[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
HEARING TO REVIEW DAIRY POLICY
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON AGRICULTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
__________
APRIL 20, 2010, HARRISBURG, PA
__________
Serial No. 111-47
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 DAVID P. ROE, Tennessee
STEVE KAGEN, Wisconsin BLAINE LUETKEMEYER, Missouri
KURT SCHRADER, Oregon GLENN THOMPSON, Pennsylvania
DEBORAH L. HALVORSON, Illinois BILL CASSIDY, Louisiana
KATHLEEN A. DAHLKEMPER, CYNTHIA M. LUMMIS, Wyoming
Pennsylvania ------
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
(ii)
C O N T E N T S
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Page
Holden, Hon. Tim, a Representative in Congress from Pennsylvania,
opening statement.............................................. 3
Prepared statement........................................... 3
Neugebauer, Hon. Randy, a Representative in Congress from Texas,
opening statement.............................................. 4
Peterson, Hon. Collin C., a Representative in Congress from
Minnesota, opening statement................................... 1
Prepared statement........................................... 2
Witnesses
Redding, Hon. Russell C., Secretary, Pennsylvania Department of
Agriculture, Harrisburg, PA.................................... 5
Prepared statement........................................... 8
Dunn, Ph.D., James W., Professor of Agricultural Economics,
Pennsylvania State University, University Park, PA............. 12
Prepared statement........................................... 13
Frey, John, Executive Director, Center for Dairy Excellence,
Harrisburg, PA................................................. 28
Prepared statement........................................... 30
Hissong, Rod, Co-Owner, Mercer Vu Farms Inc.; Past President,
Professional Dairy Managers of Pennsylvania, Mercersburg, PA... 33
Prepared statement........................................... 35
Mosemann, Lauren, Dairy Producer, Misty Mountain Dairy LLC,
Warfordsburg, PA; on behalf of Maryland & Virginia Milk
Producers Cooperative Association, Inc.; National Milk
Producers Federation........................................... 38
Prepared statement........................................... 40
Supplemental material........................................ 84
Heffner, Kent, President, Schuylkill/Carbon County Farm Bureau;
Dairy Producer, Pine Grove, PA................................. 47
Prepared statement........................................... 49
Brandt, Daniel, Vice Chair, Charter Board, Dairy Policy Action
Coalition; Partner, Brandt View Farms, Annville, PA............ 51
Prepared statement........................................... 53
Rutter, Todd M., President, Rutter's Dairy, York, PA............. 55
Prepared statement........................................... 57
Submitted Material
Carlin, Gerald, Dairy Farmer, Meshoppen, PA, submitted statement. 71
Gotham, Bryan, Dairy Farmer, St. Lawrence County, NY, submitted
material....................................................... 75
Moyer, Ralph E., Dairy Producer, Myerstown, PA, submitted
statement...................................................... 83
Tewksbury, Arden, Manager, Progressive Agriculture Organization,
submitted statement............................................ 76
HEARING TO REVIEW DAIRY POLICY
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TUESDAY, APRIL 20, 2010
House of Representatives,
Committee on Agriculture,
Harrisburg, PA.
The Committee met, pursuant to call, at 9:26 a.m., at the
Farm Show Complex and Expo Center, 2300 North Cameron Street,
VIP Room, Harrisburg, Pennsylvania, Hon. Collin C. Peterson
[Chairman of the Committee] presiding.
Members present: Representatives Peterson, Holden, Boswell,
Scott, Dahlkemper, Neugebauer, and Thompson.
Staff present: Mary Knigge, Dean Goeldner, Nona Darrell,
Alejandra Gonzalez-Arias, April Slayton, John Konya, Debbie
Smith, John Goldberg, and Sangina Wright.
OPENING STATEMENT OF HON. COLLIN C. PETERSON, A REPRESENTATIVE
IN CONGRESS FROM MINNESOTA
The Chairman. Welcome to today's hearing of the House
Agriculture Committee and we are happy to be here in central
Pennsylvania, the home of our esteemed Vice Chairman of the
Committee, one of our outstanding Members who has been a great
ally of mine and a great help to the Committee bringing his
expertise and the views of people from this area to the
Agriculture Committee. We are here to talk about the future of
dairy policy because I know that this issue is very important
to this state and the people of this community.
The crisis that dairy farmers continue to face is an
ongoing concern of the Members of the Agriculture Committee and
other Members of Congress who represent dairy-producing areas.
