below, many dairy product manufacturers are 
reluctant to sell product to the CCC. We urge the CCC to become an 
active buyer of dairy products on the CME at the established price 
support levels, instead of the current practice of being a passive 
buyer by simply offering to buy product at the established CCC purchase 
price. Because CME prices are widely used as a benchmark price for off-
market dairy product sales, we believe the CCC's active participation 
in the CME would significantly enhance the DPPSP effectiveness. We 
believe the Secretary has the authority to buy products for CCC 
directly on the CME if, administratively, he waives the CCC product and 
packaging specifications that are outdated, impractical and costly.

(4) Take all practical actions available to harmonize CCC packaging and 
        grading standards with commercial standards set by the CME.
    Currently, CCC packaging and grading standards differ from 
commercial standards established by the CME. Therefore, manufacturers 
are reluctant to sell product to the CCC because they must change 
manufacturing procedures in order to address those standards. Because 
of the discrepancies between CCC and CME standards, and periodic delays 
in receiving payment from the CCC, there are additional costs 
associated with selling product to the CCC. We urge USDA to undertake a 
full review of its dairy product packaging and grading standards, in 
dialogue with the dairy industry representatives, to investigate 
practical ways to harmonize CCC standards with those used for 
commercial sales.

Additional Efforts Necessary to Purchase Cheese for USDA Nutrition and 
        Food Donation Programs
    USDA has taken action to use existing CCC stocks of nonfat dry milk 
for food donation programs. In the long run, this will be helpful in 
preventing excessive stocks from hanging over the market. We appreciate 
the Secretary's efforts in this regard. According to food aid 
organizations such as Second Harvest, food pantry demand is up 
significantly from 1 year ago. Dairy products can provide healthful 
food to children and families in need.
    We believe, however, the USDA should take additional action to use 
all authorities at the Secretary's disposal to purchase cheese products 
directly off the market for use in USDA nutrition and food donation 
programs. Direct purchases off the market will have the most direct and 
immediate affect in stabilizing milk and dairy product prices. They 
will also help address the humanitarian food needs for low-income 
populations.

Federal Milk Market Order Reform
    The dairy farmers and industry leaders of the upper Midwest have 
long voiced concerns about the discriminatory pricing policies inherent 
to the Federal milk marketing order system. It is widely documented 
that the bias of the current system toward Class I (fluid) milk has a 
downward affect on the value of milk used for manufacturing. For 
regions like the upper Midwest, where 85 to 90 percent of the milk is 
used for manufactured dairy products, this discrimination is of great 
concern. In addition, as Class I utilization percentages nationwide 
continue to decline, the outdated Class I bias of the Federal milk 
market order (FMMO) system must be revisited. We look forward to 
working with the Committee and USDA to reform the system in favor a 
more coherent approach to milk pricing.

Trade Issues
    We greatly appreciate the Secretary's recent announcement of the 
Dairy Export Incentive Program (DEIP) allocation for the 2009-2010 
marketing year and urge quick action to fill these allocations. The 
delay in announcement of the 2008-2009 DEIP allocations caused much of 
this allocation to go unfilled, which is a lost opportunity to help 
stabilize milk prices. Hopefully, the 2009-2010 experience will be more 
positive.
    In the world of dairy, small imbalances in supply and demand result 
in large changes in milk prices. We cannot ignore the fact that dairy 
imports and exports play a role in that overall supply-demand equation. 
The strong milk prices of 2007 and 2008 were driven in large part by 
tight supplies of dairy products in the world market and a related 
surge in U.S. dairy exports. The milk price crash of 2009 was related, 
in part, to the loss of those markets. The unique, high world market 
price situation of 2007 and 2008 allowed the U.S. to take advantage of 
the export market at prices that were profitable to U.S. dairy farmers. 
The world market dairy prices, however, are often below the U.S. cost 
of production. While we should look for ways to expand our export 
opportunities, it defeats the purpose if those markets come at prices 
that are unsustainable to U.S. dairy farmers.
    There have been times in the last decade when dairy product imports 
have significantly affected domestic price levels. There continue to be 
dairy product import categories, such as milk protein concentrates 
(MPCs), for which there are no limits. Whenever U.S. dairy prices start 
to recover, our market will once again be vulnerable to lower-priced 
MPC imports from our competitors. The Midwest Dairy Coalition continues 
to support efforts to establish tariff-rate quotas on MPC imports. This 
would improve consistency with import rules in place for other dairy 
products and close loopholes that have encouraged circumvention of 
those rules.

Long-Term Solutions Needed to Address Wide Price Volatility
    While immediate action is needed to address the current milk price 
crisis, the current situation has sparked industry-wide discussion 
about long-term solutions to prevent the wide volatility in milk 
prices. The bottom end of the wide price swings of the last decade has 
been disastrous for dairy farmers. The high ends of the price cycles 
are leading dairy product users to seek out alternatives and reduce 
their use of dairy products, with long-term effects on dairy demand. 
Indeed, neither side of these wide price swings is beneficial to dairy 
farmers.
    Many plans are being discussed in the industry to institute long-
term policies to prevent the type of price crisis we are now 
experiencing from ever happening again. While there is no national 
consensus of the best approach to achieve this goal, we strongly urge 
the Committee and the Secretary to assist the industry in developing 
and analyzing options for the long-term viability of dairy farming in 
this country.
    Thank you for the opportunity to submit this testimony.

    The Chairman. Thank you, Mr. Welch.
    Now we will hear from Mr. Phil Plourd.

    STATEMENT OF PHILIP G. PLOURD, PRESIDENT, BLIMLING AND 
  ASSOCIATES, INC./ROGER W. BLIMLING, INC., COTTAGE GROVE, WI

    Mr. Plourd. Mr. Chairman and Members of the Committee, 
thank you for inviting me to appear before you and participate 
in this important ongoing discussion.
    I am President of two Wisconsin-based firms that have 
worked extensively with dairy producers on risk management 
issues for more than 15 years. We administer ten cooperative 
and plant forward contracting programs across the nation 
including the one at AMPI, Mr. Welch's firm, and we also work 
with several individual dairy producers. The forward 
contracting programs we manage, theoretically, serve more than 
10,000 farms. I say ``theoretically'' because the reality is 
that only a small percentage of producers use the programs and 
other tools to hedge. This is unfortunate on many levels, and 
it is curious. Reasonably well-developed futures and options 
markets exist at the Chicago Mercantile Exchange. Last year, a 
total of 470,000 Class III milk futures and options contracts 
traded at the CME. Ten years ago, only 58,000 contracts traded.
    In addition, great strides have been made in facilitating 
dairy producer access to the tools. Forward contracting 
programs like those managed by our firm are fairy common. 
Importantly, these programs typically allow smaller producers 
to access risk management tools. In short, many producers are 
able to contract milk with their cooperative or proprietary 
plant in much the same way grain producers can forward contract 
corn or soybeans with a local elevator.
    Finally, while the milk and dairy products markets are 
certainly volatile, they do not stand out among their peers in 
the agricultural arena. That is, standard calculations do not 
show dairy markets to be somehow so volatile as to make 
conventional risk management impossible. So dairy futures and 
options markets exist. Convenient producer access to those 
markets has been facilitated by forward contracting programs, 
and volatility in the dairy complex is not altogether different 
from volatility in other domestic agricultural markets.
    So why are producers not actively managing risk? For a 
while I believed the slow adaptation rate was mostly a function 
of experience. After all, dairy market volatility only really 
emerged in the late 1980s. The need to manage risk is still 
relatively new. More recently, however, I have come to a 
different conclusion. In my opinion, producer risk management 
efforts are seriously hampered by the various and complicated 
systems employed to price milk in the United States. Consider 
how corn producers typically manage risk. They call the local 
elevator for a quote. Elevators offer a price tied to the 
Chicago futures market plus or minus a local basis. Producers 
agree to the price. When the time comes they ship the corn and 
get paid the contract price. Now consider how different the 
process is for a dairy producer in, say, Chairman Scott's home 
State of Georgia. The producer sees a Class III futures price 
of $14.50. He or she may be offered a Class III value as a base 
price via a cooperative but here is the rub: dairy producers in 
Georgia are part of the Southeast Federal Milk Marketing Order. 
Typically in that order, 60 percent of a producer's income is 
tied to the Class I price, which is determined of the higher of 
the Class III or Class IV formula set a month in advance plus 
his own differentials across the order. Ten percent of the 
income is based on the Class II price, which is tied to nonfat 
dry milk and butter plus a differential. Twenty percent of 
income comes from Class III, which is determined by the cheese 
and whey markets, and finally, ten percent of income is drawn 
from Class IV, which is again linked to the nonfat and butter 
markets.
    Believe it or not, there is actually a pretty strong 
correlation between producer pay prices in Georgia and the 
Class III price that can be hedged in the futures market, or 
with a forward contract. It would work. If we had an hour or 2 
I could break out the spreadsheets, but who would believe that 
at a glance? Who could?
    Grain farmers would almost certainly hedge less too if 
confronted with a maze of pricing tied to whether the bushels 
they send to the elevator go into corn syrup versus corn 
flakes, creamed corn in a can versus frozen niblets in a bag, 
bulk poultry feed or a fifth of Wild Turkey.
    It has been our anecdotal observation that dairy producers 
in the areas with significant cheese production and clear ties 
to the Class III price are more likely to hedge than producers 
in more diverse utilization areas, but it is still not easy. 
Importantly, producers who do hedge have significantly reduced 
their income variability in recent years. This is supported by 
our own internal studies of producer risk management 
performance, and we have clients today who are receiving $17 or 
$18 per hundredweight for milk hedged last summer compared to 
the low market prices that prevail. The existing vehicles work; 
the road, however, is twisted and rutted.
    We are trying to convince producers to use modern market-
based risk management tools, but they are compelled to do so in 
an antiquated, complex pricing system. This is not a call for 
wholesale deregulation. Instead, positive results could be 
achieved by making a conscious effort to align policy 
prescriptions with risk management realities. Our dairy 
producers deserve better than the pricing complexity that 
confronts most of them every day. United States dairy farmers 
are the most dynamic producers in the world. Many understand 
how hedging works. It is my belief that they would be better 
served by a system that allows them to make it happen. Thank 
you.
    [The prepared statement of Mr. Plourd follows:]

    Prepared Statement of Philip G. Plourd, President, Blimling and 
      Associates, Inc./Roger W. Blimling, Inc., Cottage Grove, WI

    Mr. Chairman and Members of the Committee, thank you for inviting 
me to appear before you and participate in this important, ongoing 
discussion of current conditions in the dairy marketplace.
    I am President of a pair of Wisconsin-based firms that work 
extensively with producers, processors, end-users and other interested 
parties on a variety of dairy market issues. Specific to this 
discussion, our firm has been a leading provider of market-based risk 
management services for dairy producers for more than 15 years. Indeed, 
in 1994, working in partnership with Alto Dairy Cooperative and the 
Wisconsin Department of Agriculture, Blimling and Associates introduced 
what is believed to be the nation's first futures-based forward 
contracting program for members of a dairy cooperative. Today, we 
administer a total of ten similar cooperative/plant programs from 
coast-to-coast. Those programs theoretically serve more than 10,000 
farms--many located in the districts or home states of the 
distinguished Committee Members.
    I say ``theoretically serve'' because the reality is that only a 
comparatively small percentage of producers actually use these tools to 
hedge--whether on their own, through the programs we manage, or via 
programs managed by others. This is unfortunate on many levels, not 
only for the individual producers themselves but for the dairy industry 
at large.
    And, it is curious.
    Reasonably well-developed futures and options markets exist at the 
Chicago Mercantile Exchange Group (CME). While not to be confused with 
the corn or crude oil markets, the dairy markets have come a long way 
since their inception in 1993. Last year a total of about 470,000 Class 
III milk futures and options contracts traded at the CME; 10 years 
earlier, in 1999, only 58,000 contracts traded. [i] Volume in 2008 
equaled approximately \1/2\ of U.S. milk production. Class III milk 
futures and options combined open interest [ii] stood at about 79,500 
contracts on June 30, equal to about 8% of annual U.S. milk production. 
In addition, there is also a small but growing marketplace in over-the-
counter instruments for managing dairy risk that are not traded through 
the CME.
    Beyond the development of markets over the past decade, great 
strides have been made in facilitating dairy producer access to the 
tools. Forward contracting programs like those managed by our firm are 
fairly common. Though I cannot say for certain, I estimate that at 
least 15 of the 25 largest U.S. dairy cooperatives offer programs. In 
addition, thanks to a laudable provision of the last farm bill, several 
proprietary plants offer programs. While not every program is 
identical, they tend to share basic characteristics. Most notably, they 
allow smaller producers to access risk management tools because forward 
contracts are offered in increments smaller than the futures contracts 
traded at the CME (the plant or cooperative bundles milk forward 
contracts for sale in the futures market or to customers via a price 
for finished products). In addition, producers using a forward 
contracting program are not required to post margin monies as would be 
required if they were using futures directly in their own account. In 
short, many--and perhaps a majority--of producers have a mechanism 
available to contract milk with their cooperative or proprietary plant 
in much the same way grain producers can forward price corn, soybeans 
or wheat with a local elevator.
    Finally, while the milk and dairy products markets are certainly 
volatile, they do not stand out among their peers in the agricultural 
arena. That is, standard calculations do not show dairy markets to 
somehow be so volatile as to in some way preclude risk management via 
traditional methods employed by producers of other agricultural 
commodities. For example, we calculate that 30 day historic price 
volatility in the block cheddar cheese market averaged 27.6% from 2006 
through 2008. It was 26.5% in the Class III milk futures market over 
the same period. That compares with corn at 40.1%, wheat at 44.8%, 
soybeans at 35.0%, lean hogs at 36.8% and live cattle at 19.2%. [iii] 
The dairy markets are not exceptionally volatile--at least as 
conventionally measured.
    So: dairy futures and options markets exist. Convenient dairy 
producer access to those markets has been facilitated by forward 
contracting programs. And, volatility in the dairy complex is not 
wholly divergent from volatility in other domestic agricultural 
markets. Yet comparatively few dairy producers are using risk 
management tools.
    What's going on?
    For several years, I believed the slow adaptation rate was largely 
a function of experience--or the lack thereof. After all, dairy market 
volatility only really emerged in the late 1980s. Up to that point 
market-based risk management was not a concern for producers or anyone 
else in the dairy industry. Sure, grain farmers hedged in larger 
numbers, but they had a 100 year head start. I must confess that, in 
less confident moments, I wondered if we were just somehow lousy 
teachers. We crisscrossed several states talking about risk management 
and forward contracting programs, conducting workshops for or visiting 
with literally thousands of dairy producers . . . and only a small 
percentage came on board.
    More recently, however, I have reached a different and more 
plausible conclusion: in my opinion, producer risk management efforts 
are seriously hampered by the various and complicated systems employed 
to price milk in the United States.
    Consider how corn producers typically manage risk. They look at 
futures prices. They call the local elevator for a quote. Elevators 
offer fixed-forward prices at the futures value plus or minus a local 
basis. [iv] Producers agree to the price. When the time comes, they 
ship the corn and get paid the forward contract price.
    Now consider how different the process is for a dairy producer in, 
say, Chairman Scott's home state of Georgia. The producer sees a Class 
III futures price of $14.50/cwt posted for January 2010. He or she may 
be offered that Class III value as a ``base price'' via a cooperative. 
Here's the rub: dairy producers in Georgia are part of the Southeast 
Federal Milk Marketing Order. Typically, in that order, 60% of a 
producer's income is tied to the Class I price--which can be the higher 
of a base price determined by the Class III or IV formula set a month 
in advance plus a Class I differential zoned across the order; 10% of 
income is tied to the Class II price, which is based on an advanced 
skim value linked to the price of nonfat dry milk over a 2 week period 
plus a Class II differential as well as butterfat related to a butter 
price for the entire month plus a fixed Class II differential; 20% of 
income comes from Class III, which is determined by the cheese and whey 
markets; and, finally, 10% of income is drawn from Class IV, which is 
again linked to nonfat dry milk and butter. On top of all that the 
producer finds plant and marketing agency premiums as well as volume, 
quality and hauling adjustments. Against that backdrop, it is difficult 
to know exactly what the $14.50/cwt Class III futures price means to 
the dairy producer in Georgia.
    Believe it or not, there is actually a pretty strong correlation 
between producer pay prices in Georgia and the Class III price that can 
be hedged in the futures market or via a forward contracting program. 
It would work. If we had an hour or 2 I could break out the 
spreadsheets, but unless you are one of the few dairy marketing 
professionals in this country who actually know all about the regulated 
milk prices and constantly changing premiums discussed in the previous 
paragraph, who would believe that at a glance? Who could?
    Grain farmers would almost certainly hedge less, too, if confronted 
with a maze of pricing tied to whether the bushels they send to the 
elevator go into corn syrup versus corn flakes, creamed corn in a can 
versus frozen niblets in a bag, bulk poultry feed versus a fifth of 
corn whiskey.
    It has been our anecdotal observation over the years that dairy 
producers in areas with significant cheese production are more likely 
to hedge than producers in areas with more diverse milk product 
utilization. Producer hedging, in other words, is more widespread in 
Wisconsin, Minnesota and Idaho than in Pennsylvania (high Class I and 
II) or California (an entirely different pricing system and a lot of 
nonfat dry milk and butter in the pricing pool). Producers are more 
inclined to hedge when they can readily connect the Class III hedging 
mechanism with their milk check. This is not to say that a dairy 
producer in Northeastern Wisconsin has as easy-to-understand a hedging 
mechanism as his or her neighbor marketing soybeans. But it is closer.
    Importantly, those producers who can make the connection and do 
hedge have significantly reduced their income variability in recent 
years. This was demonstrated by data included in the testimony offered 
by Mr. Kruse of Blue Bell Creameries last week. It is supported by our 
own internal studies of producer risk management performance. We have 
clients today who are receiving $17 or $18 per hundredweight for milk 
hedged last summer; some will be in the $15 to $16 range for the second 
half of this year based on marketing decisions made in February and 
March. This compares to base prices of $10 per hundredweight that their 
neighbors are receiving.
    The existing vehicles work; the road, however, is twisting and 
rutted.
    Overall, it is my sense that we are in the murky middle so far as 
producer risk management is concerned.
    We are trying to convince producers to use modern, market-based 
risk management tools; but they are compelled to do so in an 
antiquated, complex pricing system. We speak about trying to reduce 
volatility on a macro, market-wide level but underestimate the 
likelihood that micro, individual level volatility reductions would be 
far easier to achieve if the U.S. milk pricing system were simplified 
in a manner that would allow traditional futures and options markets to 
thrive and foster the greater use of forward contracting.
    The inherent challenges, I might add, are not limited to the 
producer community. Processors and end-users face myriad dairy risk 
management challenges as well--challenges that are also largely a 
function of the pricing system. For example, it is much more 
straightforward for a pizza maker to hedge the cost of wheat used to 
make dough flour than it is for a pizza maker to hedge the cost of 
cheese.
    This is not a call for wholesale deregulation. Yes, that would 
definitely force the issue. Yet similar results could be achieved by 
making a conscious effort to align policy prescriptions with risk 
management realities. It boils down to some simple questions. Such as: 
if we adjust policy in a particular direction, are we increasing or 
decreasing a producer's ability to manage risk via conventional 
methods? Or, perhaps more productively: how can we construct a pricing 
system that makes managing risk straightforward?
    Our dairy producers deserve better than the pricing complexity that 
confronts most of them every day. U.S. dairy farmers are the most 
dynamic producers in the world. They achieve the amazing day after day. 
Many understand how hedging works. It is my belief that they would be 
better served by a system that allows them to make it happen.
    Thank you.
Endnotes
    [i]

    
    
    [iii] 
    
    

    ^$0.03/bu relative to the CME Group corn futures price.The 
Chairman. Thank you, Mr. Plourd.
    Now we will have Mr. Everett Williams from Madison, 
Georgia.

   STATEMENT OF J. EVERETT WILLIAMS, PRESIDENT, GEORGIA MILK 
                  PRODUCERS, INC., MADISON, GA

    Mr. Williams. Chairman Scott and Members of the 
Subcommittee, I would like to thank you for the opportunity to 
discuss with you the economic conditions that face dairy 
producers today. My wife, Carol, and I live in Madison, 
Georgia, where we operate a third-generation dairy farm with 
our four children. As President of Georgia Milk Producers, I am 
here today representing all dairy farmers in Georgia. Georgia 
dairymen operate in an area where population growth is one of 
the fastest in the United States. The milk deficit for our area 
grows greater each year with Georgia now importing up to 68 
million pounds of milk per month. The Federal Milk Market 
Administrator's Office in Atlanta predicts that within the next 
decade, no dairies will exist in the Southeast. One reason for 
this is the current dairy pricing system.
    The USDA Dairy Product Price Support Program helps support 
prices and farm income. The price paid for nonfat dry milk, 
butter and cheese is too low to help dairy producers remain 
profitable. Raising the support price for these products is not 
a good long-term solution because the government would have to 
buy more of these products as dairymen produce them for sale to 
the government. Government-purchased products depress market 
prices. Buying products at a price below the cost of production 
does not support dairymen, but creates inventories that depress 
prices for months or years, only prolonging the low prices for 
dairymen. Without the Dairy Product Price Support Program, milk 
prices might drop lower than with the current system, but 
prices will rebound faster because the market would use more 
dairy products, and there would be no government inventories to 
depress future prices.
    The Chicago Mercantile Exchange and cheese trading--
producers need a true dairy market for its price signals and 
income. Farm milk price correlates very closely with the block 
cheddar price on the CME. We are concerned with the small 
amount of cheese, less than one percent, that is traded with a 
small number of buyers and sellers for cheese on the Chicago 
Mercantile Exchange. The price could be easily manipulated to 
the detriment of dairy producers. A Government Accountability 
Office report released in July 2007 stated, ``Because the CME 
spot cheese market remains a market in which few daily trades 
occur and a small number of traders account for the majority of 
the trade, questions exist about this market's susceptibility 
to potential price manipulation.'' The government should follow 
up on this GAO report with an investigation to find 
improvements or a more equitable dairy pricing system.
    Marketing programs--we support the Holstein Association's 
Dairy Price Stabilization Program. The dairy markets continue 
to have ever-increasing price volatility, which hurts 
producers, processors and consumers. This program is designed 
to match supply with demand, including exports. Federal 
legislation would be needed to implement this plan. This plan 
allows expansion of production and new producers. The goal 
would be to control milk price volatility while not setting 
milk price.
    Pricing Class I milk--the present system of using a formula 
that locks Class I pricing to manufactured pricing is adversely 
affecting markets that are primarily Class I. Over the last 
decade the expansion of milk production in the West has 
weakened Southeast fluid milk production. A system needs to be 
developed that would price milk independently.
    Southeast milk marketing conditions--Our daily cooperatives 
have done a very poor job of matching milk production with 
demand. In the Southeast, milk production has decreased 23 
percent while in the Southwest production has increased 44 
percent since the year 2000. The end result is that we have a 
fluid market in the Southeast that his short of fluid milk. The 
money that processors pay for milk is being spent to pay for 
milk hauling from the Southwest to the Southeast. 
Transportation credits of 30 cents per hundredweight of milk 
are paid by Class I processors to a Federal order fund to help 
supply milk from outside the Southeast. These transportation 
credits create disorderly milk marketing. This action hurts all 
dairy producers in the Southeast for the benefit of a few 
haulers.
    Thank you for this opportunity.
    [The prepared statement of Mr. Williams follows:]

  Prepared Statement of J. Everett Williams, President, Georgia Milk 
                      Producers, Inc., Madison, GA

    Chairman Scott and Members of the Subcommittee, on behalf of 
Georgia Milk Producers, Inc., I would like to thank you for giving us 
this opportunity to discuss with you the economic conditions that face 
dairy producers today.
    My name is Everett Williams. My wife, Carol, and I live in Madison, 
Georgia, where we operate a third generation dairy farm with our four 
children. As the President of Georgia Milk Producers, I am here today 
representing all dairy farmers in Georgia.
    Georgia dairymen operate in an area where population growth is one 
of the fastest in the U.S. The milk deficit for our area grows greater 
each year with Georgia now importing up to 68 million pounds of milk 
per month. The Federal Milk Market Administrator's office in Atlanta 
predicts that within the next decade no dairies will exist within the 
Southeast. One reason for this is the current dairy pricing system.
    We appreciate this Committee's efforts to review the current 
economic situation and to investigate all short-term and long-term 
possibilities that would improve our industry. Here are some 
suggestions that we believe would help our region and the nation as a 
whole:

USDA Dairy Product Price Support Program
    The USDA Dairy Product Price Support Program helps support prices 
and farm income. The price paid for Nonfat Dry Milk (NFDM), butter and 
cheese is too low to help dairy producers remain profitable, especially 
considering the dramatic rise in input costs over the past 3 years. 
Even though raising the support price appears to help producers now, 
however it is not a good long-term solution. Dairymen would be 
producing milk for the government to purchase instead of the 
marketplace. If these government purchased products are used in the 
U.S., such as for the school lunch program, they still depress market 
prices causing the government to buy more product. If large amounts of 
product were given or sold to foreign countries that would depress 
prices and cause harm to relationships between the U.S. and trading 
partners.
    The government should encourage dairy product usage in the school 
lunch program to improve our children's diet and nutrition, but using 
surplus inventories displaces normal market sales.
    The USDA Dairy Product Price Support Program is an example of good 
intentions by the government to help dairymen but now causes more harm 
than good. Buying products at a price below the cost of production does 
not support dairymen, but creates inventories that depress prices for 
months or years, only prolonging the low prices for dairymen. When the 
dairy industry has excess production processors make NFDM to sell to 
the government, instead we should be making whole milk powder for the 
world market. Most foreign countries want whole milk powder not NFDM. 
Without the Dairy Product Price Support Program milk prices might drop 
to lower prices than with the current system but prices would rebound 
faster because the market would use more dairy products and there would 
be no government inventories to depress future prices. Dairymen would 
get a better, clearer signal to cut production and to produce products 
for the market, not the government.

Chicago Mercantile Exchange (CME)/Cheese Trading
    Producers need a true dairy market for its price signals and 
income. Farm milk price correlates very closely with the Block Cheddar 
price on the Chicago Mercantile Exchange (CME). We are concerned with 
the small amount of cheese (less than 1%) traded with the small number 
of buyers and sellers for cheese on the CME. The price could be easily 
manipulated to the detriment of dairy producers.
    We know from a Government Accountability Office (GAO) report (GAO-
07-707) released in July 2007, that the opportunity for price 
manipulation exists. GAO stated, ``Because the CME spot cheese market 
remains a market in which few daily trades occur and a small number of 
traders account for the majority of trades, questions exist about this 
market's susceptibility to potential price manipulation.''
    Cheese plants report prices to the National Agricultural Statistics 
Service (NASS). These prices are the CME cheddar cheese price of 10 
days earlier including basis. Therefore the cheese price on the CME 
sets the NASS survey price which sets the Class I Mover.
    We want the government to follow up on this GAO report with an 
investigation to find improvements or a more equitable dairy pricing 
system.

Supply Management Programs
    We support the Holstein Association's Dairy Price Stabilization 
Program. The dairy markets continue to have ever increasing price 
volatility which hurts producers, processors and consumers. Low prices 
benefit processors and consumers, but helps to force dairymen out of 
business causing a severe drop in production and the next round of high 
prices for consumers. These high prices are needed by dairymen to repay 
equity lost in the low part of the price cycle, but hurt processors and 
consumers causing a decrease in milk consumption which makes the next 
round of low prices even worse.
    The Holstein Dairy Price Stabilization Program is designed to match 
supply with demand, including exports. Federal legislation would be 
needed to implement this plan. An advisory board would be appointed 
which would set the amount of milk needed and the market access fee per 
hundredweight. This fee would be paid by those producers who produce 
more than their assigned market amount. The fees would be collected and 
paid proportionally to those producers who do not expand. This advisory 
board would react to market conditions by increasing supply when milk 
was short or decreasing supply when there is too much milk. This plan 
allows for expansion of production and new producers. The goal would be 
to control milk price volatility while not setting milk prices.

De-Coupling Class I Milk
    The present system of using a formula that locks Class I pricing to 
manufactured pricing is adversely affecting markets that are primarily 
Class I. The expansion of milk production in the West over the last 
decade has negatively impacted dairymen producing for fluid markets. A 
system needs to be developed that would price fluid milk independently.

Southeast Milk Marketing Conditions
    Our dairy cooperatives have done a very poor job of matching milk 
production with demand. We have allowed tremendous production declines 
in the Southeast while encouraging large milk production increases in 
the Southwest.
    In the Southeast, milk production has decreased 23 percent from 
12.0 billion pounds to 9.2 billion pounds since 2000. Meanwhile in the 
Southwest, production has increased 44 percent from 11.9 billion pounds 
to 17.1 billion pounds since 2000. The end result is that we have a 
fluid market in the Southeast that is short of fluid milk. The money 
that processors pay for milk is being spent to pay for milk hauling 
from the Southwest to the Southeast instead of going to pay local 
dairymen. Transportation credits of 30 cents per hundredweight of milk 
are paid by Class I processors to a Federal Order fund to supply milk 
from outside a marketing area during periods of deficit milk 
production. These transportation credits are being used to subsidize 
milk hauling from the Southwest to the Southeast even as some milk is 
being hauled out of the Southeast to manufacturing plants in the north. 
This action hurts all dairy producers in the Southeast for the benefit 
of a few haulers.
    Thank you for the opportunity to submit our plea for help and a 
call for a drastic change both for the good of Georgia's dairy 
industry, the Southeast as well as for the U.S.

    The Chairman. Thank you, Mr. Williams.
    And now we will hear from Mr. Rozwadowski.

       STATEMENT OF PAUL J. ROZWADOWSKI, CHAIRMAN, DAIRY
  SUBCOMMITTEE, NATIONAL FAMILY FARM COALITION; DAIRY FARMER, 
                          STANLEY, WI

    Mr. Rozwadowski. Mr. Chairman, Members of the Subcommittee, 
on behalf of myself, my family and other family farmers, I 
thank you for giving me the opportunity to come here and 
testify on the dairy crisis that is causing economic 
devastation to dairy farm families, related agribusinesses and 
rural economies all across the nation and it is putting our 
food security at risk. I am a dairy farmer from Stanley, 
Wisconsin. I milk 60 cows on 375 acres along with my wife and 
four children, and have been doing so for 30 years. I serve as 
the Dairy Committee Chairman of the National Family Farm 
Coalition. The NFFC has dairy farmers both conventional and 
organic members from coast to coast.
    As we meet here today, the crisis dairy farmers are living 
worsens. Virtually every dairy farmer in the country is going 
broke. The stress level amongst farmers is past the breaking 
points. My parish priest told me last week that for the past 
couple of months he has had to counsel one or more dairy 
farmers a week to try to stop them from committing suicide, and 
he doesn't know how much longer he can be successful at this. 
Members of this Subcommittee, you have called for this hearing 
today because you recognize that there is a serious problem in 
dairy. I believe you are genuinely concerned and we urge you to 
look for solutions, both short term and long term. We are in a 
situation that needs emergency actions. Loans are well intended 
and they pay some bills, but it will further send farmers into 
debt without the capability to repay even the interest on those 
loans. Loans get repaid from profit and at $10 to $12 milk, 
there is no profit.
    Congress had good intentions with the MILC Program and now 
it even has a feed adjuster with it, but at $10 milk I receive 
about $1.47 payment per hundredweight, which doesn't even bring 
me close to the $18 I need to operate my farm. Even doubling of 
these payments would fall far short and put more burden on the 
taxpayer at a time when dairy processors are making record 
profits, and should be the ones paying farmers, not the 
taxpayers. Dean Foods, the large fluid milk processor in the 
country, saw profits double to $76 million in the first quarter 
of this year while Kraft Foods saw a $60 million increase in 
the first quarter when consumers are still paying nearly the 
same price at the store as they did a year and a half ago when 
processors were paying us dairy farmers $20 or more for our 
milk. Now, let us think about this. The processors are getting 
nearly the same for their product at the retail level but the 
farmer is receiving half as much for the raw product. Even if 
we had a five percent surplus, which I don't believe there is, 
the math just doesn't add up, five percent causing a 50 percent 
drop in price. What it does add up to is a lot of greed and 
corruption.
    I would be the first one to admit that the processing 
industry is vitally important, and I could not farm without 
them processing and marketing my milk. They know they need a 
profit and return on investment and they successfully got 
Congress some years ago to give them a make allowance which 
amounts to about $2 a hundredweight. Again, the dairy farmer 
pays that cost. Well, the dairy farmer needs to make a profit 
too. Milk prices have been so low for so long that we must act 
quickly, or in a few short months there will be a massive exit 
of dairy farmers like you can't possibly imagine.
    I know lobbying organizations for the big processors are 
telling you that the dairy farmers are producing so much milk 
that there is a big surplus, and that the poor economy is 
causing consumers to buy less dairy products, but here is some 
interesting USDA research figures for 2008. Dairy farmers 
produced 190 million pounds of milk and the commercial 
disappearance of the dairy products was 193 pounds. Two 
thousand nine is following along the same path but with an 
interesting twist. According to Resources Incorporated, a firm 
that collects data from retail checkout scanners, found that 
during the 13 week period from March 1 through May 31 of this 
year, retail cheese sales were up by five percent and fluid 
milk sales were up 1.2 percent in the United States. Someone is 
lying about this surplus thing or maybe it has something to do 
with the record amount of protein concentrates being imported 
and made into garbage cheese. Again, the processors are playing 
both ends by profiting from using cheap, untested imported 
ingredients and passing it off to consumers as cheese and 
creating a mythical surplus, forcing down the price of raw 
milk. Cheese is retailing for $3.50 a pound or more. If 1 pound 
of cheese is made from 10 pounds of milk, then 100 pounds of 
milk is worth $35. With the farmer getting $10, who is getting 
the other $25? We are killing cows with the National Milk 
Producers Federation's Cooperatives Working Together Program to 
try to lower milk production. Then we import cows right back 
from Canada and allow in massive imports. This is another Band-
Aid approach that has about as much chance to solve the dairy 
price crisis as taking an aspirin would have to cure cancer.
    We have corruption demonstrated by Dairy Farmers of 
America, the largest marketing co-op in the country, being 
fined $12 million and disciplined by the Federal Government for 
violating rules in futures trading and daily trading at the 
Chicago Mercantile Exchange. They have also been the focus of a 
2 year Department of Justice investigation which I am told is 
the biggest in U.S. history by the Department. The findings of 
the investigation never came to light under the Bush 
Administration. We hope the USDA and the DOJ can immediately 
revive this investigation.
    Another example of corruption plaguing the dairy industry 
was the misreporting of powdered milk prices from August 2006 
to April 2007 on the NASS surveys. It is my opinion that the 
management of these cooperatives that serve on the board knew 
what was happening and encouraged it. I respectfully ask 
Congress to see what is happening here. How much more evidence 
will it take to convince you that the dairy pricing system is 
broken. Greed and corruption are running the show.
    We ask the Congressional Agriculture Committee----
    The Chairman. Mr. Rozwadowski, we are going to have to ask 
you--you are a minute or so over. We are going to ask you if 
you can wrap it up right quick, please.
    Mr. Rozwadowski. Yes, last sentence. We ask the 
Congressional Agriculture Committee to investigate all the 
corruption in the dairy industry and start working on a new 
pricing system for dairy. The old one is very badly broken and 
can never be fixed. Congress needs to start listening to the 
voices of the family farmers. Thank you.
    [The prepared statement of Mr. Rozwadowski follows:]

      Prepared Statement of Paul J. Rozwadowski, Chairman, Dairy 
Subcommittee, National Family Farm Coalition; Dairy Farmer, Stanley, WI

    Mr. Chairman, Ranking Member and other Members of the Committee, 
thank you for giving me the opportunity to come here to testify on the 
dairy crisis that is causing economic devastation across the nation and 
putting our nation's food security at risk. I am a dairy farmer from 
Stanley, Wisconsin. I milk 60 cows on 375 acres and have been a dairy 
farmer for 30 years. I currently serve as the Dairy Subcommittee 
Chairman for the National Family Farm Coalition. NFFC has dairy farmers 
from across the country as part of its membership, from California to 
Wisconsin to Pennsylvania to New York. We also have organic dairy 
groups who are part of our membership. In the short term, dairy farmers 
need an $18 emergency price floor for all manufactured milk. In the 
long term, we need to revamp our failed milk pricing system and 
antitrust reform of our heavily consolidated industry that has left 
farmers with few options to market our milk.
    In my area, farmers are burning up their equity accumulated over 
their lifetimes. One farmer in my area had to cash out his wife's IRA 
just to get crops planted this spring. My parish priest in my small 
town has had to counsel one or more dairy farmers a week to prevent 
their suicides. And we know of reports across the country of farm 
suicides that have already occurred.
    All of us, whether we are small or large farms, conventional or 
organic, have believed for a long time that our industry was in a 
crisis. During the farm bill, NFFC was one of the few farm groups 
warning about this coming catastrophe and urging that the current milk 
pricing system had to be replaced because it was prone to manipulation 
by a few corporate interests and fostered unsustainable volatility. 
Now, as we confront 1970s prices for our milk and the worst conditions 
I have ever seen in 3 decades of farming, we still believe fundamental 
change is needed to address the corruption and greed that is at the 
root of this crisis. Dairy prices have crashed to 1970s levels not 
because of any supposed overproduction, but because of a pricing system 
easily manipulated on Wall Street, a flood of untested imported dairy 
ingredients, and dairy cooperatives that have long ceased to represent 
their farmer memberships. We believe industry groups such as the 
International Dairy Foods Association and so-called dairy cooperative 
groups like National Milk Producers Federation have failed America's 
dairy farmers and are the reason why we have barely 60,000 dairy farms 
left in the country. So long as Secretary Tom Vilsack and Congress 
continue to take their policy cues from these industry outfits, we will 
never solve our dairy crisis.
    The National Family Farm Coalition has been working tirelessly for 
over a decade to represent the real voices of dairy farmers from across 
the country and to expose corruption in the dairy industry. We have 
been among the few raising questions about our dairy co-ops, the 
pricing system and the deep-seated corruption of our so-called industry 
groups such as National Milk Producers Federation. NFFC's work helped 
to launch the Department of Justice's 2 year antitrust investigation 
into Dairy Farmers of America, the nation's largest dairy cooperative. 
The findings of that investigation have never been released. We have 
repeatedly requested that the Senate Judiciary Committee look into 
investigating DFA's activities, but to no avail. NFFC members also 
protested at the Chicago Mercantile Exchange where cheese prices are 
determined. Our efforts led the Commodity Futures Trading Commission in 
December 2008 to issue an unprecedented fine of $12 million against 
Dairy Farmers of America. NFFC in 2007 brought to the attention of USDA 
price misreporting of nonfat dry milk prices, costing dairy farmers at 
least $50 million. To date, dairy farmers have not been compensated for 
this egregious error that occurred as a result of incompetence on the 
part of our main dairy cooperatives. NFFC also helped to release a 
report earlier this year showing the false myth that overproduction was 
behind the current price collapse when we are currently importing 
record amounts of milk protein concentrates from foreign countries. On 
these antitrust and corruption issues, dairy lobbyists such as IDFA, 
National Milk Producers and our major co-ops have remained virtually 
silent while continuing to support a pro-free trade, globalized dairy 
industry that only benefits the bottom lines of processors seeking the 
cheapest ingredients. These groups have proven over and over that they 
do not care about the well-being of America's dairy farmers.

Immediate Actions
    NFFC, along with Farm Aid, has repeatedly urged Secretary Vilsack 
to exercise the authority he has under Section 7 of 608c(18) of the 
1937 Agriculture Act that gives him authority to adjust the minimum 
price of milk under the FMMOs if the price ``is not reasonable in view 
of the price of feeds, the available supply of feeds, and other 
economic conditions which affect market supply and demand for milk.'' 
Over 13,000 faxes and letters have been delivered to USDA demanding 
that farmers receive an $18 emergency floor price. Farmers do not like 
the idea of receiving taxpayer money from Milk Income Loss Contract 
payments. While a doubling of MILC payments may address some of the 
problems short-term, NFFC believes farmers should not be deriving their 
income from taxpayers, but from processors, many of whom are enjoying 
record profits. Dean Foods, the largest fluid milk processor in the 
country, saw profits double to $76 million in the first quarter of this 
year while Kraft Foods saw a $60 million increase in first quarter 
profits.

Fixing The Broken Dairy Pricing System
    Longer term, in order to stabilize our industry and ensure 
consumers have access to local sources of fresh dairy products, we need 
a new pricing system and a reasonable supply management program. 
Instead of spotlighting our broken dairy pricing system, industry 
representatives continue to focus on the Dairy Export Incentive 
Program, National Milk's Cooperatives Working Together's ``cow 
retirement'' program, and more government purchasing of dairy products, 
none of which have made a dent in the crisis. Our milk prices are 
currently determined in large part by cheese trading at the Chicago 
Mercantile Exchange. These thinly traded markets are easily manipulated 
by large corporate players, such as Kraft Foods and DFA. The Government 
Accountability Office in 2007, at the request of several U.S. Senators, 
found that the CME was highly prone to manipulation and the December 
2008 fine of DFA only confirmed what many farmers suspected for years 
as we struggled with extreme volatility with our prices. It is 
unconscionable to have a pricing system that has no basis in supply and 
demand. Farmers should not be receiving prices that are lower than what 
they were 30 years ago, not even accounting for inflation! In 1980, the 
dairy support price was $13. In recent months, we have received between 
$9 and $11 for our milk. This is unacceptable and it is time to change 
the system to finally account for farmers' cost of production in the 
pricing formula.

