[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
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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!