Last year in July, we held a series of three hearings to
address the economic conditions facing the dairy industry and
the message we received was loud and clear that the current
present dairy programs are not providing an adequate safety net
for dairy farmers.
Between 2003 and 2007 the price of milk has fluctuated from
a low of $11 to as high as $20 per hundredweight. Something
needs to change in order to prevent this roller coaster ride
that farmers face on a regular basis, and we have been through
this a little bit, but this last year was the worst I have ever
seen, and it is just not tolerable. We are still not out of all
of the effects that happened because of what happened last
year.
To complicate matters, less than one percent of Americans
today are involved in the production of agriculture and few of
our friends in the cities and suburbs understand what a
critical piece of the economy the dairy industry represents.
Most Americans do not understand the volatility, the long hours
and the many challenges faced by dairy farmers. The challenges
facing the dairy industry are longstanding and solving these
problems is not going to be easy. As long as I have been in
Congress, I have studied the dairy industry and I guess I know
enough now to be dangerous. It is complicated. It is regional
and the situation we are facing has been made worse by trade
agreements that have tied our hands, and in some cases,
preventing us from doing what is best for our dairy producers.
We recognize that the need to have an effective dairy
safety net to prevent the kind of crisis we are seeing. I have
asked all the stakeholders to come together and start a long-
term list to the current programs that could be included in the
next farm bill to provide better support for this essential
industry. Today I hope our witnesses will help us continue the
conversation about the reality facing the industry right now
and what we can do to fix things. I want to thank all of you
for joining us today to talk about this important issue. I look
forward to your testimony.
[The prepared statement of Mr. Peterson follows:]
Prepared Statement of Hon. Collin C. Peterson, a Representative in
Congress from Minnesota
Good morning and welcome to today's hearing of the House
Agriculture Committee. We are happy to be here in central Pennsylvania
to talk about the future of dairy policy because I know that this is an
issue that is very important to this state and the people of this
community.
The crisis that dairy farmers continue to face is an ongoing
concern for Members of the House Agriculture Committee and other
Members of Congress who represent dairy producing areas. Last year in
July, we held a series of three hearings to address the economic
conditions facing the dairy industry, and the message we received was
loud and clear--the current Federal dairy programs are not providing an
adequate safety net for dairy farmers.
Between 2003 and 2007, the price of milk has fluctuated from as low
as $11 and as high as $20 per hundredweight. Something needs to change
in order to prevent this roller coaster ride that farmers face on a
regular basis.
Complicating matters, less than one percent of Americans today are
involved in production agriculture, and few of our friends in the
cities and suburbs understand what a critical piece of the economy the
dairy industry represents. Most Americans do not understand the
volatility, the long hours and the many challenges faced by dairy
farmers.
The challenges facing the dairy industry are long standing, and
solving these problems is not easy. As long as I have been in Congress,
I have been studying the dairy industry. It is complicated and very
regional, and the situation we're facing has been made worse by trade
agreements that have tied our hands and, in some cases, are preventing
us from doing what is best for our dairy producers.
Recognizing the need to have an effective dairy safety net to
prevent the kind of crisis we're seeing, I have asked all of the
stakeholders to come together and start looking for alternatives to the
current programs that could be included in the next farm bill to
provide better support for this essential industry.
Today, I hope our witnesses will help us continue the conversation
about the reality facing the dairy industry right now and what we can
do to fix things. Thank you all for joining us today to talk about this
important issue, and I look forward to the testimony.
The Chairman. I would like to recognize the Vice Chairman
for an opening statement. I will recognize, as well, Mr.
Neugebauer and the others will have their statements made a
part of the record.
OPENING STATEMENT OF HON. TIM HOLDEN, A REPRESENTATIVE IN
CONGRESS FROM PENNSYLVANIA
Mr. Holden. Thank you, Mr. Chairman, for your leadership
and then thank you for having this hearing here in Harrisburg,
Pennsylvania. To all of my colleagues on the Committee thank
you so much for your participation today.
We are here today because we are committed to a strong and
prosperous future for the dairy industry. This hearing presents
an opportunity for Members of the Committee to gain a better
understanding of the state of the dairy industry in
Pennsylvania and across the Northeast. In 2009, Pennsylvania
ranked fifth in the nation in total milk production behind only
California, Wisconsin, New York, and Idaho. Agriculture is our
number one industry and dairy is the top economic driver
contributing 42 percent of the agricultural receipts. It is
estimated that nearly 85 percent of the dairy farm's income is
spent locally and recycles 2.5 times through the community. As
a result, the dairy industry contributes more than $4.2 billion
into the Pennsylvania economy.