New Dairy Pricing Bill
    NFFC supports a bill introduced in the Senate by Senators Bob Casey 
and Arlen Specter, S. 889, the Federal Milk Marketing Improvement Act, 
that would establish a national average cost of production. The only 
supply management we have now are low prices that drive farmers out of 
business. This just hurts all our rural communities and puts at risk 
our domestic food supply. S. 889 would have a supply management that 
maintains supply in line with demand and gives farmers a fair price. 
S.889 would have two classes of milk and would price milk based on a 
national cost of production. All manufactured milk will be classified 
as Class II milk. The values of Class I milk will be determined by 
adding the existing Class I differential in each Federal or state 
market to the Class II price. For instance, in Federal Order #1, if the 
Class II price were $21.00 per cwt, then adding the Order #1 Class I 
differential of $3.25 per cwt would establish a Class I price of $24.25 
per cwt. The price paid to dairy farmers would be slightly over $22.00 
per cwt. S. 889 would also institute an inventory management in case of 
true overproduction after accounting for imports. Every 2 months, the 
Secretary can determine whether there is an excess of milk and milk 
products being produced in the United States. USDA Secretary must 
factor in products including cheeses, butter, butterfat, milk powder, 
ice cream, yogurt, as well as substitute dairy ingredients such as milk 
protein concentrates, casein, caseinates, whey protein concentrates. If 
the Secretary determines there is excess production, milk prices for 
producers may be reduced for not more than 5% of all milk produced. 
There will be no reduction in prices received by producers unless there 
is a positive trade balance in dairy products (i.e. exports are higher 
than imports). Producers can receive a reduced price for milk of up to 
half the Class II price. Further deductions may be taken for producers 
with more than 3 million pounds of milk. New producers are exempt from 
these guidelines for 1 year.
    IDFA has suggested that dairy producers should utilize risk 
management tools such as futures contracts and forward contracting. 
These tools are simply designed to pay producers below the FMMO minimum 
price. A USDA study shows farmers lost $28 million through their pilot 
forward contracting program. The 2008 Farm Bill unfortunately revived 
the forward contracting program. Sixty thousand dairy farmers cannot 
hope to attain a fair price when the industry is so heavily 
consolidated and controlled by a few key players, including Dean Foods 
in the fluid milk market, Leprino Cheese for the food processing sector 
and Kraft Foods for the retail sector.

Controlling Imports
    The reaction from USDA and our dairy cooperatives to stem the 
current crisis so far has been to get the government to buy up supposed 
surplus products and help subsidize exports. USDA has spent millions to 
purchase products for international food aid and to distribute to local 
food banks. USDA has also, at industry's behest, revived the Dairy 
Export Incentive Program. National Milk Producers Federation has been 
promoting for 6 years its Cooperatives Working Together program. CWT 
attempts to control U.S. dairy production through herd retirements. It 
has been an utter failure at stabilizing milk prices and also lower 
cull-cow prices, further hurting farmers' income. Farmers who have been 
milking for decades are now seeing a lifetime's work go up in smoke as 
their herds, including even bred heifers, are being sold off to the CWT 
program. The Pope this week noted we have 924 million hungry people in 
the world today, yet farmers are selling their cows to CWT instead of 
helping to produce the vital dairy products that could be used to feed 
the hungry. One respected farm reporter said, ``CWT is a bloody and 
heart-breaking supply-management program that isn't working . . . At 
best, it's a poor way of managing the milk supply. At worst, it's a 
sinister scheme for killing off the nation's dairy industry so that 
cheaper, foreign sources of dairy products can be utilized.'' None of 
these supply stabilization programs, from export subsidies to CWT, will 
work so long as we cannot control dairy imports flooding our markets 
and displacing U.S. farmers' quality milk.
    Currently, the U.S. has seen record imports of milk protein 
concentrates, which have never been approved as ``Generally Regarded as 
Safe'' by the FDA. For the first 2 months of 2009, there was a 71.8% 
increase in MPC imports compared to 2008. Seven thousand metric tons of 
MPCs were being imported in February, the highest ever on record. Yet 
USDA and industry continue to insist on an oversupply of milk and 
downplay the impacts of imports.

Consumer Gouging
    The collapse in dairy prices has not been a benefit to consumers, 
as seen in the profits experienced by dairy and food processors. While 
prices paid to farmers have dropped 50%, consumers have certainly not 
seen a 50% drop in prices at the grocery store for milk and cheese. 
Dean and Kraft's profits show that consumers are still paying 
exorbitant prices in many parts of the country for milk and cheese.

Fallacy of Global Markets
    The industry and our dairy cooperatives have continually promoted 
the false idea that global exports are the key to helping improve milk 
prices. Food processors and dairy co-ops are continually trying to 
degrade standards of identity for milk to allow for inferior and 
cheaper dairy ingredients to be used, instead of U.S. farmers' 
wholesome fresh milk. Industry has tried to allow for the use of more 
MPCs to be used in cheesemaking and wants ultrafiltered milk to be 
labeled as simply ``milk.'' Consumers thinking they are getting real 
milk in their dairy products are now seeing these milk substitutes, 
many coming from foreign countries, in everything from coffee creamers 
to macaroni and cheese. MPCs, which are the dry powder form of 
ultrafiltered milk, remove many of the vitamins and minerals contained 
in real milk. MPCs were originally intended for use in industrial glue 
and are sourced from countries that include China and India! They may 
even be coming from water buffaloes and not cows. No consumer is 
clamoring for ``innovative'' dairy products containing more fake milk 
substitutes using imported materials. Only the industry, such as IDFA's 
members, supports such innovation not to address consumer demand, but 
to fatten their own profit lines. NFFC supports the immediate closure 
of loopholes allowing for the import and use of MPCs and passage of the 
Milk Import Tariff Equity Act. Consumer interest and trends have shown 
a strong preference for local sources of fresh dairy products. This is 
the exact opposite of industry's vision of a ``global marketplace.'' 
NFFC remains greatly concerned about the Federal Milk Marketing Order 
Review Commission called for by the 2008 Farm Bill to examine milk 
pricing. The Commission emphasizes ensuring globally competitive dairy 
markets at the expense of a fair price for dairy farmers. Also, the 
Commission explicitly calls for ``evaluating the nutritional 
composition of milk, including the potential benefits and costs of 
adjusting the milk content standards.'' We believe this is a dangerous 
attempt by food processors to water down the definition of milk to 
include MPCs and ultrafiltered milk.
    Dairy farmers have also never seen the trickle down effects of 
export markets. When dairy prices were relatively higher in 2007 due to 
supposed export demand for nonfat dry milk, U.S. prices consistently 
lagged behind the world price and behind the EU and Oceania (New 
Zealand and Australia). Through the work of NFFC member John Bunting, 
we helped expose price misreporting in 2007 on the part of 
DairyAmerica, the marketing agency for nonfat dry milk exports. 
DairyAmerica is made up of several major U.S. cooperatives, including 
DFA. It was discovered that from August 2006 to April 2007, 
DairyAmerica had submitted erroneous nonfat dry milk powder prices to 
the NASS survey that helps determine milk prices. NFDM prices reported 
to NASS consistently lagged behind world prices. A June 2008 report 
released by the USDA's Inspector General estimated farmers lost at 
least $50 million due to this scandal. To date, USDA has offered no 
compensation to farmers for this enormous loss. NFFC believes this is a 
gross underestimate of the real amount of losses. I am now part of a 
class action lawsuit filed in March 2009 on behalf of dairy producers 
in twenty five states against DairyAmerica. I believe the price 
misreporting scandal shows why reliance on global exports will never 
benefit dairy farmers, but only the processors and cooperatives that do 
the exporting. This is also why the DEIP program is unlikely to benefit 
farmers.

Antitrust and Fair Competition in Dairy Markets
    An April 2004 meeting, organized by NFFC and attended by New York 
Attorney General Eliot Spitzer, was held in Syracuse, New York, on 
dairy antitrust issues. The meeting helped spur investigations to 
finally look at the market abuses on the part of our dairy 
cooperatives. The Department of Justice's antitrust division then 
launched a 2 year investigation into DFA and its market collusion with 
the likes of Dean Foods and others. The Bush Administration never 
allowed charges to be brought forth, despite evidence of severe anti-
competitive practices on the part of DFA. NFFC is working with the DOJ 
to see if this case can be revived again and justice served for dairy 
farmers who suffered from DFA's abuses and in many cases were driven 
out of business. In addition, two antitrust lawsuits have been brought 
by DFA members and customers against the co-op and in April 2009, a 
shareholder lawsuit against Dean Foods was filed alleging illegal 
marketing practices harming farmers. Through all these years of 
antitrust problems and failures to have a truly free and competitive 
dairy market, Congress has failed to examine these incredible market 
failures in our industry while continuing to rely on policy advice from 
these same players.

Organic Dairy in Crisis
    It is not just conventional dairy farmers who are being threatened 
with bankruptcy. Organic dairy farmers, many of whom invested heavily 
to switch to organic production, are suffering the same tragic effects 
of this current crisis. Processors have now cut the price of milk for 
farmers, and imposed production caps. Many family farmers are now in 
danger of losing their farms.
    The same corporate processors who control conventional dairy 
production are now threatening the viability of the organic dairy 
industry. In addition to the serious financial losses some farmers are 
experiencing, two of the largest organic milk processors and handlers, 
Dean Foods (marketing Horizon milk) and HP Hood, which owns Kemps dairy 
in the Midwest (marketing Stonyfield milk) have informed some of their 
farmers that they will not renew their contracts.

Enforce Organic Dairy Standards
    In the dairy sector, there are now estimated to be 20 large 
industrial dairies, each milking thousands of cows, producing as much 
as 40% of the nation's organic milk supply. Under the Bush 
Administration, the USDA was accused of ``looking the other way'' as 
large corporations invested in organics while allegedly violating 
Federal standards. These corporations have, in essence, signed a 
financial death warrant for these farmers. Without contracts to sell 
organic milk, many of these operators face bankruptcy and risk losing 
the farms that have been in their families for multiple generations.
    For years, members in the organic community and the National 
Organic Standards Board, the expert panel set up by Congress, have 
appealed to the USDA to crack down on ``scofflaws'' bending the organic 
regulations on giant factory dairies, mostly in the desert-West. NFFC 
urges Secretary Vilsack and Congress to view this as a legitimate 
emergency and take immediate action, to shut down the giant farms that 
are violating Federal organic law. If nothing is done, many of the 
ethical, hard-working farmers who built the organic dairy industry will 
be driven out of business by those who are unethically skirting the 
law.
    The dairy industry, conventional and organic, contributes over $20 
billion to Wisconsin's economy. We help support thousands of jobs in 
rural communities. The current crisis is now putting our entire rural 
economies in jeopardy, from our feed suppliers to equipment companies 
to veterinarians to local small businesses. USDA and Congress need to 
start listening to the voices of family farmers and not those of the 
industry who are in large part responsible for this mess. Unless action 
is taken immediately, we will see \1/3\ of our remaining dairy farmers 
go out of business very soon. Consumers in the very near future may 
have to rely on Chinese imported dairy products for their food supply. 
For the sake of our rural economies and our national security, let us 
work towards ensuring we will always have a viable American dairy 
industry and consumer access to safe, quality, and real dairy products.
          * * * * *
    The National Family Farm Coalition (NFFC), founded in 1986, 
provides a voice for grassroots groups on farm, food, trade and rural 
economic issues to ensure fair prices for family farmers, safe and 
healthy food, and vibrant, environmentally sound rural communities here 
and around the world. For further information about the organization, 
visit www.nffc.net.

    The Chairman. Thank you very much.
    Now we will hear from Mr. Scott Hoese, President of the 
Carver County Farmers Union.

  STATEMENT OF SCOTT HOESE, PRESIDENT, CARVER COUNTY FARMERS 
 UNION, DAIRY FARMER, MAYER, MN; ON BEHALF OF NATIONAL FARMERS 
                             UNION

    Mr. Hoese. Good morning, Mr. Chairman and Members of the 
Committee. I am a dairy farmer from Mayer, Minnesota, where my 
wife, son and I own and operate a diversified farm. We grow all 
of our own feed for our 120 milk cows in addition to some corn 
and soybeans. I currently serve as the President of the Carver 
County Farmers Union, and I am here today on behalf of the 
National Farmers Union. Bongards' Creamery, where I serve as a 
Board Member, had a June base price of $10.90 per 
hundredweight, a dollar over Class III. My costs of production 
averages $14. As a board member, right now we are trying to pay 
the most to our producers.
    Because the expansion of our operations 3 years ago, we now 
have surplus pregnant heifers to sell. Today they sell for 
$1,000 and $1,200 apiece. Last year I was getting more than 
$2,000.
    To comply with state environmental regulations on my manure 
pad, I have to empty my pad, take out 2 feet of soil clay and 
then put in 2 feet of new clay back in around the perimeter and 
then get certified by the NRCS. EQIP will cost share us 75 
percent but I still have to account for $10,000 this year.
    Recently the Minnesota Farmers Union held a number of 
listening sessions to hear directly from dairy farmers across 
the state. What we heard were stories of farmers having to go 
to their local food bank for food because they have no income. 
One was hoping his garden would do well this year so he has 
something to feed his family, and there were two recent 
suicides by hog and dairy farmers. This economic crisis does 
not discriminate based upon herd size or location. Today's 
situation is unlike any experienced in the past.
    The roller coaster market dairy producers have been riding 
seems to be getting more severe with each passing year with the 
highs not lasting long enough to mitigate the lows. Each month 
the National Farmers Union publishes the farmer's share for the 
retail food dollar. July data shows consumers paying $4.99 for 
a pound of cheddar cheese while the farmer receives less than a 
dollar. Consumers pay $2.99 for a gallon of fat-free milk with 
the farmers receiving 97 cents. At a time when consumers are 
eating more at home and increasing retail dairy product sales, 
producers are losing money on every gallon of milk sold. 
Policies need to allow producers to capture a greater 
percentage of the retail food dollar.
    Much of the debate over today's situation has been centered 
on whether we are producing too much milk for current demand. 
Unfortunately, the data published by the USDA does not provide 
a full or accurate picture of the commercial disappearance. 
Failure to account for imported protein skews the overall 
picture. If USDA would recognize its own 2004 AMS report which 
concluded milk protein imports used in food production are 
equivalent to approximately five percent of our milk 
production, then you would see why we are a net deficit 
producer. Farmers Union has supported closing MPC and casein 
loopholes since it was created in 1995. The loophole, coupled 
with the lack of environment enforcement by the Customs 
Service, allows an overflow of imported dairy proteins to 
displace U.S. milk and drive down our domestic market.
    While some argue imports are not having a significant 
impact on our prices and point to export data, it is important 
to understand where we have been. During the past 6 years, the 
dollar has lost 40 percent of its value according to the 
Federal Reserve. That devaluation made the price of U.S. 
commodities increasingly competitive on the world market at a 
time when economies across the globe are experiencing growth. 
Two major factors have changed significantly since 2007-2008. 
The world economy is in the midst of a severe recession and the 
value of the dollar is strengthening. Increasing and expanding 
exports is important to farmers but the chart in my written 
testimony shows dairy imports have outpaced exports 13 out of 
the past 16 years. Imports must be part of the discussion when 
trying to address today's crisis.
    Due to increased levels of consolidation, there is a lack 
of competition in the dairy sector. A few major companies 
dominate the market, leaving producers and consumers to suffer 
as a result. In order for the dairy industry to be viable in 
the future, policymakers need to take immediate steps to foster 
and restore competitive competition in the marketplace. There 
is no single reason why the dairy industry is in the economic 
condition it is in, and there is no single option to solve the 
crisis.
    The following principles were identified and agreed to by 
producer organizations in March 2000 and remain valid today. 
Number one: Return on investment greater than cost of 
production plus a profit from the market; two, reform the 
Federal Milk Marketing Order System, and number three, restore 
competition to the dairy market. Included in my written 
testimony is a detailed list of options to achieve these three 
principles.
    Let me be clear: Producers need a lifeline now. Farmers 
Union recognizes the need for a fundamental overhaul of our 
Federal dairy policy, but unless Congress and the 
Administration extend a lifeline proportionate to today's 
crisis, there will be little need to overhaul policy because so 
many producers will be out of business.
    Thank you for the opportunity to be here today.
    [The prepared statement of Mr. Hoese follows:]

  Prepared Statement of Scott Hoese, President, Carver County Farmers 
  Union; Dairy Farmer, Mayer, MN; on Behalf of National Farmers Union

    Good morning, Mr. Chairman and Members of the Committee. My name is 
Scott Hoese, I am a dairy farmer from Mayer, MN. My wife, son and I 
have a Century farm that consists of more than 600 acres, 120 milk cows 
and an additional 125 heifers and young stock. We grow all of our own 
feed in addition to some corn and soybeans. We expanded our operation 3 
years ago, from 65 cows to the current 120. I currently serve as the 
president of Carver County Farmers Union, as a township supervisor, on 
the board Bongards' Creamery and am past President of the Minnesota 
Association of Soil and Water Conservation Districts. I am here today 
on behalf of National Farmers Union (NFU)--a nationwide organization 
representing more than 250,000 farm, ranch and rural residents.
    In 1908, a small number of dairy farmers in Carver County, 
Minnesota decided to organize a farmer-owned cooperative creamery, 
Bongards' Creamery. This farmer-owned cooperative has two processing 
facilities in Bongards and Perham, Minnesota where we produce 
approximately 60 million pounds of natural cheese each year and a 
variety of top quality whey powders. My family has been part of this 
co-op since 1962 and I currently serve as a director. The initial goals 
were simple and continue to be our focus today: produce the freshest, 
most wholesome and flavorful dairy products while getting a fair return 
for our raw milk.
    I applaud the Subcommittee for scheduling this hearing and 
providing producers the opportunity to speak directly to you. Recently, 
the Minnesota Farmers Union held a number of ``No Bull'' dairy action 
sessions to hear directly from dairy farmers and gather suggestions to 
improve dairy farm-gate price and profits. As a producer, it has been 
frustrating, to say the least, to weather one of the worst economic 
periods in 30 years yet it seems as though our society as a whole has 
not grasped how desperate our situation is.
    Dairy farmers of all sizes and across all regions of the country 
are enduring an unprecedented disaster. From Minnesota to California 
and Texas to Vermont, the current situation is untenable. Equity is 
rapidly disappearing, market prices remain at 1970 levels, creditors 
are cutting off producers--yet there is no relief in sight. Since the 
first of the year, two dairy producers in California have committed 
suicide as due to the gravity of their financial situation and the 
future outlook. This situation is unlike any experienced in the past 
and the width and depth cannot continue to be ignored.
    My state is the sixth largest dairy state in the United States, 
milking about five percent of the national herd. While many large dairy 
states have witnessed a decrease in their herd, Minnesota has increased 
cow numbers for the past 4 consecutive years. Despite the increase in 
herd size, the number of Minnesota farmers milking today is fewer. Our 
states' economic engine relies on the dairy industry. For every dollar 
from dairy production and processing, about $2 is generated in 
statewide economic activities.
    The multiplier effect of the dairy industry on Minnesota's economy 
is a total economic output of nearly $9 billion and almost 40,000 jobs. 
Unfortunately, the 2009 market collapse has resulted in an average of 
$12.60 per hundredweight (cwt) for Minnesota dairymen for the first 4 
months of the year according to the Minnesota Department of 
Agriculture--the lowest market level since 2002. One of the untold 
stories with today's dairy crisis is the impact it has had off the 
farm--jobs are lost and rural communities struggle to survive if even 
just one dairy producer is forced to liquidate their operation. 



Supply Versus Demand
    Much debate over today's situation has been centered on whether 
U.S. farmers are producing too much milk for current demand. 
Unfortunately, the commercial disappearance data used by USDA does not 
account for the imported MPC, casein and caseinates for food usage as 
reported in a 2004 USDA Agricultural Marketing Service (AMS) report 
titled, ``Milk Protein Products and Related Government Policy Issues''. 
The report stated that in 2003, the amount of imported milk protein 
concentrates accounted for 5.9 percent of the total U.S. milk protein 
production. The report concluded that milk protein imports is 
equivalent to approximately five percent of our milk protein 
production.
    According to a recent letter from Secretary Vilsack to the National 
Family Farm Coalition, domestic milk marketing's in 2008 totaled 188.8 
billion pounds. Data from USDA's Economic Research Service shows 
commercial disappearance on a milkfat basis totaling 193 billion pounds 
(184.3 billion pounds of domestic use and 8.8 billion pounds of 
exports). Vilsack cites this data to underscore his point that domestic 
marketing's are more than adequate for domestic use. Where USDA's data 
is flawed is in the lack of accounting for the five percent equivalent 
of U.S. milk production in the form of imported milk proteins as stated 
in AMS's 2004 report. Five percent of the 188.8 billion pounds of milk 
marketed in 2008 totals close to 9.5 billion pounds. Adding the 9.5 
billion pounds of equivalent imported milk proteins increases the 
commercial disappearance number to 202.5 billion pounds.
    The 2008 commercial disappearance number of 202.5 billion pounds 
appropriately includes the imported milk protein ingredients used for 
food. After removing the export commercial disappearance of 8.8 billion 
pounds, the total domestic commercial disappearance is 193.7 billion 
pounds. Comparing the 188.8 billion pounds of milk marketing's verses 
the 193.7 billion pounds of domestic commercial usage, we are a net 
deficit producer by nearly 5 billion pounds. If we produce just 188.8 
billion pounds and use 202.5 billion pounds for both domestic usage and 
exports, we are 13.7 billion pounds short on production. As you can 
see, by using more accurate data to account for imported proteins used 
for food production, it is clear that U.S. dairy producers are not 
oversupplying the market.

Imports
    For many years, NFU has supported closing the milk protein 
concentrate (MPC) and casein loophole created by the Uruguay Round 
agreement, which allows for the importation of MPC and casein tariff-
free. The overflow of imported, ultra-filtered dried protein product 
displaces American-produced milk in the production of dairy products. 
MPC was a relatively new product during Uruguay Round negotiations and 
after implementation of World Trade Organization (WTO) rules in 1995 
became commercially viable.
    A lack of enforcement by the U.S. Customs Service has allowed dairy 
protein blends to be imported in circumvention of U.S. tariffs and 
tariff-rate quotas. Much of the imported dairy protein blended products 
are essentially equivalent to skim milk powder and do not satisfy the 
common or commercial meaning of the term ``milk protein concentrate.'' 
Therefore, they should be subject to tariff provisions covering 
powdered milk imports. Moreover, a 2001 Government Accountability 
Office (GAO) report stated ultra-filtered milk is not nutritionally 
equivalent to fluid milk nor has the product undergone mandatory safety 
tests under the Food and Drug Administration's ``Generally Recognized 
as Safe'' rules.

                                                                      Dairy Imports
--------------------------------------------------------------------------------------------------------------------------------------------------------
         Milk Equivalent (Billion Lbs.)              Factor          2002         2003         2004         2005         2006        2007        2008
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                        Cheese         x10            4.75         4.75         4.71         4.60         4.54        4.35        3.75
                                        Casein         x39            7.93         8.94         8.72         8.36         6.95        7.75       10.21
                                        Butter          x4.2          0.14         0.13         0.22         0.16         0.16        0.15        0.13
                                           MPC         x22            2.01         2.34         2.12         2.67         3.04        2.96        3.04
                                              Lactose   x5.5          0.05         0.08         0.06         0.06         0.07        0.07        0.09
                                                --------------------------------------------------------------------------------------------------------
  Total........................................                      14.88        16.24        15.84        15.85        14.76       15.28       17.22
                                                --------------------------------------------------------------------------------------------------------
                          U.S. Milk Production   (Billion)          169.758      170.394      170.934      176.989      181.787     185.602     189.892
                    Percent of U.S. Production                        8.77%        9.53%        9.27%        8.95%        8.12%       8.23%       9.06%
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                 United States Department of Agriculture FAS Agricultural Import Commodity Aggregations
--------------------------------------------------------------------------------------------------------------------------------------------------------

    While some argue that imports do not have a significant impact on 
domestic dairy prices and point to recent export data, it is important 
to understand where we have been and where we are headed. According to 
the Federal Reserve, the dollar lost 40 percent of its value from 2002-
2008 and in 2008 was at a 30 year low according to USDA, compared to 
other major currencies. The devaluation of our currency made the prices 
of U.S. commodities increasingly competitive abroad. In 2007 and 2008, 
we witnessed record agricultural exports in terms of volume and value 
despite record high domestic market prices. As economies across the 
country were experiencing strength and growth, a new demand was created 
for food commodities. The new middle class populations in Asia, Latin 
America and Africa were demanding an improved diet including meat and 
dairy products. Two major factors have changed significantly since 2007 
and 2008: economies across the world are in the midst of a severe 
recession and the value of the U.S. dollar has been strengthening. 
Increasing and expanding exports is important to American farmers, but 
in looking at the chart below, dairy imports have outpaced exports 13 
out of the past 16 years. The impact of imports must become a central 
part of the discussion when trying to address today's crisis.



Chicago Mercantile Exchange Reform
    In June 2007, the Government Accountability Office issued a report 
on the spot cheese market titled, ``Market Oversight Has Increased, But 
Concerns Remain About Potential Manipulation''. Since the demise of the 
National Cheese Exchange (NCE) due to manipulation allegations, the CME 
is where spot cheese prices are determined, impacting virtually all 
cheese traded in the U.S. as well as impacting the price producers 
receive for their milk. Despite these significant influences, it is 
typically less than one percent of the national cheese production is 
traded on the CME. GAO concluded, ``Because the CME spot cheese market 
remains a market in which few daily trades occur and a small number of 
traders account for the majority of trades, questions exist about this 
market's susceptibility to potential price manipulation.'' In its 
report, GAO recommended USDA reduce the redundancy that exists in the 
NASS survey of cheese prices, improve the timeliness associated with 
the cheese prices survey's and implement an audit for the survey. To 
date, we are unaware of efforts within USDA to implement GAO's 
recommendations.
    GAO highlighted the lack of transparency on the CME by identifying 
how the market involves daily anonymous trading compared to the NCE 
where cheese traded once a week with the identities of the traders made 
public. The concerns of manipulation that led to the demise of the NCE 
remain prevalent at the CME including, low trading volume and a small 
number of entities making the trades. GAO specifically cited trading at 
the CME spot cheese market being concentrated among a small number of 
entities, primarily large companies and cooperatives in the cheese and 
dairy industry. The ability of a handful of players to influence the 
spot cheese market has a significant negative economic impact on all 
producers. If the CME was a more open and honest market, more 
businesses would trade and increase the volume to create a more 
accurate and reliable market that better reflects the actual milk 
production in the United States. I encourage the Subcommittee to review 
the GAO report and utilize it as a tool in striving to eliminate 
manipulation from dairy markets.
    On December 16, 2008 the Commodity Futures Trading Commission 
(CFTC) announced a $12 million penalty levied on charges of attempted 
manipulation of the Class III milk futures contract and exceeding 
speculative position limits in that contract. CFTC found attempted 
manipulative practices occurred from May 21 through June 23, 2004 on 
the CME Cheese Spot Call market. This settlement made public just 18 
months following the publication of GAO's report demonstrates the need 
for the Federal Government to restore fair, transparent and open 
markets for America's dairy producers.

Competition
    Consolidation within the agricultural industry has been on the rise 
recent years and has brought about the demise of thousands of 
independent family farms. Independent producers are finding it 
increasingly difficult to participate in a fair, open 





Make Allowance
    Dairy producers and cheese processors are partners, each dependent 
upon the other. However, both, not just one or the other, must sustain 
profitability to achieve a healthy dairy industry. Farmers receive no 
assurance of profitable milk prices under Federal milk market order 
system, leaving the question as to why should processors be given 
special treatment. National Farmers Union has opposed all proposals to 
increase the make-allowance for processors because we believe it gives 
an unfair advantage to processors and will be economically harmful to 
producers.
    The current make allowance system sends a false signal to 
processors to continue production regardless of market demand and 
provides a strong incentive for processors to run as much raw milk as 
possible through a plant regardless of market conditions. The result 
from this system is that it puts the needs of the processor at odds 
with the needs of the dairy producer. Too much milk reduces the price 
to the dairy farmers and milk shortages decrease the amount of milk 
available to the processor.
    The make allowance system should be reformed so that it provides 
benefits to the producer and processor. Farmers Union has long 
advocated for the establishment of a variable make allowance that would 
link processor and producer prosperity. A variable make allowance would 
increase significantly when milk prices are high, thereby giving an 
incentive to the processor to continue production because the return 
would be greater. However, when prices are low the make allowance would 
decrease and send a signal to the processor to limit production in 
order to allow demand to catch up with production. We believe a 
variable make allowance is a ``win-win'' proposal because it would 
enable producers and processors to make a higher return when milk 
prices rise.
    As long as the manufacturing allowance is fixed at the processor's 
cost plus a return on investment, and is paid for by farmers, the 
processing segment of the industry will be unconcerned with market 
signals. We need a system that works with the marketplace at all 
levels: producer, processor, wholesaler, retailer and consumer to 
provide an equitable, stable and viable economic environment for all 
segments of the dairy industry.

NASS Survey
    In April 2007, NFU sent letters to USDA's Inspector General and 
then-Secretary Johanns regarding concerns with reports that prices 
reported for non-fat dry milk (NFDM) by NASS were consistently below 
actual prices observed in the marketplace, resulting in lowered prices 
paid to dairy producers. Because the NASS reports are directly linked 
to the prices received by dairy producers through the Federal order 
system, any misreporting, underreporting or inaccurate reporting of 
NFDM prices is a significant pricing problem. When the misreporting 
became known, NFU called on USDA to take the following actions:

   Immediately review price reporting procedures for NFDM from 
        July 2006 to the present (April 2007);

   Calculate, with publicly available documentation, the amount 
        of revenues lost by producers as a result of the misreporting;

   USDA should review milk pricing programs, including whey 
        reported prices, to assure that dairy commodity prices are 
        accurately and fairly reported;

   Explanation as to why the department had not implemented the 
        auditing authority granted by Congress in 2000 and 2002; and

   Calculate, with publicly available documentation, the impact 
        of all classes of milk and adjustments to monthly prices for 
        Class I, Class II and Class IV.

    To allow such serious agency errors to occur at the expense of 
dairy producers should not be tolerated.

Policy Options
    Time is of the essence for dairy producers. Many continue to lose 
$100-$200 per dairy cow per month with no immediate increase in the 
market on the horizon. Regardless of operation size, many producers 
have been issued notice from feed suppliers that they will no longer 
receive feed and creditors are terminating lending options. Since dairy 
prices peaked last year, the market has precipitously collapsed to 
historic low levels and is now well below the cost of production. NFU 
supports a comprehensive dairy policy that accounts for dairy 
profitability, income stabilization, limitation on imports, competitive 
markets and supply-inventory management.
    In 2007, NFU hosted a dairy summit of producer-based organizations 
to seek solutions, both long and short term, for dairy producers. The 
following three core principles were identified and agreed to by 
participating organizations and remain applicable in today's 
environment:

   Return on investment greater than cost of production, PLUS a 
        profit from the market;

   Reform of the Federal Milk Marketing Order system; and

   Restoring competition to a non-competitive dairy market.

    The NFU board voted in June to encourage Congress to pass a dairy 
stimulus package to provide an adequate safety net for producers in 
addition to establishing an inventory management program. Most 
importantly, the board expressed the need for producers to receive an 
immediate financial lifeline to sustain their livelihoods through this 
unprecedented situation. A suite of policy options exist to ensure 
producers will survive this devastating economic period. Options to 
achieve the above mentioned principles are outlined below, categorized 
by short-term action and long-term action.

Short Term Options:
   Establish safety-net support price that is fair and 
        equitable to all producers--Establish an emergency Class III 
        floor price of $18/cwt by existing authorities of the Secretary 
        for a period of 6-9 months. During this period, USDA should 
        launch the FMMO review as established in the 2008 Farm Bill and 
        CFTC should launch additional investigations into potential 
        manipulation on the CME. A long-term supply management program 
        must be established in tandem with the emergency floor.

   Continuation of the countercyclical Milk Income Loss 
        Contract (MILC) program--Legislation has been introduced in the 
        Senate that would double the MILC payment rate short term. This 
        provides a quickly deployable lifeline in an effort to prevent 
        additional dairy bankruptcies.

   Eliminate the make allowance. If not eliminated, make it 
        variable and tied to producers' cost of production.

   Require the NASS survey to be audited periodically.

   Maintain standards of identity on dairy products and move to 
        increase fat content standards in fluid milk. Milk is naturally 
        produced with fat content of 3.5 or higher, yet most of the 
        whole milk sold in the U.S. has been reduced to 3.2.

   Deploy low-interest and emergency loans, including a 
        foreclosure mitigation program to stem the tide of loan 
        foreclosures.

   Purchase dairy products and hamburger for donations to food 
        banks and other nutrition programs.

   Allow producers to label milk as free of artificial growth 
        hormones.

   Require accurate recording and publishing of import data 
        from ERS.

   Ensure imported dairy protein blended products are accounted 
        for and categorized appropriately according to the common or 
        commercial meaning of the term ``milk protein concentrate,'' 
        not allowed to disguise skim milk powder MPC to avoid tariffs 
        and the tariff rate quota.

Long Term Options
   Efficient transmission of price signals should be 
        established. Today's market is non-functioning with imbalance 
        of buyers/sellers.

   Pass the Milk Import Tariff Equity Act to address unlimited 
        imports flooding U.S. domestic market.

   Include California and all regions/areas in the FMMO.

   Correct pooling/de-pooling provisions in the FMMO.

   Eliminate bloc voting.

   Allow ``no'' vote on amendments, yet maintain FMMO.

   Do not place financial burden of transportation onto 
        producers.

   Establish three-part pricing formula to include: cost of 
        production, Consumer Price Index and Chicago Mercantile 
        Exchange.

   Resolve distribution and supply management challenges.

   Repeal forward contracting authority.

   Support funding for academic antitrust research.

   Intensify review process for proposed mergers.

   Promote smaller coops and increase oversight of coop 
        management to ensure interests of producers are met.

   Passage of the Federal Milk Marketing Improvement Act of 
        2009 (S. 889)

   Eliminate authority for dairy import promotion assessments.

    As stated at the beginning of my testimony, today's economic 
conditions for dairy producers can be attributed to many factors. As 
such, there will be no single action by Congress or the Administration 
to resolve all of the challenges. I hope the series of hearings this 
Subcommittee conducts will provide you with all the necessary resources 
of ideas to create a suite of options to ensure both short term 
survival and long term prosperity for America's dairy farmers. Thank 
you for the opportunity to be here today.

    The Chairman. Thank you, Mr. Hoese.
    Now we will have Mr. Donald DeJong, dairy farmer from 
Hartley, Texas.

  STATEMENT OF DONALD A. DeJONG, OWNER AND MANAGER, NORTHSIDE 
  FARMS, LLC; OWNER AND CEO, AgriVision FARM MANAGEMENT, LLC; 
                       OWNER AND MANAGER,
          NATURAL PRAIRIE DAIRY FARMS, LLC; OWNER AND
              MANAGER, DJ FARMS, LTD., DALHART, TX

    Mr. DeJong. Thank you, Mr. Chairman, Mr. Neugebauer, other 
Members of the Committee for this opportunity to address you on 
the crisis that faces us in the dairy industry today.
    My mom and dad immigrated here to this country in 1958 with 
nothing, just one machine and a couple hundred bucks. They 
milked cows for others in southern California, and over a 20 
year period put enough money together to buy a dairy farm in 
Riverside, California. I am one of seven. I have three brothers 
in the industry, two in central Texas, myself in Hartley, 
Texas, on the high plains, and one brother still in Shasta, 
California.
    This is truly hard times that we are facing. My dad said we 
have never seen such a dip or the spreads between cost and 
profit have been so wide, and it hurts. But we haven't sat 
still as a family in understanding it. It has been a long 
process. My dad left The Netherlands for a reason. There was no 
opportunity there. This country has opportunity. We can work 
hard. We have laws and it is predictable. And through the years 
that he has been here, we have been able to work through this 
process, we have been successful. We currently milk a lot of 
cows and we use a lot of tools. We try to read the tea leaves 
as best as we can, and when we need a change, we change. 
Through the process we have known we have to use market tools, 
and as soon as they were introduced we started using them. We 
have opportunities now not always to lock in a profit, but to 
at least avoid devastation. The last 5 years we have always had 
an opportunity to take advantage of those products, and those 
products are both through co-ops. It is not size discriminate. 
It doesn't cost a lot of money, but you have to be disciplined 
to make a decision on your own to say, ``Look, I can now take a 
margin, I need to take this margin, I need to take it now and 
it is going to survive.'' We have done that. Is it always 
possible? No. Have we missed some dollars on the top? Yes. Have 
we avoided the destruction of our family? No. We have been able 
to grow. The turtle wins the race.
    An example of what we have to do--we grow a lot of our 
feed. We are integrated farms. But I can never, ever get my 
farm hat to agree with my dairy hat on when to buy and sell my 
corn. The market gives us opportunities to do that. I am able 
to take a price. Last year I could sell into a market of corn 
at $7 and we did. I can buy the corn back at $3.50 to $4. We 
did. And the market gives us that opportunity. And the same 
with the milk. We need to have systems in place that don't 
discourage this. We need to have systems that encourage it. We 
need to get disciplined. Turtle wins the race. We have in this 
system a dairy industry that can be a global player. We can 
grow the pie. But the current systems we have today are 
discouraging that. Our price support program encourages the 
government to buy products that the market doesn't want. The 
powder is the wrong kind. The butter is packaged wrong. And 
then we have to resell that back into the market. Why do we do 
that? Then we set up a system with our price support program 
that we are the balancer of the world. Why do we want to do 
that? Why do we do that to ourselves? I don't think that is 
what we want to do in the future. When we roll up our sleeves, 
we need to talk about those things.
    One of the things that we could do immediately is 
transparency. For somebody who wants to work, and understand 
price discovery, we have to have better transparency, and daily 
reporting of sales of all products would go a long way towards 
that.
    In closing, I would like to say I think our future is 
bright. It is hard. We are at the bottom of this thing. Do no 
harm. If we act and do things on a knee-jerk reaction now, it 
is going to do more harm. We are sending the wrong signals. We 
are clearing the market. We are seeing life happening. We are 
seeing a reduction of the herd and we will get through this, 
and we need to roll up our sleeves and say how are we going to 
fix this thing to be the dominant dairy player in the world, 
and lead by example as we always have in this country. Thank 
you.
    [The prepared statement of Mr. DeJong follows:]

 Prepared Statement of Donald A. DeJong, Owner and Manager, Northside 
 Farms, LLC; Owner and CEO, AgriVision Farm Management, LLC; Owner and 
Manager, Natural Prairie Dairy Farms, LLC; Owner and Manager, DJ Farms, 
                           Ltd., Dalhart, TX

    Chairman Scott and Ranking Member Randy Neugebauer, thank you for 
giving me this opportunity to discuss with you and the Committee the 
economic conditions that face dairy industry today. More than just talk 
to you and the Committee about the serious economic conditions, I want 
to share with you and the Committee some of the tools available to all 
dairymen, regardless of size, that have assisted me and my farm through 
these difficult times.
    My name is Donald DeJong. I operate an integrated dairy farm 
operation in the northwest corner of the Texas Panhandle. I am the son 
of a Dutch immigrant who started milking cows for relatives in Southern 
California in 1958. Our family started our own farm in 1978 after 
accumulating the necessary capital to start. In 1989 I moved my family 
to near Dublin, Texas, west of Fort Worth where I started my own dairy. 
About 5 years ago I moved again to Hartley County, Texas where my wife 
Cheri and I established the integrated dairy operation we run today.
    I am here today to describe to the Committee the risk management 
tools which we have used to lessen the strain of the current market 
price disaster in dairy and to identify areas where the Congress can 
assist to make these tools better and better used by dairymen. By 
almost all standards, I operate what is called a ``large dairy''. 
However, what I am going to talk about today is available to large and 
small dairy farmers alike.
    I appreciate the Chairman calling this hearing to consider the 
economic conditions which now face dairymen. There are no words that 
can adequately describe how truly bad the economics are, they are just 
that bad. These losses are being carried by every producer regardless 
of region, regardless of size, regardless of marketing or no marketing 
orders, and regardless of co-op membership. It is broad, it is deep, it 
is painful. As I read and heard the testimony given today, there is 
clearly a call to do something to stop the pain. It is also clear that 
you, Mr. Chairman, and the Committee are interested in the plight of 
the American dairy farmer and want to do something to help us. We 
appreciate the sincere concern and desire.
    As much as we all would like some immediate cure from this, I 
caution the Committee and the Congress in its good hearted pursuit to 
help us in dairy farming. At this point in this crisis, the likelihood 
that your actions will hurt us are as great as the likelihood that you 
will help us. Let me explain.
    The losses are already made. Some of the results of those losses 
have some more time to play out, but the losses are set. Though we are 
not at the end, for those who will not survive, the die is already 
cast. The market response as to who is milking and where in the dairy 
industry will become clearer over the next several months to a year. 
Those actions are already in play and cannot be changed. It is 
unfortunate, but that is the reality in which we operate.
    The problem is simply stated: We have too many farms with too many 
cows producing too much milk for the markets that we have at this time. 
As an industry, we responded quickly to rising export demand 2 years 
ago. However, we have been slower to respond to lower export demand. 
That is the challenge: Milk has to leave, cows have to go, and, 
unfortunately, some farms will have to go as well.
    Due to a lot of factors, change cannot come soon enough to save 
those who progressed too far along the path of overproduction, and for 
many the result will be the end of their farming experience. It is too 
late.
    Without saying that I agree with the following scenarios, I think 
seeing how some of the recent proposals to help dairymen would play out 
will help explain my point. For example, the Secretary could raise FMMO 
milk prices. The Secretary currently has two open hearings regarding 
make allowances, yields, and other factors concerning the formulas that 
set prices in the Federal milk marketing orders. These formulas are 
also used in the Dairy Price Support Program. It is within the power of 
the Secretary today to use the record as it exists and roll back price 
reductions of late last year. Depending on what he did, such changes 
could easily add another 25 cents to 50 cents per cwt to the existing 
formulas and to producers in general. That is not small money, but when 
producers are losing dollars, it would not be enough. Even then, 
assuming he announced that action today, it could not be effective any 
earlier than for September milk. Producers would receive the benefits 
in the second half of October, or 3 months from now. It would be too 
little, too late. At the same time, if the decision was not based on 
sound law, facts, or policy, it could have other, negative impacts due 
to being rushed.
    There are also proposals that the Secretary immediately announce a 
higher price support price for powder, butter and cheese. Such a move 
would directly impact powder, maybe butter, but not necessarily cheese. 
Cheese has often been trading below the support price since January and 
there is no clear signal that the price support program is having any 
real effect. Even then, the higher prices now would only begin to 
impact product sold in August and would still not reflect in producer 
checks until September.
    Any other program that could be devised will take time to develop, 
implement, and have an impact on dairy. But, as I mentioned, they will 
not solve the problem of those deepest in need. There are many farms 
which will have already exhausted or are on the verge of exhausting all 
their resources. They will have ended dairying before any forced price 
relief happens. Farmers are counting days, not months.
    Each and every one of us dairy farmers is looking for some relief, 
a glimmer of hope. Farmers and their bankers and their creditors are 
looking for any excuse to hang on a little longer, lose some more 
money, hoping that before they lose it all, relief will have arrived. 
The announcement of, and holding, these hearings is already providing 
that glimmer. A program would be a beam of light. But as I noted above, 
it will be too late and the longer they stay, the longer this time of 
low prices will continue. The longer the necessary market correction is 
delayed, the more capital will be drained from the survivors leaving an 
even more weakened dairy industry. Because the problem is too much milk 
from too many cows from too many farms, keeping the current numbers up 
means the source of our problem is continued and relief is delayed. It 
is how the law of economics works.