Additionally, the area generates over 40,000 jobs across
the Commonwealth. Despite its strength, 2009 also presented
challenges for the industry. Record low milk prices decreased
milk margins by more than 40 percent, causing the average farm
to lose $1,000 per cow in equity during the year. The number of
dairy farm operations in the state dropped more than five
percent, while the number of cows dropped by nearly two
percent. Taking steps to correct these challenges is critical
not only for the future of our family farmer but for the entire
Commonwealth of Pennsylvania.
Today's hearing will include testimony from witnesses
representing a broad cross-section of the local dairy community
who will provide information and perspective on issues of
particular importance to Pennsylvania as we continue our look
at the dairy policy for the next farm bill. Pennsylvania
farmers deserve the strongest advocacy possible in Washington,
and I am committed to working with Chairman Peterson and the
other Members of this Committee to bring home the best deal
possible to a family dairy farmer in Pennsylvania and across
the nation. A Pennsylvania-based hearing is a great step toward
assuring an even stronger Pennsylvania voice in this process. I
look forward to today's expert testimony and to the opportunity
to listen, learn and question those at the forefront of this
issue.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Holden follows:]
Prepared Statement of Hon. Tim Holden, a Representative in Congress
from Pennsylvania
Thank you, Chairman Peterson. I'd like to welcome you and all my
colleagues on the House Agriculture Committee to the Commonwealth of
Pennsylvania. I would also like to thank our witnesses and guests for
coming today.
We are here today because we are committed to a strong and
prosperous future for the dairy industry. This hearing presents an
opportunity for Members of the Committee to gain a better understanding
of the state of the dairy industry in Pennsylvania and across the
Northeast.
In 2009, Pennsylvania ranked 5th in the nation in total milk
production, behind only California, Wisconsin, New York, and Idaho.
Agriculture is our number one industry and dairy is the top economic
driver contributing 42 percent of the agricultural receipts. It is
estimated that nearly 85 percent of a dairy farm's income is spent
locally and recycles 2.5 times through the community. As a result, the
dairy industry contributes more than $4.2 billion into the Pennsylvania
economy. Additionally, dairy generates over 40,000 jobs across the
Commonwealth.
Despite its strengths, 2009 also presented challenges for the
industry. Record low milk prices decreased milk margins by more than 40
percent causing the average farm to lose $1,000 per cow in equity
during the year. The number of dairy farm operations in the state
dropped more than five percent while the number of cows dropped by
nearly two percent.
Taking steps to correct for these challenges is critical not only
for the future of our family farmer but for the entire Commonwealth of
Pennsylvania. Today's hearing will include testimony from witnesses
representing a broad cross section of the local dairy community who
will provide information and perspective on issues of particular
importance to Pennsylvania as we continue our look at dairy policy for
the next farm bill.
Pennsylvania farmers deserve the strongest advocacy possible in
Washington. I am committed to working hard with Chairman Peterson to
bring home the best deal possible for family dairy farmers in PA and
across the nation. A Pennsylvania-based hearing is a great step toward
assuring an even stronger Pennsylvania voice in this process. I look
forward to today's expert testimony and the opportunity to listen,
learn and question those on the forefront of this issue.
The Chairman. I thank the gentleman and I want to
recognize, we have Mr. David Scott from Georgia with us, who is
the Chairman of the Subcommittee that deals with livestock and
dairy, and Mr. Scott has been gracious to allow Mr. Holden to
make an opening statement and we appreciate his leadership and
being with us today. I now recognize the Ranking Member of the
Livestock, Dairy, and Poultry Subcommittee, Mr. Neugebauer, for
a statement.
OPENING STATEMENT OF HON. RANDY NEUGEBAUER, A REPRESENTATIVE IN
CONGRESS FROM TEXAS
Mr. Neugebauer. Well, thank you, Mr. Chairman. I am Randy
Neugebauer from the great State of Texas. It is great to be
here in Pennsylvania. We want to thank Representatives Holden,
Thompson, and Dahlkemper for hosting us. It is good to be here
and thanks for all of your great hospitality.
Mr. Chairman, the dairy industry has faced an enormous
challenge over the last 18 months. While the industry has had
past experiences with price swings, this particular downturn
has been exacerbated by an unusual spike in feed prices that
have negatively affected the margin of dairymen. It has become
clear to me from talking with dairy producers from my district
in the panhandle of Texas that existing Federal dairy policies
do not adequately empower producers to manage the increasing
volatility that threatens their survival.
While it is difficult in these circumstances to talk about
the upside, I do believe that the current situation we find
ourselves in represents the best opportunity in many years to
bring an industry plagued with internal divisions together
behind a new comprehensive policy approach. I am aware that
numerous groups have developed internal approaches to attacking
these problems, and I am thankful for all their hard work that
they have already done.
As we begin today the process of developing the next farm
bill, I don't expect at this stage that any proposal will have
all the i's dotted and the t's crossed, but I would like to
hear from the individuals and organizations regarding the
process that they are undertaking and the direction that they
are heading. Dairy policy in our country has long suffered from
a band-aid approach and each time Congress has tackled this
issue the end product is simply to be added onto the new
measures that in many cases are contradictory to the programs
that are already in place. I think and I hope that we can all
come together and we can do better for this industry.
I look forward to hearing what producers in Pennsylvania
have to say about the future direction of our national dairy
policy. I am confident that their contribution will greatly
inform our coming debate.
Thank you, Mr. Chairman, and thank you to all the producers
who have taken their time to participate in this process today.
The Chairman. I thank the gentleman. The chair would
request that other Members submit their opening statements for
the record so that the witnesses may begin their testimony and
make sure that we have ample time for questions.
So we will call up this panel. First we have the Honorable
Russell Redding, the Secretary of the Pennsylvania Department
of Agriculture. Mr. Secretary, welcome to the Committee, and
Jim Dunn, Ph.D., Professor of Agricultural Economics at Penn
State University, welcome gentlemen. We appreciate your being
with us today and look forward to your testimony and your full
statements will be made part of the record. Feel free to
summarize and we are on the 5 minute rule, I guess. Oh, Mr.
Secretary, I understand you have as much time as you want so
you talk at your peril.
Mr. Redding. I will still try to honor the 5 minutes.
STATEMENT OF HON. RUSSELL C. REDDING, SECRETARY, PENNSYLVANIA
DEPARTMENT OF AGRICULTURE,
HARRISBURG, PA
Mr. Redding. Mr. Chairman, Vice Chairman and distinguished
Members of the Committee, welcome to Pennsylvania and thank you
very much for coming to PA.
The Chairman. I think you need to get the microphone a
little closer. You may have to raise it.
Mr. Redding. Okay, got it. Thank you for coming to
Pennsylvania to talk about the dairy industry. We are very
proud to have three Members on your Committee from
Pennsylvania, Congresswoman Dahlkemper, Congressman Thompson
and of course the Vice Chairman. I am very pleased to have all
of you here today. I also want to say thank you to your staff.
We have a lot of contact with them over time on a lot of
different issues and many of them are here today. I just want
to thank you for the excellent work that the Committee and the
staff do.
On behalf of the governor, welcome and it is a pleasure to
have you here. I will certainly try to abbreviate the comments.
You have the written testimony in front of you, but I just want
to have a couple of opening statements and then get to some
near term actions and some longer term actions that we would
like to have some consideration on by the Committee. We
appreciate your interest in the Committee and particularly this
industry of dairy. We look forward to working with you and the
Committee on both short- and long-term actions.
We cannot allow this moment to pass without some aggressive
action on dairy policy reform, pricing transparency, risk
management tools, and adequate financing mechanisms. The
industry cannot hit pause and wait for the next farm bill
negotiations to actively address the dairy policy and price
reform. We must use this time at hand to explore and experiment
on some of the critical dairy issues, and then use these
experiences to inform the debate for the next farm bill.
I would be remiss if I didn't mention clearly as we have
talked about in the opening statements of the Committee that
each time we do dairy policy we add onto that. Sometimes we
forget to say thank you for what was done, and the recent farm
bill is a good example. There was a lot of good work done by
the Committee, the Senate, and Members of the delegation here
so we thank you very much for that. Certainly, the reporting
requirements, the feed adjustment factors, they are just a
couple of examples and a thank you to Secretary Vilsack for the
work that he is doing presently with the Dairy Industry
Advisory Committee. I want to say thank you to him and the work
that he is doing, as well.