What can and should Congress do?
    As we ponder things for the future it is important that after 2 
decades of milk diversion programs, whole herd buyouts, the milk 
assessment with refund, MILC, price supports, and the industry-funded 
CWT program, we still find ourselves with $9 milk. Over time, the laws 
of supply and demand will always win as markets seek efficient pricing. 
This is true in free markets and controlled markets. Free markets 
adjust relatively quickly in finding price equilibrium. History shows 
that markets which have been controlled, by government for example, 
eventually self-destruct--generally because prices were set too high or 
low and oversupply or shortages accordingly ensue. And markets, such as 
dairy in the United States, that are regulated are not immune from this 
economic force.

The role of price risk management today
    In discussions about today's situation there is a lot of talk about 
price volatility. In looking at the numbers, there is no doubt. We have 
seen within a twelve month period record high prices and record low 
prices. Dairy farmers are squeezed between commodity prices. Their 
inputs are grains and crops that have their ups and downs and their 
highs and their lows. These commodities are turned into another 
commodity--milk. It has ups, downs, highs, and lows. The cycles between 
inputs and outputs do not align. Today we are facing unprecedented high 
feed costs and equally historic low milk prices.
    The circumstances are such that is unlikely that any dairy farmer 
when considering all of the costs is making any money. Most are not 
even covering their operating costs.
    What role does price risk management have in this circumstance?
    First, it is important to understand that price risk management is 
not the same as guaranteeing a profit. The role of risk management is 
to limit losses to capital to levels which the farm can sustain and 
remain viable. In practical terms, what that means is that in the use 
of the multiple tools available to producers to manage risk (we will 
talk about those later) the goal is to maximize margins by establishing 
upper limits for feed costs and lower limits for milk. Sometimes in 
doing so it means fixing a loss but it is a known loss and one which we 
know we can afford. We do not have to worry about the losses being 
greater.
    Too often, dairy farmers look at the futures market and say to 
themselves they want a higher price. Rather than fixing what is 
available they expose themselves to the risk it will get lower on the 
chance it will get better.
    In summary, price hedging is not the same as price adequacy. 
Hedging is not always about hedge to profit, hedging to protect capital 
from losses.

What tools are available?
    There are many options available to handle this volatility and 
protect capital during downturns in prices and upturns in costs.
    Today in many markets producers have the opportunity either with 
their buyer or their cooperative to forward contracts. These options 
are available regardless of the size of the producer. Under this 
option, producers and buyers agree either to a fixed price or a fixed 
formula for a period of time. Both parties analyze the contract to 
insure that it is something they can afford to be a part of. At the end 
of the term of the agreement it may or may not be the best price for 
milk when compared to what others were paid, but it was the best price 
at the time it was negotiated and if properly understood is good enough 
to protect the farm capital for survival.
    I can and do participate in forward contracts for feed. Under these 
agreements we agree to purchase in advance hay and other commodities at 
fixed prices for the upcoming year. Again it is not a question as to 
whether we judged the market correctly, but whether we fixed our 
contracts so that we minimized losses or maximized profits depending on 
market conditions. Feed companies generally provide fixed price feed 
agreements with their customers. These contracts are available to all 
farmers regardless of size.
    Another means of managing risk is the use of the Chicago Mercantile 
Exchange Class III and IV prices. Contracts can be had for 200,000 per 
month or what a 100 cow farm would produce. Many cooperatives offer 
mini contracts to their members at lower volumes. Through the CME one 
can use the puts to floor prices and actually sell milk months in 
advance at higher prices. If milk producers had entered into forward 
contracts or hedged their milk sales in the fall, and in some cases 
earlier this year, this price protection may not have guaranteed 
profits, but the losses might have been in the range of $1 per 
hundredweight instead of $5 or $6 per hundredweight.
    When we look back on these difficult times and look at the 
survivors there will be many characteristics common among them and 
generally not found in those who fared less well. Aside from those who 
started with more capital, integrated dairy farming operations that 
produced most or all of the crops were better able to survive because 
the costs of their feeds were less. Smaller farmers tended to be in a 
better position in general than larger farms who only owned the dairy 
and purchased the inputs.

The Supply Management Programs should not be adopted
    Before further discussion, we must remind ourselves that the milk 
market is different from any other market in the world. Unlike corn, 
its raw product is perishable. Unlike perishable vegetables which are 
subject to annual planting decisions, its raw product cannot be 
``turned on or off'' at the individual producer level except by program 
liquidation. Unlike a domestic oil well, its raw product cannot be 
immediately sourced overseas under efficient market arbitrage. Unlike 
gold, its raw product is a solid staple in the diet of over half of the 
world's population. In my opinion, the fact that the milk market is 
very unique from other markets implies that it is even more important 
to understand and respond to milk's supply and demand laws. It goes 
hand-in-hand, then, that the normal process of supply and demand 
seeking equilibrium pricing should not be manipulated.
    The law of unintended consequences, but clearly predictable, will 
play out if supply management is instituted. By decoupling milk prices 
from market reality, the gaps between dairy prices and the ingredients 
from imported products or the use of substitute ingredients will over 
time further reduce the demand for milk. By decoupling the milk prices 
from the rest of market activity, producers will be exposed to higher 
risk of unprofitability because prices will not respond to costs of 
production. Technology for increasing production will stagnate. The 
value of more milk per cow will decrease.
    There have been a number of farmers who have been advocating 
instituting a supply management program for dairy. The ``promise'' of 
this program is that by managing supply, dairy farmers will always be 
profitable or, at least, not experience what they have now. Supply 
management has been in Europe for decades and they have the same low 
prices we do. Canada's system exists because they can balance off of 
the United States.
    The supply management program, irrespective of its merits or 
difficulties, cannot solve dairymen's problems today. The current 
difficulties will have resolved themselves, good, bad, or ugly, before 
any such program could be decided upon, let alone implemented and 
having an impact.
    The only way a supply management program can work is to isolate us 
from the world both in terms of imports and exports. It is difficult 
enough to estimate domestic demand; it is impossible to do so for world 
demand. Besides dozens of different economies, the ever changing value 
of the dollar, international events and politics, and different weather 
conditions all pose multiple factors to the equation. We in the United 
States are sitting on the cusp of a tremendous opportunity to grow our 
dairies to supply the world. We should not be shutting it down. 
Matching supply and demand to domestic market eliminates opportunities 
in world markets. When global demand comes, the U.S. will not have the 
milk.
    The institution of supply management will reduce the value of 
heifers. Limiting farm production means fewer cattle, less cattle means 
less value. Reduced value of cattle will reduce credit lines, balance 
sheets, and producer income regardless of size. The excess heifers 
unwanted in U.S. will be exported to develop and grow competing milk 
supplies elsewhere in the world. Smaller, retiring farms will be 
especially hit. Their animals will be worth less than with a dynamic 
market and opportunities to sell will be reduced.
    As I have shown, you can reduce the risk of volatility with 
existing marketing tools and do not need a program; in fact, supply 
management may interfere with the liquidity of those tools.

What Congress can do?
    Consider long term reform for the dairy industry that is done in a 
thoughtful and methodical manor. Decisions should not be made in 
``crisis mode''. It will be better to do nothing now and allow the 
market to find equilibrium while working toward the goal of 
transforming the U.S. dairy industry into a consistent global supplier 
of high quality dairy products.
    Eliminate the price support program. It is a burden to the U.S. 
dairymen and tax payer. The U.S. price support programs should not 
continue to be the balancer of burdensome global milk supply.
    Replace End product pricing with competitive pricing for milk.
    Institute a mandatory price reporting (analogous to mandatory price 
reporting in U.S. cattle trade.) We need greater transparency and price 
discovery in pricing of milk and milk products. Surveys of what all 
plants are paying for milk, inventories of dairy products, prices 
received for milk products. This information helps us understand what 
the dairy economy is doing.
    We need to maintain the integrity of the markets and those who 
participate in them.
    We can talk about other insurance or safety net so long as it does 
not hamper the sale and movement of milk and milk products domestically 
and in world markets. Thank you.

    The Chairman. Thank you, Mr. DeJong.
    What I find intriguing from these hearings, as we are 
trying to find a way to help the dairy industry, are the 
differences of opinions coming from each of you on what the 
solutions are. For example, let us first talk with one that I 
think is at the heart of this discussion, and that is the Dairy 
Pricing Support Program. Let us talk about that. The gentleman 
from Minnesota, Mr. Plourd, says we need to keep this pricing 
support system. My friend from Georgia, Mr. Williams, says we 
need to do away with the price support system. Now, we are 
sitting here and in order to come up with some of these 
solutions, we as a Committee are going to have to have the 
wisdom of Solomon. If one of you say the answer is to do away 
with the price support system and another one the issue is to 
keep the price support system, how do we grapple with that? So 
let me ask you about that. Why do you say do away with it, why 
do you see keep it, and what should we do with it, and why--
each of you, what is the problem? Let us start with that. How 
do we fix the pricing support system and why do we have such 
varying opinions on what to do, because we have only one road 
to go down here and we have to decide what road this is. So 
would you tell me why you two have such differences on that? 
And I would like to get everybody's opinion on that one because 
there is so much here that my first round of questions can't 
cover it all, but we want to have everybody have a chance for 
questions.
    My apologies. Thank you, my crackerjack staff, it wasn't 
you, Mr. Plourd. It was Mr. Welch.
    Mr. Welch. I would love to address that issue, Mr. 
Chairman. The U.S. dairy industry has been supported forever 
basically. It has been a very good floor and safety net for 
years and years and years. When the support program got into 
trouble was the mid 1980s and we probably--I have to be careful 
here, but the dairy industry probably allowed the support price 
to get too high. Maybe the cost of production wasn't where it 
should have been. The support price got to $13, and in that 
time period the government was buying all kinds of nonfat 
cheese and they had warehouses full of product that they 
couldn't possibly give it away to food nutrition programs. So 
we wanted to keep the support program because it worked great 
for years. Remember in the 1980s, there was no volatility. You 
bought cheese at $1.35 under the support and you sold it back 
at ten percent over that so you sold it back at $1.43, and when 
you look at the price swings of milk in the 1980s, there 
weren't any. As you have gone through the 1990s and the 2000s 
and 2010s, this variability, which to me is the key issue here, 
that is what is killing the dairy industry. Our consumers and 
customers don't like it. The export market doesn't like it, and 
our dairy farmers can't stand the bottom side of it. So we had 
a support that was too high, too much product in the 
warehouses. The suggestions at that time were supply 
management, a two-tier-type program. When you get a certain 
level of product, cut back on production. I still think those 
are viable options. I think we let the program support get too 
low where it was very meaningless, but nobody can argue the 
last 5 months if we didn't have the support at $1.10, cheese 
would have gone lower. It is not a coincidence cheese went down 
to 3 cents under support. I told Secretary Vilsack last week, 
if he raised the support price 20 cents, I bet cheese would go 
up 20 cents. It would be 3 cents under support. The big cheese 
people aren't interested in the government holding onto cheese. 
They are interested in holding onto cheese as cheap as 
possible. So I think the support is an integral part of it. And 
the other side of it is, any dairy economy in a modernized 
nation--we have the highest standard of living in the country. 
Europe strongly supports their dairy industry. The United 
States has always supported dairy, and agriculture, for that 
matter. In my opinion, if we think that the United States wants 
to be unsupported and unprotected and compete with the world 
market, it is going to be a difficult situation because New 
Zealand, Brazil, Ukraine, there are a lot of places out there 
that have lower cost of production.
    The Chairman. Mr. Williams, could you expound quickly why 
you differ?
    Mr. Williams. My point is, the support price is low enough 
now that all it does is, when it is enacted the government buys 
inventories and those inventories continue to depress the 
price. But, the future of those inventories are done away with, 
and if they sold back in commercial channels they continue to 
depress the price. We might be better off as dairy farmers to 
allow the bottom go down to wherever it was until the product 
clears out, and then the prices can rebound. It happens with 
whey now and whey has come back very quickly because it is not 
supported. It is kind of halfway in between and halfway out. If 
we increase the support price, somebody has to buy that product 
and that ends up being the government, and I don't think that 
is going to work in the long run.
    The Chairman. Just finally because I want to get to the 
Ranking Member here, but on this main point, could I just get 
kind of like a show of hands or nod of the head as to those who 
agree with Mr. Welch that it is an integral part, the price 
support system. Okay. You have one, two. Anybody else? Okay. So 
there are two folks favoring the price support system and four 
that don't. Is that right? Okay. We will come back to that a 
little later.
    I will turn to the Ranking Member now.
    Mr. Neugebauer. Thank you, Mr. Chairman. That was an 
excellent question because I think there is a lot of difference 
of opinion. One of the things we need to make sure is, when the 
government is making policy, it is making policy that is 
helpful and beneficial. If we have current policy that is not 
beneficial or helpful, then I think certainly that ought to be 
an issue that is on the table.
    Mr. DeJong, Mr. Plourd was talking about some tools that 
are available and you kind of alluded to some of those tools, 
and we talked about, I guess, that milk at one time about a 
year was $20. It is now less than $10. Was there opportunities 
last summer to lock in these high prices for a period that 
would have lasted into this year?
    Mr. DeJong. The market trades about 18 months out, and you 
roll through an 18 month contract, and yet, the market is 
always giving us opportunity not only to be profitable but 
really to avoid these huge dips, yes, and we have used those 
tools.
    Mr. Neugebauer. Is that available, Mr. Plourd, to small 
producers as well as large producers?
    Mr. Plourd. Yes. I mean, there has been a tremendous effort 
over the past 10 years to, if you will, democratize the 
process. Most producers shipping to cooperatives and many 
proprietary plants have access to programs. Some have a 25,000 
pound minimum contract, which captures more producers than the 
contracts in Chicago themselves. So smaller producers do have 
access to the programs through their plants and cooperatives.
    Mr. Neugebauer. Now, one of the things that I think we have 
unanimity on was that the price discovery for milk is somewhat 
problematic, that it is not just a matter of my milk is worth X 
today and I can get a daily price. In the current farm bill we 
actually provided for an opportunity for USDA to provide daily 
pricing, but it is my understanding they have not done that at 
this time. What is the issue that could simplify and make the 
milk industry more transparent and allow it to be able to use 
some of the market tools to hedge, to take some of the dips and 
valleys out of the industry? Mr. DeJong?
    Mr. DeJong. Sir, we do have, currently, some price 
reporting in the dairy industry, but it is not on a daily 
basis. If we went to a system very similar to the cattle system 
of daily reporting of contracts, and this is everything from 
cheese to fluid, so when our co-op sells five spot loads of 
milk at $1 over or $2 under, it should be immediately reported. 
This will help all market participants understand where the 
process is moving. As a dairy producer trying to hedge myself 
being able to make a more-informed decision and sometimes 
really having to step out and hope that that is the direction 
we are going. If there is product that shows up that is not on 
or reported what is coming in or out of the country and things 
like that, that transparency will only enhance the market, make 
it more efficient.
    Mr. Neugebauer. Yes, sir.
    Mr. Rozwadowski. I would like to comment on what has 
discouraged me as a dairy farmer from buying milk futures 
contracts or forward contracts. I think it was 2006, not long 
ago, the USDA did a study on forward contracting, and that was 
when it was still a pilot program. The purpose being, they 
wanted to know how much money farmers made or lost, and they 
reported that farmers lost $28 million. I approached my 
accountant about futures contracts, and that is all he does is 
dairy farmers in my area and he is probably the largest 
accountant for dairy farmers in Wisconsin or one of the 
largest. I asked him right out, how many farmers, just give me 
a rough percentage, how many of your farmers have gone into 
futures, and he says he has had 25, 30 percent. He says a lot 
of them have. And I say, again, percentage-wise, how many of 
those farmers made money at it, and he says I can answer that 
exactly, he says it is zero; I have never had one come out 
ahead. He says sometimes they buy futures for a short period of 
time and come out ahead. Then they will go into it again and 
they will lose. He says every one of my farmers have lost.
    Futures contracts and forward contracts are the only legal 
way for processors to pay less than the minimum legal announced 
milk price by the Federal Milk Marketing Orders.
    Mr. Neugebauer. Mr. DeJong, do you want to comment on that?
    Mr. DeJong. I may respond to that, that we are looking at 
do dairymen lose money on hedging. Well, if you say you are 
going to get the top price every month on every hedge, you are 
a genius and it ain't going to happen. It won't happen. But did 
you lock in a profit and did that accountant show your bottom 
line to make money. Sure, you had losses in your hedge account 
but you made money. You stayed in business. You are able to 
have a predictable growth pattern, and that is the point that I 
think that, as we mature in these markets, that is what I would 
call discipline and how do we get to that point to have the 
discipline, and not worry about what might show up as a hedge 
loss.
    Mr. Neugebauer. Thank you, Mr. Chairman. I see my time is 
expired.
    The Chairman. Thank you.
    Mr. Kagen, the gentleman from Wisconsin.
    Mr. Kagen. Thank you again, Mr. Chairman, for calling this 
meeting. If we had all of the people in dairy and those people 
who represent dairy come in to give testimony about the 
problems they are having, we wouldn't have time for much else 
that is going on here in Congress because most everybody I know 
that dairyland, Wisconsin, is underwater and losing $100 a cow, 
and these are markets that we can't control. I think what this 
Committee has to begin to focus on is those factors that we can 
control, that we can influence, not necessarily the world and 
global market. I don't think this Committee can have any effect 
whatsoever about $9 cost reduction of milk over in New Zealand. 
What we have to do is make certain that we continue to have the 
resources in our dairy states and dairy farmers so we continue 
to become food independent.
    Mr. Welch, in your testimony you brought up a number of 
important factors that influenced the price of milk 
domestically, in particular, the milk protein concentrates, the 
MPCs. My understanding is, there are no limits at the present 
time for any corporate import of MPCs. Is that your 
understanding?
    Mr. Welch. That is my understanding. There are import 
limits on nonfat and butter and cheese, but as you read the 
data, there are a lot more MPCs coming back in, and every month 
there are more, and there is a lot of butterfat coming in in 
the forms of concentrated milk fat and other milk fat products. 
One of our main competitors, we do a lot of business for 
McDonald's Cheese and we are competing on price, and when you 
make a processed slice, you use butter. We use domestic butter. 
They use imported butter, 40 cents difference in price. It is 
hard to compete on a level playing field when things like that 
are happening.
    Mr. Kagen. You also mentioned in your testimony about the 
difference between active and passive buying at the CME. I 
would like you to explain in some detail for other Members of 
the Committee, and our staff, what you think should be taking 
place there.
    Mr. Welch. Well, my suggestion is that when there is an 
offer at the support price, the CCC should automatically buy 
it. You know, if the support price is $1.13, which it has been, 
why has the block cheese price been $1.07 to $1.10? Well, the 
reason is, there is a lot of convoluted things we have to go 
through to offer the cheese. By the time we get the grater set 
up it is 3 weeks later and gee, will the cheese market be back 
up by then. We don't know. So it doesn't work. The floor on 
support is not really $10 milk. Cheese is about 60 cents, 
70 cents less, it appears. But if the CCC bought everything 
offered at the support, that would be the support. It would be 
$1.13 where it is intended. Now, the USDA would say, well, the 
quality or find some other issues with it. Well, find somebody 
to shred it and put it in the food service program or there are 
other things you can do with the cheese.
    Mr. Kagen. You also had a suggestion that we could 
harmonize the packaging standards between commercial packaging 
and also the CCC.
    Mr. Welch. Well, these would have to go hand and hand, they 
would have to, because the 40 pound blocks offered on the CCC 
have standards and they are not much different than the 
government standards. There are some issues on bag tightness, 
and I am not even sure if they need sleeves anymore like they 
used to. But my opinion, I don't want to get in trouble here 
but those standards are roadblocks to make it difficult to 
offer cheese.
    Mr. Kagen. Let me ask this of the entire panel, whether or 
not anyone would object to somehow finding a way forward to 
tying the price of MILC price support in some way to the price 
that consumers are paying at the markets, the grocery stores. 
Does anybody object to that? Well, we have one person that 
would object, the French guy over here, is it?
    Mr. DeJong. Donald DeJong, Dutch.
    Mr. Kagen. So you think that is a bad idea? The old idea of 
milk-to-feed ratio didn't work out so well in this marketplace. 
I haven't noticed anything in the grocery stores where the 
prices are going down for the consumer, but they certainly went 
down at the farm.
    Mr. DeJong. I am not here to defend retailers, but their 
risk structure is a lot different than my risk structure. I do 
not want their risk and I do not want to duke it out like they 
duke it out in their stores. When we set prices arbitrarily by 
a few people, it is market distortion and I will vote forever 
that thousands of people making thousands of decisions daily 
will move this market where it needs to be quicker and faster.
    Mr. Kagen. So you are suggesting that at the CME there are 
too few purchasers and sellers, it is too restrictive of a 
market?
    Mr. DeJong. I think we should encourage everything we can 
do to have that transparent market grow and encourage that.
    Mr. Kagen. So you would be in favor of transparency of 
prices of milk that are forward contracted as well if we de-
identify those people----
    Mr. DeJong. Every transaction that happens in dairy should 
be reported the day it happens. Yes, I am in favor of that.
    Mr. Kagen. Thank you. I see that my time is expired. Thank 
you for being here today.
    The Chairman. Thank you very much, Mr. Kagen.
    The gentleman from Virginia, Mr. Goodlatte.
    Mr. Goodlatte. Thank you, Mr. Chairman.
    Mr. Welch, you suggest in your testimony that USDA should 
be an active buyer on the Chicago Mercantile Exchange as 
opposed to serving its traditional role of being a market of 
last resort for sellers. Are you suggesting that USDA should 
actively bid on the private market?
    Mr. Welch. No, I am suggesting they would have a standard 
bid. It would be the support price, so if somebody offered at 
the support price and somebody else in the industry didn't buy 
it, they would buy it. That would guarantee that the market 
would not go below the product support price. This product 
support price was never intended to really be at $1.08. I mean, 
we have a product support price program. First of all, we took 
out the processed-cheese side of it. That weakened the program. 
And now the prices are 4 cents or 5 cents under it, and the 
USDA is not buying any product.
    Mr. Goodlatte. Would there be any kind of a mechanism that 
would stop that from becoming excessive purchases of these 
commodities? Because I presume they would have to take delivery 
on these items.
    Mr. Welch. Quite likely there might have to be a volume 
limit. I don't know.
    Mr. Goodlatte. Does anybody else want to comment on that? 
Mr. Plourd?
    Mr. Plourd. I think harmonizing the packaging would 
accomplish the same goal essentially. I mean, if people had a 
choice between offering at the CME below support or offering to 
the government at support but the packaging, everything was the 
same, it would come closer.
    Mr. Goodlatte. Does anybody else want to comment on that? 
If not, Mr. Plourd, is there any combination of steps 
individual producers can take in today's market to better 
position them to ride out the current economic crisis?
    Mr. Plourd. Well, yes, I think that the risk management 
tools that I discussed do exist, and I think that the point of 
using these tools is not to--you would expect that producers 
would limit the variability in their price, not always get the 
high or get the low. I mean, our studies have shown that 
producers using forward contracts versus producers who don't 
end up about the same at the end of the day dollar for dollar, 
but the huge difference is that the guys who are contracting 
have a $4 or $5 swing between high and low and the guys who are 
not have a $10 swing between high and low. So it is a way to 
manage individual volatility on an ongoing basis, and most 
dairy producers have access to the tools, and my opinion, my 
testimony is that the pricing system complicates the use of 
those tools. It is often difficult to understand how to get 
from point A to point B, given the complexities in the pricing 
system.
    Mr. Goodlatte. Thank you.
    Mr. Rozwadowski, am I close on that pronunciation?
    Mr. Rozwadowski. Perfect.
    Mr. Goodlatte. You also had another interesting suggestion. 
You want the Congress to enact an $18 per-hundredweight price 
floor. Do you know what the impact of that would be on 
government purchases?
    Mr. Rozwadowski. That immediate step would be temporary 
like until the end of the year, until we can get a new pricing 
system going, and on a temporary basis. I don't believe it 
would have too much effect on supply at all because right now 
farmers are so far behind in paying bills and debt, and as each 
month goes on you are even more farther behind.
    Mr. Goodlatte. So they are not going to increase production 
because they don't have the capital to buy more cows? Is that 
what you are----
    Mr. Rozwadowski. Well, they are going to use the money to 
pay their bills and catch up on the past bills that they have 
been getting so far behind on, and that is going to last for at 
least a few months or quite a few months.
    Mr. Goodlatte. But you don't have any cost estimates on 
that proposal?
    Mr. Rozwadowski. No, sir, I do not.
    Mr. Goodlatte. I wonder if those of you who have experience 
using a forward contract for your feed purchases or milk sales, 
were you ever charged or paid a price different from that 
specified under the terms of your contract? Nobody. And for 
those of you who have experience using a forward contract for 
your feed purchases or milk sales, were you ever coerced into 
entering a contract? And for those of you with those same 
experiences, have you ever turned down a contract offer that 
did not work within the financial plan of your business? Have 
any of you used forward contracting, I guess is my first 
question. What is your experience with it?
    Mr. Hoese. Well, we have in the past. We have not done it 
for the last couple years. Like the gentleman next to me said, 
we pretty well broke even. But our creamery charge is a 
25 cents per hundredweight which you do contract to protect the 
cream and to pay the broker. There are some fees involved in 
forward contracting of the milk, so that is what I will comment 
on that.
    Mr. Goodlatte. Is that why you are not participating in it 
now?
    Mr. Hoese. Well, at times we think about it because we are 
diversified, we have other crops we do some forward contracting 
on and we should be--my son is more or less in charge of the 
dairy part of it. You know, he wants to and I say go ahead. By 
the time we go ahead, then the price has dropped again so it is 
a matter of communication between myself and son, so that is 
part of the issue, I guess, right there.
    Mr. Goodlatte. Thank you, Mr. Chairman.
    The Chairman. Thank you. I thank you, Mr. Goodlatte.
    Let me ask each of you this question. Why doesn't the 
United States produce more milk protein concentrates and why do 
we produce more nonfat dry milk? Can we start with each of you? 
Mr. Welch?
    Mr. Welch. Well, basically I think it is pretty simple. The 
milk protein concentrates have always been cheaper from New 
Zealand and Australia. We have had attempts over the last 10 
years to produce our own milk protein concentrates, but our 
milk prices are high, and it is just--if we are going to let 
them free access, that is why we do have tariffs on cheese and 
butter or we wouldn't be producing cheese and butter. It is all 
about price. Our milk prices are quite a bit higher than theirs 
and they can produce it quite a bit cheaper. I think it is that 
simple. The same with caseinates. Caseins are subsidized out of 
Europe and we have never been able to make caseinates in this 
country where we could make money because they are subsidized.
    The Chairman. Are you saying the same thing about why we 
produce more nonfat dry milk?
    Mr. Welch. Well, there are a couple answers there. One of 
course is there is a support program so they know they have a 
market of last resort, and the domestic nonfat market has been 
fairly strong. It is just in the last 20, maybe 20 years that 
they have differentiated the proteins and gone to milk for more 
protein concentrates and some other products.
    The Chairman. Mr. Plourd, do you agree?
    Mr. Plourd. Yes, I would say that the competitive cost of 
production of MPC is cheaper elsewhere. I guess I will agree 
with Mr. Welch on both counts. I think with nonfat, the biggest 
reason we make so much nonfat is because the government will 
buy it. We sort of devolve into a last resort kind of 
mentality. Now, if you are going to make a big investment in a 
plant, you are going to make it in something--all things being 
equal, you know that the government will buy nonfat from you at 
80 cents per pound. They don't have a support price for MPC, so 
where are you going to put your capital investment, and that 
tends towards nonfat instead of the others.
    The Chairman. Mr. Williams, do you agree?
    Mr. Williams. The trouble I see with the imports is, 
industry has learned to use these imports at a cheaper rate to 
go in the cheese vat and manipulate cheese prices. Our cheese 
prices are what sets the price of milk all across the United 
States, and as more of these products are brought in, they go 
in the cheese vat, increase the cheese yield and the industry 
has become very adept at using these imports to control cheese 
price.
    The Chairman. Mr. Rozwadowski?
    Mr. Rozwadowski. Yes, it is a profit thing. The processors 
can produce powdered milk and make more profit on that even at 
price support levels than they can making a profit on MPCs, 
given the fact that they can buy imported MPCs so cheaply.
    The Chairman. And Mr. Hoese?
    Mr. Hoese. I guess I agree with what the gentlemen had 
previously said so I don't have any further comment.
    The Chairman. Mr. DeJong?
    Mr. DeJong. Sir, in the Southwest and Texas, we have, 
really, a joint venture plant between DFA and Fontera that 
makes MPC in this country, and it is a plant that we use it as 
our cow balancer. It is the place where we put the milk when we 
don't have anywhere to put the milk. We can take that plant 
from zero to 160 loads a day, and to manufacture at that time 
when our cows are giving us more milk that the market doesn't 
need. It is an efficient way to do it. Should we have gone out 
and built a nonfat plant? Our tea leaves say long term-wise, 
no. But if you are risk averse and the system in place that we 
have today would tell us as a cooperative, build a nonfat plant 
and shove it to the government. We will make allowance and we 
will make a profit in that plant. I don't know what the price 
of my product is going to be to my farm, but that is not what I 
want to do. I want to make something that is going to sell and 
not hold over my head, and if we use it that way, we can make 
MPC in this country efficiently.
    The Chairman. I see. Let me ask you one other question. 
There has been a lot of discussion about supply management that 
different dairy organizations have proposed. What is each of 
your opinion on this option as a management tool to help 
stabilize prices?
    Mr. DeJong. I believe that any market intervention to that 
scope will end in tears.
    The Chairman. Will end in tears?
    Mr. DeJong. Tears. Supply management is either going to end 
with a surplus or not enough milk, a deficit, and I don't know 
how to set that fine tune. When you have a country, Mr. 
Chairman, that has different costs of production from coast to 
coast, different marketing opportunities, it will be very, 
very, very difficult. I don't know how to get it done, and 
obviously with all the programs we have had today, MILC, CWT 
and everything else, we are here talking about $9 milk.
    The Chairman. I see. Anyone else care to comment on that? 
Yes, Mr. Rozwadowski.
    Mr. Rozwadowski. As far as that goes, farmers may be a 
unique bunch, especially in this country when prices tend to be 
down, milk prices tend to be down. They strive and do 
everything that they possibly can to increase milk production 
of their cows to try to overcome this deficit. Now, when prices 
are good, of course, we fall into the category of adding on to 
your farms, adding on to your herds and increasing the supply. 
So it works on both ends, and I don't see any other way that we 
can stop this or curb this without some form of supply 
management.
    The Chairman. Okay. Thank you very much.
    Mr. Conaway, the gentleman from Texas.
    Mr. Conaway. Thank you, Mr. Chairman.
    A couple things. Mr. Welch, would it be okay if the USDA 
sold into that market, all that stuff they are buying at 
support prices, they turn around and sell it back into the 
market?
    Mr. Welch. At ten percent over?
    Mr. Conaway. No, just sell it at market, at $1.13. So you 
want protection of the downside but you don't want the upside 
competition?
    Mr. Welch. Well, I was assuming they would send it in at 
what the program now, at 110 percent over, but they could. They 
could sell it to--we could buy it and shred it.
    Mr. Conaway. Well, what if the USDA sold it, though? Would 
you be okay with them selling it on the CME, this huge 
inventory that they are buying?
    Mr. Welch. Sure. Quite likely, they could sell it at $1.40 
as the market went back up. It would be the same cheese. It 
happens a lot. People buy and sell the same cheese in the CME.
    Mr. Conaway. But not the Federal Government cheese. It is 
not that huge inventory that they buy. That doesn't go back 
into the market at those high prices, does it? Okay. Help me 
understand. Somebody mentioned packaging and differential 
between the CCC and CME. I know there is a difference but is 
there a distinction between them? Is there a reason why there 
is a difference in lot size or package size or whatever it is?
    Mr. Welch. I have been told it is for keeping quality. The 
program I am familiar with is the barrels, and the barrel is 
definitely a higher price, firmer fiber barrel, seals up 
better, probably costs 2 cents to 3 cents more. On the 40 pound 
blocks, we don't make any 40 pound blocks, but I understand 
there are some different standards on the block itself.
    Mr. Conaway. On the price production management system, 
there are price production management systems that do work. It 
is typically the market in non-ag businesses because the price 
will decide whether or not something gets sold or not, and then 
if you can't sell it and if you don't have that buyer of last 
resort, the taxpayers. We talk about the government buying 
stuff. The government really doesn't have any money that it 
doesn't take from taxpayers or borrow from somebody else, and 
so there is a management system that would work. I am assuming 
none of you are really interested at that point in just a free 
market for milk at this stage. Thank you, Mr. Welch.
    I had one other question, Mr. Chairman. The risk management 
tools that are available, are there barriers to using those 
other than the 25 cents fee that Mr. Hoese mentioned? Are there 
other barriers that are systemic, something that we could fix? 
I can't fix the decision between you and your son whether or 
not you guys want to pull the trigger. I can't fix the 
accountant's analysis of whether or not it is a good deal or 
not but are there things that could be done contract-wise or 
market-wise that would make those tools a true risk management 
tool that you would use as opposed to just theoretically 
thinking about?
    Mr. Plourd. In my estimation, it is about simplification. 
We have four classes of milk, different calendars operating 
that set the price, and I think that some effort to harmonize--
--
    Mr. Conaway. Mr. Plourd, thank you. We hear a lot of 
conversations that a lot of the commodities contracts aren't 
exactly the same. They kind of look like contracts. You buy or 
sell one thing that kind of looks like something you bake. Have 
you looked at if you did use a contract at the Class III 
forward price how that compared with--can that be used as a 
risk management tool for folks who actually produce and they 
sell against this complicated, convoluted system where you have 
a little bit of Class I, II, III and IV make up the price you 
actually get. Is the contract near enough to be able to use 
that or are they afraid they are not going to get the best 
price for that?
    Mr. Plourd. I think, from a mathematical correlation 
perspective, it does work. As a practical matter, it is not 
something that is just--people snap to it and understand it 
right away in terms of reconciling their own milk check with 
the trade instrument. It does work. Correlations are good but 
it is complicated to get from milk check to Class III.
    Mr. Hoese. If I may, if you look at Minnesota and 
Wisconsin, the most average age of a dairyman is probably 
between 55 and 60 so that is one of the curtailing elements 
that they don't contract now. Some of the larger herds do a lot 
of contracting. That is what we see in Minnesota.
    Mr. Conaway. Thank you, Mr. Chairman. I yield back.
    The Chairman. Thank you, Mr. Conaway.
    Well, we have talked about supply management, we have 
talked about the pricing. Let me ask you all each about the CWT 
program. It seems to me that through herd reduction we could do 
two things: we could decrease the milk supply and stabilize our 
price for fluid milk. Is that not agreeable with everybody? Can 
we all get on the same page with that one? Is there anybody 
that agrees with that? Are we all happy with the CWT? Is there 
anybody that has a problem with that? Mr. Hoese?
    Mr. Hoese. Currently, I am not paying into CWT, and of our 
450 producers, there is only probably a handful of producers 
that do pay in the CWT. One of the things that I see as an 
issue for myself especially is, the last go-around they paid 97 
percent up front and another ten percent if you leave your barn 
empty. I have heard of one producer already went to CWT, sold 
all his herd, next day he is buying heifers, he is going to 
forego that ten percent just to start milking again, so that's 
one issue I have with CWT that I don't agree with.
    The Chairman. Okay. Mr. Rozwadowski?
    Mr. Rozwadowski. Yes, I have to agree with Mr. Hoese. I 
have had one farmer that I saw myself that sold his herd on CWT 
and at the same time they were hauling them out, they hauled in 
springing heifers and he never missed a single milking. I don't 
believe the program is working and has any chance of working.
    The Chairman. Mr. Williams?
    Mr. Williams. I don't think most people would say it is 
working real well with $9 milk, getting rid of enough cows to 
control production.
    The Chairman. Mr. Welch?
    Mr. Welch. I think the concept has a lot of merit. It is a 
supply management program. Most of the panel doesn't agree with 
supply management but, yes, it has some pitfalls, and a program 
like that has to be mandatory. You can't have winners and 
losers and parts of the country that are in or out. But I do 
think it has some potential.
    The Chairman. Mr. DeJong, did you want to add anything?
    Mr. DeJong. Sure. Currently, our cooperative does pay into 
CWT. Again, I am not a fan of market initiative but at this 
current crisis, if you look at a respectful way to retire, this 
is a respectful way to retire at the values that they are 
giving to get us out of a short-term crisis here. Will it work 
perfect? No. Have I voiced my opposition to it within my 
boards? Yes. But the hopeful sign was at least initially we 
have 67 percent of the industry together to agree on something, 
and it has and will make an impact on this industry. Has it 
been administered perfectly? No. Will it get renewed again? I 
don't know. But it has forced industry to come together and do 
something, so that is a positive.
    The Chairman. All right. Do any of you currently 
participate in the Livestock Gross Margin-Dairy insurance 
program? Anybody? Getting to a way to stabilize the industry, 
do you think moving towards a single nationwide marketing order 
would help create some stability in the industry? Let us start 
with you, Mr. Welch.
    Mr. Welch. I do. I think if you had one order, you would 
have not all these other issues about orders, shipping, and all 
the other requirements.
    The Chairman. Do you agree, Mr. Plourd?
    Mr. Plourd. Yes. I mean, there is always a lot of 
particulars but in the realm of simplicity, I think it would go 
a long way.
    The Chairman. Good. Mr. Williams?
    Mr. Williams. I guess it would be more simple but as we 
consolidate orders, we decrease production, especially in the 
Southeast where it is short. We are a high-cost region of 
production, and with a single price we are probably going to be 
at a greater disadvantage than we are now.
    The Chairman. But you say it could help create some 
stability?
    Mr. Williams. I said it might be more simple than the 
conditions are now, but simple does not mean that the dairy 
industry in the Southeast would survive with a price that was 
pretty well based on cheese, and when we produce a fluid market 
and our price cost in the Southeast, we just cannot produce for 
the cheese market.
    The Chairman. I see. Mr. Rozwadowski?
    Mr. Rozwadowski. I would agree with Mr. Welch's comment on 
that one.
    The Chairman. Okay. Mr. Hoese?
    Mr. Hoese. I guess I would agree with the previous 
gentleman but who would run it and manage it. I guess that 
would be my major question. Where would you start from? A lot 
of unknowns here, I guess.
    The Chairman. All right. Mr. DeJong?
    Mr. DeJong. Sir, any movement for less gamesmanship in the 
Federal Milk Marketing Orders, and they have a lot of 
gamesmanship between areas, so any movement in that direction 
would be good.
    The Chairman. So you agree with that?
    Mr. DeJong. Yes.
    The Chairman. Well, this is wonderful. We are making 
progress here. Mr. Williams is a little hedging but I think 
that we got one area of agreement, which is great. Okay.
    Mr. Thompson.
    Mr. Thompson. Well, first of all, thank you, Chairman and 
Ranking Member, for the privilege of sitting in with this 
Subcommittee. I very much appreciate this series of hearings 
that you have been doing. It is very important.
    I have information that was collected from the Center for 
Dairy Excellence regarding my Congressional district. It shows 
that the economic impact of dairy in Pennsylvania's 5th 
District, it is over $1 billion, and these numbers are striking 
in terms of the discrepancy. The farm revenue has just over 
$200 million, and I would fathom to say that frankly the 
farmers' checkbooks are in red ink. The discrepancy there is 
just incredible, and so this is such an important hearing. 
Obviously we are looking at those farmers' checkbooks, that is 
the important thing here, because we need them to stay in 
business and continue to feed us and clothe us and to house us 
and all the things that comes off of our family farms. We are 
focusing, specifically, on dairy this afternoon and look to the 
other side of that balance sheet in terms of input costs. I am 
just curious, Mr. DeJong, how much does input cost? We heard a 
lot about imports and obviously you compete in that global 
market, and, obviously, costs impact the balance sheet. How 
much in your opinion do input costs, particularly in our 
country in the form of taxes and regulations, energy prices, 
how much does that put U.S. dairymen at a disadvantage?
    Mr. DeJong. When we say tax, regulation and energy, our tax 
structure, I would say is benign for me as a dairyman. The 
regulations, we are looking at investments in--what we talk 
about is upgrading our systems with nutrient utilization plans, 
comprehensive nutrient management plans, which are very, very 
expensive. It is forcing growth, forcing a guy to get bigger 
because they have to get more cows to cover the costs of that 
infrastructure. So that is a big issue, and then energy swings 
have been impacted hugely, and it is very hard for us to figure 
out as a farmer and an irrigator in west Texas, we use a lot of 
energy, and it has been very difficult for us on the energy 
side.
    Mr. Thompson. Thank you.
    Mr. Williams, if you were the milk czar and you had the 
ability to do whatever reform is necessary to the Federal Milk 
Marketing Order, what would you see or what would you like to 
see?
    Mr. Williams. The gamesmanship that has been alluded in the 
Federal orders, the fact that supplying a Class I market has a 
higher cost that producing, say, for a cheese market because of 
swings in production in the Southeast versus demand, and that 
would be two of the ones.
    Mr. Thompson. Mr. Hoese, any thoughts on that?
    Mr. Hoese. Again, that is a loaded question. If I was the 
milk czar, I probably wouldn't be sitting here right now. You 
know, every area in the nation is different and cost of 
production is different in areas. To be a milk czar, whatever 
you want to call the person in charge of the milk market order 
or whatever, the task would be overwhelming. My costs of 
production might be a little lower or might be a little higher 
than some of the gentlemen sitting here, so I think it is 
whatever it is in the area that you are in, I don't see a milk 
czar taking care of the questions that we have here. I think it 
is going to be tough enough for you gentlemen to solve this and 
to work through this, and a year from now it might be $18 again 
on its own. We don't know that right now. You know, when we 
were thinking about contracting milk in January, it went up to 
$16. We didn't do it. Everybody was telling us it was going to 
be higher by then. We didn't contract milk by then. We should 
have then. We would have been money ahead but we didn't, so to 
your question, I really don't have a simple answer even though 
I spun around here a little bit, so sorry about that.
    Mr. Thompson. That is all right. It is not a simple 
question. I understand that.
    Mr. Rozwadowski, right now the safety line that I think I 
just read on Friday, the USDA is helping to ease up credit to 
help folks be able to borrow. There was something like that, 
that I don't want to misquote it, but I have heard discussions 
about the lifeline and the lifeline being credit. It seems to 
me that is a short-term solution obviously to keep farms 
surviving. How hard is it for our farmers to be able to pay 
this debt back?
    Mr. Rozwadowski. It is impossible right now at $10 milk. It 
is impossible. Most farmers are not making their mortgage 
payments. A lot of banks are allowing them to go down to the 
status of paying interest only, and those farmers are 
struggling something terrible just to pay that interest.
    Mr. Thompson. Thank you, Mr. Chairman.
    The Chairman. Thank you, Mr. Thompson.
    Let me ask each of you this question. We have addressed 
different things today, but if you had to prioritize what we 
need to do to help the current dairy situation, what would each 
of you list as the two most critical things that we should do, 
or that should be done in the short term to alleviate the 
current dairy situation? We would like to get what each of you 
would recommend as the two most critical things that you feel 
we need to do for the short term to help the dairy industry. 
Let us start with Mr. Welch.
    Mr. Welch. I think the two things that would immediately 
help would be to raise the support price, and I would recommend 
20 cents. I don't think the government would buy any cheese at 
$1.33. And raise the MILC payment, go from 45 to 90 percent. 
That would probably be $2\1/2\-$3. It would not be cost of 
production but it would at least keep some people in business. 
I strongly fear if we don't do something, we are going to have 
a mass liquidation and we won't have enough milk. I think it is 
a domino thing. When one starts going, we might see a lot of 
people exit the dairy business if we don't give something----
    The Chairman. I want to get this right. The first thing 
would be to raise the support price by 20 cents.
    Mr. Welch. Yes, I gave it a number, on cheese.
    The Chairman. On cheese?
    Mr. Welch. Yes.
    The Chairman. Okay, and the second one?
    Mr. Welch. That the MILC calculation, the 45 percent 
payment, make it 90 percent.
    The Chairman. It is 45 percent now, you want to make it 90 
percent.
    Mr. Welch. Yes, and those would be short term. As a matter 
of fact, you wouldn't have near as much MILC payment because of 
the support price increase. I haven't done the calculation but 
there wouldn't be a very big MILC payment.
    The Chairman. Raise the support price by 20 cents on 
cheese, and the MILC from 45 percent to 90 percent, raise the 
payment?
    Mr. Welch. Sure, but if you raise the support price by 
20 cents, the milk price goes up $2. I suspect the MILC 
payments may not even exist at that level. I am not sure.
    The Chairman. Okay. Good. Thank you.
    Mr. Plourd?
    Mr. Plourd. I am not sure I should be in the habit of 
disagreeing with one of my better customers. I would say two 
things. I think if I were in the dairy producer lobbying role, 
I would say that one of the things that struck me as curious 
was USDA's decision to eliminate the purchases of processed 
cheese under the support price program. It was a way to get an 
easier quality standard into the government would have cleaned 
up the barrel market quite a bit sooner. For myself, I would 
say with all due respect, I would say that we should just wait 
because we have had these--I mean, every 3 years we are back at 
the same table basically discussing the crisis in the dairy 
farm economy. I think that we ought to make a decision to have 
these hearings when prices are at higher levels. I mean, we 
tend to wait until we get way too low before we try to find a 
fix and we try to fix things. I am not sure we make them 
better. And then the market tends to take its course and will 
turn higher. So that would be my comments.
    The Chairman. To wait?
    Mr. Plourd. I have the opinion that already today market 
forces are at work in such a way that we will see higher milk 
prices by the fourth quarter of this year as well as on into 
next year.
    The Chairman. Okay. That is good to know.
    Mr. Williams?
    Mr. Williams. I somewhat agree with the last one. I am not 
sure there is anything government is going to do in the short 
term that is going to make a significant difference besides 
handing out money. I don't think that is going to work real 
well and we ought to be working on more long-term solutions 
that balance supply with demand and cut out the gamesmanship on 
Federal orders and that type of thing, and find a true market 
that cannot be manipulated by a few traders. I think the long-
term solutions are much more--even though we are going to have 
a mass exodus of dairymen, it is hard to enact anything that is 
going to slow that, that is not going to mess with the market 
in the future.
    The Chairman. So you feel we should do nothing?
    Mr. Williams. Unfortunately, I don't know anything that 
they can do besides, like I said, hand out money, that is going 
to make a significant difference.
    The Chairman. And you don't want us to do that?
    Mr. Williams. Well, if it was given to me, it would be 
fine, I guess, with no strings.
    The Chairman. Answered like a good man from Georgia.
    Mr. Rozwadowski?
    Mr. Rozwadowski. First I would like to see an $18 floor 
price and let that price come from the marketplace, not the 
taxpayers. That would get some money into the dairymen's 
pockets so they can pay some bills. And second, one thing that 
we could do that would really make a difference is, stop the 
imports of cheese, MPC and dairy ingredients and caseinates and 
all that stuff.
    The Chairman. Okay. Eighteen dollar floor price as 
determined by the market, not anything we would do. Is that 
what you are saying?
    Mr. Rozwadowski. I don't think so. A set price announced by 
the USDA of $18 or near that figure.
    The Chairman. What is it now?
    Mr. Rozwadowski. There is none.
    The Chairman. There is none? Okay. Thank you. Eighteen 
dollar floor price set by USDA. All right. And stop imports of 
cheese. Is that correct?
    Mr. Rozwadowski. Yes, sir. Well, cheese and ingredients 
like MPCs that we use in our cheese vats to make more cheese.
    The Chairman. All right. Thank you.
    Mr. Hoese?
    Mr. Hoese. I guess one important thing we should really 
consider right now is MILC payment. There is a production cap 
on that, and from my herd of 120 cows, I am going to hit that 
production cap in about 10 months, so if we could raise that 
cap or allow that cap to extend, I think that is one of many 
concerns if there is no price increases of our dairy milk, so 
that is one issue I have. I agree with the gentleman on the 
end, raise it 20 cents a hundredweight for the cheese, just get 
a little stimulus into the program. I am a little concerned 
about the $18 floor price because that is going to lead to 
overproduction again, but if you raise it a couple dollars a 
hundredweight, it should help to alleviate some of the current 
issues.
    The Chairman. Okay. Thank you very much.
    Mr. DeJong?
    Mr. DeJong. Sir, I do believe in do no harm.
    The Chairman. Hold on a second. Let me go back.
    Mr. Hoese, you said raise the MILC.
    Mr. Hoese. Yes, there is currently a cap, like 1.9 million 
pounds or something in a year or something like that, and like 
I said, my herd is going to reach that in about 10 months.
    The Chairman. What would you raise it to?
    Mr. Hoese. Double it, because we have to help the gentleman 
next to me too, and I am sure he probably ran out of his 
already for this year or close to it. In 10 months he said he 
will be out of his MILC cap. He will be at the cap. But we 
should double it to help--it is just 120 cows. If you split 
that between myself and my son, we each have 60 cows, which is 
the average herd probably in Minnesota right now and Wisconsin, 
so everybody looks at you with 120 cows, you got a lot of cows, 
but----
    The Chairman. So what would that cap be?
    Mr. Hoese. It is 3.6-3.7 million pounds, and I think that 
would probably help a lot right now with the current situation.
    Mr. Welch. The current cap is 2.95 million pounds.
    Mr. Hoese. Okay. Thank you.
    The Chairman. Okay, 2.95 million pounds, so you are looking 
at 6 million pounds.
    Mr. Hoese. Six million pounds. Thank you.
    The Chairman. Mr. DeJong?
    Mr. DeJong. Mr. Chairman, I think that this market has gone 
through a cycle and we are coming out of it. When we send 
signals out there that we are going to keep and hold these 
herds and develop a program, it is going to send a signal, it 
is going to make this thing last longer. Right now, as hard it 
sounds, is do nothing, is to let this thing--the futures 
markets today are responding and saying yes, we do believe that 
the price recovery is at hand and is coming. Herd reduction is 
here. We are at the trough, and the simple fact that we are all 
meeting here again is extending this longer for everybody in 
the dairy sector to get their arms around what the problem is 
and understand how to solve it. The other thing I would 
encourage is, just move to mandatory price reporting in 
everything already and that will encourage a more transparent 
market.
    The Chairman. Mandatory price reporting?
    Mr. DeJong. Yes, sir.
    The Chairman. All right. Thank you each very much. Mr. 
Conaway, anybody? All right.
    I want to thank all of our witnesses for coming today. This 
has been a part of a series of hearings that we will be 
holding, and we will be holding another hearing next Tuesday on 
July 28. I look forward to our continued discussions with our 
Subcommittee, our producers and our processors.
    Under the rules of the Committee, the record of today's 
hearing will remain open for 10 calendar days to receive 
additional material and supplementary written responses from 
the witnesses to any questions posed by a Member of the panel.
    The hearing of the Subcommittee of Livestock, Dairy, and 
Poultry is thereby adjourned. Thank you.
    [Whereupon, at 12:55 p.m., the Subcommittee was adjourned.]
    [Material submitted for inclusion in the record follows:]