So these things combined are real time. They are making a
real difference. Unfortunately, this economy is upside down
financially, and is having a toll on the dairy industry and the
rest of the agricultural economy, as well. But the actions you
have taken as a Committee, both in terms of the appropriation
for the Dairy Loss Assistance Program and also the farm bill
and the work of the USDA, are encouraging to the farm families
of Pennsylvania. It is a signal that you understand the issues
and are trying and prepared to work with them so thank you for
that.
Today we face a crisis in our dairy industry, not just for
price but of confidence. Confidence in the markets, confidence
in the prices going back to our farmers, and confidence in our
ability to continue to manage and have viable dairy operations.
It is a confidence crisis and confidence in crisis for price,
as well, but just a couple of things to focus in on.
One is the issue of price discovery. We hear a lot about
that. There was discussion in the last farm bill. I put that at
the top of the list as one of the issues we have to address
that really doesn't take any additional authority of Congress.
It simply takes the implementation of the 2008 Farm Bill
provision. We have had discussions with Secretary Vilsack at
the USDA. We think that is one of the most important items that
can be done. Actually this could be done right now because you
have to at some point address this issue of what triggers the
price of milk. Right now, a very thinly traded Chicago
Mercantile is really the primary indicator. We believe that
there needs to be a more robust system of price discovery, so
that is number one.
Two, and probably the most important thing I will say today
is really about creating a new outlook on income protection for
farmers. Many, again, have worked for years, Mr. Chairman, in
particular, the Vice Chairman on the issue of risk management
and crop insurance. We believe with our lessons learned on the
crop side of the business that I can borrow for the benefit of
dairy. It is the only major commodity where there is not a
workable, meaningful, affordable crop insurance equivalent for
the industry. We think the time is right, given what we have
learned over the years with the crop insurance, is that if you
have a meaningful and affordable and workable product,
producers will participate. So I put that on the table as one
of those important items today. As we look at the future of the
dairy industry and all the complications of finding some way
for balancing supply and demand and regions, et cetera, this is
the one thing that is a common denominator from the Susquehanna
Valley to the San Joaquin Valley is that you have to be able to
manage the margin right and insure that margin. The Livestock
Gross Margin product that we have worked with the private
developer producer and the USDA on, we think holds great
potential. It is called LGM Dairy and as the name implies, it
is really about insuring that margin so we think that is one
item that, again, is an actual item for the Committee to
consider. I believe we can look at both the LGM Dairy and maybe
there are other better options, but this one--we don't say
believe--but we hope that the next year or 2 we can use this
time to really explore and experiment with other risk
management tools.
On the LGM Dairy, just to note, there are a couple of
things that we would appreciate the support of the Committee
on. One is that there is no subsidy at this point for the LGM
Dairy crop. It is 100 percent of the producers' cost and we all
know that if that was the case on the crop side, how difficult
it would be to sell those policies to producers. At this
moment, it is not a subsidized product. It is an available
product to the industry. We are seeing steady but slow growth
in number of policies. The fundamentals are right. It really is
about insuring that margin and that is what the product is
designed to do, but there needs to be some subsidy on that.
Second, we would appreciate flexibility in the use of the
product, meaning at this point the sales closing dates are
pretty narrow and we are requiring the producer to pay 100
percent of the premium up-front. It is all front-loaded, so you
know how difficult it is when there aren't many dollars
available, so another one of those changes is what we suggest,
as well.
My final point would be just on the credit side. The other
two recommendations are more dairy specific, but as a general
comment, we believe that there are a lot of producers just
given the collapse of the industry and the eroding price that
they have been historically good investments for lenders, both
Farm Credit and private sector. The challenge, of course, is
what happens with equity, and the equity I have been told that
in the last year that these folks have lost 3 years of equity.
So given the loan status we would ask the Committee to take a
look at the availability of credit, both in terms of the USDA's
Farm Service Agency.
Just as an example, in the last year the Farm Service
Agency in Pennsylvania has grown by $150 million, 65 percent of
that is dairy. The concern, of course, is the credit quality
and whether they are really in a position to continue to be
viable borrowers for the future. We believe the credit
discussion is really the bridge to the better year, right. If
we can get this dairy turned in a way, it is still going to
take some time to work out what the right policies are long-
term, so we need the cooperation of the lenders to really work
with us. We believe they want to work with us but we have been
told that in this post-TARP environment, where the regulations
are much more stringent in terms of how they have to handle
particularly those loans that are termed troubled assets which
are loans that were 90 days past due. So that is going to put
them in a very awkward spot. Even if they want to work with the
farm community, they may not be able to so that is one of those
regulatory pieces that I would ask the Committee to take a look
at.
There is a good example in the testimony about a borrower
from Lancaster County, Pennsylvania and the challenges that he
has had, and the family has had, of building that business. A
great operator and he is doing okay but the question remains,
can they withstand some extended period of time.
So there is much we could talk about and I will end where I
began with a simple thank you to the Committee for the good
work that has been done. For the full cooperation, the
Committee should really try to explore and look in-depth at
whether the policy is good for the dairy industry in
Pennsylvania and America so, Mr. Chairman, thank you.
[The prepared statement of Mr. Redding follows:]
Prepared Statement of Hon. Russell C. Redding, Secretary, Pennsylvania
Department of Agriculture, Harrisburg, PA
Chairman Peterson, Vice Chairman Holden and distinguished Members
of the Committee, welcome and thank you for inviting the Commonwealth
of Pennsylvania to be part of this important hearing to explore
potential actions to strengthen our dairy industry.
On behalf of Governor Edward G. Rendell, it is my honor to testify
before you today. The Governor has been a strong advocate in seeking
new and innovative tools, programs and policies at the state and
Federal level to help our state's dairy industry address the current
economic struggle as well the future of Pennsylvania agriculture's
largest sector. We appreciate your interest in the dairy industry, and
we look forward to working with you and the Committee to find both
short-term and long-term solutions to the current financial challenges
that our dairy farms face. We can not allow this moment to pass without
aggressive action on dairy policy reform, pricing transparency, risk
management tools, and adequate financing mechanisms. The industry
simply cannot hit pause and wait until the start of farm bill
negotiations to actively address dairy policy and price reform. We must
use the time at hand to explore and experiment on some of the critical
dairy issues--and then use these experiences to inform the work that we
do in the next farm bill. In addition to looking to the future, we must
also utilize every ounce of authority available to us today to have a
positive impact on the farmers' margins since milk prices continue to
erode.
We are very appreciative of Congress for the Dairy Loss Assistance
Program and the efforts of USDA Secretary Vilsack, including the
creation of the Dairy Industry Advisory Committee, the purchase of
dairy products for nutrition programs and the steps taken to increase
the support price. All of these actions are helpful and have provided
much-needed encouragement to our dairy farm families that we value
their work and we are prepared to work together to find solutions.
The last 12 to 18 months have caused considerable debate--and
rightly so--about our existing U.S. dairy policy and to what extent it
serves the needs of dairy farmers, milk processors and consumers. As
painful as this period has been, it is important to not loose sight of
what has happened to U.S. dairy production over the past 30 years:
production has risen from 129 billion pounds in 1980 to 189 billion
pounds in 2008. We have also enjoyed increasing exports of dairy
products during this same timeframe, reaching a peak in 2008 when 11.5%
of our domestic product was shipped and marketed outside of the U.S.
Looking forward, the United Nations Food and Agriculture Organization
has called for a 100 percent increase in food production by the year
2050, prompting the U.S. Dairy Export Council to conclude that the U.S.
will have a significant opportunity to continue growing exports to help
meet the increased expectation for food worldwide. This is positive
news, and should help shape a U.S. strategy for dairy that sees our
industry as the source for growing demand, creating the opportunity for
dairy farms to incorporate additional family members, welcome the next
generation of producers back to profitable operations, and grow dairy-
related businesses.
Having stated the above, we know that this scenario does not occur
simply because we wish it to. Today we face a crisis in our dairy
industry not just of price, but of confidence--confidence in the
market; confidence in the prices going back to our farmers; confidence
in our ability to continue to manage viable dairy operations. The
current systems used to discover prices, manage risk and protect farm
income, and secure financing/bolster farm equity must be revisited
before we can truly move past this crisis.
Understanding that price discovery has an important place in
smoothing the peaks and valleys impacting the dairy industry,
Pennsylvania developed (in cooperation with dairy economists from the
Land-Grant institutions in Pennsylvania, New York and Wisconsin) dairy
policy recommendations in 2007 that we believe hold true today. There
has been growing concern for some time that the amount of dairy product
being bought and sold on the Chicago Mercantile Exchange (CME) is a
very small sample in relationship to the overall quantity of milk
products produced in the U.S. This ``small sample'' has huge economic
implications for dairy farmers, as it effectively sets the price they
receive for their milk. This is an issue that deserves immediate
attention.