Supplementary Material by J. Everett Williams, President, Georgia Milk 
                            Producers, Inc.

July 27, 2009

Hon. David Scott,
Chairman,
Subcommittee on Livestock, Dairy, and Poultry,
Committee on Agriculture,
Washington, D.C.

    Dear Congressman Scott:

    I would like to take this opportunity to thank you for inviting me 
to serve as a panelist for the hearing held by the Subcommittee for 
Livestock and Poultry on July 21, 2009. This is a perilous time for the 
nation's dairy industry, and we hope that the hearings held by this 
Subcommittee will lead to a quick recovery for our industry. I have 
faith that with the right changes made to our milk marketing system, 
our industry could one day thrive again.
    I would like to respond further to one of the questions asked of 
the panel during the hearing on July 21. A Committee Member asked the 
panel what actions we would take to improve the current dairy pricing 
system if we were appointed Milk Czar. I would have the Justice 
Department investigate market access for all dairymen and any antitrust 
concerns in the milk markets. The Justice Department should investigate 
the Chicago Mercantile Exchange cheese markets for illegal activity.
    Also, current imports of casein and Milk Protein Concentrates do 
not meet USDA standards and therefore should not be allowed for use in 
cheese making. The government's goal should be to not allow the greed 
of milk companies to destroy dairymen.
    The Federal Milk Marketing Order (FMMO) should be expanded to cover 
all of the United States. Their mission should be to audit milk plants 
(for better price discovery) and to enforce milk payments to dairymen.
    Manufacturing and fluid milk would be the only two classes of milk. 
The market would be used to set the prices. The goal on fluid pricing 
would be to encourage milk production near the population. We in 
agriculture must recognize that allowing the least cost production 
areas to set our fluid prices will cause more and more milk to be 
shipped even greater distances.
    I would also implement the Holstein Dairy Price Stabilization 
Program to control milk price volatility. Matching production with 
market needs would benefit dairymen, processors and consumers.
    Once again, I appreciate your efforts to improve our nation's dairy 
industry and for the opportunity to serve on the panel last Tuesday. I 
hope you consider these suggestions and please feel free to contact me 
at [Redacted].
            Sincerely,

Everett Williams,
President.
                                 ______
                                 
                          Submitted Questions

Questions Submitted By Hon. Glenn Thompson, a Representative in 
        Congress from Pennsylvania *

    Question 1. In your view, are the current proposals to assist 
access to credit a short term or long term solution?
---------------------------------------------------------------------------
    * There was no response from the witnesses by the time this hearing 
went to press.

    Question 2. How will farmers be able to deal with this debt? How 
---------------------------------------------------------------------------
will they be able to pay it off?

    Question 3. How much do input costs--particularly in the forms of 
taxes, Federal regulations, and energy prices--put U.S. dairymen at a 
disadvantage?

    Question 4. In your view, how are milk imports affecting prices?


    HEARING TO REVIEW ECONOMIC CONDITIONS FACING THE DAIRY INDUSTRY

                              ----------                              


                         TUESDAY, JULY 28, 2009

                  House of Representatives,
     Subcommittee on Livestock, Dairy, and Poultry,
                                  Committee on Agriculture,
                                                   Washington, D.C.

    The Subcommittee met, pursuant to call, at 10:30 a.m., in 
Room 1300, Longworth House Office Building, Hon. David Scott 
[Chairman of the Subcommittee] presiding.
    Members present: Representatives Scott, Costa, Kagen, 
Holden, Boswell, Cardoza, Markey, Murphy, Minnick, Peterson (ex 
officio), Massa, Neugebauer, Goodlatte, King, Conaway, Smith, 
Roe, and Thompson.
    Staff present: Adam Durand, Alejandra Gonzalez-Arias, 
Chandler Goule, Scott Kuschmider, James Ryer, Rebekah Solem, 
Mike Dunlap, John Goldberg, and Jamie Mitchell.

  OPENING STATEMENT OF HON. DAVID SCOTT, A REPRESENTATIVE IN 
                     CONGRESS FROM GEORGIA

    The Chairman. This hearing of the Subcommittee on 
Livestock, Dairy, and Poultry to review economic conditions in 
the dairy industry, part three, will come to order. Thank you 
all very much.
    The gentleman from Pennsylvania, Mr. Thompson, is not a 
Member of this Subcommittee, but he has joined us again today. 
I have consulted with the Ranking Member. We are pleased to 
welcome him to join in the questioning of the witnesses. Good 
to have you, Mr. Thompson, again.
    This is the third part of our Subcommittee's examination of 
the current crisis in the dairy industry--and crisis in the 
dairy industry is really putting it mildly. As always, I 
appreciate everyone attending and aiding us in our efforts.
    For those who were not able to attend last week's hearing, 
I would like to inform you that you missed what is perhaps the 
most monumental event in history of dairy policy. A diverse 
group of panelists, representing a broad geographic and 
ideological spectrum all agreed to something, and that is very, 
very important. I don't know if anyone on this Subcommittee, 
and certainly not me, can recall that happening in recent 
history. Of course whether or not that portends further or 
larger agreements in the future remains to be seen. Let us hope 
so. For it is only by us coming together that we can really 
find a solution to these very critical issues that are indeed 
complex and challenging facing the dairy industry. At the very 
least, however, it did show that our idea about where dairy 
policy should head is not irreconcilable.
    Of course there is certainly a tremendous amount of work to 
be done before we are all marching through the halls of 
Congress singing Kum Bay Ya. Hopefully we will be able to do 
that. However, I feel that this series of hearings has laid the 
foundation and the groundwork upon which we can begin to enact 
sound dairy policy reforms.
    That being said, new and different voices are always 
welcome to contribute to the debate.
    [The prepared statement of Mr. Scott follows:]

 Prepared Statement of Hon. David Scott, a Representative in Congress 
                              from Georgia

    Welcome everyone, to the third part of our Subcommittee's 
examination of the current crisis in the dairy industry. As always I 
appreciate everyone attending and aiding us in our efforts.
    For those who were not able to attend last week's hearing, I would 
like to inform you that you missed what is perhaps the most monumental 
event in the history of dairy policy. A diverse group of panelists, 
representing a broad geographic and ideological spectrum, all agreed to 
something. I don't know if anyone on this Subcommittee, and certainly 
not me, can recall that happening in recent history. Of course, whether 
or not that portends further or larger agreements in the future remains 
to be seen. At the very least however it did show that our ideas about 
where dairy policy should head are not irreconcilable.
    Of course there is certainly a tremendous amount of work to be done 
before we're all marching through the halls of Congress singing Kum Bay 
Ya. However I feel that this series of hearings has laid the groundwork 
upon which we can begin to enact sound dairy policy reforms. That being 
said new and different voices are always welcome to contribute to the 
debate. And in the interest of hearing all of those voices I'll end 
here and turn to my Ranking Member, Mr. Neugebauer, for any comments he 
wishes to add and then we'll hear from our panelists.

    The Chairman. And in the interest of hearing all of those 
voices, I am going to end here and turn to my Ranking Member, 
Mr. Neugebauer, for his comments that he would like to add, and 
then we will hear from our Chairman, Mr. Peterson, and the rest 
of the panel. Mr. Neugebauer.

OPENING STATEMENT OF HON. RANDY NEUGEBAUER, A REPRESENTATIVE IN 
                      CONGRESS FROM TEXAS

    Mr. Neugebauer. Well, thank you, Chairman Scott, for 
calling this third and at least final hearing for a while on 
the review of current economic conditions in the dairy 
industry.
    As I was visiting with some of the witnesses before the 
meeting here, we had really good meetings in the past. We have 
had great panels. As the Chairman alluded to, we have had 
diverse panels. We have had people with different perspectives 
and different ideas on what is the current situation in the 
dairy industry, and really how--where do we go from here. I 
think one of the things we have heard that there is not 
universal agreement on, some of the actions that we need to 
take that probably should give this body pause for concern, 
that until we come to a consensus on what we would do, we 
should approach this with some degree of caution.
    One of the things that happens when the government starts 
doing things is it many times disrupts market conditions. And 
so, then, when the government gets into a marketplace and the 
market participants have to learn how to now deal with the 
government being in the room, we are seeing that in other areas 
of government right now. We have had a massive intrusion of the 
government into our financial institutions. We now have the 
government in the car business. We have the government in the 
insurance business. And I would tell you that those of you out 
there in the dairy business, you don't want the government 
getting into the dairy business too deep.
    And so what we hopefully will hear today are some more 
ideas and thoughts about what are some of the appropriate 
things that we can do. I would hope that we would be looking 
for long-term solutions. Many cases when market dips and 
markets go up and down, sometimes government is chasing the 
problem, maybe things are too expensive or things are too 
cheap, and somehow people think the government's role is to 
determine what the price of a commodity is, and that is not the 
role of a government to determine what the price of something 
is. Is it the role, then, for government to make sure there is 
integrity in the market? Certainly. Transparency, certainly. 
Those are roles we can play.
    But I would just caution those that are looking for a quick 
fix that quick fixes sometimes have long-term consequences. 
What I would hope we would be looking for, then, are solutions 
that make the dairy industry healthy and profitable and 
continue to be a major part of our agricultural economy, and 
quite honestly, a major part of a way of life in America.
    So I thank the witnesses for being here today. We know that 
we have a great panel of thoughtful witnesses and we look 
forward to hearing your testimony. With that, Mr. Chairman, I 
yield back my time.
    The Chairman. Thank you, Ranking Member Neugebauer. Now we 
will hear from the Chairman of the full Committee on 
Agriculture, Chairman Peterson.

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

    Mr. Peterson. Thank you, Mr. Chairman, and thank you, Mr. 
Neugebauer for your leadership, for holding these hearings, the 
third one that we have done here. And I would guess that we are 
not done listening to people yet. We will decide how we 
proceed. But, it is important that we have an opportunity for 
people to come in and give us advice about where we ought to be 
going and how we ought to approach this situation, which is a 
very bad situation as we are all aware.
    I just want people to know I have been--I was on this 
Subcommittee for many, many years going back, way back to Mr. 
Gunderson's time, and this is one of the worst situations we 
have been in. But I want folks to know how much Members of this 
Subcommittee, the full Committee, and Members outside of our 
Committee have focused on this issue. This is not something 
that people have not paid attention to.
    I cannot tell you how many Members have approached me on 
the floor, called me into meetings, particularly in the 
Northeast. The Members--Mr. Holden, Mr. Murphy, Mr. Massa, Mr. 
Welch, Mr. Courtney--I know I am forgetting somebody. Just 
about everybody that has agriculture, including some of my 
friends on the other side of the aisle, have talked to me. In 
California, which saw this problem first and probably the 
hardest, Mr. Cardoza, Mr. Costa, Mr. Nunes have been very much 
focused on this.
    As usual in dairy, we have not come to a consensus yet. 
There are ideas out there. Some good ones, some that I am not 
sure are so good. But one of the problems we run into is 
finding out--finding a way to pay for the different ideas that 
are out there. And frankly from my perspective, one of the 
problems is that we have been pretty firm in not opening the 
farm bill, not trying to get down the road of opening that 
whole situation up. So we have been working within some 
constraints there as well, but rest assured this Committee very 
much understands the problem, understands the seriousness, 
understands that this is something that needs to be dealt with 
on a timely basis. I can tell you that the Members are very 
much focused on this and providing leadership and we will 
continue to do that.
    So, Mr. Chairman, I appreciate your leadership and the time 
that you have spent on this issue, and I look forward to 
hearing from our witnesses today. We welcome you all to the 
Committee and very much appreciate your taking your time in 
giving us your advice about where we ought to move. So, thank 
you, Mr. Chairman.
    [The prepared statement of Mr. Peterson follows:]

  Prepared Statement of Hon. Collin C. Peterson, a Representative in 
                        Congress from Minnesota

    I would like to thank Chairman Scott and Ranking Member Neugebauer 
for calling this third and final hearing this month on the economic 
conditions facing the dairy industry. I appreciate their leadership on 
this issue and for their diligence in holding these hearings before we 
adjourn for the August District Work Period.
    I will be very brief since the purpose of today's hearing is to 
continue with the examination of the economic hardships facing dairy 
producers because of historic low prices.
    The two hearings this Subcommittee has held to this point have been 
instructive and have shown that the dairy crisis is not confined to one 
region or type of business operation. I imagine we will hear much of 
the same today.
    Including today, this Committee will have heard from 20 witnesses 
over these three hearings, including producers from California, the 
Pacific Northwest, Texas, Georgia, Minnesota, Wisconsin, and 
Pennsylvania. In addition, we heard from two of our colleagues, 
Representatives Peter Welch of Vermont and Joe Courtney of Connecticut, 
about the situation in their districts, where the dairy industry plays 
a big role in the local economy.
    I think it was important for this Committee to hear as many 
different voices as possible from all across the country when it comes 
to the current plight of the dairy industry and how best to move 
forward. I know there is a lot of passionate debate on dairy policy, 
even in the absence of low prices. Too often those strong feelings 
break along regional lines, pitting producers in one part of the 
country against another. As I said many times when we were going 
through the farm bill, we cannot afford to have agriculture divided. I 
hope our witnesses today and in the previous hearings will keep that in 
mind.
    I appreciate today's witnesses being here today and lending their 
voice to this timely debate. I thank you again, Chairman Scott, and 
Ranking Member Neugebauer, for calling today's hearing, and I yield 
back my time.

    The Chairman. Thank you very much, Mr. Chairman. The chair 
would request that other Members submit their opening 
statements for the record so that the witnesses may begin their 
testimony and we can make sure we have ample time for their 
questions.
    [The prepared statement of Mr. Baca follows:]

Prepared Statement of Hon. Joe Baca, a Representative in Congress from 
                               California

    Chairman Scott and Ranking Member Neugebauer:

    I am pleased to be here today as we continue to discuss the current 
economic conditions facing the dairy industry--and what steps, if any, 
the Federal Government should take to stabilize the dairy market.
    I thank the Chairman and Ranking Member for convening this hearing 
and hope we will be able to gain valuable insight into this critical 
issue.
    I also want to thank all our witnesses for coming here today--and 
taking time from their schedule to help us in Congress hear the 
perspective of the dairy producers and exporters on how to tackle the 
current crisis.
    Everyone in this room understands the important work America's 
dairy farmers do, and the vital need to keep the dairy industry healthy 
and prosperous.
    When agricultural markets fluctuate, there is a direct and 
significant impact on our nation's food supply--and thus the health and 
nutrition of virtually every American.
    In my own Congressional District in the Inland Empire of 
California--dairy is a significant agricultural and economic product.
    As Members of the Subcommittee on Livestock, Dairy, and Poultry, it 
is vitally important that we gather as much information on this subject 
as possible.
    America's dairy industry must remain strong and secure.
    We must be willing to work together on this issue. The USDA, 
industry groups, the Federal and state governments all play an 
important role in stabilizing our markets.
    I look forward to hearing from our witness today and again thank 
the Chairman and Ranking Member for their leadership.
    Thank you.

    The Chairman. We have a battery of issues and concerns, 
among them, the Dairy National Pricing Order, our Livestock 
Cost Margin Dairy Program, our Herd Buyout Program, how you 
feel about the CWT. There is just so much here for us to deal 
with to try to come to some solutions as to how we can get some 
help. Our goal again, as I reiterated, is to see what we can do 
to get some immediate help as well as long-term help.
    So with that, let me welcome each of you and our panel of 
witnesses that we are pleased to have, Mr. Craig Lang, 
President of the Iowa Farm Bureau Federation and a Member of 
the Board of Directors of the American Farm Bureau Federation 
of Brooklyn, Iowa. Welcome.
    Mr. W. Anthony Bostwick, the CEO of Braum's Ice Cream and 
Dairy Stores, on behalf of Braum's and the American Independent 
Dairy Alliance, Oklahoma City, Oklahoma.
    Mr. Joaquin Contente, dairy farmer and President of 
California Farmers Union, Hanford, California.
    Mr. Walter M. Guterbock, D.V.M. and M.S., Manager of the 
Columbia River Dairy and Sixmile Land and Cattle Company from 
Boardman, Oregon.
    Ms. Melissa L. Hughes, General Counsel, CROPP Cooperative, 
LaFarge, Wisconsin.
    Mr. Gordon M. Cook, Jr., dairy producer and Member of the 
Board of Directors of Holstein USA, Inc., of Hadley, 
Massachusetts.
    And Mr. Thomas M. Suber, President of U.S. Dairy Export 
Council, Arlington, Virginia.
    Thank you and welcome to each of you, and we thank you for 
taking the time out to come and share with us your expert 
testimony.
    Mr. Lang, we will begin with you.

         STATEMENT OF CRAIG LANG, PRESIDENT, IOWA FARM
 BUREAU FEDERATION; MEMBER, BOARD OF DIRECTORS, AMERICAN FARM 
                BUREAU FEDERATION, BROOKLYN, IA

    Mr. Lang. Chairman Scott and Ranking Member Neugebauer, 
thank you for the invitation to be here today. I would also 
like to say it is good to see my friend and Congressman, my 
personal Congressman, Congressman Leonard Boswell, here today. 
It is good to see you. Thank you.
    I am Craig Lang, a fifth generation farmer from Iowa. Two 
of my sons comprise the sixth generation of our family to be 
involved in farming. Our farm is truly a three-generational 
dairy. My 83 year-old father works on the farm every day. My 
brother manages the dairy, and my two sons are working into 
partnership and ownership. They work full time on the farm 
because, unlike many farms, dairy is a full-time occupation. I 
would also like to add that my daughter, Jessica, is Executive 
Secretary of the Iowa Dairy Association. So our roots run very 
deep in the dairy industry.
    We milk 560 cows three times daily, producing roughly 
35,000 pounds of milk each day. We plan to expand by building a 
new parlor and a new nutrient handling system, and also by 
doubling our herd when long-term profitability returns to the 
dairy sector. Until that time, we are only expanding enough to 
meet the needs of my two sons joining my operation. Our break-
even cost is around $14 per hundredweight, of which $7 per 
hundredweight is for feed. Our current mailbox price is about 
$11 per hundredweight after you add in for premiums for quality 
and volume.
    Because of the historically challenging milk price, we have 
almost depleted all the cash we put away over the previous 2 
years when our farm milk price receipt was considerably higher.
    At this time, we have about 40 percent of our 2010 milk 
production sold for a price between $14 and $18 per 
hundredweight using a buying tool through our milk cooperative. 
We have always believed that operating our farm from a strong 
financial position is our best defense to low prices.
    This year, U.S. dairy producers have been caught in a 
classic price-cost squeeze, with milk prices declining sharply 
from record highs while feed and land costs remain high. At the 
current time, public and private intervention measures are in 
place, but are not being fully felt at the farm gate.
    Dairy farmers enjoyed positive returns in 2007 and most of 
2008 as strong international demand pushed up the price of 
dairy products and the mailbox price of milk. In November of 
2007, all-milk price hit a record $21.90 per hundredweight. In 
2008, milk prices remained high and sent a signal to the market 
to produce more. And we, as farmers always do, we did produce 
more because the prices were good.
    Last fall converging factors lead to an evaporation in U.S. 
dairy export markets. First and foremost, the global economic 
recession virtually halted the trade of products, while a 
stronger dollar also made our products more expensive in the 
marketplace. And finally, New Zealand was able to regain their 
market position in late 2008.
    The Farm Bureau believes the major factors leading to the 
current economic stress in the dairy industry are the demand 
shock from the evaporation of the international marketplace, 
excess supply being thrust upon the domestic marketplace, and 
shrinking margins in income over feed costs.
    Declining milk and dairy product prices in late 2008 and 
2009 have reactivated government programs to support dairy 
prices and dairy farm income. In February of this year, milk 
prices dropped below the trigger of Milk Income Loss Contract 
payments to dairy farmers for the first time in 2 years 
triggering over $450 million in checks to dairy producer. 
However, our dairy herd size only allows us to reap about 30 
percent of our production in that program.
    In addition, USDA has allocated the maximum volume of dairy 
products to the U.S. through the MILC Program to export Dairy 
Export Incentive Payments and yet be consistent with World 
Trade Organization commitments. We believe this program is 
good. The Farm Bureau has encouraged USDA to expand Commodity 
Credit Corporation purchases authority and purchase CCC 
inventories for domestic feeding programs and expand dairy 
allocations through DEIP. Short-term solutions include 
maintaining the current safety net, letting existing programs 
work, further use of DEIP, expanding or enhancing Cooperatives 
Working Together Program and altering existing programs to 
enhance dairy income.
    The Farm Bureau would be supportive of at least three 
options to assist dairy producers in the short term, the first 
and probably the best through the CWT Program, removing cows 
from the market. We believe that another three percent 
reduction in cow herd numbers is important to bring prices back 
to a profitable level.
    Thank you for your time, and I will answer questions later.
    [The prepared statement of Mr. Lang follows:]

     Prepared Statement of Craig Lang, President, Iowa Farm Bureau
      Federation; Member, Board of Directors, American Farm Bureau
                        Federation, Brooklyn, IA

    Chairman Scott and Ranking Member Neugebauer, thank you for the 
invitation to be here today. I am Craig Lang, a fifth generation farmer 
from Iowa. My two sons comprise the sixth generation of my family to be 
involved in farming. Our farm is a three-generation dairy. My 83 year 
old father works on the farm everyday. My brother manages the dairy and 
two of my sons are working into ownership. They work full time on the 
farm because, unlike many farms, dairy is a full time occupation.
    My oldest son is a graduate of the University of Northern Iowa with 
a degree in Political Communication. He has decided not to go to law 
school because he believes there is a good future in the dairy 
industry. My second son graduated from Kirkwood Community College with 
an Agriculture Production degree. He also believes agriculture holds a 
promising future and is specializing mainly in the crops and feed needs 
of the dairy animals. My two sons could find employment off the farm, 
however, their passion is to continue farming. With good policy and a 
little luck, they will succeed in growing our operation to a profitable 
and competitive size.
    We milk 560 cows three times each day, producing roughly 35,000 
pounds of milk per day. We plan to expand by building a new parlor and 
nutrient handling system when long-term profitability returns to the 
dairy sector. Until that time, we are only expanding enough to meet the 
needs of my two sons joining our operation. Our expansion includes a 
remodeled free stall barn, more cows in milk, expanding our silage 
storage capacity, dry feed storage and additional rented land.
    Our break even cost for the milk we produce is around $14 per 
hundredweight, of which $7 per hundredweight is for feed. Our current 
mail box price is about $11 per hundredweight after you add in premiums 
for quality and volume.
    Because of the historically low milk price, we have almost depleted 
all the cash we put away over the previous 2 years when the price was 
considerably higher. We are now using a bank line of credit to help pay 
for daily operations. We have about 40 percent of our 2010 milk 
production sold for a price between $14 and $18 per hundredweight using 
a buying tool through our milk cooperative.
    This year, U.S. dairy producers have been caught in a classic 
``price-cost squeeze'' with farm milk prices declining sharply from 
record highs while feed costs remain high. At the current time, public 
and private intervention measures are in place but are not yet being 
fully felt at the farm gate.
    Dairy farmers enjoyed positive returns in 2007 and most of 2008 as 
strong international demand pushed up the price of dairy products and 
the mail box price of milk. In November 2007, the all-milk price hit a 
record $21.90 per hundredweight. In 2008, milk prices remained high and 
sent a signal to the market to ``produce more.'' Farmers responded by 
increasing U.S. milk production. Total U.S. milk production rose by 2.1 
percent in 2007 and by 2.3 percent in 2008. This is close to the 2.1 
percent average increase since 2000. Much of this supply increase was 
driven by cow numbers rather than gains in milk production per cow 
because of the pressure of rising feed prices--both concentrates and 
forage.
    Last fall, converging factors led to an evaporation of the U.S. 
dairy export market. First and foremost, the global economic recession 
virtually halted the trade of products, while a stronger dollar also 
made our products more expensive in the marketplace. Finally, New 
Zealand was able to regain much of its drought-plagued milk production 
in late 2008.
    Farm Bureau believes the major factors leading to the current 
economic stress in the dairy industry are the demand shock from the 
evaporation of the international marketplace, excess supply being 
thrust upon the domestic marketplace, and shrinking margins of income 
over feed costs.
    Declining milk and dairy product prices in late 2008 and 2009 have 
reactivated government programs to support dairy prices and dairy farm 
income. USDA estimates that it purchased 170 million pounds of nonfat 
dry milk in the first 6 months of 2009. That is the equivalent of about 
30 percent of production. USDA has said they expect to remove an 
additional 40 million pounds of nonfat dry milk during the remainder of 
2009. In February 2009, milk prices dropped below the trigger for Milk 
Income Loss Contract (MILC) payments to dairy farmers for the first 
time in 2 years, triggering over $450 million in checks to dairy 
producers. In addition, USDA has allocated the maximum volume of dairy 
products the U.S. is allowed to export with Dairy Export Incentive 
Payments (DEIP) subsidies and yet be consistent with World Trade 
Organization (WTO) commitments. Farm Bureau has encouraged USDA to 
expand the Commodity Credit Corporation (CCC) purchasing authority, 
purchase CCC inventories for domestic feeding programs and expand dairy 
allocations via DEIP.
    Yet, this declining economic picture has caused all of us to look 
at various options to determine what can be done to assist the dairy 
industry--in the short- and long-terms.
    Short-term solutions include: (1) Maintaining the current safety 
net and letting existing programs work; (2) further use of DEIP; (3) 
expanding or enhancing the Cooperatives Working Together (CWT) program; 
and (4) altering existing programs to enhance dairy farmer income.
    While Farm Bureau policy on dairy is lengthy, a few policy 
highlights include:

    (a) We support ``a market-oriented national dairy program that 
        includes a national countercyclical income assistance 
        component, such as the MILC program which is consistent with a 
        worldwide fair and open trade policy.'' In addition, we oppose 
        ``discrimination against large producers in the MILC program.''

    (b) We support a ``continuation of the dairy price support program 
        at the current level.''

    (c) We support ``state and regional initiatives or compacts which 
        are consistent with our overall goal of a market-oriented 
        national dairy program, specifically the expansion and 
        reauthorization of the Northeast Interstate Dairy Compact and 
        authorization of the Southern States Dairy Compact.''

    (d) We support and encourage the use of CWT.

    Given these policy positions, Farm Bureau would be supportive of at 
least three options to assist dairy producers in the short-term. The 
first, and probably best, option would be a further ongoing effort to 
reduce cow numbers through the CWT program. We applaud the efforts 
undertaken by CWT so far. The latest removal of 100,000 cows 
unfortunately, only represents about one percent of the U.S. herd. Our 
economists believe another three percent reduction in the cow herd 
numbers for an extended period of time will be required before dairy 
prices are likely to significantly rebound.
    We fully understand that the buyout program may not have the funds 
to reduce the U.S. herd enough to boost milk prices back to a 
profitable level. This may mean that the only option is for more 
farmers to sell their herds on the open market. Eventually, that 
culling of the U.S. herd will reduce milk supply and boost prices. Cull 
cow markets have already softened considerably and are making this a 
difficult decision for farmers.
    While fewer dairy cows would be useful in increasing dairy prices 
to farmers, we are adamantly opposed to a Federal Dairy Herd Buyout 
program similar to that used in the past. While that program did 
decrease production significantly and increase the price available to 
dairy farmers, it added to total meat supplies and had a negative 
effect on the beef industry. As a general farm organization 
representing farmers who produce all types of commodities, it is 
imperative that we do not support programs that may benefit one sector 
to the detriment of another sector.
    Some in the dairy industry have suggested limiting milk supply by 
taxing increases in production. That would only serve to increase 
domestic milk prices and make U.S. dairy producers less competitive in 
world markets.
    We know that some Members of Congress and dairy organizations have 
asked USDA to raise the purchase prices under the Dairy Price Support 
program. While this would certainly raise prices, it is not something 
AFBF can support given our policy to continue the ``dairy price support 
program at the current level.'' We also oppose increasing support 
prices because it has the strong potential to send the wrong signal to 
the market to increase or at least maintain, rather than to decrease, 
production.
    While our policy does not support increasing the price support 
levels, it does call for ending discrimination against large milk 
producers in the MILC program. The current program limits payments to 
an operation of about 160 cows. Farm Bureau would like to see this 
payment limitation removed. We would also support state and regional 
initiatives or dairy compacts, although we do not see much ambition for 
such an initiative at the current time.
    DEIP pays cash bonuses to exporting companies, subsidizing the sale 
of U.S. dairy products to foreign buyers at prices less than cost and 
enables U.S. companies to compete in global markets where other 
countries may be subsidizing their own dairy product sales. DEIP has 
been dormant for several years but due to encouragement from AFBF and 
others, USDA reopened the program recently, setting allocations that 
could help move up to 1.5 billion pounds of milk to the export market. 
As of July 1, U.S. companies had received $2.3 million in bonuses to 
export dairy products. AFBF will continue to pursue future DEIP 
allocations in a timely fashion in order to continue to encourage more 
dairy product exports while operating within our WTO commitments.
    In the short-term, it is tempting to ``do something'' to help 
producers immediately. But, as USDA Under Secretary Jim Miller 
testified before the House Agriculture Committee 2 weeks ago, ``USDA is 
currently forecasting the all-milk price to average $11.60/cwt in the 
third quarter and $13.10/cwt in the fourth quarter. For all of 2010, 
USDA is projecting an all-milk price of $15.30.'' We are working our 
way out of this severe crisis and must let the dairy sector return to a 
supply/demand balance as soon as possible.
    I want to draw your attention to a few charts. Farm Bureau believes 
there is a huge problem in trying to ``help'' the dairy industry via 
increasing the dairy price support levels. The cost of producing milk 
varies widely around the U.S. The first chart is a graph of dairy 
margins (price minus cost) for each of the last 18 months for the 25 
percent of producers who are the lowest cost producers in the U.S. 
These producers have actually made a profit over the last year and a 
half. 







    A supply/growth management program is problematic for a variety of 
reasons: (1) It is predicated on the fact that someone can adequately 
and accurately predict domestic and world supply and demand for dairy 
products; (2) It limits innovation and incentives for efficiency gains 
in the industry; (3) It potentially offers an insurmountable barrier to 
entry for new producers; and (4) It takes away the U.S. dairy 
industry's ability to participate in the potentially lucrative world 
markets.
    AFBF's policy is clear that greater market presence is needed in 
the dairy industry. We support an expanded role for markets and private 
enterprise in establishing prices for all classes of milk; and a price 
discovery method which utilizes more milk and expands mandatory 
reporting and auditing of prices and inventories; including penalties 
for inaccurate reporting.
    We also support modifications in the Federal Milk Marketing Order 
that will enhance the milk price received by producers and are 
encouraging USDA to appoint the task force to review the Federal Milk 
Marketing Orders as soon as possible. Many of our dairy producers see 
the need for improved price discovery and feel that Federal orders 
could operate more effectively.
    In conclusion, we are keenly aware that producers are facing 
significant income loss and that all of them may not be able to survive 
financially. We believe encouraging further CWT programs to reduce 
supply would be most beneficial. We do not believe increasing the 
minimum support levels in the current dairy price support program is a 
good idea as it would encourage additional milk production and slow the 
supply adjustment process needed to bring the dairy market back into 
balance.
    We have encouraged USDA in the past year to increase dairy product 
purchases by the government. We will undoubtedly request additional 
buys in the future. We are willing to discuss long-term strategies to 
help stabilize the dairy sector; however, we do not see supply/growth 
management implemented by the U.S. Government as a viable option.
    As a general farm organization, AFBF must ensure producers of all 
agricultural commodities are treated fairly. It comes as no surprise to 
anyone here that the pork and beef sectors are undergoing as troubled a 
time as is the dairy industry. Certainly, there is reason to believe 
peanut producers are also suffering. If AFBF was to support additional 
assistance for the dairy industry, we would also need to be helpful to 
other sectors as well.
    Farm Bureau appreciates the opportunity to share our views and we 
look forward working with you on these issues.

    The Chairman. Thank you very much, Mr. Lang. We will now 
hear from Mr. Anthony Bostwick.

 STATEMENT OF W. ANTHONY BOSTWICK, CEO, BRAUM'S ICE CREAM AND 
              DAIRY STORES, OKLAHOMA CITY, OK; ON
         BEHALF OF AMERICAN INDEPENDENT DAIRY ALLIANCE

    Mr. Bostwick. Chairman Scott and Members of the 
Subcommittee, on behalf of Braum's Ice Cream and Dairy Stores 
and the American Independent Dairy Alliance, I would like to 
thank you for giving us this opportunity to testify today.
    Our recommendations grow out of our experience operating a 
strong regional milk and ice cream business. We believe that 
there is compelling need now to modernize the U.S. dairy 
policy. Our current economic condition provides an opportunity 
that we cannot afford to waste.
    Braum's is a vertically integrated third generation 100 
percent family-owned business based in Oklahoma. Braum's is 
unique in that we raise our own crops to feed our own cows, we 
milk our own cows, we bottle our own milk, and we make our own 
ice cream, and we sell our own milk and ice cream products in 
our own stores. Our marketing strategy is based on quality, 
traceability, time to market, freshness, higher solid nonfats 
and the lower fat milks.
    ADIA is a group of diverse, independent producer-handlers 
and exempt plants formed several months ago. My testimony is 
focused on the role of the Federal Milk Marketing Order System 
and our recommendations for change.
    First, Federal minimum prices are set by the government 
without regard to the cost of production to the producer.
    Second, in a highly concentrated market in which a few 
large cooperatives and processors exercise dominate market 
power, losses fall with disproportionate weight on smaller 
producers in the regulated pool.
    Third, the Federal Milk Marketing Order pricing system is 
complex, poorly understood, nontransparent, and ill-equipped to 
facilitate innovation, growth, and production diversification 
responsive to changing customer demand. It has essentially 
become divorced from reality. As originally designed in the 
1930s, it was intended to ensure adequate supplies of Grade A 
milk for fluid consumption. That goal has been accomplished. 
Fluid milk today is a minority use of milk. Cheese is the 
undisputed primary use. And the rules of the FMMO today 
primarily serve that use and are disruptive to fluid milk 
markets.
    We have a system in which a mother buying milk for her 
toddler is essentially subsidizing cheap cheese for pizzas. 
This neither makes nutritional or economic sense. A coherent 
national dairy policy is essential. What is our national policy 
and what should it be? Is it to preserve small farms? The 
pooling and pricing system does not contribute to that goal. 
Nor do the support programs because they are insufficient to 
overcome the economic penalty of the small farm as a producer 
of a commodity pool to milk. If that is the goal, a different 
suite of tools and programs would be required.
    Is it reformation of dairy policy to assure producers a 
return consistent with cost of production and a reasonable 
profit? The pooling and pricing system as currently structured 
contemplates no such requirements.
    Is it simplification and increased transparency to 
facilitate a thriving and efficient market driven dairy 
industry? Braum's and the ADIA both believe that this should be 
a goal of a revised future oriented Federal dairy policy. We 
support such simplification. For example, a single Federal 
order with a single all-milk price could help remove much of 
the market disruption caused by the current system. A program 
driven by continuously shrinking Class I receipts is just not 
rational dairy policy.
    Is it to provide options for farmers to control their own 
destiny? We are headed in the direction of fewer, less diverse 
opportunities in the milk business rather than more. This is 
wrong, and it is a counterproductive national policy.
    Producer-handlers, large and small, are innovators in the 
dairy industry, and they respond directly to customer demand 
for differentiated milk products, organic, grass fed, local, 
glass bottles, home delivery, higher solids, nonfat content and 
low-fat milks, freshness, single source farm traceability. The 
business risks and capital investments of a producer-handler 
and management responsibilities of direct marketing are very 
substantial. But for those that choose this model, it is a 
viable alternative.
    We recommend the following: Modernize the Federal Milk 
Marketing Order system to simplify complex, arcane, and 
antiquated price formulas and replace them with a national and 
transparent single price system, and direct the USDA to suspend 
the producer-handler elimination hearings pending such 
modernization.
    Thank you for the opportunity to testify today.
    [The prepared statement of Mr. Bostwick follows:]

 Prepared Statement of W. Anthony Bostwick, CEO, Braum's Ice Cream and 
  Dairy Stores, Oklahoma City, OK; on Behalf of American Independent 
                             Dairy Alliance

    Chairman Scott and Members of the Subcommittee, on behalf of 
Braum's Ice Cream and Dairy Stores (Braum's) and the American 
Independent Dairy Alliance (``AIDA'') I would like to thank you for 
giving us this opportunity to testify today. Our comments and 
recommendations grow out of our experience as a producer-handler 
operating a strong regional milk and ice cream business and our reasons 
for opposing the current NMPF and IDFA proposals pending before USDA to 
eliminate independents from the U.S. dairy marketplace by forcing them 
into the regulated pool. To us, this is an example of the need now to 
modernize U.S. national dairy policy. The current economic conditions 
provide an opportunity that we cannot afford to waste.

I. Braum's and AIDA--Who We Are
    Braum's is a vertically-integrated, third-generation, 100% family-
owned business based in Oklahoma. Braum's is unique in that we raise 
our own crops to feed our own cows, we milk our cows, we bottle our 
milk and make our own ice cream; and we sell our milk and ice cream 
products in our own stores. The only milk you can buy at a Braum's 
store is Braum's milk. Braum's operates stores in five states: 
Oklahoma, Texas, Arkansas, Kansas and Missouri. Our stores include a 
quick service restaurant with drive thru windows, an Ice Cream Parlor, 
and a Fresh market where fresh dairy, bakery, meat and produce items 
are sold.
    Our marketing strategy is based on quality, traceability, time to 
market, freshness, and higher SNF (solids non-fat) in lower fat milks. 
Our lower fat milk products are unique--they contain a higher SNF 
percentage than other brands based on a process through which we remove 
water. As a result, it takes 3 gallons of milk to make every 2 gallons 
of Braum's fat-free milk. A variety of doctors in our marketing area 
recommend our low-fat milks to their patients who need extra calcium 
with less fat.
    AIDA is a group of diverse independent producer-handlers and exempt 
plants formed several months ago in response to a petition by NMPF and 
IDFA to eliminate producer-handler status as a matter of national 
policy.\1\ We are each strongly interested in the rejection of that 
proposal on its merits in the ongoing proceeding at USDA, and equally 
interested in a seat at the national policy table to discuss effective 
modernization of U.S. dairy programs. To that end, my testimony is 
focused on the role of the Federal Milk Marketing Order system and our 
recommendations for change.
---------------------------------------------------------------------------
    \1\ The founding members of AIDA include Snowville Creamery (Ohio), 
Kreider Farms (Pennsylvania), Heartland Creamery (Missouri), Aurora 
Organic Dairy (Colorado), GH Dairy (Texas) and Longmont Dairy 
(Colorado).
---------------------------------------------------------------------------
II. The Current Dairy Market Economic Situation
    A number of witnesses have already testified about one of the 
fundamental problems for producers in today's market--Federal minimum 
prices under the Federal Milk Marketing Order system are set by the 
government without regard to the cost of production to the producer. In 
times of high input prices for feed and fuel like the present, the 
economic loss associated with the inability to secure a cost of 
production plus a reasonable rate of return is devastating.
    A second problem is that in a highly concentrated market such as 
the one we have, in which a few large cooperatives and processors 
exercise dominant market power, such losses fall with disproportionate 
weight on smaller producers in the regulated pool. The record in the 
producer-handler hearing demonstrates as much as a $5/cwt cost of 
production disadvantage for such producers.
    A third problem is that the Federal milk marketing order pricing 
system is complex, poorly-understood, non-transparent and ill-equipped 
to facilitate innovation, growth and product diversification responsive 
to changing consumer demand. It has essentially become divorced from 
market reality. As originally designed in the 1930s, it was intended to 
ensure adequate supplies of Grade A milk for fluid consumption. That 
goal has been accomplished. Fluid milk is today a minority use of milk. 
Cheese is the undisputed primary use--and the rules of the FMMO today 
primarily serve that use, and are disruptive to the fluid milk market. 
We have a system in which a mother buying milk for her toddler is 
essentially subsidizing cheap cheese for pizza. This makes neither 
nutritional or economic sense.
    A fourth problem is the lack of a consistent regulatory program 
throughout the country although there is clearly a national market for 
milk and the dairy products produced from it. We have a jumble of 
federally regulated areas, state regulated areas, Federal and state 
regulated areas and areas outside of any order whatsoever. A single 
national order that encompasses the existing marketing areas would help 
but would still leave large areas of the country out of the 
``national'' system. The State of Idaho, for example, now one of the 
top ten dairy states is not included in any Federal or state order 
system. A coherent national dairy policy is essential.

III. Redefining National Dairy Policy
    The elements of the foregoing situation demonstrate a need for re-
evaluation of both national objectives and national policy. What is our 
national policy and what should it be?

   Is it the preservation of small farms? The FMMO pooling and 
        pricing system does not contribute to that goal, nor do the 
        support programs because as currently structured they are 
        insufficient to overcome the economic penalty of the small farm 
        as a producer of commodity, pooled milk. If that is the goal, a 
        different suite of tools and programs is required and should be 
        developed to facilitate economically viable small farm 
        operations. Farm preservation should not be the goal of a 
        program intended to facilitate orderly flow of milk to 
        consumers.

   Is it reformation of dairy policy to assure producers a 
        return consistent with cost of production and a reasonable 
        profit? The FMMO pooling and pricing system as currently 
        structured contemplates no such requirement and unless USDA 
        elects to revisit the methods by which prices are set, 
        Congressional action to change the law may be required.

   Is it simplification and increased price transparency to 
        facilitate a thriving and efficient market-driven dairy 
        industry? Braum's and AIDA both believe that this should be the 
        goal of a revised, future-oriented Federal dairy policy. We 
        support such simplification. For example, a single Federal 
        order with a single all-milk price could help remove much of 
        the market disruption caused by the current system. A program 
        driven by continuously shrinking Class I receipts is just not 
        rational dairy policy. As just one example of lost economic 
        value in the current FMMO system, we estimate that the FMMO 
        fees that would be due from Braum's to the USDA for telling us 
        what we should pay ourselves for our own milk would equal an 
        additional ten farm jobs. We would hope we can all agree that 
        folks in Oklahoma need these jobs more than the government 
        needs money for such a purpose.

   Is it providing options for farmers to control their own 
        destinies? As very clearly demonstrated by the producer-handler 
        hearing, we are headed in the direction of fewer, less diverse 
        opportunities in the milk business rather than more. This is 
        wrong and is counter-productive national policy. Producer-
        handlers, small and large, are innovators in the dairy industry 
        responding directly to consumer demand for differentiated milk 
        products (organic, grass-fed, local, glass-bottled, home 
        delivery, higher SNF content in low-fat milks, freshness, 
        single-source farm traceability, etc.). The business risk, 
        capital investment and producer-handler management 
        responsibilities of direct marketing are very substantial but, 
        for those who choose this model it is a viable alternative for 
        economic success and provides a valuable source of competition 
        in the U.S. market.

   Is it maintaining every economically viable business we have 
        in rural areas? Dairy farms in rural areas provide important 
        economic engines for those areas. Every reasonable tool 
        available to minimize consolidation is important to maintaining 
        the economic base of those rural areas. Braum's and AIDA 
        support national dairy policy that is consistent with 
        maximizing jobs in rural America. This presumes every 
        reasonable tool available for competitive success remains 
        available.

IV. Conclusion and Recommendations
    We submit that we should stop fighting individual alligators and 
drain the swamp instead. We need a future-oriented dairy policy that 
addresses the market we have today and that we hope to have and grow in 
the future. The independent producer-handler option is an important 
component of any policy that fosters a healthy competitive marketplace 
with strong ties between producer, handler, retailer and consumer, of 
which I represent all four. To this end we recommend the following:

   modernize the FMMO system to simplify complex, arcane and 
        antiquated pricing formulas and replace them with a national 
        and transparent single price system;

   direct USDA to suspend the producer-handler elimination 
        hearing pending such modernization; and

   affirm the ability and right of participation of independent 
        dairies in the marketplace.

    Thank you for the opportunity to testify today.

    The Chairman. Thank you, Mr. Bostwick. And now we will hear 
from Mr. Joaquin Contente. And let me apologize for just 
basically murdering your name a few minutes ago. And I thank 
Mr. Jim Costa, your Congressman, and my staffer for coming to 
my rescue.
    Mr. Contente, you are recognized.

           STATEMENT OF JOAQUIN CONTENTE, PRESIDENT,
 CALIFORNIA FARMERS UNION, HANFORD, CA; ON BEHALF OF NATIONAL 
                         FARMERS UNION

    Mr. Contente. Thank you, Mr. Chairman and Members of the 
Committee. And I would also like to thank Chairman Peterson for 
allowing these meetings to exist. And, of course my 
Congressman, Congressman Costa from the Valley there, we 
appreciate all of you being here today.
    My name is Joaquin Contente. I farm in the Central Valley 
with my brother Tony, and currently I serve as President of the 
California Farmers Union, the state chapter of the National 
Farmers Union. Today I testify on behalf of the National 
Farmers Union.
    I come here humbly today to try to emphasize how serious 
things are. In my county alone, there are 25 dairies that have 
either filed, or are on the edge of filing, for bankruptcy. 
Each day, we have people that are falling into that category 
closer and closer. Two producers in my area there, immediate 
area there, have committed suicide and many more are 
experiencing unimaginable stress because the difference between 
what producers are receiving and what they are paying for their 
inputs is huge.
    California's dairy industry is very, very large, $61 
billion economy to the state, 435,000 jobs that we have in the 
state due to the dairy industry. Many of the allied industries 
and businesses that participate in this industry are also 
falling into these categories of failures. The producers are 
not able to pay their bills and you are finding businesses that 
rely on these industries it causes them to fail. The impact 
will be huge if we do not change something in the very near 
future.
    I have found that there is considerable widespread 
consensus among dairy producers and their allied industries in 
what should be done to improve the dairy policy to end this 
crisis. The California Dairy Campaign has launched a letter 
writing campaign to call attention to the ongoing crisis. We 
have sent hundreds of letters here to the Committee and also to 
the Administration.
    A number of counties in the state have recently adopted a 
resolution. The largest counties, Tulare, Kings, and Merced, 
have adopted these resolutions. This resolution is included in 
the testimony that I presented here today in its entirety, And 
it provides the solutions for the industry.
    The first solution: A Federal mandate. I would like to read 
an excerpt from the OMB's website of what the Support Price 
Program, a definition of it. For this program to be successful, 
it should maintain market prices near average operating costs. 
This will ensure that the efficient producers are able to stay 
in business until prices recover. However, less efficient 
producers will not have this protection.
    This is a very good explanation of what the Support Price 
Program should do. It should be there for when the market has 
these interventions. We had this intervention that happened 
with the financial meltdown last fall, which really had nothing 
to do with supply and demand on the producer side. So we should 
have something in place--and it is a mandate of the Federal 
Government to have that and that mandate is not being 
adequately adjusted for the conditions that we have.
    We support the July 15th letter that Senator Patrick Leahy 
of Vermont, along with my Senator, Barbara Boxer, from 
California, have signed on, urging the Secretary to increase 
the Dairy Price Support Program. And we also feel that the 
Secretary has this authority without having to open up the farm 
bill.
    The second solution, implementation of fair tariffs on 
unregulated dairy solids. During the 1993 Uruguay Round, the 
caseins were not included in the tariff rate schedules that 
were negotiated. That left a big hole for product to come in 
basically unregulated. Today these unregulated milk proteins 
make up the largest category of imports by volume. Compounding 
the problem is the failure of USDA ERS information in regard to 
the usage data for these proteins. The commercial disappearance 
or utilization reports do not include any of these imports, 
thereby misleading the impact of these proteins. If you were to 
figure out the volume of the amount of milk equivalent of this 
category, which would be casein, caseinates, and MPC, it would 
be equivalent to about 15 billion pounds of milk annually. It 
is the largest single category of imports.
    Sorry.
    [The prepared statement of Mr. Contente follows:]

 Prepared Statement of Joaquin Contente, President, California Farmers 
        Union, Hanford, CA; on Behalf of National Farmers Union

    Good morning, Mr. Chairman and Members of the Committee. My name is 
Joaquin Contente. I own and operate a dairy farm with my brother Tony 
in Hanford, which is just West of Fresno in the Central Valley of 
California. I currently serve as a President of the California Farmers 
Union, a state chapter of the National Farmers Union (NFU). I serve on 
the board of the California Dairy Campaign (CDC) which represents dairy 
farmers throughout California. The California Dairy Campaign is a 
member organization of California Farmers Union and a member of the 
dairy Subcommittee of the National Family Farm Coalition (NFFC).
    My dairy has been in my family since the 1920's, but the future of 
my dairy and others throughout California and the nation are in serious 
jeopardy due to record low producer prices. In my county alone 25 
dairies have either filed or are in process of filing for bankruptcy 
and many more are closer to bankruptcy each day. Many of the dairy 
operations near bankruptcy today have been in operation for several 
generations. They are family dairy farms that have weathered many 
economic storms, but the crisis they confront today is unparalleled in 
our history. Two dairy producers in my state have committed suicide and 
many more are undergoing unimaginable stress because producer prices 
cover just 50 percent of the average cost of production in California.
    California leads the nation in dairy production generating more 
than $61 billion in economic activity and more than 434,000 full-time 
jobs. The dairy crisis is adversely affecting all the related 
businesses that supply and provide services to dairy producers. Dairy 
producers across the country face the same grim outlook due to record 
low producer prices that cover just a fraction of the average cost of 
production.
    Mr. Chairman, I commend your leadership for holding this series of 
hearings to address the economic conditions in the dairy industry 
because the dairy crisis becomes more serious each passing day. In 
order to end this crisis it is vital that dairy producers come together 
to agree upon policy changes that will lift our industry out of this 
deepening crisis. In my lifelong history as a dairy farmer I have never 
seen prices remain this far below our costs for this long and I have 
never seen so many dairy producers so desperate for relief.
    I have found that there is considerable and widespread consensus 
among dairy producers and their allied industries about what should be 
done to improve Federal dairy policy end this crisis. The California 
Dairy Campaign launched a letter writing campaign in May to call 
attention to the ongoing dairy crisis and offer solutions to end it. 
Producers and allied industries alike joined the letter writing effort 
to urge President Obama and leaders in Congress to work together to 
provide relief to dairy producers. Thus far we have sent more than 300 
letters to Members of the House and Senate Agriculture Committees and 
President Obama calling for an increase in the dairy support purchase 
price and the establishment of an inventory management program.
    A number of counties throughout the California, including some of 
the biggest dairy producing counties like Tulare, Kings and Merced, 
have passed a dairy resolution put forward by CDC and CFU to raise 
public awareness about the dairy crisis and call for specific actions 
to end it. I have included a copy of the California dairy resolution in 
its entirety in my testimony. Local officials understand the profound 
impact that the dairy crisis is having on communities throughout the 
state. The dairy resolution puts forward solutions to end the crisis by 
calling for an increase in the dairy support purchase price to reflect 
today's cost of production; implementation of fair tariffs on 
unregulated imported dairy solids; greater market transparency; and the 
establishment of an inventory management program. I will outline each 
of these solutions in my testimony today.

Increase the dairy support purchase price
    In order to be effective, the dairy support purchase price must 
factor in today's cost of production so that is can provide a 
meaningful safety net during crisis like the one faced by producers 
across the country today. We support a temporary emergency floor price 
of $18 per hundredweight to provide immediate relief to producers. We 
call for an increase in the Federal support purchase price to the level 
included in the Milk Income Loss Contract (MILC) program, which is the 
Boston Class I price plus the feed adjuster.
    The Federal Government supports the price of dairy products at 
$9.90. This is the price milk producers received 30 years ago. We call 
upon Congress to act quickly to adjust the Federal purchase price so 
that it includes the current cost of production, not the costs paid to 
producers more than 30 years ago.
    The Office of Management and Budget (OMB) during the last 
Administration publicly stated that the price support needs to be at 
the cost of production. We call upon Congress and the Obama 
Administration to act quickly to adjust the Federal purchase price so 
that it includes today's cost of production, not the costs paid by 
producers more than 30 years ago.
    The recent devastation of the dairy industry can be attributed to a 
number of factors including the financial meltdown that began last 
fall, rising concentrated dairy imports, a lack of competition in the 
marketplace, consolidation, rising input costs and other factors. To be 
an effective safety net, the price support program must be increased in 
response to rising production costs.
    The U.S. is already a net deficit milk producer. Federal dairy 
policy should foster a healthy and viable domestic milk supply because 
each cow in the U.S. generates $20,000 per year to the national 
economy. In these uncertain financial times, it is critical that dairy 
producers receive a fair price that is based on their full cost of 
production. An equitable price support that more closely reflects the 
prevailing cost of production would be an important first step in 
ending the dairy crisis.

Implement Fair Tariffs on Unregulated Dairy Solids
    Concentrated dairy imports for January and February of 2009 surged 
upward more than 70 percent compared to 2008 despite record low 
producer prices. Much attention has been paid to the decline in dairy 
exports. But rising imports of concentrated dairy proteins are the real 
threat to the future of our domestic milk supply. With these imports a 
little goes a long way in displacing domestic milk production and most 
do not meet basic food safety standards.
    It is difficult to comprehend the impact of concentrated dairy 
imports because these imports, including milk protein concentrate 
(MPC), casein and caseinates for food usage, are not included in the 
commercial disappearance data issued by USDA. A 2004 USDA Agricultural 
Marketing Service (AMS) report titled, ``Milk Protein Products and 
Related Government Policy Issues'' stated that the amount of imported 
milk protein concentrates accounted for 5.9 percent of the total U.S. 
milk protein production. The report concluded that on average milk 
protein imports are equivalent to approximately five percent of our 
domestic milk protein production.
    The U.S. dairy market is the world's largest single commercial 
dairy market. This market last year reached and exceeded 200 billion 
pounds of milk including exports. However, the USDA ERS fails to 
include any usage data for casein, caseinates and MPC in its commercial 
disappearance of milk data. Therefore, the commercial disappearance or 
utilization reports from USDA ERS are not complete or accurate. Once 
all the different categories are included in the commercial 
disappearance calculation such as casein, butter, MPC, and lactose the 
total for imports surpasses 15 billion pounds of milk equivalent or 
more than seven percent of U.S. milk production. Just a few percentage 
changes in milk consumption can have a significant impact on producer 
prices. Concentrated dairy imports amount to more than seven of our 
domestic milk production and have a substantial impact on the prices 
received by U.S. dairy producers and have made our country net deficit 
in milk production.
    Dairy producers have fought for years to pass legislation to 
regulate dairy imports by supporting passage of the ``Milk Import 
Tariff Equity Act.'' So far, dairy processors and food manufacturers, 
with their well funded lobbying firms, have fought off any regulation. 
To end the dairy crisis, lawmakers need to direct their attention to 
the dairy imports that are flooding our market and forcing so many 
operations to the brink of financial collapse.
    As consumers become more interested in where their food comes from, 
a trade loophole is allowing a flood of concentrated dairy imports from 
far off places. Our country already relies on dairy imports to meet our 
domestic needs, and if action isn't taken soon we are going to become 
even more dependent on imports.

Mandate Greater Market Transparency
    In order to establish an effective dairy price discovery system the 
Federal Government must restore fair, transparent and open dairy 
markets. The consolidation that has occurred over the past couple of 
decades has eliminated market competition to the point that now the 
last one percent of our daily milk production determines the price of 
all of the milk produced regardless of prevailing market demand for 
dairy products.
    A handful of traders set the prices for cheese and butter on the 
Chicago Mercantile Exchange (CME). This thinly traded market operates 
for only a few minutes 5 days per week yet it is the mechanism that 
sets all-milk futures contracts. The CME completely lacks transparency. 
Traders use code names to guarantee their anonymity. Capitalism and the 
interests of society are trumped by a handful of traders that are self-
regulated with virtually no oversite. Dairy producers across the 
country are very concerned that the lack of Federal oversight and 
transparency at the CME has led to market manipulation, and created a 
highly volatile market that negatively impacts dairy producers.
    Due to the lack of transparency at the CME, producers that may be 
economically impacted by anti-competitive trading practices, have no 
recourse to independently inquire or investigate the lack of 
competition in the marketplace. If the CME was more open and 
transparent, more businesses would trade, and the sales volume would 
increase fostering a more accurate and reliable market that better 
reflects the actual value of milk in the United States.
    In June 2007, the Government Accountability Office (GAO) issued a 
report on the spot cheese market titled, ``Market Oversight Has 
Increased, But Concerns Remain about Potential Manipulation.'' The 2007 
GAO report documented that few daily trades occur on the CME and a 
small number of traders account for the majority of trades. The report 
further concluded that the CME is susceptible to potential price 
manipulation.
    One of the greatest challenges facing U.S. producers and every 
other producer in the world is consolidation and concentration of the 
marketplace, which also drives market globalization. Capitalistic 
markets function properly when there is a balance of buyers and 
sellers. There are about 60,000 dairy farms marketing milk today 
through 200 cooperatives. Half a century ago, there were 180,000 dairy 
producers marketing through 1,000 cooperatives. While the number of 
farms and cooperatives continue to decline, the marketing presence of 
farmer-owned dairy cooperatives has actually expanded during the past 
generation. Despite this expansion there is less competition vying for 
producers at the co-op level, with more intervention by non-
cooperatives and non-farmer controlled businesses.
    Dairy cooperatives continue to grow in size and form strategic 
alliances with private entities. For example, my own cooperative, Land 
O' Lakes, sells a large portion of their cheese to Kraft Foods. The 
largest cooperative, Dairy Farmers of America, has ongoing agreements 
to supply milk to Dean Foods and Leprino Foods, and continues to expand 
its relationship with Fonterra. Cooperatives justify their actions by 
claiming they are subject to the growing demands of retailers. Wal-
Mart, for example, wishes to consider no more than two suppliers for 
each food product it features in its stores across the U.S. The 
consolidation and concentration not only harm producers through lower 
prices, but also negatively impacts consumers with less choice at the 
grocery store.
    In most U.S. metropolitan areas, one company, Dean Foods, has 
acquired the majority of fluid plants. Two corporations dominate the 
cheese sector; Kraft Foods at the retail level and Leprino Foods at the 
food service level. Regardless of which cooperative a U.S. producer 
markets his milk, at the end of the day the vast majority of milk is 
purchased by only three major buyers that dictate each market. Dean 
Foods dominates the fluid market, Kraft owns the retail market and 
Leprino runs the food service market. Until steps can be taken to end 
the stranglehold that these three entities have on the three major 
components of the dairy sector, competition will be stifled and 
producer prices depressed.
    Economic power concentrated in the hands of a few players has 
essentially eliminated the price system, which capitalism is thought to 
rest. The farm-gate price is no longer cost plus profit; instead it is 
a command economy with a few corporate players dictating farm price. 
The loss of producer economic power is best illustrated by the widening 
gap between retail prices and farm-gate prices. While consumers 
continue to experience sticker-shock on dairy products, dairy producers 
are left with a shrinking percentage of the consumer dollar.
    Many organic dairies throughout the country are also struggling due 
to the dairy crisis. Many have seen the price they receive for organic 
milk decrease substantially and are now subject to production caps. 
Organic dairy producers have invested heavily to meet organic 
standards, but now that many of the same corporate processors have 
entered the organic market, these producers are also struggling due 
increasing consolidation and concentration.

Establish an Inventory Management Program
    Inventory management is sorely needed now more than ever. At the 
turn of the century the Federal order adopted the California style 
make-allowance structure. This pricing mechanism establishes cost of 
production values for plants. These values remain constant whether the 
market is short or long. Plants become isolated from market conditions 
and are decoupled from capitalistic signals in regard to supply and 
demand.
    Since the loss of parity in 1981, the gap between retail and farm-
gate prices has continued to widen dramatically. As the mid 1990's 
approached, volatility constantly increased due to several factors 
including consolidation; introduction of futures contracts, and the 
U.S. became a net-importer. Establishing a milk inventory management 
program will ensure the stability of the marketplace and provide 
sustainability for all in the dairy industry and these benefits will 
also be enjoyed by retailers and consumers alike.
    California dairy producers have been in a constant growth mode. 
When prices are good, we add cows; when prices go down, our bankers 
tell us to add cows in order to cash flow, even though, historically, 
California has had some of the lowest mail box prices in the nation. An 
effective inventory management system would provide an incentive for 
dairy producers to manage milk production to meet prevailing market 
demand. Producer price volatility is a threat the dairy producers in 
California and across the nation. The current system provides an 
incentive for dairy producers to simply maximize their production, 
especially when producer prices are high which can lead to lower prices 
due to the increase in supply that results. An inventory management 
program could provide an incentive for smart growth in milk production 
that is based upon current market conditions. It would lead to the end 
of the boom and bust cycles that have plagued dairy producer prices for 
so many years and provide some stability in the future for all 
producers.

Conclusion
    The outlook for dairy producers in California and across the 
country is grim unless Congress acts quickly to reform Federal dairy 
policies. We call upon Congress to increase the dairy support price to 
factor in today's cost of production; address rising unregulated 
imports of concentrated dairy proteins; mandate greater market 
transparency and establish and inventory management program to balance 
milk supply with market demand.
    We thank you Mr. Chairman for holding this important series of 
hearings to address the difficult and unprecedented economic conditions 
dairy producers face today. We greatly appreciate the opportunity to 
testify today and look forward to working with Members of the House 
Agriculture Committee to end the dairy crisis and sustain our domestic 
milk supply in the future.

                               Attachment

California Dairy Resolution
Relative to dairy producers.
    Whereas, California has been the nation's leading dairy state since 
1993 and is ranked first in the U.S. in the production of total dairy 
product, butter, ice cream, yogurt, nonfat dry dairy product, and whey 
protein concentrate and is second in cheese production, and
    Whereas, the dairy industry provides an economic impact of an 
estimated national average of $20,000 per cow per year, primarily in 
local economies, and
    Whereas, dairy farming is the leading agricultural commodity in 
California generating more than $7 billion in revenue each year, and
    Whereas, the California dairy industry generates more than $61 
billion in economic activity and more than 434,000 full-time jobs, and
    Whereas, the absence of profitable prices in the dairy industry for 
farmers, the lack of competition in dairy product processing ownership, 
as well as outdated regulations are causing an economic crisis among 
California dairy producers, and
    Whereas, since last year, the price that dairy product processors 
pay farmers for their dairy product has dropped as much a 50 percent, 
and
    Whereas, the primary safety-net for California dairy producers is 
the Federal dairy product price support program of $9.90 per cwt, and
    Whereas, the Federal dairy product price support program does not 
adequately provide a safety net due to the fact that it is based on 
production costs from thirty years ago, and
    Whereas, the Federal Government in 2006 implemented an ethanol 
policy mandate that has increased all feed costs to dairy producers in 
California, and
    Whereas, the Federal dairy product price support program does not 
account for this new Federal energy mandate, and
    Whereas, the Federal dairy product price support program should 
maintain market prices near average operating costs in order to be 
successful. This will ensure that efficient producers are able to stay 
in business until prices recover; however, few efficient producers will 
have the protection at the current price support level, and
    Whereas, California dairy product prices are set by the Chicago 
Mercantile Exchange (CME) cash cheese exchange. A June 2007 General 
Accounting Office (GAO) report on the CME states that the CME is thinly 
traded and is not a very competitive market. As a result, the CME 
should be reviewed and analyzed to determine if it is an effective and 
transparent price discovery mechanism; and
    Whereas, the Federal dairy product price support program needs to 
be at an adequate level to ensure California dairy producers have a 
viable, competitive and stable market free of manipulation, and
    Whereas, a significant loss of capacity would create a dependence 
on imported dairy product and other dairy products and reduce our 
nation's food security, and
    Whereas, concentrated dairy imports for January and February of 
2009 surged upward more than 70 percent compared to 2008 despite record 
low producer prices.
    Resolved by the Senate and the Assembly of the State of California, 
jointly, That the Legislature of the State of California respectfully 
requests that the President, Congress and the United States Department 
of Agriculture acknowledge the importance of the dairy industry 
nationwide as well as the unique aspects of the dairy industry region-
by-region through:

    (1) Updating the Federal dairy product price support program to 
        reflect today's cost of production;

    (2) Implementing fair tariffs on unregulated imported dairy solids;

    (3) Mandating greater market transparency.

    (4) Establishing a milk inventory management program.
          * * * * *
    The NFU board voted in June to encourage Congress to pass a dairy 
stimulus package to provide an adequate safety net for producers in 
addition to establishing an inventory management program. Most 
importantly, the board expressed the need for producers to receive an 
immediate financial lifeline to sustain their livelihoods through this 
unprecedented situation. A suite of policy options exist to ensure 
producers will survive this devastating economic period. Options to 
achieve the above mentioned principles are outlined below, categorized 
by short-term action and long-term action.

Short Term Options:
   Establish safety-net support price that is fair and 
        equitable to all producers--Establish an emergency Class III 
        floor price of $18/cwt by existing authorities of the Secretary 
        for a period of 6-9 months. During this period, USDA should 
        launch the FMMO review as established in the 2008 Farm Bill and 
        CFTC should launch additional investigations into potential 
        manipulation on the CME. A long-term supply management program 
        must be established in tandem with the emergency floor.

   Continuation of the countercyclical Milk Income Loss 
        Contract (MILC) program--Legislation has been introduced in the 
        Senate that would double the MILC payment rate short term. This 
        provides a quickly deployable lifeline in an effort to prevent 
        additional dairy bankruptcies.

   Eliminate the make allowance. If not eliminated, make it 
        variable and tied to producers' cost of production.

   Require the NASS survey to be audited periodically.

   Maintain standards of identity on dairy products and move to 
        increase fat content standards in fluid milk. Milk is naturally 
        produced with fat content of 3.5 or higher, yet most of the 
        whole milk sold in the U.S. has been reduced to 3.2.

   Deploy low-interest and emergency loans, including a 
        foreclosure mitigation program to stem the tide of loan 
        foreclosures.

   Purchase dairy products and hamburger for donations to food 
        banks and other nutrition programs.

   Allow producers to label milk as free of artificial growth 
        hormones.

   Require accurate recording and publishing of import data 
        from ERS.

   Ensure imported dairy protein blended products are accounted 
        for and categorized appropriately according to the common or 
        commercial meaning of the term ``milk protein concentrate,'' 
        not allowed to disguise skim milk powder MPC to avoid tariffs 
        and the tariff rate quota.

Long Term Options
   Efficient transmission of price signals should be 
        established. Today's market is non-functioning with imbalance 
        of buyers/sellers.

   Pass the Milk Import Tariff Equity Act to address unlimited 
        imports flooding U.S. domestic market.

   Include California and all regions/areas in the FMMO.

   Correct pooling/de-pooling provisions in the FMMO.

   Eliminate bloc voting.

   Allow ``no'' vote on amendments, yet maintain FMMO.

   Do not place financial burden of transportation onto 
        producers.

   Establish three-part pricing formula to include: cost of 
        production, Consumer Price Index and Chicago Mercantile 
        Exchange.

   Resolve distribution and supply management challenges.

   Repeal forward contracting authority.

   Support funding for academic antitrust research.

   Intensify review process for proposed mergers.

   Promote smaller coops and increase oversight of coop 
        management to ensure interests of producers are met.

   Passage of the Federal Milk Marketing Improvement Act of 
        2009 (S. 889)

   Eliminate authority for dairy import promotion assessments.

    The Chairman. You are about a half a minute over. But we 
have seven Committee Members. So we are going to try to hold 
everyone to the 5 minutes so that we can get into the 
questions. What you have to say is so very, very important, and 
I appreciate you getting your major points in those 5 minutes. 
Then we will have ample time with questions and answers from 
the Committee Members to get into further detail with you. So I 
appreciate your cooperation and it will help us to make sure we 
get everything in.
    Next we have Mr. Walter Guterbock.

        STATEMENT OF WALTER M. GUTERBOCK, D.V.M., M.S.,
 LIVESTOCK MANAGER, COLUMBIA RIVER DAIRY AND SIXMILE LAND AND 
                  CATTLE COMPANY, BOARDMAN, OR

    Dr. Guterbock. I am Walter Guterbock. I am the Manager of 
Columbia River Dairy, which is on the shores of the Columbia 
River in eastern Oregon. Columbia River Dairy is part of an 
integrated farm that produces potatoes, mint, peas, carrots, 
and other food crops, as well as feed for the cows. We are able 
to feed a lot of the byproducts of food processing back to our 
animals.
    Our dairy was built specifically to supply a particular 
cheese plant which is nearby. We have a direct contract with 
our customer and we are not a member of a co-op.
    The Pacific Coast dairy industry, Mr. Chairman, has unique 
needs. We live in an area--this would include California--where 
feed is plentiful, the climate favors dairy production, we have 
water, we have land, we are able to handle our waste 
responsibly, there is lots of byproducts of our agricultural 
bounty that can be fed to animals to create a high quality 
protein. And we have to grow rotation crops which are also 
animal feed.
    We are close to Pacific seaports and we are far from 
eastern markets. There are lots of cows and lots of processing 
plants between us and the bulk of the U.S. population. So we 
really--for our future growth or our future success, we need to 
focus on exports, specifically exports to Asia and to Mexico. 
We need be able to compete on the world market and we can.
    As previous speakers have said, we are in the worst 
economic crisis in the dairy industry that any of us can 
remember, and the wealth destruction for dairy families and the 
loss of their family identity is really tragic. And our dairy 
is losing money just like everybody else or most other people. 
But the current problem is due to a collapse in demand, mainly 
export demand, as others have said. The supply of milk is 
pretty much in line with trends, so supply management is the 
solution to the wrong problem.
    Previous programs, government programs, failed--supply 
management programs failed to have any lasting effect on milk 
prices. So the need, as others have said, is to bring supply 
and demand into balance. The current milk pricing system based 
on the CME regional orders, modifying the CME price based on 
regional usage, depooling decisions by processors, and so on, 
create imbalances between supply and demand in local areas. The 
most important point is that all the milk that a dairy producer 
produces is priced the same. So the incentive to the producer 
is to produce as much as possible. There is a saying that says 
nobody has a surplus of milk on their farm, and that is true. 
So the system does not give clear signals not to overproduce. 
And similarly, the make allowance and the structure of the 
Federal program allows excess plant capacity to exist.
    So supply management has several disadvantages. First of 
all, it perpetuates current production patterns and prevents 
shifts to more efficient areas and more efficient enterprises. 
It creates a privileged class of people who have a license to 
produce milk, and provides a barrier to entry to young families 
who want to get in. Most dairy owners look about like me and we 
need young blood in our industry.
    It would increase the surplus that overhangs the market and 
threatens to reduce prices in the future, and it won't increase 
demand. It would--most proposals include a tax on producers 
that would come at absolutely the worst time for cash flow in 
history, and the tax will come long before there is any benefit 
in milk pricing.
    It will create an artificially high price, which makes us 
less competitive and will attract imports. And no agency or no 
person is smart enough to predict supply and demand, and 
central planning always creates surpluses or shortages.
    We cannot isolate ourselves from the world market. The 
higher U.S. price will cut exports and attract imports and our 
barriers, whether sanitary or tariffs, are not effective. The 
Congressional Research Service estimated that by 2018, 5 
billion pounds, or 2\1/2\ percent, of our milk supply will be 
allowed in as imports just under current treaties.
    So there is a desire now to do something, anything to 
prevent this kind of crisis from happening again. But supply 
management is not the solution, and it would perpetuate the 
current imbalance between supply and demand.
    A free market with safeguards and transparent reporting of 
prices is the most efficient way to match supply and demand. So 
dairymen and co-ops need to be able to contract freely with 
users and negotiate prices, and prices need to send clear 
signals to producers not to overproduce.
    Thank you.
    [The prepared statement of Dr. Guterbock follows:]

   Prepared Statement of Walter M. Guterbock, D.V.M., M.S., Livestock
  Manager, Columbia River Dairy and Sixmile Land and Cattle Company, 
                              Boardman, OR

    Chairman Scott and Ranking Member Neugebauer. Thank you for giving 
me this opportunity to discuss with you and the Committee the economic 
conditions that face dairy industry today.
    My name is Walter M. Guterbock. I have been actively involved in 
dairying either in academia, veterinary practice, or operation of farms 
since 1979. I am the Manager of Columbia River Dairy and Sixmile Land 
and Cattle Company, both in eastern Oregon along the Columbia River. 
Columbia River is a very large dairy that supplies a nearby cheese 
plant. Our farm is not a member of a cooperative. It is part of an 
integrated farm that raises most of the forage crops that are fed to 
the animals and other food crops such as potatoes, onions, peas, and 
mint that generate byproducts that are fed to the animals. The animals 
in turn provide fertilizer for the crops. We take pride in the 
excellent quality of milk we produce, in the certification we have 
earned for animal welfare, in the responsible way we handle animal 
waste, and in our progressive labor management practices. Previously, I 
have been a partner in or managed farms in California, Michigan, and 
Washington.
    The financial losses of family dairy farms in 2009 are 
unprecedented. No region, no operation size, nor any business model has 
been spared the impact of low milk prices and high input costs in the 
midst of a worldwide economic downturn. Almost all dairy farms, large 
and small, are owned by families, and it is the wealth of farm families 
that has been destroyed. There are very few corporate dairy farms.
    Crises are the cradles of ideals and ideas. It is too late to 
prevent the loss of wealth to dairy families that has already occurred. 
But of course people in the industry are looking for programs that 
might avoid such economic losses in the future.
    Some of these can generally be labeled as supply management 
programs. The details of these programs vary, but there are key 
elements that continue to emerge in all of them.

    (1) Individual farm and cooperative voluntary plans for growth, 
        consolidation, and relocation will be replaced by government 
        mandates and limitations.

    (2) Numerous decisions by independent producers and cooperatives 
        involving the supply of milk will be replaced by a centralized 
        decision making process determining where milk will be produced 
        and how much.

    (3) Growth based upon farm family goals, available resources, 
        current market demands, local opportunities, and other 
        individual farm factors will be replaced by government-assigned 
        quota based upon past production. Current national production 
        patterns will be cast in stone and adjustments of milk 
        producing capacity between regions will be difficult. This 
        means that consumers will not benefit from regional 
        efficiencies; the industry will be preserved in less efficient 
        areas and will not be able to expand in more efficient ones.

    (4) Payments for milk will be taxed, reducing farm income. Either 
        all producers will pay a tax that will benefit those who comply 
        with restrictions, or substantial penalties will be imposed on 
        milk from farms that do not. In some plans, the tax is on all 
        milk produced, not just the milk that is over the limit, so 
        that the farmer who milks one extra cow or whose production 
        rises because of good luck or good management would pay a 
        severe penalty on all his milk. The tax will reduce revenue to 
        dairy farmers during a severe cash flow crunch, hardly a 
        desirable goal. Any potential milk price increase resulting 
        from the program will come long after the blow to revenue.

    (5) Business decisions and estate planning for dairy farmer 
        families, already complex due to estate and income taxes, will 
        become more complicated. Proposed rules will make it more 
        difficult to combine operations, divide them, or expand them to 
        allow younger family members to participate in the business. As 
        in farm subsidy programs, ingenious ways will be found to hide 
        common ownership of different herds to allow expansion to 
        continue while appearing to comply with the limits.

    (6) Supply management creates a privileged class (current 
        producers) and raises huge barriers to entry to entrepreneurs 
        or young families who want to get started in dairying. The 
        population of dairy owners looks about like me, and we need 
        young, aggressive, progressive producers to enter our ranks to 
        keep us moving forward.