We must improve the systems of price discovery; the dairy industry
would benefit from a reliable and transparent method of price discovery
for the commodities produced. Many individuals in the room today worked
hard to get language in the 2008 Farm Bill that mandates greater
transparency. We need to have the reporting provision activated so we
can have an informed discussion about the value of milk--which is
required before we can honestly redesign the milk pricing system.
Presently, the CME market for cheese and butter is thinly traded and is
the market of last resort for both buyers and sellers. Yet these are
the transactions that send the signal to USDA's National Agricultural
Statistics Service (NASS) for prices of dairy products, which the
Federal Milk Marketing Order system depends on for market prices of
dairy commodities. The challenge in this system is that the NASS survey
creates a lag in pricing information (typically 1 to 2 weeks).
Understanding that the NASS work is the foundation for the dairy
pricing system, the NASS survey must be improved. This should include
the elimination of lag time, applying the survey to all dairy products
sold (including inventories in cold storage facilities), and mandatory
daily reporting as required by other protein commodities. We believe
this change--which could be implemented by NASS or USDA's Agricultural
Marketing Service (AMS)--would represent a major step forward by the
industry and would require a minimal investment.
We would also like to improve the integrity of the marketplace--
again addressing the crisis of confidence--by creating an alternative
to the CME or using a collection of price discovery tools that would
more accurately reflect current market conditions of supply and demand.
These tools could include the futures market prices, reportings of
actual prices paid from mandatory pricing surveys, and Consumer Price
Index (CPI) numbers which reflect the costs of corn, energy and other
input costs realized by farmers. Each factor would be assigned an
appropriate weighting and would have numerous benefits to dairy
farmers. By using a collection of discovery tools for price such as
cash and futures markets, pricing surveys and input cost calculations,
the integrity of the marketplace is improved and extreme price
fluctuations are abated.
In addition to addressing what we believe is a flawed pricing
system, we must use this time to create a new outlook on income
protection by farmers and allied industry partners. The most important
recommendation I can share here today is that we borrow a lesson from
the crop side of our business, where risk management has been used to
help protect the income of farmers and transfer this learning to the
dairy industry. The time is right to make workable, meaningful and
affordable voluntary dairy risk management products available to
producers.
August of 2008 saw the launch of a new risk management program for
dairy producers. Livestock Gross Margin for Dairy, or LGM Dairy, is a
federally reinsured dairy insurance program now included with USDA's
crop insurance offerings. The program provides protection against
unexpected declines in gross margins on targeted quantities of milk,
without forfeiting increased profits. The program is based on milk
income over feed costs, which are termed the ``gross margin.'' The
insurance policy covers the difference between the expected gross
margin (insurance guarantee) and the actual gross margin for the
producer's selected months, based on a targeted amount of milk. Futures
prices from the CME and Chicago Board of Trade (CBOT) are used to
determine the values of Class III milk, corn and soybean meal. Futures
prices result in uniform commodity prices for all producers, however
the program offers flexibility in the margin insured by individual
producers and the months covered by the policy. There is a maximum
enrollment limit of 240,000 hundredweights of milk per year.
There is no doubt that a risk management tool for dairy producers
is required. This option is available for all other major agricultural
commodities, and risk management has been used quite effectively in
Pennsylvania since the state was severely impacted by a disastrous
drought in 1999. As we have promoted LGM Dairy in Pennsylvania and
worked with the crop insurance industry and producers alike to
encourage participation, we have received valuable feedback on how to
speed the adoption of this critical tool. We would request your support
for flexibility for the producers to pay the premium costs for policies
incrementally versus one flat, up-front fee, which would better reflect
the standard business operations of the dairy industry. As most dairy
farmers operate on a cash flow basis, this change would be a
significant help in aligning this product with standard financial
management protocols. An extension of the sales closing period for LGM
Dairy would also encourage more producers to take advantage of this new
risk management option.
We believe that LGM Dairy has great potential to help dairy
producers better manage their risk, but at this point it is cost-
prohibitive and needs premium subsidy. In addition, since this is a new
concept for the industry, we must have an aggressive and sustained
education campaign--for producers as well as the insurance industry.