    Fresh milk is highly perishable. It must be processed within days 
of leaving the cow. Storage capacity at the farm is usually 1 or 2 
days' production, so milk must be picked up promptly or the farmer 
can't milk because the tanks are full. Milk can only be stored long 
term in the form of finished products like cheese, butter, protein 
concentrates, and powder. This means that a farmer must have a 
processor who will pick up the milk reliably and promptly, and that the 
processor must then pay the farmer for it. Unlike the grain farmer, the 
dairyman can not store his product and wait for favorable markets. If 
the producer can't sell milk immediately, it quickly becomes worthless.
    The processor, in turn, has to find a home for the milk or for the 
finished products. Surplus milk is freely traded and its value tends to 
fall until the market is cleared. The government support price provides 
a floor. Little milk is ever discarded. Unfortunately, our current 
pricing system of Federal orders, pooling, and support prices does not 
allow these price signals to get back to the producer. The dairy 
producer gets paid the same price for all the milk he produces, whether 
it finds a profitable home or not. While the coop or marketing order as 
a whole may pay some price for overproduction, the individual producer 
does not really feel it. A supply management system with an artificial 
floor price will encourage overproduction in relation to real demand 
and reduce further the transmission of price signals back to producers. 
The best way to rein in overproduction is to have local co-ops and 
processors pay farmers far less for milk that is surplus to their 
needs, sending a strong price signal not to overproduce.
    A national supply management system would not recognize local needs 
for flexibility to adjust to changes in supply and demand. Consuming 
populations grow and shrink. Successful dairies tend to expand, because 
they generally produce more heifers (young cows) than they need to 
replace the cows they cull. There are also tax advantages to 
reinvesting income into herd expansion and new facilities. Dairy 
families use expansion as a way to create opportunities for young 
family members to stay in the business. Also, dairy farming tends to 
expand in areas like the Northwest where land and feed are reasonably 
priced and there are opportunities to market milk, and contract in 
areas where climate, urbanization of farmland, short growing seasons, 
the lack of processing capacity, or other factors make it less 
efficient. In the long run, efficient, successful producers of all 
sizes can supply dairy products to the public more cheaply than 
inefficient legacy producers. Certain areas of the country favor 
efficient dairy production more than others, and should be allowed to 
expand, while others need to contract.
    Both the supply and the demand for milk, on a regional or national 
scale, are unpredictable, although there are patterns. In order to 
ensure consumers a consistent supply of fresh dairy products without 
sudden shortages, there has to be some surplus production. So any milk 
marketing system has to be able to accommodate changes in supply or 
demand and have enough capacity to accommodate the fluctuations. The 
idea of supply management is to bring supply in line with demand so 
that the excess milk does not depress the price of all milk. But milk 
supply is always out of line with demand somewhere in the country, and 
milk is moved from one area to the other at market-clearing prices. 
Surplus milk will find a home at some price in the current system, but 
if the price is not allowed to drop, there is no incentive to stop 
producing it.
    The factors driving, or dampening, domestic demand are generally 
known--income, population, season, product availability, government 
feeding programs, prices, restaurant sales, and other factors. But 
knowing general trends does not provide anyone the ability to predict 
demand exactly even 3 months in the future. Milk is traded world-wide, 
and worldwide prices affect prices and demand at home. Worldwide prices 
change in response to currency fluctuations, climatic events in other 
countries (such as drought in Oceania), political events, market crises 
(like the melamine contamination scare in China), trade negotiations 
and treaties, the strength or weakness of other economies, dairy 
policies of our competitors, and other factors. The high dairy prices 
of 2008 were in part due to increased exports, related to drought in 
Oceania and high demand from Asia. The melamine scare, the economic 
collapse, and the end of the drought reduced our exports and are 
contributing to current low prices. Our current low prices are due to a 
collapse in demand, not to a great oversupply compared to historical 
levels.
    The factors supporting supply are also well known. The trend is for 
production per cow to rise, overall milk production to increase 
slightly from year to year, and for America's dairy producers to 
continue to provide more milk with fewer cows. Seasonal variations in 
milk yield are fairly well understood. But there are many variations in 
milk production that are hard to predict, caused by weather events, 
differences in forage crop growing seasons, changes in feed prices that 
drive ration changes, and other imponderables. Successful dairy 
managers of both small and large herds understand these factors and 
have learned to maximize profit. But their results vary, day to day, 
season to season, and year to year, and are not fully predictable.
    I am sure there are witnesses who paint supply management as a 
defense of the small family dairy farm against the big farms that are 
claimed to have caused a glut of milk and the current low prices. 
Again, the current crisis is due to a collapse in demand, not a sudden 
rise in supply. The current crisis actually hurts the traditional farm 
that produces a lot of its own feed and relies on family labor less 
than it does the larger producer who recently expanded, has to purchase 
most of his feed, has high overhead, and is carrying a large debt load. 
The trend to consolidation and larger herds in dairying has been in 
place for a hundred years, and is driven by demographics and basic 
economics. When traditional dairy producers retire, their children 
often do not want to come back to run the farm. The average age of 
dairy farm owners is in the late 50s. At the same time, efficient, 
progressive producers of all sizes have expanded their businesses. 
There are many producers who started with 40 cows and now own 
thousands. As in any business, there are economies of scale that give a 
larger producer slight advantages, but smart small producers continue 
to be successful. The forces driving consolidation will not be stopped 
by a supply management program, although their effects will be 
distorted as aggressive producers find creative ways to skirt the 
rules.
    Like other areas of the economy, dairying has gone through a period 
of over-expansion fueled by high milk prices and easy credit. The party 
is over and we are in a period of adjustment to new realities. A prompt 
world economic recovery will help us like everyone else. But there are 
economic threats to our industry from the large number of heifers 
waiting to join the national herd and the huge stocks of products in 
government storage that will have to be sold on the world market 
someday and threaten to hold prices down. Raising the drawbridge by 
artificially raising the U.S. milk price through supply management will 
not do anything about either trend. It will make us less competitive on 
the world market, perpetuate the surpluses, and do nothing to increase 
demand. Again, ultimately only the operation of a free market can bring 
supply and demand into balance.
    For supply management programs to succeed, someone must be able to 
predict production and demand accurately, not just for the next 
quarter, but beyond. A producer can not turn a spigot to raise or lower 
production at will. Adjustments are made over years, not over weeks or 
months, because the production cycle of a cow is so long (2 years for a 
calf to come into production, and a 4 year productive life of an 
average cow). Production cycles in other food animals (chickens, hogs, 
beef cattle) are much shorter and capacity can be adjusted much more 
quickly than in dairy. There is no known model today which can 
consistently determine what production should be. We know that free 
markets are the most efficient way to match supply and demand. Managed 
economies usually create either shortages, because prices are held so 
low that producers lose the incentive to produce, or surpluses, if 
prices are kept artificially high and encourage overproduction.
    Not only do supply and demand vary from time to time, they vary 
from place to place. As it stands now, milk demand exceeds supply in 
the Northeast, is somewhat balanced in the Southwest and in surplus in 
California. This summer, a heat wave in California will probably change 
this balance temporarily, but it may not. Shorting milk nationally 
because one region is overproducing makes no sense in other regions. 
The view from the West Coast is different. We have a favorable climate 
for crop production and dairy cows, and a large supply of feeds that 
are byproducts of the bounty of food crops produced in the area. We 
have access to West Coast ports and the Columbia River to get our 
products onto ships. We are a long way from eastern markets and the 
bulk of the U.S. population. After consumer demands in our region are 
met, we have little opportunity to send our milk East. Large and 
growing milk sheds to the East of us are supplying large and efficient 
plants that are closer to eastern markets. The result is that the West 
Coast must look to Mexico and the Pacific Rim for its demand. To meet 
that demand we have to have the milk and we have to be able to compete 
in the world market. Penalizing efficient producers and limiting milk 
production to raise the U.S. milk price artificially will, in the long 
term, doom the dairy industry on the Pacific Coast, which includes many 
small producers as well as big ones.
    Some would counter that the allowances could be made regionally, 
not nationally, but to what effect? There is a great interdependence 
between regions. The Southeast, for example, receives a substantial 
amount of its milk from the Southwest, Central, Mideast, Midwest and 
Northeast. Milk flows freely from region to region to fulfill demand 
and to pursue pricing opportunities.
    Ultimately the design of any program will be affected by politics. 
Since there are many more consumers who vote than dairy farmers, it is 
likely to that politics will demand lower consumer prices. Ultimately 
lower farmgate prices will result, which could result in milk 
shortages. Interregional politics will also come into play, and dairy 
production will be preserved in inefficient areas where it is dying 
out. Setting prices too high in the hope of preserving the family farm 
will encourage overproduction, raise consumer prices, reduce demand, 
increase government surpluses, and cause food processors to seek 
alternatives to dairy ingredients. Again, free markets (with 
appropriate safeguards) allocate resources more efficiently and 
accurately than any agency or political process can.
    The major selling point of supply management has been that milk 
prices will be more stable. That is there will be no more lows like 
now, neither will there be any highs like last year. What this means is 
that American producers would receive a different price than the one 
that the world market would provide. Higher sometimes, lower sometimes. 
Those restrictions will not apply to milk produced outside of the 
United States. To support prices higher than those dictated by 
economics, there need to be barriers which protect the industry from 
outside forces. Outmoded political, physical, and sanitary barriers 
cannot protect the U.S. dairy industry from the outside world.
    The political barriers no longer exist. Just last year an Ontario 
court stopped shipment of milk from that province into the United 
States. Milk marketing orders, state health departments and other 
local, state, and Federal agencies in the United States were unable to 
stop that milk coming in. In fact some, such as milk inspectors, helped 
it. Instead the milk was stopped because the Canadian court held that 
all milk produced in Ontario belonged to Dairy Farmers of Ontario and 
DFO did not wish to market in the United States. That could change 
tomorrow and we would not be able to stop it. Under NAFTA it is 
virtually impossible to export milk and milk products into Canada and 
equally impossible to stop Canadian milk from coming into the United 
States. The proximity of Canadian milk sheds to U.S. markets in the 
East and the Northwest makes this a major long term threat if our milk 
prices get out of alignment with world prices.
    Our southern border also poses a challenge. Milk processed in 
Mexico, whether U.S. milk exported to the plant or milk produced in 
Mexico, can come into the United States virtually without tariffs and 
free of Federal Milk Marketing Orders and a supply management program. 
Large population areas in Texas and Southern California are ready 
markets if milk prices are out of alignment.
    Physical barriers no longer protect us. The use of container ships 
and a massive, efficient, and speedy transoceanic transportation system 
mean that the cost of transportation on milk and milk products to the 
United States provides a lower cost barrier than before. U.S. prices 
cannot be too far out of alignment with world prices plus those lower 
transportation costs. Added value products such as cheeses and creams 
and even UHT fluid milk would be attractive exports to the United 
States if milk prices were out of alignment with the world.
    Over the years various trade agreements in addition to NAFTA have 
provided access to our domestic markets. We have attached a table 
showing the amount of dairy products are allowed under multilateral and 
unilateral trade agreements. Limits on imports from the European Union 
are not strong enough to prevent a misalignment of prices from 
attracting European milk and milk products to the U.S.
    Sanitary rules provide no protection. To market products as Grade A 
anywhere in the United States, the product must come from a plant 
certified on the interstate milk shippers (IMS) list which in turn 
means that the plant must use milk that comes from farms meeting the 
Pasteurized Milk Ordinance (PMO) requirements. Though this is universal 
in the United States and is a U.S. program, it is not limited to the 
United States. PMO certifying agencies in Florida, New York, and 
Vermont have inspected and certified plants in Greece, Spain and 
Canada. A current list shows that plants in Spain, Ontario, and Mexico 
are on the IMS list and certified by third party certifiers.
    We are part of the world market and must meet that market. We are 
efficient producers of very high quality products. Our goal must be to 
sell American milk to the world, not provide opportunity for the world 
to sell milk in our markets. To do that we need a world based pricing 
system so that we can be exporters of milk and milk products.
    Columbia River Dairy's contract with its customer is a good example 
of how milk can be produced to meet the challenges of the future. Our 
dairy was located specifically to be close to feed, water, and a 
market. The plant where we send our milk was built to accommodate the 
production of our dairy and two others in the area. Our contract was 
negotiated to meet our customer's needs, its customers' needs, and our 
needs. It creates a fair means for win-win-win, although we are 
currently receiving less than our cost of production and are losing 
money like everyone else. The contract provides for surplus milk so 
that it does not become a burden for anyone. I agree with a witness 
from the first hearing who said that the way to get supply and demand 
into balance is at the farm to plant level. One of the reasons for the 
current oversupply of milk was the failure of co-ops to place limits on 
milk shipments from their members. They built new plants instead, to 
harvest the make allowance, and with the assurance that the government 
would be the ultimate customer for powder, butter, and cheese. An 
improved system would send clearer signals to co-ops and producers not 
to produce in excess of what their customers need.
    Producers who would compete on the world market and still make a 
profit must be efficient. Current dairy programs such as the milk 
marketing orders and dairy product price support program create or 
encourage inefficiencies and discourage efficiencies. The make 
allowance formulas should be replaced with competitive pricing. Plants 
and producers need to be free to negotiate supply and price to maximize 
the profits of both. That negotiation requires transparency of 
information. Full and timely disclosure of volumes of milk and milk 
products and prices will help us achieve the efficiencies we need. The 
dairy product price support program needs to end. We need to be free to 
clear the market and to grow with the market. We certainly do not need 
a supply management program that taxes those who wish to locate and 
grow to meet demand efficiently and reward those unwilling to take on 
those opportunities. All the products the government holds eventually 
have to be sold to someone and will depress future prices. In the end 
it is producers, taxpayers, and consumers who pay the price for these 
programs.
    In times like these, free markets look cruel, and it is tempting to 
try to temper their effects. It is painful to see families losing their 
life's savings and businesses that have become part of their identity. 
Businesses that supply dairy farmers also feel the pain and the risk of 
financial ruin. Dedicated dairy workers lose their jobs and cows get 
loaded on trucks and go off to an uncertain fate. But in the long run, 
the market will win. Artificially raising the milk price will reduce 
our competitiveness, encourage overproduction, and cause even greater 
surpluses to hang over future markets from government storage.
    Thank you again for giving me this opportunity.
    I will be happy to answer any questions.

    The Chairman. Thank you very much. Now we will hear from 
Ms. Melissa Hughes, General Counsel to CROPP Cooperative.

         STATEMENT OF MELISSA L. HUGHES, J.D., GENERAL
           COUNSEL, CROPP COOPERATIVE (COULEE REGION
           ORGANIC PRODUCE POOL), LaFARGE, WISCONSIN

    Ms. Hughes. Mr. Chairman, Members of the Committee, good 
morning. My name is Melissa Hughes, with CROPP Cooperative in 
LaFarge, Wisconsin. Thank you for the opportunity to come here 
today to discuss the current economy's impact on the organic 
dairy industry.
    CROPP stands for Cooperative Regions of Organic Producer 
Pools. We are the largest national organic cooperative. Founded 
20 years ago by eight farmers, last year we had over $500 
million in sales of organic dairy products, juice, produce, 
eggs, and meat. We have over 1,300 certified organic farmers in 
28 states. Of that, approximately 1,050 are dairy farmers with 
an average herd size of 50 cows.
    After 20 years of double-digit growth, 2009 has seen that 
growth come to a screeching halt. Some companies have seen 
sales fall back. Ours are flat. The organic dairy industry is a 
separate but parallel stream to the conventional industry. You, 
Congress, helped create this separate stream of commerce with 
the passage of the Organic Foods Production Act in 1990. It 
takes stringent requirements to get into this stream and the 
USDA's National Organic Program is there to enforce the 
regulations.
    We appreciate your continued support of the NOP and the 
Secretary's commitment to strengthening and solidifying the 
organic program. In an era where many claim to be natural or 
green or sustainable, organic remains and should remain the 
gold standard of labels, assuring consumers that the products 
have followed a rigorous production standard audited and 
verified from farm to shelf.
    But like many other industries, our lane of traffic has hit 
a traffic jam. Our sales have slowed, causing an excess of 
supply of organic milk. Although certainly the recession has 
contributed, we believe other factors have played a part. As 
the gold standard, many have tried to knock organic from the 
pedestal. Some of those attacks have come from our own 
community.
    Another factor has been a rush of companies coming into our 
stream. Who can blame them? We were moving faster. But as those 
companies have realized, organic dairy is a complicated 
business to run and they have left the market. The tragedy here 
is that this has left many small organic dairy farmers stranded 
with no market for their organic milk. Although they want to 
remain organic, the high cost of production and feed is forcing 
them to go conventional or stop dairying entirely. Organic 
helped them stay on the farm, and without organic they are 
leaving the farm. This is terrible for our agricultural system 
and for our rural communities.
    Today, we at CROPP are doing okay. The fundamental 
principles of our business, organic production, a stable and 
sustainable pay price and supply management are serving us 
well. Organic production provides a valuable product our 
consumers desire. A stable and sustainable pay price enables 
our farmers to know what to expect in their mailbox and know it 
will cover their costs. We continue to pay our farmers an 
average of $27/cwt.
    Finally, we are diligent in our efforts to match supply 
with demand. We have instituted a supply management quota to 
address the current oversupply. Our farmers have collectively 
decided to reduce their production by seven percent. While this 
is certainly not easy, we believe this supply management effort 
will get us through this period and provide us with good 
lessons for the future.
    Again, Mr. Chairman, we appreciate your continued support 
of organic production and the National Organic Program. 
Although separate and distinct, our neighbors and partners are 
conventional dairy and we sincerely appreciate your efforts to 
help them through this difficult period. Thank you.
    [The prepared statement of Ms. Hughes follows:]

 Prepared Statement of Melissa L. Hughes, J.D., General Counsel, CROPP 
     Cooperative (Coulee Region Organic Produce Pool), LaFarge, WI

    Mr. Chairman, and Members of the Committee, thank you for inviting 
our organization to appear before you and participate in this 
important, ongoing discussion of current conditions in the dairy 
industry.
    Twenty years ago, eight farmers in the small town of LaFarge, 
Wisconsin came together at a moment not completely unlike this period 
in the conventional dairy industry, when milk was at prices well below 
the cost of production and farms were forced out of business everyday.
    These farmers were schooled in the ways of the conventional dairy 
system. They had seen the roller coaster prices, and cooperatives who 
were supposed to serve the farmers, serving themselves. At a time when 
the small farmer was struggling to stay on the farm, this group saw 
organic management principles and the consumer demand as path to 
redesigning the relationship between the farmer and the customer, and 
reconnect the production of milk to the management of land and animals.
    Our cooperative is built on the foundation that organic production 
of milk is the result of sustainable husbandry and farming practices 
and that these principles must yield a sustainable income. Our farmers 
have translated those principles into a business model that has 
democratically guided the cooperative over the last twenty years, and, 
we like to believe, influenced the organic marketplace to an extent 
that the principles are part of that marketplace.
    Of course, front and center was the principle that organic farming 
worked. Appealing to every farmer's independence, and recognizing the 
connection between livestock and the land, the farmers chose to be as 
self-sufficient as possible--avoiding off-farm inputs, including feed 
and chemicals. The farmers had either farmed conventional and were 
looking for alternatives, or had never chosen that route. As one farmer 
said ``it was easy for me to go organic. I was so far behind I was 
ahead.'' Whichever path the farmer had come from, they now joined on a 
path towards organic production.
    The next guiding principle is the farmers always get paid a target 
price first. It does not matter if the milk is sold on promotion, or if 
the milk is made to cheese, or powder. When a consumer purchases a 
gallon of Organic Valley milk, and that money is returned to the 
cooperative, the farmer is paid first.
    The third guiding principle is a stable pay price. Each year, the 
farmer-governed Board of Directors sets a target pay price for the 
upcoming year, and although minor adjustments may be made, up or down, 
the farmer can expect that this pay price will be reflected in the milk 
check. The money left over from the sale of the milk goes to the 
cooperative for operations. The goal of the pay price is to pay the 
farmers a price that is economically sustainable in that it accurately 
reflects the farmers' costs of production. The pay price is not tied to 
conventional prices. The simplicity of stable pricing obviously 
benefits the farmers, and in addition, benefits, processors and 
retailers, as well as consumers by setting consistent expectations in 
price.
    Attached to this testimony is a graph demonstrating the comparison 
of our Midwest base price to the conventional statistical uniform 
price. (Our Midwest base excludes quality components in excess of base 
and regional premiums.) Although not perfect, you will see that our 
price has been stable, growing and reliable.
    To support the target pay price, if we are not able to sell their 
milk for the organic price we have set, we will not sell the milk as 
organic. We will not participate in a spot market for organic milk that 
drives the overall price down. If we cannot sell the milk for the 
organic price we have set, we sell it conventionally. We will not 
engage in a bidding war that lowers the price of our organic milk. Our 
farmers rely on a price that reflects, to the best of our ability, our 
farmers' cost of production and marketing. To sell organic milk for 
less would treat our principles as little more than a marketing ploy 
and defeats the purpose.
    From the small beginning of eight farmers, CROPP Cooperative has 
grown into nation's largest organic dairy cooperative. We have over 
1,300 USDA-certified organic members, who collectively produce 
certified organic dairy products, eggs, beef, poultry, soy, produce and 
juice. In 2008, our total sales were $527.8 million, representing 22% 
growth over 2007. In 2008, we paid our dairy farmers a total organic 
premium of $85.0 million.
    This is not to say that the path has been smooth. Throughout the 
years, we have experienced many difficulties involving matching supply 
and demand and the challenges of a fledgling industry. We, and the 
organic dairy industry, are not immune from the current economic 
crisis. After experiencing double digit growth for the last 20 years, 
our growth for 2009 is flat, if not in some cases, down. Prior to the 
downturn, for the last 9 years, we have been unable to meet the supply 
demands of the consumers. We continually worked to talk to farmers 
about the benefits of transitioning to organic, and many of those 
farmers became our members. At this time, we are no longer actively 
recruiting farmers to consider the transition to organic. We do have 
farmers approaching us to market their milk--whether newly 
transitioned, or existing organic farmers who have lost their organic 
market. For those farmers who come to us, we can make no promises that 
we will have a market for their milk. The cooperative has stopped 
capital projects, has slowed hiring, and is heavily promoting in our 
retail markets.
    However, we do continue to pay our farmers an national average 
mailbox price of $27/cwt. We have not kicked any farmers off our truck 
because of a market declines. We believe that we have seen the bottom 
of the marketplace, and hope to see sales stabilizing and growth 
returning in the next 6 months. For the most part, we believe our 
members will come through this economic crisis and stay on their farms. 
Many are suffering, as costs of health care, feed and other hardships 
are forcing farmers or their families to take positions off the farm to 
cover costs. Farming is a hands on job, and when farmers are forced to 
leave the farm, and in their absence, new problems can develop and 
existing ones can be exacerbated.
    The current economy has challenged but not defeated our guiding 
principles. The low price of conventional milk has meant that when we 
sell organic milk conventionally, we have to make up the difference to 
our farmers some other way. As a cooperative, our farmers are committed 
to investing in the business, and so a strong equity structure has 
helped us weather this period financially. However, continued low 
conventional prices will put more strain on our cooperative.
    In June, we chose not to lower the pay price, and instead chose to 
institute a supply management system within which our farmers decided 
to lower their production by 7%, and for any production over 93%, the 
farmers will receive the conventional price. You have heard many 
proposals to vitiate price volatility, and heard much about the 
concepts of Federal supply management during these hearings. We are 
trying what has worked for use for twenty years, farmer-based supply 
management. We don't claim this is easy, each of our 1,300 farmers has 
a family, and a story. Our process lets each farmer tell their story by 
appealing the quota, asking for relief because of the hardships unique 
to their story. Our own farmer-members hear the appeals and this means 
we are, together, writing the next chapter of each farm's story and the 
story of our cooperative. Like any collective effort, we find some 
farmers are willing to do more to help than others. But we are 
committed that collectively we can make supply management work to get 
through this time, and certainly believe it will be part of our 
marketing system moving forward.
    As independent as we like to be, we know part of our story includes 
Congress, and the United States Department of Agriculture. An early 
chapter was written by the Congress in 1990; the enactment of the 
Organic Food Production Act, meant that organic, by Federal mandate, is 
a separate and distinct category of products from ``conventional.'' By 
creating a production and handling system that is audited and verified 
at every step of the process as more environmentally sustainable, 
beginning on the farm and running all the way to the shelf, Congress 
authorized a parallel stream of commerce. We know that the organic 
community has not been easy to work with. This new way of producing 
products has lead to new ways of doing business, like our cooperative. 
This that would not have happened without Congress' continued support.
    Today, the organic industry stands alone as one of the main engines 
of growth in U.S. agriculture and food sales. The 2008 Farm Bill 
included unprecedented recognition of the importance of this separate 
stream of organic. We appreciate that support, especially as its 
reflected in increased funding for the USDA's National Organic Program, 
and its expanded influence that can assure that the organic certificate 
remains the gold standard among the world's certification processes.
    But the challenges to the National Organic Program are not easy to 
address. The rise of unregulated labels on products, like ``natural'', 
``sustainable'', or ``local'' have the potential to undermine Congress' 
seal. Some organic purists have argued that organic does not mean what 
it says. Our primary interest is that the USDA organic seal is seen as 
the first and last inquiry a consumer needs to make when purchasing an 
organic product. Without this level of certainty, the risk exists that 
consumers believe that some goods are ``more organic'' than others, or 
worse, that the USDA organic seal itself does not necessarily mean that 
goods were produced in strict adherence with organic standards.
    To that end, we are working with the USDA to promulgate clear and 
understandable organic regulations as soon as practicable regarding 
pasture and other issues used to ``threaten'' the integrity of the 
organic seal. In addition, where necessary, the USDA needs to enforce 
organic standards swiftly and based on fact, not mere allegations. We 
ask for a full commitment from Congress and the USDA to the organic 
seal, and to reject labels that confuse the marketplace, and the 
consumers.
    And although we are a separate and parallel industry to 
conventional, we are affected by the difficult times facing 
conventional dairies. Our neighbors are conventional dairymen, the 
processing plants we work with are conventional, the stores we sell to 
also sell conventional milk. A low and volatile conventional price has 
strong effects throughout our industry, and through the United States' 
food supply. While we recognize that we cannot walk in conventional 
shoes, we do believe that lessons can be learned at this moment, and if 
the work is done in the upcoming months, the lessons will not be 
forgotten.
    But these difficulties faced can only be avoided by creating the 
atmosphere for a cultural shift in the dairy industry. Short term cures 
like ``more exports'' or expanded purchase by government programs do 
not address fundamental structural problems in the dairy industry. A 
traditional dairy farm of thirty cows was historically naturally 
restricted from growth by barn size and land base. These small family 
farms formed the basis of a vibrant and healthy rural community and 
diverse food supply. We feel it is good public policy to have tens of 
thousands of family farms provide diversity of farm operation and 
production, train tomorrow's farmers and support rural communities. A 
large group of moderately scaled farms supports this policy, rather 
than concentrating operations in hands of larger and larger farms.
    Today, farms expand without check--adding cows in a milk parlor 
setting by simply lengthening milking time, and defying breeding 
variances by using sexed semen to select for heifers. These seemingly 
simple choices have led to increased supply without concern for the 
market, or penalty for the producer. The producers and processors who 
have grown without a market should bear the burden more than the farmer 
who has managed growth conservatively. Today's drive to find markets 
overseas does not recognize the growth of overseas supply, with low 
costs which U.S. dairymen cannot compete against. In our cooperative's 
small microcosm, we have been able to have the farmer receive what the 
farmer needs to stay on the farm, we have shared the risk of changes in 
supply and demand, and we have always tried to build our production 
around the current demands of the market. The connection of land and 
animals has forced a natural boundary on supply increases, allowing for 
growth, but in reasonable, manageable increments.
    We cannot offer the detailed short-term efforts that others have 
suggested for conventional dairy policy. But we can encourage the dairy 
industry to consider long term efforts that include supply management 
tools, quotas, or forward contracting. Our ideas, tested over twenty 
years, once seemed radical, and now seem conservative. But in the 
course of twenty years, most important of all, we have reconnected the 
consumer and the farmer. Our consumers purchase our product because 
they believe in the value of our production methods, and they believe 
that the value is reflected in a sustainable price that can be returned 
to our farmers. This might seem radical today to the dairy industry, 
but a short twenty years from now, the consumers could understand and 
value the dairy farmers of America in a manner that they deserve.

                               Attachment



 Thank you, Ms. Hughes. Now we will have Mr. Gordon Cook, Jr.STATEMENT 
     OF GORDON M. COOK, Jr., MEMBER, BOARD OF DIRECTORS, HOLSTEIN 
                      ASSOCIATION USA, INC.; DAIRY
                          PRODUCER, HADLEY, MA

    Mr. Cook. Thank you, Chairman Peterson, and Chairman Scott, Ranking 
Member Lucas, and Ranking Member Neugebauer, and other distinguished 
Members of this Committee for inviting me to testify.
    I am Gordon Cook, a dairy farmer from Hadley, Massachusetts, who 
milks about 65 cows, and I am here representing the 30,000 members of 
the Holstein Association USA, Inc., a nonprofit dairy organization that 
is headquartered in Brattleboro, Vermont. I am here to talk about our 
Dairy Price Stabilization Program which we believe will be able to 
stabilize the peaks and valleys of milk prices.
    The crisis facing American dairy farmers is well documented. You 
are aware that basically every dairyman in this country is losing money 
on every pound of milk they sell. What has led us to this crisis? The 
landscape of the dairy industry has changed significantly since our 
current milk pricing system was established. There is a disconnect 
between the producer and processor, which generally is not beneficial 
to the dairy farmer.
    For example, for 1 gallon of milk that the consumer pays $2.99, the 
dairy farmer who produced that milk gets just 91 cents. The $2.08 
difference goes to the dairy producer and retailer.
    We have seen changes in the quantities of dairy ingredients and 
products being imported into the United States from other countries. In 
general, as dairy imports increase the price paid to U.S. dairy farmers 
decreases.
    A third change is the development of sexed semen and the effect it 
is having and will have on the amount of milk produced in the United 
States. This year, we expect 63,000 extra heifers to enter the national 
dairy herd, and in 2010 that number is expected to increase to 161,000.
    Historically, the U.S. milk pricing system has encouraged dairymen 
to produce all the milk they can, which has led us to instability in 
prices paid to farmers. In the last 4 years, we have seen the U.S. all-
milk price average fluctuate between $20.50 and $11.50.
    Milk is perishable, unlike other agriculture commodities such as 
corn and soybeans that can be stored until the market reaches an 
acceptable level. It is time for our industry to change its mindset and 
start producing milk for the market instead of hoping we can market all 
of the milk we produce.
    The basic objective of the Holstein Association Dairy Price 
Stabilization Program is to prevent severely depressed producer milk 
prices that result in low and negative returns to dairy producers; to 
reduce the volatility of milk prices, thereby reducing the price risk 
to dairy producers, dairy processors and consumers of milk and dairy 
products; to complement and not replace other existing dairy programs 
such as the Federal Dairy Price Support Program and the Milk Income 
Loss Contract program. In fact, our program may well reduce the Federal 
Government's cost to both of these programs.
    Here is an overview of the program. Further details have been 
submitted to you in writing. Let me stress, this program will not 
require the farm bill to be opened. The Dairy Price Stabilization 
Program removes the incentive to produce milk beyond the levels of our 
markets demands. It rewards producers to stay in line with market 
needs. The U.S. Secretary of Agriculture would administer the program 
with an advisory board. The board will forecast the 12 month domestic 
and export market demands for fluid milk and manufactured dairy 
products.
    With consideration toward the current level of milk production, a 
determination will be made to the needed change in milk production to 
fulfill the market needs for each quarter of the next 12 months to 
return a profitable price to dairymen. This is referred to as the 
allowable milk marketings, AMM. Dairy producers who maintain their milk 
marketings by quarter within the AMM will not have to pay a market 
access fee. Dairy producers who expand their operation and exceed their 
AMM will be assessed a market access fee per hundredweight on total 
milk marketing. Initially we would expect the fee to be between $2 and 
$3 per hundredweight on all milk marketed as determined by the 
Secretary of Agriculture through the board.
    The fees collected from producers paying the market access fee 
would be distributed as a bonus to dairy producers who stayed within 
their allowable milk marketings.
    Producers will receive their base by filing their history of milk 
production in monthly marketings to the area USDA Farm Service FSA 
office. The FSA office will notify the producer's milk plant or dairy 
cooperative to deduct the market access fee if the producer exceeds 
their AMM.
    The cost of the program to taxpayers is nothing. We would expect an 
assessment of less than 2 cents per hundredweight to producers of all-
milk marketings to cover administrative costs of the program.
    We are certain that there will need to be some sort of short-term 
fix such as a temporary 6 to 12 month raise in the Price Support 
Program or other quick remedy. However, the dairy industry cannot keep 
coming back to Washington for continued bailouts. The Dairy Price 
Stabilization Program provides that long-term solution.
    On behalf of the Holstein Association, I thank you for this 
opportunity and I will look forward to your further questions.
    [The prepared statement of Mr. Cook follows:]

Prepared Statement of Gordon M. Cook, Jr., Member, Board of Directors, 
       Holstein Association USA, Inc.; Dairy Producer, Hadley, MA

    Thank you Chairman Peterson, Chairman Scott, Ranking Member Lucas, 
and Ranking Member Neugebauer for inviting me to testify. I am a dairy 
farmer from Hadley, Massachusetts who milks 65 cows, and I am here 
representing the 30,000 members of the Holstein Association USA, Inc., 
a nonprofit dairy organization that is headquartered in Brattleboro, 
Vermont. I am here to talk about our Dairy Price Stabilization Program 
which we believe will be able to stabilize the peaks and valleys of 
milk prices.
    The crisis facing America's dairy farmers is well documented. You 
are aware that basically every dairyman in the country is losing money 
on every pound of milk they sell.
    What has led us to this crisis? The landscape of the dairy industry 
has changed significantly since our current milk pricing system was 
established. Sometimes there is a disconnect between the producer and 
processor which generally is not beneficial to the dairy farmer.
    For example, for 1 gallon of milk that the consumer pays $2.99 at 
the grocery store, the dairy farmer who produced that milk gets just 
91 cents. The bulk of the $2.08--the difference between what the 
consumer pays and the farmer receives--goes to the dairy processor, and 
retailer.
    We have seen changes in the quantities of dairy ingredients and 
products being imported to the United States from other countries. In 
general, as dairy imports increase, the price paid to U.S. dairy 
farmers decreases.
    A third change is the development of sexed semen and the effect it 
is having, and will have, on the amount of milk produced in the United 
States. This year we expect 63,000 extra heifers to enter the national 
dairy herd, and in 2010, that number is expected to increase to 
161,000.
    Historically, the U.S. milk pricing system has encouraged dairymen 
to produce all the milk they can, which has led to instability in 
prices paid to farmers. In the last 4 years, we have seen the U.S. all-
milk price average fluctuate between $20.50 and $11.50.
    Milk is perishable, unlike other agriculture commodities such as 
corn, soybeans, and others that can be stored for days, or months until 
the market reaches an acceptable level. It is time for our industry to 
change its mindset and start producing milk for the market, instead of 
hoping we can market all the milk we produce.
    The basic objectives of the Holstein Association's Dairy Price 
Stabilization Program are:

   To prevent severely depressed producer milk prices that 
        result in low and negative returns over feed costs to dairy 
        producers.

   To reduce the volatility of milk prices to dairy producers 
        and thereby reduce the price risk to dairy producers, dairy 
        processors, and consumers of milk and dairy products.

   To complement, and not replace, other existing dairy 
        programs such as the Federal dairy price support program and 
        the Milk Income Loss Contract Program. In fact, our program may 
        reduce the Federal Government cost of both of these two 
        programs.

    Here is an overview of the program, and further details have been 
submitted to the Committee in writing. Let me stress, this Program will 
not require the farm bill to be opened.
    The Dairy Price Stabilization Program removes the incentive to 
produce milk beyond the levels our market demands. It rewards producers 
who stay in line with market needs.
    The U.S. Secretary of Agriculture would administer the program with 
an advisory Board. The Board will forecast the 12 month domestic and 
export market demands for fluid milk and manufactured dairy products.
    With consideration of the current level of milk production, a 
determination will be made to the needed change in milk production to 
fulfill the market needs for each quarter of the next 12 months and 
return a profitable price to dairymen. This is referred to as the 
``allowable milk marketings''.
    Dairy producers who maintain their milk marketings by quarter 
within the allowable milk marketings will not have to pay market access 
fees.
    Dairy producers who expand their operation and exceed their 
allowable milk marketings will be accessed a market access fee per 
hundredweight on total milk marketings. Initially, we would expect the 
fee to be between $2.00 to $3.00 per hundredweight on all milk marketed 
as determined by the U.S. Secretary of Agriculture and the Board.
    The fees collected from producers paying the market access fee 
would be distributed as a bonus to the dairy producers who stayed 
within their allowable milk marketings.
    Producers will receive their base by filing their history of milk 
production and monthly marketings to their area USDA Farm Service 
Agency (FSA) office. The FSA office will notify the producer's milk 
plant or dairy cooperative to deduct the market access fee, if the 
producer exceeded their allowable milk marketings.
    The cost of the program to taxpayers is nothing. We would expect an 
assessment of less than 2 cents per hundredweight to producers on all-
milk marketings to cover administrative costs of the program.
    We are certain that there will need to be some sort of short term 
fix, such as a temporary 6-12 month raise in price support or some 
other quick remedy. However, the dairy industry can not keep coming 
back to Washington for continued bailouts. The Dairy Price 
Stabilization Program provides a long-term solution.
    In closing, the Holstein Association's membership of 30,000 dairy 
producers of all sizes from coast to coast appreciate the study you are 
doing on the U.S. dairy crisis. Something needs to be done now to stop 
the volatile producer milk price roller coaster ride our nation's dairy 
farmers continue to experience.
    The Dairy Price Stabilization Program was developed for dairy 
producers by dairy producers and is a long-term solution to the problem 
of milk price volatility. This Program will be beneficial to dairy 
farmers, milk cooperatives, processors, and consumers.
    Thank you very much.

                               Attachment

Holstein Association USA, Inc.
Dairy Price Stabilization Program--Draft
Updated July 22, 2009

    The volatility in dairy product prices and dairy producer milk 
prices is extremely difficult for dairy producers, milk processors and 
end users of milk and dairy products to manage. The U.S. All Milk price 
averaged $15.13 for 2005, just $12.88 for 2006, a record high of $19.13 
for 2007 and $18.32 for 2008, the second highest on record. But, the 
U.S. All Milk price was a record monthly high of $21.90 November of 
2007, started 2008 with a January price of $20.50 only to fall to 
$15.60 by December and down to $11.50 for February 2009. Such 
volatility creates major problems for dairy producers to manage cash 
flow and make capital investment decisions. When prices are at their 
lows returns over feed costs become unfavorable and even negative. 
These unfavorable returns have a negative impact beyond the dairy 
producer level. Farm input suppliers are negatively impacted as dairy 
producers reduce their purchases of feed, seed, fertilizer, crop 
chemicals, machinery and other inputs. These lower input purchases 
negatively impact local businesses and communities.
    Program objectives:

   To prevent severely depressed producer milk prices that 
        result in low and negative returns over feed costs to dairy 
        producers.

   To reduce the volatility of dairy product prices and 
        producer milk prices and thereby reduce the price risk to dairy 
        producers, dairy processors and end users of milk and dairy 
        products.

   Provide flexibility in allowing dairy producers who wish to 
        expand their dairy operations as well as providing for new 
        producers who wish to enter dairying.

   To complement and not replace other existing dairy programs 
        such as the Federal dairy price support program and the Milk 
        Income Loss Contract Program. In fact, this program would 
        reduce the Federal Government cost of both of these two 
        programs.

   Provide for a long run dairy program for 7 years with a 5 
        year review for continuation and/or modifications based on past 
        performance.

    Program provisions:

   The program is mandatory in that all states will be 
        included. However, it is flexible in that individual producers 
        may decide to expand their dairy operation and new producers 
        are allowed to enter the dairy industry. States having programs 
        to grow their dairy industry will still be able to implement 
        such programs.

   For the purpose of this legislation, the term ``new 
        producer'' shall be defined as any individual or group of 
        individuals entering the dairy business, none of whom have any 
        interest in a current dairy enterprise.

   Upon implementation of the program, each dairy producer will 
        be assigned an initial base of raw milk marketings from April 
        1, 2008 through March 30, 2009. There will be a Committee setup 
        to review individual appeals. For those producers with less 
        than a 12 month history and for new producers entering after 
        the implementation date, their base will begin with their first 
        full quarter of milk marketings and for the next three 
        quarters. Each producer's base will be divided into their 
        quarterly historical milk marketings. Bases are a moving base 
        whereby at the beginning of the next 12 month period, a 
        producer's base will be the recent past 12 months.

   The base is assigned to the producer owning the producer 
        license for the dairy operation.

   Bases can be transferred to someone who takes over the dairy 
        operation on the existing dairy facility.

   Producers can combine their bases from two or more 
        facilities into one dairy facility provided each producer 
        holding one of the bases to be combined remains engaged in milk 
        production of the operation in the combined facility.

   In all other instances a producer's base evaporates once the 
        owner of the producer license no longer is actively producing 
        and marketing milk.

   The program will be administered by the U.S. Secretary of 
        Agriculture with an advisory Board, hereafter referred to as 
        Board, appointed by the Secretary from nominations. The Board 
        will include two dairy producers from each of six regions--the 
        West, South, Southeast, Central, Midwest and Northeast; one 
        consumer representative, one representative of dairy product 
        firms (cheese, butter, milk powder or other manufactured 
        products), one representative of a fluid milk bottler, and a 
        dairy economist advisor to the Board.

   The U.S. Secretary of Agriculture in consultation with the 
        Board will forecast the market for fluid milk and manufactured 
        dairy products (total commercial disappearance) that includes 
        both the domestic market, any foreseen government purchases, 
        and exports for each quarter of the next 12 months. Taking into 
        consideration the current level of milk production, a 
        determination will be made as to the needed change in U.S. milk 
        production to fulfill the market needs for each quarter of the 
        next 12 months allowing for a producer raw milk price that is 
        positive over operating costs as determined by the Board. The 
        Board will meet quarterly with the U.S. Secretary of 
        Agriculture to revise forecasts and to forecast out by quarter 
        for the next 12 month period. The market needs by quarter is 
        referred to as ``allowable milk marketings''.

   Dairy producers who maintain their milk marketings by 
        quarter within the ``allowable milk marketings'' are not 
        directly impacted by the program. Recognizing that milk 
        production is affected by weather, feed quality, herd health, 
        etc., a producer who exceeds the ``allowable milk marketings'' 
        for a given quarter by two percent or less will not be impacted 
        provided that their milk marketings for the entire 12 month 
        period are within the ``allowable milk marketings'' and if so, 
        any ``market access fees'' collected will be refunded.

   Dairy producers who produce at or below their ``allowable 
        milk marketings'' will not be impacted with a reduction in base 
        in the future marketing period/s.

   Dairy producers who wish to expand their dairy operation and 
        exceed the ``allowable milk marektings'' will be assessed a 
        ``market access fee'' per hundredweight on total milk 
        marketings. This ``market access fee'' will initially be in the 
        range of $2.00 to $3.00 per hundredweight on all milk marketed 
        as determined by the U.S. Secretary and the Board. Based on 
        historical performance of the program, this market access fee 
        may be increased or decreased, but cannot be increased for 
        dairy producers currently being assessed the ``market access 
        fee'' for the current 12 month marketing period. If the market 
        access fee would drop while a producer is expanding, the fee 
        could go down (because we need more milk), but a fee would 
        never go up once locked in for 12 months.

   For dairy producers who expand marketings beyond the 
        ``allowable milk marketings'' and pay a ``market access fee'', 
        their fees would be collected and redistributed back to the 
        dairy producers who held their milk marketings within the 
        ``allowable milk marketings''. Redistribution of ``market 
        access fees'' will be done annually at the anniversary date of 
        the inception of this program.

   Once it is determined that a dairy producer has expanded 
        milk marketings beyond the ``allowable milk marketings'' for a 
        given quarter, the dairy producer will have the ``market access 
        fee'' deducted from their milk check in the following quarter 
        and for the next three quarters. The dairy producer's higher 
        milk marketings during the first quarter and following three 
        quarters having a ``market access fee'' becomes the new and 
        higher historical base to which milk marketings for the 
        quarters for the next 12 months will be compared to. New dairy 
        producers are those who are not the transferee of an existing 
        dairy producer's base, but rather entering dairying as an 
        entirely new dairy operation. New dairy producers will have the 
        ``market access fee'' deducted for the first four quarters of 
        their milk marketings. Thereafter, the milk marketings during 
        these four quarters become the new dairy producer's base to 
        compare the next 12 months' milk marketings to.

   As with Milk Income Loss Contract payments dairy producers 
        will file their milk production history and monthly milk 
        marketings with their area USDA Farm Service Agency (FSA) 
        office to establish a milk base. Dairy producers will authorize 
        their milk plant or dairy cooperative to submit their milk 
        marketings directly to the FSA office. If a dairy producer's 
        milk marketings exceed the ``allowable milk marketings'' for a 
        given quarter, the FSA office will notify the dairy producer's 
        milk plant or dairy cooperative to deduct the ``market access 
        fee'' starting the following quarter and for the next three 
        quarters and submit the fees to the FSA office. Area FSA 
        offices will submit ``market access fees'' collected to the 
        national FSA office where they will be pooled and a value per 
        hundredweight will be calculated for distribution to all dairy 
        producers who had not exceeded the ``allowable milk 
        marketings''.

   Transfers of bases from one dairy producer to another or the 
        combination of bases must be approved by the area FSA office.

   The Federal Milk Market Administrator or State Market 
        Administrator, will, if solicited, provide information to use 
        to verify reported producer milk marketings from dairy plants.

    Administrative costs:

   An assessment of no more than 2 cents per hundredweight will 
        be assessed against all milk marketings to cover administrative 
        costs of the program. Milk plants are to submit these 
        assessments directly to the national FSA office.

    For more information, please contact:

Gordie Cook, Director and Chair, Legislative Affairs Committee, 
Holstein Association USA, Inc.;

Adam Griffin, Dairy ID Programs Manager, Holstein Association USA, 
Inc.;

Lucas Sjostrom, Government Relations Specialist and Communications 
Assistant, Holstein Association USA, Inc.

    The Chairman. Thank you very much, Mr. Cook. Now we will 
hear from Mr. Thomas Suber.

  STATEMENT OF THOMAS M. SUBER, PRESIDENT, U.S. DAIRY EXPORT 
                     COUNCIL, ARLINGTON, VA

    Mr. Suber. Mr. Chairman, Ranking Member, Members of the 
Committee, thank you for the opportunity to testify in a very 
serious situation facing our industry, due in large part to 
problems in our export markets.
    My name is Tom Suber. I am President of the U.S. Dairy 
Export Council. In partnership with dairy farmers, dairy 
processors, cooperatives, and the Foreign Agricultural Service, 
our mission is to increase the volume and value of U.S. dairy 
exports.
    Over the past several years, U.S. dairy exports expanded 
significantly, steadily setting new records. They grew from 
$1.1 billion in 2003 to $3.8 billion last year. Virtually all 
of these shipments sold without government or other assistance. 
The National Milk Producers have estimated this moves the 
producer prices by $1.69 per hundredweight last year, 
contributing $3.6 billion directly to producers' bottom lines.
    We export a broad array of U.S. dairy products. Thanks to 
NAFTA, our number one market is Mexico. We also ship 
considerable volumes of product to Canada, Southeast Asia, 
Japan, the Middle East, and China. Our export competitiveness 
was not unexpected, sudden, or the result of luck. Long-term 
factors, such as the world's rising middle classes improving 
their diets, using dairy's many nutritious forms, as well as 
favorable trade agreements such as the Uruguay Round and NAFTA 
opened up greater opportunities worldwide. Milk supply from 
traditional new sources simply can not keep up with this demand 
growth.
    To help our members seize these opportunities, we created a 
unified national research promotion trade policy and regulatory 
programs to help increase their sales. From 2003 to 2008, we 
exported almost 1 out of every 3 new pounds of milk we 
produced, doubling the percentage of exported milk production, 
reaching almost 11 percent by 2008.
    Our farmers did what any market economy should, expanding 
production in the face of steadily increasing demand using our 
high quality mid-tier cost base as our strength. Then 
unfortunately came the global economic and financial crisis 
last year, dramatically and deeply depressing dairy demand 
globally. Despite the crash in demand, these new milk supplies 
from the U.S. and other countries simply cannot stop, resulting 
in huge inventories both private and public.
    The soft global markets have resulted in recent declines in 
U.S. dairy exports. Through May of this year, exports 
represented only 8.1 percent of U.S. milk production. Much of 
the decline in this year's shipments comes from a drop-off in 
overseas sales of nonfat dry milk, exports through 5 months 
were 195 million pounds, down 53 percent. Cheese exports were 
similar, off 30 percent, totaling 90 million pounds for the 
same period. The reduced size of today's global market of these 
core products has forced them back into the U.S., depressing 
our product prices, as you have heard.
    Entering the second half of this year, despite continued 
activities by U.S. exporters, recovering global demand remains 
elusive, leaving expectations for soft commodity markets for 
the rest of this year and into 2010. Dairy demand remains 
sharply lower in emerging markets such as China and Southeast 
Asia, where we saw much of the growth of the past 5 years. 
Ultimately the return of consumer demand will only come with 
the restoration of economic growth, which fortunately has the 
attention of policymakers worldwide.
    In the medium and long term, however, virtually all 
forecasters see a return to dairy demand growth that exceeds 
the supply capacities of lower-cost exporters such as New 
Zealand and Argentina. The U.S. is well positioned to 
profitably meet this international market demand. Despite the 
declines in global markets, it is clear the processors and 
producers need exports for a healthy and growing industry.
    Funded by our own farmers and processors, USDEC is 
assisting U.S. export suppliers to make the marketing and 
relationship investments needed to sustain these markets. To 
complement the industry's own efforts, Congress and the 
Administration could pursue a number of measures that would 
maintain and improve our global competitiveness, while 
permitting a more rapid return to global markets as our 
economies improve. I will just touch on just a few of these 
here, others being mentioned in my written testimony.
    We should swiftly move towards approving pending FTAs with 
Panama and Colombia and especially Korea. We also need to 
swiftly and fully eliminate all export subsidies through a 
balanced and ambitious WTO round. However, until then, so long 
as the European Union continues to employ its export subsidies, 
the U.S. must use our own Dairy Export Incentive Program to its 
fullest extent. We also need to strongly enforce our rights 
under trade agreements to ensure that our exports have access 
that we have negotiated and won.
    As we do this, however, it is equally critical that the 
U.S. both live up to its own trade commitments and base trade 
related food safety decisions on sound science.
    In closing, I would call your attention to a forthcoming 
report by the Innovation Center on U.S. Dairy which will talk 
about the impact and consequences of dairy's increasing 
globalization. It calls out many of the issues that I mentioned 
before here, confirms them by a top-tier consulting firm about 
our global competitiveness as we will be able to reach late 
market demand that will exist internationally. As that report 
is done, we hope to be able to brief the Members of this 
Committee on it.
    Thank you very much.
    [The prepared statement of Mr. Suber follows:]

  Prepared Statement of Thomas M. Suber, President, U.S. Dairy Export 
                         Council, Arlington, VA

    Mr. Chairman, Ranking Member and Members of the Committee: Thank 
you for the opportunity to testify on the very serious situation facing 
our industry's ability to develop export markets and to present our 
recommendations for how to help improve these circumstances. My name is 
Tom Suber and I am the President of the U.S. Dairy Export Council. The 
U.S. Dairy Export Council (USDEC) is a nonprofit, independent 
membership organization that represents the export trade interests of 
U.S. milk producers, proprietary processors, dairy cooperatives, and 
export traders.
    The Council's mission is to increase the volume and value of U.S. 
dairy product exports. Our programs are jointly funded through the 
national Checkoff by dairy farmers, with matching funds from the U.S. 
Department of Agriculture/Foreign Agricultural Service (USDA-FAS) and 
from industry members. The programs cover a wide range of activities, 
but stop short of actually selling or subsidizing any dairy products.
    Both my preparation for testifying and my testimony today has been 
funded exclusively with non-Checkoff membership dues of the U.S. Dairy 
Export Council. The time I have spent preparing my written testimony 
and my appearance today have not been funded with any Checkoff dollars.
    I'd like to begin by thanking this Committee for the deep interest 
shown in the challenges currently facing the U.S. dairy industry and 
for the steps many Members of Congress have supported to help address 
the situation such as full use of the Dairy Export Incentive Program 
(DEIP). We appreciate the concern about the grave circumstances facing 
many in our industry at the moment and we hope these hearings will help 
shed some light on various aspects of the challenges facing the dairy 
sector.

Global Dairy Market Dynamics and U.S. Export Situation
    Over the past several years, U.S. dairy exports expanded 
significantly, hitting new record highs several years in a row. Over 
the past 5 years, U.S. dairy exports grew from $1.5 billion in 2004 to 
a high-water mark of $3.8 billion in 2008. By calculations made by the 
National Milk Producers Federation (NMPF), the impact of commercial 
exports boosted producer prices by $1.69 per cwt in 2008, thereby 
contributing $3.6 billion directly to dairy producer bottom lines.
    We ship a broad array of U.S. dairy products all around the world. 
Our number one market is our full NAFTA (North American Free Trade 
Agreement) partner Mexico, a market where we have substantially 
benefited from the full elimination of dairy tariffs and quotas. We 
also ship considerable amounts of product to Canada (despite the lack 
of virtually any NAFTA benefits for U.S. dairy exports there), 
Southeast Asia, Japan, the Middle East and China. Our most competitive 
products have been those products such as whey proteins and lactose for 
which global market distortions--high tariffs and quotas, export 
subsidies and domestic support--are lowest. However, we also have seen 
strong increases over the last 5 years in our exports of nonfat dry 
milk (NDM) and cheeses, in addition to other dairy products. The chart 
below illustrates this robust growth in U.S. dairy exports over the 
past several years on a total milk solids basis. 



    It was clear to the farmer leaders of Dairy Management Inc. when 
they founded USDEC in 1995 that these trends would inevitably lead to a 
favorable change in global dairy trade for the United States. 
Traditional suppliers from Europe, Australia and New Zealand would 
simply not be able to keep up with the demands of new dairy consumers. 
Consequently, the United States, as the world's largest cow milk 
producer with a high quality, mid-tier cost base, was well-positioned.
    Yet, it fell to USDEC to work with our industry--including farmer-
owned cooperatives, proprietary firms and trading companies--to 
capitalize on this opportunity. In short, we sought to maximize the 
upside and minimize the downside that underlying economic and trade 
circumstances would permit. Therefore, USDEC focused on carefully-
planned programs that integrated efforts to increase sales by helping 
members resolve constraints based on information, commercial, trade 
policy and regulatory factors.
    The steady increases in U.S. dairy exports over the last 5 years 
underscored the importance of this unified national strategy. As supply 
became strained either from temporary issues such as weather or 
currency value or from long-term trends cited earlier, U.S. dairy 
farmers had the capacity and the will to quickly expand production in 
response to marketplace signals.
    From 2003 to 2008, this was illustrated by two benchmarks. First, 
during this time, we exported almost one out of every 3 new pounds of 
milk we produced. Second, U.S. dairy exports as a percent of total 
production went from 5.7 percent to 10.8 percent. Also notable is that 
the DEIP program remained dormant during these years, as were massive 
EU export subsidies.
    The 2007-2008 drought in New Zealand accelerated this gradual 
tightening of supply into an acute pinch, driving global dairy prices 
to record levels. Matched with a run-up of commodities such as oil and 
other food and feed products, net consumer incomes in important 
emerging markets began to erode. Then, just as high prices began to cap 
demand in early 2008, the global economic and financial crisis hit in 
the third quarter of 2008.
    With these multiple factors, combined with the United States buying 
fewer goods from overseas, constrained or absent credit and trade 
financing, rising unemployment abroad and the dairy food scare brought 
on by China's melamine scandal, dairy demand simply crashed. During 
this same 2007-2008 time frame, record high milk prices worldwide 
fueled expanded milk production at the farm level. Oceania and European 
suppliers boosted production, as did supplemental global suppliers from 
South America and China.
    Despite the crash in demand, these new supplies from various 
sources could not simply be turned off, resulting in a build-up of huge 
inventories, both private and public, for the first time in 2 years. 
World dairy prices ended the year down significantly from where they 
started. Export prices for milk powder, cheese and butter fell 40 to 60 
percent in 2008, with the majority of the declines occurring in the 
second half. If this had been a more typical commodity cycle, we would 
surely have seen some weakening of demand such as that experienced in 
mid-2008. But the velocity and magnitude of the economic deterioration 
pushed the global market down far deeper than anyone expected.
    The soft global markets have resulted in declining U.S. dairy 
exports in 2009. From January through May, the value of U.S. dairy 
shipments was $855 million, down 52 percent from last year's record 
pace, according to U.S. Department of Agriculture/Foreign Agricultural 
Service data released July 10. In the first 5 months of the year, 
exports represented 8.1 percent of U.S. milk production as measured on 
a total solids basis. This figure is down from 10.8 percent of 
production in 2008 and the lowest percentage since 2004.
    The chart below depicts this trend line of exports as a percentage 
of total U.S. milk production through May 2009 (the most recent month 
for which data is currently available). For comparison, it also shows 
imports as a percentage of total U.S. milk production over the same 
time period. Both are calculated on a total milk solids basis.



    Much of the decline in 2009 volumes comes from a drop-off in 
overseas sales of nonfat dry milk/skim milk powder (NDM/SMP), the 
largest U.S. dairy export commodity by volume and value. Exports from 
January through May were 195.2 million lbs., down 53 percent. Some 
exporters, however, have maintained shipments in lieu of selling to the 
Commodity Credit Corporation (CCC) by creating a standardized protein 
skim milk powder that is more desirable than our conventional NDM.
    Cheese exports, which reached record-high volumes last year, were 
off 30 percent at 90.4 million lbs. for January to May 2009. However, 
based on good penetration and support from USDEC, U.S. exporters still 
are increasing sales to Mexico. As the largest overseas market for U.S. 
cheese, Mexico still gained 15 percent in the first 5 months of the 
year. Overall butterfat shipments for the same time period (January to 
May 2009) were just 18.6 million lbs., down 80 percent. Again, sales to 
Mexico were higher (+51 percent) as exporters focused on one of their 
core markets. I would be remiss not to mention the important role that 
the voluntary, producer-funded Cooperatives Working Together (CWT) 
export assistance plan. The strategic bonuses CWT has offered to 
participating members for exports to particular markets have helped 
support continued butterfat sales in particular as participants have 
shipped product in the early months of 2009 for which bonuses were 
granted in late 2008.
    Exports of dairy ingredients like whey and lactose have held up 
well in 2009. Shipments of dry whey in the first 5 months of the year 
were 186.0 million lbs., up 15 percent from last year. Exports of 
higher-value whey protein isolates were up 51 percent, to 14.7 million 
lbs., while sales of whey protein concentrates were down 17 percent, to 
105.4 million lbs. Overall, whey protein exports to key markets China 
and Mexico were higher, while shipments to South America and Oceania 
slackened. Exports of lactose were 182.0 million lbs., up one percent 
from January through May.

Dispelling Misconceptions
    As an organization dedicated to trade and the promotion of U.S. 
dairy products overseas, USDEC would like to highlight some factors 
that it believes have contributed to current market pressures and 
proposals to avoid another crisis. We would like to take this 
opportunity to comment on a few of them in order to set the record 
straight on these trade-related issues.

   Imports: One charge repeated by some is the misconception 
        that a surge in dairy imports has created or at least 
        dramatically exacerbated the situation facing the dairy 
        producer community. In a crisis such as we are currently 
        experiencing, any imports can be damaging. Yet, in fact, we 
        have not seen a significant surge in imported dairy products 
        into the United States. In fact, on a total milk solids basis 
        in 2009, year-to-date imports of dairy products are actually 
        down compared to recent years. As I have stated above, the crux 
        of the problem facing our industry is the swift and steep drop 
        in global demand for our products, not an influx of foreign 
        dairy products into the U.S. market.

   Isolationism: As supply management program ideas have begun 
        to circulate, many have argued that isolationism would solve 
        this crisis. The goal is seemingly to create a fully closed 
        market like Canada's. However, by aiming to address this 
        aspect, we would likely create even more complications. It is 
        virtually impossible to forecast market twists and turns 
        accurately enough to match production with domestic and export 
        demand. Therefore, overwhelmingly likely decisions by a so-
        called Supply Management Board would tend towards undersupply 
        in order to keep farm incomes on the high side. The consequence 
        would be steadily rising imports in reaction to prices much 
        higher than those that exist globally, which would steadily 
        ratchet down our domestic production. In short, we would 
        steadily shrink as an industry.

   In addition, building a supply management system replicating 
        Canada's would mean substantially raising our tariff walls, 
        thus requiring offsetting trade concessions to meet WTO 
        obligations. We also would face substantial problems selling 
        exports beyond DEIP, since the WTO ruled out the use of a two-
        tier pricing system in a case that the United States itself 
        brought--and USDEC strongly supported--against Canada in 1999.

    Although some may argue that our industry is better off abandoning 
the export market, USDEC would like to take the opportunity to remind 
this Committee that in 2009 to date, we have still exported 
approximately eight percent of U.S. milk production and that this swing 
in the demand for only three percent of our total milk production has 
been one of the most significant factors leading to the current market 
situation. If we were tasked with somehow finding swift alternate uses 
for approximately 11 percent of U.S. milk production rather than simply 
three percent, the crisis would be even deeper and more protracted.
    Whatever the declines in global markets, it is clear that 
processors and producers have come to rely upon exports as fundamental 
to the health and growth of the industry. We're far removed from the 
1990s, when the value posed by a vibrant export market was simply 
theoretical, and the low levels of exports that existed were mostly 
facilitated by government programs. Now, a forced retrenchment will 
hurt most everyone in the supply chain.

Expectations for the Future
    Entering the second half of 2009, recovery in global dairy demand 
remains elusive, leaving expectations for soft commodity markets for 
the balance of the year and into 2010. Global economic activity is 
still almost universally down over recent years. Developed countries 
remain in a recession that has lasted more than a year, still 
struggling with a credit crisis that has sapped normal commercial 
activity, while substantially increasing unemployment. These factors 
and others have resulted in sharply less demand for dairy products in 
emerging markets such as China, Southeast Asia and Latin America, where 
we saw much of the growth of the past 5 years.
    Ultimately, the return of consumer demand will only come with the 
restoration of economic growth. Some early signs of recovery are 
emerging, albeit slowly. For instance, the International Monetary Fund 
(IMF) believes the global economy is beginning to pull out of 
recession, though full recovery is expected to be sluggish. Leading 
lenders such as Rabobank International have cautioned however that a 
build-up of inventories could forestall a speedy price rebound in the 
dairy sector. The more product stored in U.S. and European Government 
warehouses or in private storage in Oceania, the longer depressed 
prices will persist. Thus, commitment of stocks to useful purposes such 
as domestic and international feeding programs is important in order to 
help shorten the current situation.
    In the medium and long-term, however, virtually all forecasts 
foresee a return to dairy demand growth that exceeds the supply 
capabilities of lower cost exporters such as New Zealand, Australia, 
Uruguay and Argentina. Consequently, prices would increase to levels 
necessary to draw additional exportable supply from the next tier of 
producers. The United States is among the producers well positioned 
with the capability to profitably respond to this demand and provide 
additional exportable supplies to the international market. Because of 
this, USDEC is continuing to make the investments needed in overseas 
programs and relationships to pave the way towards that opportunity.

Recommended Government Actions
    Congress and the Administration could pursue a number of measures 
that USDEC believes would help us maintain and improve our global 
competitiveness and permit us to more rapidly regain export markets as 
economies improve. Exports have already been shown to dramatically 
benefit farmer income; we cannot afford to ignore this part of the 
equation so critical to overall supply/demand balance of the U.S. dairy 
market. Some of these suggestions are short-term solutions such as full 
use of the DEIP. Others, such as passage of beneficial trade 
agreements, would help provide the medium to long-term growth our 
industry needs to continue to compete in the global market.

   We should swiftly move towards approving pending Free Trade 
        Agreements (FTAs) with Panama and Colombia and, especially, 
        South Korea. These agreements would remove barriers to our 
        products and would either provide us with an edge over our 
        competitors or at least allow us to remain on more even footing 
        as many of these trading partners pursue FTAs with other 
        important exporters. We recognize that the Administration and 
        many Members of Congress believe that some work is needed to 
        address issues of concern they have regarding each of the FTAs; 
        however, we urge that this work be done with the degree of 
        urgency befitting such important international agreements.

     We would caution, however, against the pursuit of 
            agreements that offer no prospect for a balanced outcome 
            such as would be the case under a Trans-Pacific Partnership 
            FTA, if dairy trade between the United States and New 
            Zealand were included. There are very strong anti-
            competitive concerns USDEC has with the near-monopolistic 
            structure of the New Zealand dairy industry. Given such 
            concerns, our members have advocated for the full exclusion 
            of U.S.-New Zealand dairy trade, should the TPP FTA move 
            forward as currently envisioned.

   At the same time that we pursue genuinely beneficial 
        bilateral agreements, we must not take our eyes off the bigger 
        prize--a successful multilateral deal. We urge the 
        Administration to continue to aggressively pursue an ambitious 
        Doha Round agenda, which would prevent the backsliding that we 
        are now witnessing on export subsidies and market access, 
        particularly in developed countries that have become such a 
        serious concern this year. We need to have a balanced market 
        access package that calls on those with the steepest tariff 
        barriers to do the most and does not undermine the access 
        secured in key developing markets in the Uruguay Round. 
        Additionally, the swift and full elimination of export 
        subsidies is a particularly important aspect of the overall 
        Round, as we've seen the impact this year's reactivation of the 
        EU's massive subsidies has had on global markets.

   So long as the EU continues to employ its export subsidies, 
        however, it is essential for the United States to use the tools 
        available to it as well. We call on Congress to urge the 
        Administration to maximize its use of the DEIP. This program is 
        small in comparison with what commercial trade can drive during 
        more typical market conditions (150 million pounds of NDM 
        annually permitted under DEIP versus an average of 660 million 
        pounds of NDM exports annually between 2004 and 2008). Despite 
        its relatively small size, in times like these it is an 
        important way to help stimulate export demand for U.S. products 
        in a global economy currently plagued by ever-rising EU export 
        subsidies.

     DEIP also helps counter the continuing practice by New 
            Zealand to clear its inventories at virtually any price due 
            to its need to export 95 percent of its production. New 
            Zealand has now become the world price maker with its 
            recent, almost panicked selling, which will resume upon the 
            start of its production season in August. Full use of DEIP 
            can help our exporters keep a foothold in key markets to 
            help better enable them to maintain relationships that have 
            been cultivated over the years but are facing heavy strain 
            due to market dynamics this year.

   In a similar vein, we ask that Congress maintain funding for 
        the Market Access Program (MAP) and the Foreign Market 
        Development (FMD) program at their full farm bill authorization 
        levels of $200 million and $35 million, respectively. We also 
        urge Congress to direct the Administration not to make changes 
        to the current eligibility parameters for the program. Wide 
        consensus exists that they contribute to the great success of 
        the program and overall U.S. agricultural exports. MAP and FMD 
        are excellent examples of a successful industry-government 
        partnership that can directly benefit producer incomes, as the 
        dairy industry has seen over the past 5 years. USDEC has 
        participated in these programs for several years now and has 
        used the funding to help grow demand for U.S. dairy products 
        abroad and cultivate receptiveness to supplies from the United 
        States--until recently not one of the major dairy exporters to 
        the world.

   The other critical part of the export support equation is 
        the expertise the FAS team, both in Washington and many of the 
        overseas offices, brings to bear on the many challenges facing 
        our exporters. These range from the close cooperation between 
        FAS and the U.S. Trade Representative's Office (USTR) on free 
        trade agreements (FTAs) and World Trade Organization (WTO) 
        issues, to resolution of important sanitary/phytosanitary (SPS) 
        and technical barriers, to technical barriers to trade (TBT) 
        challenges to addressing time-sensitive issues when product is 
        detained in port. The knowledge of FAS and its dedication to 
        helping facilitate the flow of U.S. exports and influencing the 
        policy dynamics disadvantaging our products is absolutely 
        critical. We urge Congress to fully support FAS's core mission 
        of promoting U.S. agricultural exports by providing adequate 
        funding to achieve this goal.

   As our hard-working FAS and USTR staff go about trying to 
        make our trading partners adhere to their commitments, however, 
        it is equally critical that the United States live up to the 
        trade commitments it has made by adhering to our trade 
        agreements and basing technical trade-related decisions on 
        sound science. Very simply, how can we demand others abide by 
        their deals when we simply refuse to do the same by inventing 
        specious justifications?

     One particularly important issue is our cross-border 
            trucking obligations with Mexico under NAFTA. The United 
            States was found several years ago to be in violation of 
            NAFTA by refusing to allow cross-border trucking with 
            Mexico, despite our ability to require Mexican trucks to 
            adhere to the very same requirements U.S. trucks face while 
            on American roads. In the spring of this year, Mexico 
            finally retaliated against the United States for this trade 
            violation, putting at risk $2.4 billion worth of trade. As 
            Mexico is by far our number one dairy export market, we 
            believe it is essential that the United States adhere to 
            its trading obligations under NAFTA.

     There are additional examples of a more technical 
            nature as well that have given USDEC cause for concern. The 
            health and safety of America's consumers has always been a 
            major focus of America's dairy farmers and processors. 
            However, it is vital that in making decisions regarding 
            imported food products and various SPS trade issues, we 
            apply the same rigorous adherence to sound science and 
            uniform standards that we expect our trading partners to 
            apply in their own countries. Safe food must be paramount, 
            but we must let science run its course and then rely upon 
            the results, rather than prejudging the outcome of that 
            technical assessment.

   Finally, I would leave this Committee with a request that it 
        take an interest in a forthcoming report by the Innovation 
        Center (IC) on U.S. Dairy on the impact on and consequences of 
        the dairy industry's increasing globalization. Staffed and 
        supported by Dairy Management, Inc., the Innovation Center 
        provides an unprecedented, high-level forum where top leaders 
        from dairy farm groups, processors, co-operatives and trade 
        associations can review major structural constraints to 
        industry growth and prosperity. Work outcomes then represent an 
        integrated, pre-competitive and collaborative set of 
        analytical, policy, regulatory and market development programs 
        across a range of issues.

     In March, an Innovation Center task force retained an 
            experienced management consulting firm to profile the 
            present and future state of the global dairy trade, the 
            competitive position of the U.S. industry, and a 
            prospective set of integrated programs that could improve 
            our ability to accommodate these changes. The task force is 
            close to concluding its work on this ``white paper'' 
            analysis. The report of its preliminary findings earlier 
            this month to the IC board created considerable interest in 
            its insights. The analysis showed a virtual certainty that, 
            with a return to global economic stability, dairy's global 
            supply/demand dynamics (as reflected in my earlier 
            comments), would create a sizeable latent demand gap that 
            the United States was well positioned to fulfill. Yet, the 
            analysis also showed that this window of opportunity to 
            grow both our internal and external markets against global 
            competitors was finite. Success depends on making the right 
            strategic choices.

     Presented with choices ranging from ``Fortress USA'' 
            to the status quo to moving towards a consistent, global 
            exporter role, the Innovation Center board asked the task 
            force primarily to focus its final recommendations on 
            prospective programs to pursue the latter path. Once the 
            Innovation Center board has reviewed and decided upon its 
            work programs, we would welcome the opportunity to brief 
            interested Members of this Committee on their objectives.

    Thank you for the opportunity to provide comments to this Committee 
on such an important topic. USDEC appreciates the time and attention 
Members of this Committee have devoted to the concerns facing many in 
the dairy industry.

    The Chairman. Thank you, Mr. Suber. I really appreciate 
that very much.
    The gentleman from New York, Mr. Massa, is not a Member of 
this Committee but he has joined us today, and I have conferred 
with the Ranking Member and we are pleased to welcome him and 
permit him to join in questioning of the witnesses. Good to 
have you.
    Mr. Massa. Thank you, sir.
    The Chairman. You are quite welcome. Let me start with the 
questioning. First of all, let me just--Mr. Cook, I just want 
you to very briefly give us that breakdown again of the pricing 
of a gallon of milk, who gets what. I think you gave that in 
your testimony real quick.
    Mr. Cook. The average price--and I am sure that we could 
find differences in places. It is $2.99 a gallon.
    The Chairman. Is this in California?
    Mr. Cook. No. This is the national average. Of this $2.99 a 
gallon, the average price that the producer receives for that 
gallon is 91 cents. And that would be $2.08 of the $2.99 that 
would go elsewhere.
    The Chairman. It is 91 cents to the producer?
    Mr. Cook. Yes, sir.
    The Chairman. And $2.08 goes elsewhere. Do you know where 
that elsewhere is?
    Mr. Cook. It would go to the processing and retail industry 
and any intermittent transportation, afterwards. And the farmer 
usually pays for the transportation to the first port.
    The Chairman. Of the 2--let me ask you. The 91 cents, what 
do you think would be a proper share for the producer if it is 
not 91 cents?
    Mr. Cook. The producer's share before a lot of other 
changes used to be closer to 50 percent of the consumer dollar. 
And I think that that is--it is significant as the erosion of 
the percentage of the consumer dollar--as the erosion of the 
percentage of what the farmer receives of the consumer dollar, 
it put the producer in a harder and harder spot without a 
doubt, and it certainly adversely affects the consumer as well. 
When prices go high it is the differential between and the lack 
of percent that hurts.
    The Chairman. So it is 91 cents--you think the fairer 
amount should be about a $1.45?
    Mr. Cook. I think that would be correct, sir. And we are 
talking about fluid milk. That is right.
    The Chairman. Thank you. Mr. Contente, you mentioned 
suicides and you gave a number. Could you elaborate on that? I 
think you said ten or two. Over what period of time? You said 
two?
    Mr. Contente. We have experienced two suicides in our 
immediate area since the middle of December until present.
    The Chairman. So over the last 7 months?
    Mr. Contente. Correct.
    The Chairman. And is it in your farming area?
    Mr. Contente. Actually the Tulare and Kings area is where I 
am speaking of. The Tulare County represents the single largest 
single county of milk production. Kings might be like fifth or 
something like that. So it is a pretty strong area of milk 
production in the United States.
    The Chairman. Okay. And finally I want to make sure that we 
have this documented right. And without question, it is 
documented. These two suicides without question came as a 
direct result of the dairy situation?
    Mr. Contente. Most definitely because I know both of those 
people.
    The Chairman. Okay. Thank you. I think that is very 
important to get on the record as to the seriousness of the 
issue. Let me just ask each of you if you could very briefly--I 
would like to go through this. If you could tell us regarding 
the current dairy situation if you had to prioritize those two 
things, of what could be done, the two most critical things 
that should be done in the short term to alleviate the current 
dairy market slump? And if you could, give us those two things 
that would not require a reopening of the farm bill. What would 
those two things be?
    Let me start with you, Mr. Lang, and we will go straight 
down.
    Mr. Lang. Thank you. First of all, we should look at 
increasing CCC purchases of cheese, dried fat milk, those 
things that are already allowed within the farm bill, increase 
that. Food for the Needy School Lunch Programs. The next 
important thing to do is remove cows from the market. We 
believe that three percent more of the cows need to be removed 
before we can have long-term stabilization of milk prices, and 
farmers and co-ops working together has been very effective in 
helping that happen.
    So those are the first two.
    The Chairman. Okay. Increasing the School Lunch CCC Program 
and thinning the herd. All right.
    Mr. Bostwick.
    Mr. Bostwick. Sir, I am not sure there is really anything 
at this point that can be done in the short term. The tide has 
already started to come back in. Prices are beginning to come 
back up. So I am not really sure that there is any short-term 
solution that would not do more harm than good.
    The Chairman. All right. Mr. Contente.
    Mr. Contente. Yes. On a short-term solution, immediate 
attention should be given to the support prices I mentioned 
earlier in my testimony. It doesn't require opening up the farm 
bill. The Secretary has the discretionary powers to do that. 
That would almost fix the problem immediately. That would bring 
cash to the market immediately.
    The other solutions I offered in my testimony are almost as 
important and for a second place, whether it is market 
transparency or supply management or dealing with the 
unregulated proteins.
    The Chairman. So you would say pricing and supply; is that 
right?
    Mr. Contente. Pricing on the support mechanism which is 
lacking. The support mechanism that we have in place, which is 
a Federal mandate, is not adequate. It should be somewhat 
closer to the cost of production. So that would be the primary 
goal. Then, of course, we have these unregulated proteins that 
keep messing with our market. Those, of course, are not dealt 
with. At some point there needs to be some sort of a regulatory 
process there to bring them in line with the rest of the 
products that we have.
    The Chairman. Dr. Guterbock.
    Dr. Guterbock. Mr. Chairman, I don't think there is 
anything that can be done in the short term that wouldn't 
perpetuate the problem in the long term. I think supply 
management and raising the support price would again make us 
less competitive on world markets, and unfortunately the answer 
is to allow prices to seek their levels so that the market is 
cleared, so that demand and supply can come back into balance.
    The Chairman. So you----
    Dr. Guterbock. As hard as that will be, I think that is in 
the long term the best solution.
    The Chairman. So you directly disagree with Mr. Contente?
    Dr. Guterbock. Yes, sir.
    The Chairman. Ms. Hughes.
    Ms. Hughes. Mr. Chairman, as I mentioned, because we are in 
the organic dairy industry, we run separate from the 
conventional dairy industry. So for short-term solutions, I 
would have to defer to my colleagues at the table here. For 
longer term, I would look to the successes that we have been 
able to have, providing our farmers a stable pay price that 
covers the cost of their production and how they can expect 
what to get in the mailbox from one month to the next.
    The Chairman. Thank you. Mr. Cook.
    Mr. Cook. Yes, sir. I would think the Dairy Price 
Stabilization Program could probably alleviate a lot of the--I 
am sorry--the Dairy Price Stabilization Program, which would 
alleviate a lot of the peaks and valleys in this roller coaster 
ride that continues to bring these crises back in front of this 
body. I believe that that is probably the first and most stable 
thing that we can look at. It is for short term today. If you 
enacted this today, it would come into effect soon. But maybe a 
purchase by the government for the food supply, probably mostly 
cheddar cheese, would be the most effective thing to have an 
immediate impact. But the Dairy Price Stabilization Program 
would have the impact that would have the most effect over a 
longer period of time.
    The Chairman. All right. Thank you.
    Mr. Suber.
    Mr. Suber. As you can imagine our perspective being on 
trade matter, we would look at continuing rigorous activity in 
the Dairy Export Incentive Program as--it is important to keep 
us in our markets. I would also be cautious about playing with 
fire that we are doing with our existing exports on some of the 
trade actions that we have taken against others that are hard 
to support if they were to be taken against us. Specifically, I 
refer to the truck ban against Mexico, our biggest market, that 
they are currently retaliating to some degree, and have the 
right to do so. And it could spread to dairy and thereby 
exacerbate our situation here as well.
    The Chairman. All right. Thank you. Thank you, each of you. 
I now turn to Mr. King for 5 minutes.
    Mr. King. Thank you, Mr. Chairman. I want to thank all of 
the witnesses for your testimony here today and look to just a 
piece of information that I need to know a little bit more 
about.
    Just briefly, Mr. Cook, in your testimony you said that the 
first fourth of the transportation of milk is borne by the milk 
producer. Is most of the milk picked up on the farm? And then 
how does that \1/4\, where does that calculation come from?
    Mr. Cook. I don't know what you mean by the fourth, but I 
did say that the first price--the farmer provides the 
transportation to the first port.
    Mr. King. That is the word I missed.
    Mr. Cook. I apologize. The first port. So the first port. 
It would go from the farmer to its first stop, whether it is 
the processor or a cooperative trucking central station. But 
the farmer pays that transportation for that first ride.
    Mr. King. Even if the milk is picked up on the farm?
    Mr. Cook. That is where it is always picked up.
    Mr. King. Is that billed specifically, then? Is it an 
itemization?
    Mr. Cook. It is a deduction from your price.
    Mr. King. Okay. That is something I didn't know, and I am 
glad I clarified that. But I did mishear you as well. So I 
blundered into a little more knowledge and I appreciate it.
    I would like to then turn to Mr. Lang. And with the 
recommendations that you have made here this morning to reduce 
the herd by three percent, in the bottom line of this, when 
agriculture, especially our livestock producers have--in the 
end they have taken a lot of swings up and down in the 
marketplace, and we have had a cow buyback operation going on 
in the past. That in my view has been at least to a marginal 
degree successful, if not more so. How do we balance this with 
our pork producer industry today and the stress they are going 
through? We are going to hear from them on--if we turn our 
focus on milk cows in Iowa.
    Mr. Lang. Certainly. That is true. The pork producers and 
the beef industry are having a really challenging time as well. 
Just for your record, our farm, the co-op pays for our milk to 
be delivered to the first port. So not all dairy farmers pay 
for the milk transportation. So we don't pay that bill 
ourselves.
    First of all, we do not support a whole herd buyout similar 
to the one we had in the mid-1980s because of the repercussions 
to the beef industry and the pork industry, or the entire meat 
industry. We don't support that. But co-ops working together, 
utilizing their own money to take herds out of the market 
system over an orderly time certainly should not interfere with 
the pork and beef industry, as much as a whole herd buyout 
would. Those cows are going to go to market one way or the 
other. So the co-ops working together is at least a way for the 
farmer to garnish some income into the future rather than just 
selling the cows.
    The second part of your question is that we do not support 
managed supply of any kind. We believe that the volatility in 
the market gives opportunity to young farmers, such as my two 
sons, that when prices are the lowest it is their opportunity 
to get in the market and buy cows and work their way through.
    So there are a lot of programs already that the dairy 
industry has differently than a lot of other industries, and we 
believe that we ought to let those pieces work and let the 
reduction of another three percent take place either through 
liquidation, or through a structured program like CWT.
    Mr. King. Mr. Lang, you mentioned two young sons coming 
into the operation, and I think you would be aware that there 
is a bill floating around this Congress, and we expect it to be 
on the floor today, that would have to do with USDA moving over 
and the FDA taking over on the farms. When your young sons are 
looking at the very real prospect that that might be law here 
in the United States, with the FDA regulating livestock 
production, milk production, and setting foot on our farms and 
making decisions bureaucratically about something that will be 
abdicated by the USDA, are they more or less likely to continue 
to invest and build their future there, or do they start 
looking over the horizon to start getting away from the FDA on 
the farm.
    Mr. Lang. My sons will continue to work against that kind 
of regulation. We believe that we already have more than enough 
regulation in the dairy industry. On our farm today we have 
state inspectors, Federal inspectors, the Department of Natural 
Resources, and they look under every sink, in every 
refrigerator. They inspect all our wells, all our watering 
system and everything else. We believe we have enough 
regulation. So my point would be we wouldn't support more 
regulation by FDA.
    Mr. King. I thank you, Mr. Lang, and I thank all the 
witnesses, Mr. Chairman. I yield back the balance of my time.
    The Chairman. Thank you, Mr. King.
    The gentleman from California Mr. Costa.
    Mr. Costa. Thank you very much, Mr. Chairman, and as the 
Chairman of this Subcommittee and the Chairman of the full 
Committee, we do appreciate, those of us who come from dairy 
country, the attention and the focus that this Subcommittee has 
provided in the full Committee as it relates to what has been 
the meltdown of the dairy industry nationwide, and in 
California obviously it was ground zero where it first began.
    Having been in the dairy business, my family, for three 
generations, it clearly is of great concern to me and my 
district when you look at the total impact that the dairy 
industry in California has in terms of our economy. This is the 
worst I have ever seen it, in our family, in my family's 
generation. The boom-and-bust cycles, unfortunately, seem to be 
becoming narrower. And as has been noted by a number of the 
testimony, we have done a lot of short-term efforts in the last 
6 months to try to provide some relief with the purchase of the 
CCC and the DEIP Program, the Dairy Export Incentive Program, 
and one of you indicated that we ought to continue to do more.
    But let me just suggest to all of you that if we are going 
to try to change this cycle, these boom-and-bust cycles 
continuing to be narrow, it seems to me that the industry has 
to come together, and that is never easy, having been a part of 
this industry for three generations. So let me give you that as 
a suggestion, as we look at how we deal with the supply-side 
aspects of this.
    Let me get to a couple quick questions here. Mr. Suber, you 
indicated that obviously exports are an important part, going 
forward, in the future. On milk solid basis, exports exceeded 
.08 to 6.8 percent over the last 13 years as a percentage of 
the national dairy production, yet dairy imports were 
relatively flat, from 3.9 to 4.0 percent in 2008 with a high of 
4.6. So we are importing about four percent of our milk 
product. We are exporting, we have as high as about six percent 
plus over the past 13 years. What barriers are existing there 
from us expanding on that export market?
    Mr. Suber. Just one thing on the statistics. Depending upon 
how you count them, fat basis, solids basis, we use a total 
solids basis.
    Mr. Costa. I was doing milk solid basis.
    Mr. Suber. We are exporting--we have bid as high as 11 
percent and currently are down to around ten--eight percent 
versus the four percent that we are importing. So it is about 
twice as much that we are exporting as we are importing on a 
solids basis.
    But directly to your question in the barriers that are 
there, the biggest barrier today, of course, is the economic 
situation, so let us move past that if we can, because that is 
the focus of many policymakers, and we wish them Godspeed in 
fixing those. The issues are, many of them are, related to 
competitiveness, and the fact that we would be more competitive 
in the long run as you get the distortions out of the 
international trading system, and those are primarily export 
subsidies. We use ours and would throw them away in a minute if 
Europe would also outlaw theirs. Add as well high tariff 
barriers that exist in richer countries.
    Mr. Costa. I have a couple of other questions, so I want to 
move on.
    Mr. Joaquin Contente, I thank you for being here, and as a 
constituent of my mine, obviously the role you play is 
important, and we appreciate that. You focus in your testimony 
on milk protein concentrates and state that these imports 
represent nearly six percent of the U.S. milk inventory. Why 
are we not producing more MPCs domestically since it could be a 
significant part of the market, in your view?
    Mr. Contente. Mr. Costa, I would say that the primary 
reason for those prices would be the primary reason for the 
lack of us not producing it here, because you can import that 
cheaper than you can produce it here. It is, traditionally, it 
has been a last residual product that is made overseas. In 
fact, the EU for many years subsidized the production of it to 
be exported, so you are competing against a national treasury.
    Mr. Costa. My time is running out here.
    Mr. Cook, the Holstein Association has been working with 
producers around the country to deal with a program that would 
be more supply-side-sensitive. And how do you do that in terms 
of dealing with the base, and how do you get producers to 
participate in such a program?
    Mr. Cook. I think the producers probably don't like the 
volatility as some of the other people testifying think they 
do. I think volatility primarily helps retail organizations 
that can price things higher and then maybe not fall quite so 
fast. The volatility is what is hurting dairy producers. It is 
hurting consumers.
    Mr. Costa. The boom-bust cycle.
    Mr. Cook. Yes, sir. And the length of the time, the Vs have 
turned into Us and fairly long, long Us. And, it is this kind 
of a system that would stop that volatility. It would more make 
people supply the marketplace rather than trying to have the 
marketplace accept the supply. And, it is a means of making 
things be longer-term lasting.
    The Chairman. The gentleman from Texas Mr. Conaway.
    Mr. Conaway. Thank you, Mr. Chairman.
    I thank the panel for being here. Just a quick show of 
hands, how many of you are in favor of some sort of a 
government-run production management system? Two of you, three. 
One in the back. Thank you.
    Mr. Cook, you mentioned some comments about increased--
because of sexed semen, that you are seeing net increase in the 
size of the herds, you said about 161,000 head this year. What 
does that mean? Is that what you just said, or is that a 
segment of your business?
    Mr. Cook. On a study done by Select Sires and other people 
who are in the artificial insemination business and sell sexed 
semen, they have said 8,000 heifers in 2008 were added to this 
herd over and above normal consequences. This year it is to be 
63,000, next year 161,000.
    Mr. Conaway. So I get it right, why in the face of, what 
all of you would agree is an oversupply of production, are 
there incentives? Where are the incentives to increase the size 
of your herd? If what we have been told everyone is losing $100 
per head per month, what is creating that incentive to increase 
the supply of your herd?
    Mr. Cook. Oftentimes there are two times when farmers try 
to make too much milk. One is when they aren't getting enough 
for it, and they try to cash flow to pay their bills. And the 
other one is when they get a response, a cost to--feed costs, a 
feed-cost-to-milk ratio of greater than three to one, it is 
called an expansion mode, and people expand and grow their 
herds, and when they grow their herds, you know what happens.
    Mr. Conaway. I do. And I am curious as to the role the 
Federal Government should play in helping folks make decisions 
that are in their own best interests. What perverse things we 
are doing to perpetuate what--I am a CPA--what perpetuates 
decisions that aren't in either the individual's best interests 
or the system's best interests.
    Mr. Cook. The CWT Program, which I believe has done a great 
job, is 67 percent of the people trying to take care of 100 
percent of the problem. This milk supply program would be 
mandated, and everyone would participate.
    Mr. Conaway. Speaking of that milk supply mandate, how 
would new producers get into the system?
    Mr. Cook. They would get into the system like they always 
got into the system, but they would pay a market access fee to 
enter the system. But in any other kind of a business you 
wanted to get into, you would need to be an awful lot cheaper 
or an awful lot better to be able to sell your product. Here 
you come in, and the milk goes in at the level of anybody 
else's milk available, and if it is too much, everybody 
suffers.
    Mr. Conaway. So in a closed loop you are going to be taking 
from some producers and giving to other producers in that 
system?
    Mr. Cook. No. The beauty of this is it is open to anybody 
to make their own decisions. You can decide if you want to 
enter the business, if you want to expand the business.
    Mr. Conaway. But once in, what I understand your system 
would do is you have ten producers, and three of them produce 
too much milk under the allowable, then they pay the seven that 
don't. So it is a closed loop, taking money from each other and 
swapping money around.
    On your overproduction why wouldn't you just say everybody 
gets a fixed quota of what you can produce, figure out whatever 
management system you can work up with, everybody gets a fixed 
quota, and above that you just can't sell it? I come from the 
oil business, and there was a time when we had an allowable set 
each month by the Railroad Commission, and, again, oil and gas 
wells can be stopped and started a lot easier than cows can be 
stopped and started.
    Mr. Cook. I understand that, but I don't know if that would 
allow for new producers to get into the business, and we do not 
want to stop that from happening----
    Mr. Conaway. Have you ever seen a production management 
supply system run by a government--we have a production supply 
system that is called the market, and it is rugged, and it is 
harsh, and it is unrelenting, but it works over time, and we 
have heard several of the folks say that. A couple of the 
witnesses last week said that; in other words, don't do 
anything, just let the hard decisions that have to get made do 
that.
    Have you ever seen a government-mandated supply system in 
any market, not milk, actually work to the benefit of the 
producers and the consumers?
    Mr. Cook. Sir, I have seen the consolidation of the poultry 
and the hog industry go to vertical integration and actually 
just ruin that industry for many parts of this country, and I 
hope not to let that happen to the dairy industry. And I hope 
we can have a fresh, wholesome supply of milk all over this 
country, and I believe this program allows that to happen.
    Mr. Conaway. Some of us would respectfully disagree with 
the fact that government could run markets that way over the 
long term, in which folks can come and go in and out of the 
market fairly, and that consumers could get a fair deal, and 
that producers could get a fair deal. I would argue that there 
has not been a government-mandated supply system ever that 
worked over the long term. It may work in a short term to keep 
folks in a business that may or may not be in the business, but 
these production management systems that are government-run I 
don't think work.
    Mr. Cook. I understand your reluctance, but I do hope that 
the Secretary would pick a board that would be responsible.
    Mr. Conaway. So what you are saying is the fact it hasn't 
worked ever is because we haven't had the really smart people 
putting it together?
    Mr. Cook. I don't know that I have seen such a system in 
place.
    The Chairman. Thank you.
    The gentleman from Wisconsin Mr. Kagen.
    Mr. Kagen. Thank you, Mr. Chairman, for convening another 
hearing on the dairy crisis across America.
    I want to thank everyone for coming here to Washington, 
leaving your farms and representing your best interests and the 
people that you work so hard to represent.
    I have heard a lot of suggestions. Many of the suggestions, 
if not all of them, have already been taking place by the 
Agriculture Secretary Mr. Vilsack. Mr. Lang mentioned the 
purchase of cheese to the CCC. That has been done. Maintaining 
the safety net that we have, that is being done. The DEIP 
Program, Dairy Export Incentive Program, that is being invested 
in. So all three of these ideas have been thrown at this 
marketplace which has been collapsing before our very eyes.
    Ms. Hughes, organic farmers seem to be doing okay, but then 
you have been controlling your supply; is that correct?
    Ms. Hughes. That is right, sir. We have been working very 
hard on supply management, and we have also put into place over 
the past 20 years a pay price system that avoids the volatility 
and is stable, so that not only can the farmers know how much 
to produce, they know how much they are going to get paid for 
that production.
    Mr. Kagen. But you are not controlling the market, are you?
    Ms. Hughes. We control what we can, sir, but, no, we are 
not controlling the market, but we work very hard to create the 
connection with the consumers so that the consumers understand 
our milk is coming from a certain group of producers. Those 
producers expect a certain price and are setting their price, 
and so the consumers understand that relationship and are 
willing to pay a premium for that milk that goes directly to 
our farmers.
    Mr. Kagen. Just for the record, let me ask you a couple of 
questions about your input costs, because the rest of the dairy 
farms I am familiar with in Wisconsin have an input cost 
anywhere from $18 to $21 per hundredweight. What is your 
average on an organic farm? Do you have numbers that you could 
submit?
    Ms. Hughes. I will be able to submit those numbers to you. 
I don't have them with me today.
    I can say that our farmers have been challenged in the past 
with input costs for organic feed because they were required to 
feed 100 percent organic feed. The feed industry lagged behind 
the growth of the organic dairy industry in the past years, and 
in the past 2 or 3 years, we have seen very significant organic 
feed costs. Those have leveled out now as folks in the feed 
industry have provided more organic feed, so our farmers are 
better able to manage those costs.
    In addition, a lot of our farmers at that moment of seeing 
the increased feed costs turn to their own systems and their 
own operations to grow their own feed and to pasture their 
animals. One of the fundamental principles of organic 
production is to try to keep as closed a system as you can, 
produce what you have on your farm for your cows without having 
to go too far off for input.
    Mr. Kagen. Thank you so much.
    Mr. Suber, you mentioned that you are in favor of promoting 
all the free trade agreements available to help exports, but 
exports have been at a record high; have they not?
    Mr. Suber. They were through 2008, that is correct.
    Mr. Kagen. Until global demand was destroyed.
    Mr. Suber. That is correct.
    Mr. Kagen. And yet do you think our foreign trade, foreign 
exports of dairy products alone could pull us through this?
    Mr. Suber. They grew over a 5 year period and, in fact, 
delivered some of the highest prices that this market has ever 
seen. So, yes, they are a significant contributor to a healthy 
and growing industry. Exports are the way that this industry 
has grown for 5 years, and they are the future once the overall 
demand is robust enough globally.
    Mr. Kagen. And, Mr. Cook, you are not suggesting that what 
the Holstein group is trying to do is to produce the OPEC of 
milk, are you?
    Mr. Cook. No, sir. We are trying to stabilize this industry 
for the benefit of the producers and the consumers.
    Mr. Kagen. Thank you very much. I see my time is about to 
expire, but I have this comment to make, that I am very 
impressed with the fact that throughout the farming community, 
Mr. Chairman, if you don't know it, it is legalized gambling. 
If you are in farming, you are a gambler. You are betting on 
the weather, you are betting on the commodity market and hoping 
that you can come out okay at the end of the day. But it is one 
of the only industries that I know of where if the price is 
going down, you produce more, which really chases down your own 
price. It is counterintuitive. Maybe that is why we have these 
countercyclical programs trying to support the industry. My 
hope is that we find the bottom of the demand curve, because 
you can produce the supply to meet the world's demand.
    Let me get a quick comment from anyone on the panel with 
regard to the import licenses for cheese and for MPCs and the 
like. I am very interested to know if you are interested in 
seeing a study performed that would evaluate the role that the 
import licenses, the import of cheese and MPCs has on our 
domestic and foreign markets.
    Mr. Cook. I would just like to know that if all of the 
imports that come in that are used in the dairy industry or in 
the processing are actually imported as dairy products, or if 
some of them come in under other labels such as industrial uses 
and things like that. I think that is an important thing to 
check on.
    The Chairman. The gentleman from Tennessee Mr. Roe.
    Mr. Roe. Thank you, Mr. Chairman, and thank you for holding 
these hearings.
    I come from an area of a lot of small dairy farmers, and 
one of the things, the biggest complaints that I hear, and you 
all have very well stated the causes of this current 
catastrophe, and I was raised on a small farm in Tennessee, and 
it is a catastrophe. I met with about 60 of our dairy farmers 6 
weeks, 7 weeks ago, and most of them are about out. We have had 
counties that had 50 dairy farms down to one. And one of the 
counties that I live in already has a 16\1/2\ percent 
unemployment rate, and dairy is one of the biggest employers in 
that county.
    I think one of the complaints that I hear from my dairy 
farmers is what Mr. Cook brought up. They say, Dr. Roe, I go to 
the grocery store, Kroger's or Food City or wherever they shop, 
and milk hasn't dropped that much in price, and yet my price 
has dropped by over half. I am down from $21 to $9 or $10 or 
$11 per hundredweight. And it looks like--I don't know, and 
certainly I want everybody--I am a free market guy--to make 
money. But the folks between the producer, from the time he 
ships it out and pays that cost, which all of my farmers do, to 
the time you go buy a gallon of milk, and I realize that is 
just part of it, but liquid milk at the store, that hasn't 
dropped as much as his profit has dropped. And I think a fair 
question is, those companies are still very, very profitable, 
and the producer out there who is doing too good a job is about 
to go out of business. And so, Mr. Cook, would you comment?
    Mr. Cook. It certainly is their alternative and opportunity 
to be able to price things how they see fit. Unfortunately we 
do not have that opportunity. I think a store manages the 
supply by what it orders, and it orders what it can sell. It is 
actually very inelastic. It has a certain demand, and it knows 
what that demand is, and it prices that demand for what it 
wants that aisle to make for money. And I believe it is a 
situation that--and when prices do go up, they will go up in 
price, but I don't think you will see the price go down nearly 
as fast as it went up. And usually when it goes up, it is the 
farmer that is blamed for its trip on the way up.
    Mr. Roe. Again, a good point is that during this time that 
the milk price on the shelf that I go buy the milk, didn't drop 
nearly as much as the producers dropped, and that is a problem, 
and they are being run out. Do you see this as--you are a small 
dairy producer, and there are other larger dairy producers 
here, too. And, Mr. Lang, I want to compliment you on the 
testimony. It was excellent. I read it last night, and it was 
very good. Do you see this as a competition between the big 
producer and small producer? The folks in our area do.
    Mr. Cook. Well, I refuse to throw a stone that way. I try 
to represent the members of ours, and we have some very, very 
large ones and small ones all over the United States. And we 
are all in the same situation together, and I believe this is 
something that everybody is going to have to really look at.
    There are some of our people that are producers that have 
already vertically integrated and have the opportunity to 
create those situations you and I have just discussed within 
their own realm, and there are other people who are very, very 
large, who have reason to believe that they can make money with 
milk after the fact, even if they lose it now, and after this 
next washout of producers, which is going to eliminate the 
dairy producer landscape as we see it now. And at 57,000 people 
that are left in this business, it is getting down to we are in 
a critical mass, we are below our critical mass in realistic 
terms, and we are losing the associated industries. We are 
losing the local economic benefit of the farm suppliers and the 
open spaces that are maintained by those farmers staying where 
they are and where they currently can stay.
    Mr. Roe. I agree with that, and I think that, as I told the 
Secretary here when he was here before, I said about a carbon 
tax, it affects you all. That is another price, a cost that may 
be coming along, but we all eat. And I want to be sure that the 
producers where we are can be seen through, and they told me, 
they said, look, we don't--we are not worried about a handout; 
we just want a fair price for the product that we produce, the 
quality product that we produce. And I totally agree with him.
    I don't know, I have read here where herd size, I certainly 
understand that very well. I have a lot of beef producers in my 
area. If you flood the beef market in my area, you hurt another 
part, and you all don't want to do that.
    I don't have much time left, but I certainly, Mr. Cook, was 
intrigued by your--and will contact you later about your 
comments about how you might help the farmer, the dairy farmer.
    Mr. Cook. Thank you, and I welcome any questions you have.
    Mr. Roe. Thank you, Mr. Chairman.
    The Chairman. The gentleman from Iowa, Mr. Boswell.
    Mr. Boswell. Thank you, Mr. Chairman, for continuing to 
explore possibilities that we might do for this very important 
industry.
    I want to address a couple of questions to Mr. Lang, 
because I have known him a long, long time, his family. I drive 
by their operation from time to time, and I appreciate what 
they are trying to do and over the years with the family.
    But I would like for you to just--if you had this magic 
wand, Craig, that you could wave here for this industry, and we 
have talked short term and long term and all these things, it 
has been a great discussion, what would you do? What would you 
advise us to do? What would you ask us to go to the USDA with?
    Mr. Lang. I think you need to hold steady on the programs 
that you have in place right now and let time work. As 
unfortunate as it is, there will be some dairy farmers that go 
out of business. But it is not only just price. If you are 
around your cows 24 hours a day, 7 days a week, Sunday before 
church, Sunday after church, milking cows, there is an 
inefficiency there. When the rest of the world takes weekends 
off and has a night out with their wife from time to time there 
is an efficiency that comes with a larger herd that allows you 
to have time away from the herd.
    So it is not just price, and it is just not the size of the 
herd out of business because of price. And if you look at the 
charts that I submitted, 25 percent of the dairy industry, even 
with the lowest price, had some profitability in the last 18 
months. So that makes it very, very difficult to find a price 
that fits all.
    So I do believe that good policy is the pieces that we have 
in place now with DEIP, as long as they are WTO-compliant, with 
the MILC Program, the co-ops working together, the CCC 
purchases, will bring them around a stable price that gives us 
some long-term financial stability that gives an opportunity 
for those like my two younger sons--they are 22 and 24, they 
are not kids anymore--to grow the herd, to make a decision that 
probably what they will have to do is have a herd--rather than 
500-600 cows, have a herd 800 to 1,000 cows in order to compete 
in the area.
    Mr. Boswell. I assume--well, I know you had to--when you 
took those two young fellows into the operation, you had to 
figure another family income for each one, and it had to come 
from somewhere. I don't suppose there is a whole lot of lands 
for sale around Brooklyn, so you had to figure out how to do 
that. I just want to put that point out. You had to massage 
that pretty hard about letting them come into the operation.
    Mr. Lang. That is right, and there is a certain amount of 
sacrifice on the part of grandparents and parents to say that 
maybe our retirement will be put off for a few years in order 
to make sure that the next generation has the opportunity to be 
there as well.
    Mr. Boswell. I appreciate that.
    Mr. Chairman, I want to recommend, Mr. Lang and others were 
cut short because of the time constraints which we have to do. 
I understand that, but I would recommend that staff and 
everybody carefully read the charts and look that piece over, 
because it was well put together, as they all were.
    Another thing you bring up, Craig, is the cost of feed is 
the big factor. And we all know, we don't need to go into a lot 
of discussion about how it went up this last year, months, and 
now things have changed, but your costs are staying up. And, of 
course, we know what happened to the price of milk. So, how do 
we deal with that?
    Mr. Lang. We own most of the land that we farm. That is 
fortunate. We paid the bill for high-priced land when the rest 
of the industry had cheap feed, and right now there is some 
benefit in that for us. But still we use the real price of $7 a 
hundredweight as our feed cost, but that is less than some 
other parts of the country because we do own the land; there is 
not the debt against it that would come if you are purchasing. 
The price has come down considerably from what it was certainly 
a year ago and from what it was earlier this spring.
    Mr. Boswell. What about the cost of your inputs on the 
fertilizer and seed, have they come down?
    Mr. Lang. Fertilizer is now down. Seed this spring was not.
    Mr. Boswell. Go ahead. I am going to let you have my last 
42 seconds.
    Mr. Lang. And I would say energy costs are a big part of a 
dairy industry because unlike other parts of farming, we use 
the same amount of fuel every day. Energy costs, veterinary 
costs, labor costs, they are all high, but I do believe that if 
we hold on to the current practices of supporting milk in the 
way we have now, that this industry will come to better times 
in the near future.
    Mr. Boswell. Thank you very much.
    Mr. Chairman, I might just add this, because I recommend 
his testimony not because he is my constituent, but because 
occasionally when I get a new legislative assistant that is not 
really experienced, I send him out to their farm to get their 
hands dirty and also to sit around that kitchen table to talk 
about what it is all about.
    Mr. Lang. And we show them how to haul manure.
    Mr. Boswell. We call it getting their hands in the grease.
    The Chairman. Absolutely. The value of each of these 
testimonies is just immeasurable, and I agree with you those 
charts on dairy margins will be very helpful to us. And the 
staff really leans very heavily on each of your testimonies, 
for they have been very, very helpful throughout each of these 
hearings, to help guide us forward in finding some help in the 
industry.
    Now we will hear from the gentleman from Pennsylvania, Mr. 
Thompson.
    Mr. Thompson. Thank you, Mr. Chairman. Thanks again for the 
privilege of allowing me to join you in this very important 
hearing as dairy prices are down about half of where they were 
before, and we are struggling.
    I really appreciate Mr. Boswell's line of questioning in 
terms of inputs. I am not going to go too much further down 
there because that is a balance of cost, and supply and demand, 
and cost. Frankly, just to make a statement, one of the things 
we really could do to protect our farms and our farmers and our 
agriculture is avoid costs like some of those what I consider 
very ill-conceived programs, cap-and-tax, cap-and-trade, and 
frankly a food safety bill that is going to raise the cost on 
producers that we are going to be looking at here maybe even 
this week.
    We have talked a lot about short term, and that is 
important because I see that is a life preserver for dairy 
farmers who are drowning, because we can ill afford to lose our 
dairy farms, any farm. Frankly, the biggest threat to our 
national security would be turning our food sources over to 
other countries.
    But I want to focus just a little lit bit on the long-term 
side. We need to figure out what the life preserver is right 
now. But long term, just a show of hands of the folks on the 
panel, and thanks for being here, how many on the panel would 
support the fact that we need to simplify the pricing system?
    Great. Those who--looking for just a real quick thought on 
what would you do to do that? What would you recommend? What 
would you implement?
    Start with Mr. Lang and then any of those others who agree 
with that.
    Mr. Lang. Well, certainly have more population buy fluid 
milk would help us in the Midwest, but a single order, we would 
be open to that. We would be open to certainly more 
transparency in the pricing of all dairy products both at a 
retail level and at a--certainly a store level, but what price 
really is the price of milk that farmers receive.
    Mr. Thompson. So single order, transparency. Any additional 
thoughts on how we do that simplifying?
    Dr. Guterbock. Competitive pricing, allowing processors and 
producers and co-ops to arrive at prices based on their needs 
rather than based on the current system.
    Mr. Bostwick. I agree with that; one order, and an all-milk 
price, transparency, and just simplification in the overall 
process.
    Mr. Contente. We have in the current pricing system, we 
have fixed values for cost production at the plants; however, 
the producers don't have those same values, so I believe that 
should be cleaned up one way or the other.
    Mr. Cook. I think something to stabilize the amount of milk 
produced and to meet the market demand, and also perhaps more 
transparency in the marketplace. Maybe our product-pricing 
method is taking away milk moving toward the most profitable 
means for it. I know it stopped having tilts instituted for 
skim versus fat, but it has also caused other problems and 
maybe masked where milk really should go, and sometimes sent it 
in another direction.
    Mr. Suber. Without specifically citing a mechanic of the 
pricing, I would say the outcome that should be focused on is 
to diminish the volatility that is in the marketplace. We hurt 
our producers on the low side; we damage our buyers globally, 
domestically and internationally on the high side; and the 
peaks, valleys and the shortness between them is killing both 
ends of that equation. So dealing with that through these 
mechanics would be important.
    Mr. Thompson. What is the industry doing in this? Is it 
doing enough to create demand and markets for our products, 
given the strains our industry now faces?
    Mr. Suber. The issue on demand is constantly under 
pressure. Dairy farmers invest 15 cents for promotion. Part of 
that goes in the export side, part of it is used domestically, 
and the attempts there to build demand in fluid and in cheese 
have reached new successes in a variety of ways that I can 
certainly provide to the Committee if it needs it.
    But working with the processors and the people who control 
access to the market, meaning whether they are retailers or 
quick-service chains, are all part of trying to make sure that 
you build promotion in a way that moves product, not just 
simply building awareness.
    So the issues there are important. There is always a need 
for processors to be listening to the market, though; not just 
promoting, but listening to what the market needs. And the 
issue of diversity of protein supply is very important. One of 
the other questions was about imported proteins. Those proteins 
can be made here if our pricing system adequately reflects the 
signals that the processors need to meet that demand.
    Mr. Thompson. I see I am out of time. Thank you, Mr. 
Chairman.
    The Chairman. Thank you.
    The gentleman from New York, Mr. Massa.
    Mr. Massa. Thank you very much, and thank you for 
conducting this, and a series of very critical hearings, 
probably one of the most important issues we face back in my 
home district.
    Just by a show of hands if I could ask, please, lots of 
information to cover, do any of you support the concept of the 
execution of a single-dairy national pricing order starting 
immediately or as quickly as we could make that happen? Just a 
show of hands so I can just get a feel. I know there are lots 
of diverse opinions. It comes down almost on the same side as 
the previous question.
    I would also like to explore two things that are critical 
to what I have heard. This is first, Mr. Suber. You mentioned 
from your point of view as a trade expert that we have seen a 
drop in exports from 11 to 8 percent. Is that a correct 
characterization of your testimony?
    Mr. Suber. As a percent of production, that is correct.
    Mr. Massa. You also characterized it has had a significant 
effect on the overall dairy environment in the United States?
    Mr. Suber. Correct.
    Mr. Massa. And I have heard others at this table discuss 
what is a near catastrophic meltdown in the dairy market. I am 
using words, but would anybody--perhaps, Mr. Contente, would 
you agree with that characterization that we are facing a truly 
dire dairy situation.
    Mr. Conaway. Most definitely.
    Mr. Massa. So here back to you, Mr. Suber, I don't 
understand. From 11 to eight percent in dairy exports, that has 
been in some individuals' minds the driving factor. How could a 
three percent drop in dairy exports be so very responsible for 
everything from suicides, to families selling the farm, to the 
incredible hardship that I have witnessed firsthand? How do we 
let ourselves get into a position where foreign countries and 
our market access to them by a ratio of three percent could do 
this to us?
    Mr. Suber. Three percent is 6 billion pounds of milk and 
the various products that it turns into. If it cannot be sold 
like any commodity system, it now becomes priced against what a 
buyer will pay in the face of that amount of supply. Corn, oil, 
any commodity will have that issue if demand suddenly stops. 
The issue is that the export market became a growing part of 
our demand picture, and it will become so again when you have 
catastrophic circumstances happening in economies. We are a 
globalized dairy economy, much as we may not like to think of 
it, and therefore we are tied to it and bear the consequences 
of it.
    Mr. Massa. So just in summary, you are relatively certain 
in your position that that three percent drop is, in fact, as 
it had been characterized, a significant factor in the overall 
pain being suffered in the U.S. dairy industry?
    Mr. Suber. Yes, sir.
    Mr. Massa. Would you agree with the following statement 
that we have very little control over foreign governments to 
change that in the short term.
    Mr. Suber. The issue was not caused by the action of 
foreign governments, unfortunately, but----
    Mr. Massa. Foreign markets.
    Mr. Suber. Foreign markets. We generally cannot control 
markets, period.
    Mr. Massa. So whether or not individuals in foreign 
countries decide to eat our cheese or drink our milk is really 
a governing issue in this particular swing in the dairy 
industry.
    Mr. Suber. Yes, as we have to compete domestically for 
share of stomach at any time.
    Mr. Massa. I appreciate your candor. I don't disagree with 
you. For the record, however, you and I are very much in 
opposite spectrums of the world. I think that by engaging 
ourselves in these open-door, free-trade policies that have 
allowed this to happen is at the very core of negligence on the 
part of our Federal Government that has surrendered a great 
deal of our economic, agriculture, manufacturing sovereignty to 
the whims of foreign populations, whether they are intentional, 
or whether they are market-driven, or whether they are 
anything.
    And, as I know, it counters your testimony, and I stand in 
fierce opposition to increasing these free market agreements 
that I think will grossly exacerbate the problem and the pain 
and suffering that I have to witness and deal with every single 
day, not to use a metaphor, back on the farm. And so I very 
strongly believe that my number one duty as a Member of the 
United States Congress is to protect the interests of the 
individuals of the United States of America, and not the 
proclivities of individuals in foreign countries, whether or 
not they want to buy or sell our milk or cheese.
    So I believe that we must look aggressively in the 
immediate term to doing whatever is necessary to stabilize the 
situation, and then we can have all the philosophical arguments 
we want to have to figure out how to prevent this in the 
future, et cetera. But the pain is real. The call to action is 
right now. And frankly, I have had it up to my eye teeth as a 
new Member of Congress with ivory tower economists talking 
about what is going to happen 12 to 18 months from now. I will 
associate myself with any immediate action that will make the 
lives of our farmers better, and, frankly, double damn the 
consequences. We will figure that out 6, 7, 8 months from now.
    Thank you, Mr. Chairman. I yield back the balance of my 
time.
    The Chairman. That deserves a bow. Well stated.
    Let me just ask a couple of questions right quick, and we 
will recognize a couple of more here. But, Mr. Suber, last week 
in our hearings, it was stated that imports such as MPC cause 
our domestic price of milk to be suppressed. What do you say in 
that regard?
    Mr. Suber. We analyze imports. We do not have programs 
directed at imports. When times are tough, any imports are a 
problem. Today they are less than what they used to be. But I 
repeat, at times of stress, any imports are a problem.
    The Chairman. Thank you very much.
    Mr. Cook, in your opinion, does the Holstein plan take into 
account the interdependence of regions, as Dr. Guterbock stated 
in his testimony.
    Mr. Cook. Yes, it does. The Holstein plan does not affect 
any program that is currently in place. And the reason the 
Federal order system is in place is to make sure that there is 
a regional dairy production system. I think we are down to nine 
Federal orders from 30 some-odd just a little while ago, and I 
think that is probably a minimal number where we need to be if 
we are concerned with maintaining a production dairy industry 
throughout the United States.
    The Chairman. Thank you.
    Now, Dr. Guterbock, are there any short-term suggestions, 
short-term suggestions that you believe could help producers 
make it through these tough times?
    Mr. Gutknecht. I am afraid I don't have any short-term 
solution that would not contribute to the long-term problem.
    The Chairman. Ms. Hughes, may I ask you a question? Can you 
explain what the pending Agriculture Department's producer-
handler hearing is about? And why do you believe it should be 
suspended?
    Ms. Hughes. We actually have not taken a position on the 
current producer-handler hearing.
    The Chairman. You do not believe it should be suspended?
    Ms. Hughes. We just haven't taken a position on it.
    The Chairman. Let me ask that question to you, Mr. 
Bostwick.
    Mr. Bostwick. Well, we view the producer-handler 
controversy--producer-handler is really just a risk-management 
tool. It is a risk-management tool that has been in place for 
70 some-odd years, which basically allows a producer and a 
processor, in essence, to be the same person so that we milk 
the cows, and we bottle the milk, and we also make ice cream 
and all the things that a producer does.
    We have been free from the Federal Milk Marketing Order 
system as a producer-handler. There are those that believe that 
we should be part of the pool and be subject to these very 
archaic and unfair rules and problems that we have been 
discussing here all day long today. And that is why we kind of 
take a position that the producer-handler is a valuable tool, 
that they generally are closer to the consumer, they do things 
like grass-fed product, they put their product in glass 
bottles. We concentrate our nonfat solids in our lower-fat 
milks because our customers like that. So it is just a 
different business model, and on this particular issue 
reasonable minds are disagreeing.
    The Chairman. All right. Mr. Contente, let me ask you if 
you think that California should be part of the Federal Milk 
Marketing Order?
    Mr. Contente. Most definitely. It is kind of like having a 
football game with two separate rules. I might get 11 players, 
and the guys in Federal order might only get nine players. So 
we should all play by the same rules.
    The Chairman. Let me ask each of you very quickly and for 
the record if each of you supports a national supply management 
program?
    Mr. Lang.
    Mr. Lang. We do not.
    The Chairman. Mr. Bostwick. 
    Mr. Bostwick. We do not.
    The Chairman. Mr. Contente.
    Mr. Contente. Yes, we do. We support the Holstein plan.
    The Chairman. Dr. Guterbock.
    Dr. Guterbock. No, we do not. No.
    The Chairman. Ms. Hughes.
    Ms. Hughes. We do.
    The Chairman. Mr. Cook.
    Mr. Cook. We certainly do.
    The Chairman. Good.
    Mr. Suber.
    Mr. Suber. We do not.
    The Chairman. All right. That is about three to four. That 
is about an even split. That is the big question we have, not 
only what to do, but what to do that the industry can agree on. 
But we will--we will find answers to these questions. Thank you 
very much.
    Now we will recognize Mr. Thompson again.
    Mr. Thompson. Thank you, Mr. Chairman.
    I really appreciate the discussions between short term and 
long term. I think that there is a need for both, but it has to 
be the right one.
    Dr. Guterbock, I appreciate the sense of caution that I 
hear from you, because it is not about just taking action, but 
it is the right action. We can't make matters worse. We really 
do need to look at the long term, and we need to be doing both 
at the same time, I believe. It is that kind of a crisis right 
now.
    If Congress--there are a lot of proposals right now. I know 
there is one on the Senate side. It has to do with establishing 
kind of a price floor. If Congress were to enact an $18 per-
hundredweight price floor, as some have proposed, what would 
the impact be on government purchases? Does anybody have an 
opinion of that?
    Mr. Lang. It would be huge.
    Mr. Thompson. In what way?
    Mr. Lang. I believe that we support the current price floor 
as it exists today, but I believe that you will have production 
that is unbelievable because you have a lot of growers out 
there that can produce milk very, very profitably at a lower 
amount. And what happens when you have a price that is 
profitable, you get overproduction. And I believe that is 
exactly what will happen so that surplus needs to be purchased 
in some manner.
    Mr. Cook. I agree with--I agree with him, very much so. I 
think something like that would help immediately and would do 
most of the farmers in this country an awful lot of good. But 
without a Dairy Price Stabilization Program, exactly what Mr. 
Lang said would happen. So, we are looking at something that 
must be done in concert. What you are talking about would 
certainly help this industry short term and be a quick fix, but 
let us look at something long term that will stop these quick 
fixes from becoming necessary all the time.
    Mr. Thompson. Mr. Contente.
    Mr. Contente. I don't believe that the amount, the burden 
to the government would be that large simply for the fact that 
if you look at the last couple of weeks of CCC purchases, 
especially last week that was under 1 million pounds, so our 
production is coming in line with the market, and there is 
probably not as much production excesses as we suspect there 
is. So that would just bring the price up to a level that the 
market would have to pay. But I would agree with Mr. Cook that 
the supply management would be a necessary step further on.
    Mr. Thompson. For those of you who advocate for that or a 
similar propose, do you have a cost estimate on what that cost 
would be?
    Mr. Cook. The cost estimate for a Dairy Price Stabilization 
Program?
    Mr. Thompson. Yes.
    Mr. Cook. To the government, it would be no cost to the 
government for it. In fact, we expect that the government would 
reap huge benefits in the fact that they--we would hope that 
the MILC payment would not be necessary, we would hope that it 
would reduce requirements, we would hope that it would help an 
awful lot of things with the price support program as well.
    Mr. Thompson. Now, how about with that type of a mandatory 
supply management, how do you envision such a program would 
manage domestic production with the prospect of additional 
imports, and setting that ceiling at $18 per hundredweight, and 
do you see where there might be potential for, unfortunately, 
more imports to flood in? And what would the impact of that be 
on our producers?
    Mr. Cook. I think as far as--these are two separate issues. 
I think currently, it was said earlier, if we increased short 
term an $18 price, you wouldn't buy an awful lot more product. 
You would pay more for the product you bought, but you wouldn't 
buy an awful lot more product, I don't think, right now, 
because of the demand and supply is where it is. There is too 
much milk, but you are already buying it. You won't buy more, 
you will just pay more for what you buy.
    But, if you institute the Dairy Price Stabilization 
Program, which, by the way, would be funded by no more than 
2 cents by all the milk produced by the people producing milk 
today, you would stabilize these peaks and valleys and not have 
to continue going through this large purchase amount that you 
buy.
    And as far as our exports, I just want to go on the record 
and say that our exports are at the level they are now, being 
very highly subsidized through DEIP, thank God. DEIP is a 
program that is mandated, and I am glad we are using it. But we 
are subsidized through DEIP, and we subsidize through some 
other methods a little bit lately as well. If it is eight 
percent, that is good, but it is not all eight percent just by 
free market trade. It is eight percent because of some of it is 
being subsidized.
    Mr. Thompson. Any others have opinions on what may happen 
to potentially increased imports?
    Dr. Guterbock. I think an artificially high price in the 
United States would certainly encourage imports and increase 
them, and those would also increase purchases by the CCC, and 
all those surpluses eventually have to be sold and would 
depress future markets.
    The Chairman. Thank you.
    I will now recognize Mr. Costa of California.
    Mr. Costa. Thank you very much, Mr. Chairman. I once again 
want to thank you and Chairman Peterson. When the meltdown 
first began late last fall, we came back in January, we asked 
to put together a meeting with you, with Chairman Peterson and 
the new Secretary of Agriculture Mr. Vilsack, and we have been 
working continuously since that time to try to address both the 
short-term and the long-term aspects of this. So you are to be 
commended by the series of hearings, and we will have to stick 
with it.
    Our friends with the Holstein Association nationally and 
other organizations that have been working together on the 
proposal that has been just discussed about a supply-side 
management, we hope to have a draft of that out here soon that 
can be vetted. A number of other dairy organizations around the 
country are interested in it, and we hope to continue to vet 
that with you during the month of August. And we want your 
feedback, because I really think that if we are going to deal 
with these long-term boom-and-bust cycles, that is going to 
have to be a critical part of the long-term solution, it seems 
to me.
    I do want to ask unanimous consent for the record to submit 
information, I think, of data that is missing from the United 
States Department of Agriculture, USDA, on the role that 
caseins, caseinates, milk protein concentrate has on the U.S. 
dairy market that was produced by the National Farmers Union by 
Mr. Joaquin Contente and his organization. Without objection?
    Mr. Scott. Without objection, so ordered.
    Mr. Costa. Thank you very much. We will submit that for the 
record.
    [The document referred to is located on p. 243.]
    My question is this, because we have covered most of the 
issues here today, and I heard--it gets back to supply and 
demand, and I heard it referenced earlier with same-sex semen, 
and I am getting conflicting information. And we know that it 
is a new technology through genetics that allows us to--and 
since I came from a dairy farm, it used to be kind of 50/50 
between your young heifer calves and your bull calves, and now 
with same-sex semen, with the genetics, we are able to get 80 
or 90 percent heifer calves.
    And even if we do the herd thinning or the Herd Reduction 
Management Voluntary Program that has seemingly been working in 
a couple of months here, and we are reducing herd size, I have 
heard numbers say that we may have as much 4+ million heifers 
waiting as replacement heifers. Then I have heard other numbers 
that say that it is much lower than that recently.
    Do any of you want to, on that question, have some 
information on that is most reliable to us? Maybe we will start 
with the Holstein guy.
    Mr. Cook. I believe that Select Sires' information is 
recently available in Hoards Dairyman is at 8,000 in 2008, 
63,000 this year, 161,000 next year, maybe as much as 300,000 
year after that. I believe there is going to be--the government 
currently takes biannual reports of the heifers available, but 
usually they talk to the farmers themselves, and an awful lot 
of these heifer calves now are bought by heifer ranches. And I 
don't know if information that we will be receiving when the 
next level comes out will actually show these heifers in line 
yet, but I know they are there. And I know they are going to 
haunt us, and it will take maybe 6 months before we actually 
find that level.
    Dr. Guterbock. I don't know the exact number. I believe it 
is about 4.8 million heifers.
    Mr. Costa. I have heard 4.2.
    Dr. Guterbock. As a percentage of the milking herd, it is 
at a record high, and we do expect more of these same sex-semen 
heifers to be spawned.
    Mr. Cook. Mine are only extra heifers, sir, extra heifers 
because of the use of sexed semen. I believe the actual number 
of replacement animals that is regarded now is about 3.9 
million replacement availability.
    Mr. Costa. Mr. Chairman, we need to get a handle on this as 
we move forward on whatever long-term solutions we find only 
because the numbers I have been using--and I think they are in 
the ballpark, 9.3 million cows being milked in the country 
today, through the herd reduction effort we have been trying to 
reduce that below nine million--I have heard some numbers that 
say we are about halfway there. I don't know what the current 
count is on that, but if we get below nine million milking cows 
in the country by the end of this year, let us say, and that is 
an if, if we have anywhere from 3.2-4 million replacement 
heifers, I just don't understand how, in terms of the long 
term, we are not going to be back into the this boom-and-bust 
cycle.
    I know dairies are very efficient. Sometimes after your 
third or fourth calf, you are culling and replacing and 
bringing these new heifers in. But I don't know that any of our 
dairies are that efficient or that we can export all that 
additional milk product. So, it is an area that we are going to 
have to get a better handle on.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Mr. Costa, and let me thank all of 
you, each of you, for your expert testimony. We have a very 
serious, serious problem, a critical one. Of course, it cannot 
be solved without your inputs. We have had over 20 witnesses to 
come before on our three panels. We are determined to hear from 
everybody. We want to get as much intelligence as we can before 
our Committee. We want to get the Agriculture Department back 
over here. We want to have conversations with the Secretary.
    What we want to do is help the industry as quickly as we 
can, but as witnessed from the testimonies that have been 
given, that is not going to be an easy thing. We have to get 
agreement on exactly what the approach will be. But one thing 
is for certain that these hearings have done to this point, it 
has certainly dramatized the critical nature and the urgency of 
this issue. And it has been deeply felt by the Chairman of this 
Subcommittee as well as each Member of our Committee, and we 
are committed to helping the dairy farmers and to bring some 
price stabilization to this very critical, critical and 
important industry worldwide.
    And so under the rules of the Committee, the record of 
today's hearing will remain open for 10 calendar days to 
receive additional material and supplementary written responses 
from the witnesses to any questions posed by a Member to the 
panel.
    This hearing of the Livestock Subcommittee is now 
adjourned.
    [Whereupon, at 12:30 p.m., the Subcommittee was adjourned.]
    [Material submitted for inclusion in the record follows:]
      
                  Submitted Material by Hon. Jim Costa

The Role of Casein, Caseinates and Milk Protein Concentrate on the U.S. 
        Dairy Market
    The U.S. dairy market is the world's largest single commercial 
dairy market. This market last year reached and exceeded 200 billion 
pounds of milk including exports. However, the USDA ERS fails to 
include any usage data for casein, caseinates and MPC in its commercial 
disappearance of milk data. Therefore, the commercial disappearance or 
utilization reports from USDA ERS are not complete or accurate. An 
assessment of what information is used on supply and utilization ERS 
reports reveals the following:


 
 
 
     1. total milk production for the year.....
     2. imports--added in......................
     3. beginning stocks--added in.............
     4. total supply--total....................
     5. ending stocks--subtracted..............
     6. total--total...........................
     7. exports--subtracted....................
     8. shipments (to U.S. territories)
     subtracted................................
     9. fed to calves--subtracted..............
    10. human (domestic) final total...........
    11. per capita--per capita.................
 
      Lcnsd cheese                                          109,994.8 MT
      Non Lcnsd cheese                                       38,938.5 MT
      Lcnsd cheese items                                     21,386.7 MT
        Total                                                 170,320 MT
 


    The flaw in the USDA ERS supply and utilization of all dairy 
products reports is in the information numbers for the import category. 
In order to recognize this discrepancy, first one must check the 
Foreign Agricultural Service (FAS) Imports Commodity Aggregations 
report. After careful analysis and calculations of this report it 
becomes clear that something is missing. The cheese imports on that 
report for 2008 total 170,320 metric tons of cheese imports. This is 
equal to 375,487,472 pounds of cheese imports. Using the basic standard 
of 1 pound of cheese is equal to 10 pounds of milk, this would 
translate to 3.75 billion pounds equivalent of milk imported in 2008 
just for cheese.
    Now the amount of imports on a milk equivalent basis as stated in 
the commercial disappearance: Milk in all products, 2008 report is 3.94 
billion pounds. With the total imports of 3.94 billion pounds for 2008 
and the cheese imports of 3.75 billion pounds, the flaw as you can see 
becomes quite evident that something is missing! Once all the different 
categories are included such as casein, butter, MPC, and lactose the 
total for imports surpasses 15 billion pounds of milk equivalent. 
Herein is the Missing Data!

                                  
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