While we have provided the insight we have gleaned throughout the
process of helping to launch LGM Dairy, we know that this is just one
tool available to the dairy industry. Perhaps there are other
approaches to managing risk. Now is the time to experiment and learn,
allowing us to take the best ideas forward in the 2012 Farm Bill.
The support of the Committee is requested to address the need for
risk management in the dairy industry, including assistance with
funding producer-paid premiums and industry education.
In Pennsylvania, many of our dairy producers have gone months
without a paycheck. This diminished income has had a severe impact on
cash-flow and farm equity. Credit, equity loss, and existing banking
and USDA Farm Service Agency (FSA) regulations require attention at
this time to provide producers with a bridge to a better year. There
are two key terms to keep in mind when discussing the current
agricultural credit situation--risk and uncertainty.
We increasingly hear of producers seeking loans from the USDA Farm
Service Agency, and we have shared recommendations with Secretary
Vilsack on options to extend the support provided by the state FSA
teams. We know that many of the producers turning to FSA have not
worked with this group before, raising both the number of borrowers and
the dollars being borrowed. According to the Pennsylvania FSA office,
the loan portfolio for the state has grown from $350 million less than
a year ago to more than $425 million today--and 65% of this portfolio
is tied to the dairy industry. While we deeply appreciate this support
and the breathing room the FSA funds provide to producers, we worry
that this rate of increase is not sustainable and that FSA funds may be
depleted, compounding existing credit issues.
Dairy producers are not unaccustomed to a fluctuating market or the
associated spikes and drops reflected in the wholesale price of milk.
Historically, producers have been able to manage these cycles by
implementing best management practices, developing sound business plans
and establishing cost-saving measures in their operations to create a
reserve in good times and counteract decreases in cash flow when milk
prices drop. This dynamic has prompted producers to develop strong
relationships with their lenders and creditors to manage debt, and has
helped highlight dairy farmers among the most reliable borrows in a
lender's portfolio.
The challenge, then, is not fiscal management. It is--to a certain
extent--the nature of the industry itself. Dairies are not like many
other businesses, as they cannot shut down a production line during
downturns. Milking must continue, multiple times each and every day.
The option to sell cows does not hold a strong appeal, as this further
reduces equity and cash flow on the farm. Additionally, cow prices
track with the movement of the market, meaning producers receive lower
prices for animals they sell during downturns in the market and then
must pay increased prices as they look to increase their herd size and
production levels--a lose/lose proposition in any industry.
Agricultural lenders are keenly aware of these unique market
situations and experience has shown that this group works diligently to
help their customers through downturns. Despite solid business plans
and sound management to build financial cushions to support the dairy
during periods of low prices, this most recent downtown was far deeper
and much longer than we could have predicted. The overall loss of cash-
flow, coupled with losses in real estate values has diminished or
nearly eliminated equity on some of our most progressive and forward-
looking farms.
History has shown us that another downturn will occur. Should this
take place in the near-term, lenders will be forced to assess how many
of their customers will have the cash reserves required to survive,
further exacerbating the risk being assumed by both lenders and
borrowers--and greatly impacting the available credit that will be
required to sustain the dairy industry.
We do not live or work in a vacuum. Collapses in the real estate
market coupled with those in the larger lending sector have had an
impact on the dairy industry. Today, lenders are under more scrutiny
than ever by stockholders as well as regulators. Even in instances
where lenders are willing to extend forbearance to dairy producer
clients, regulations are having an impact that hampers this action and,
in some instances, prevents it. Post-TARP changes in how troubled
assets (those accounts greater than 90 days past due) are accounted for
on lenders' books have forced a higher standard of risk assessment on
loans and has resulted in the reduction of availability of credit for
many existing and new borrowers.
Perhaps the best way to describe the effects of these confluence of
trends is through examples of dairies in Pennsylvania. A dairy farm in
Lancaster County provides a great illustration: Approximately 3 years
ago, a progressive 150 cow operation with an updated business plan and
sound best management practices decided to bring their two children
into the farm business as partners and managers. These two new partners
each had families of their own and were excited to represent the next
generation making a living on the home farm.
The business plan was revisited and the decision was made to add an
additional 125 cows, raising the herd total to 275. This expansion
required expanded manure and feed storage, as well as the rental of an
extra 250 acres to meet feed and best management practice needs.
At the time, milk prices were strong and cow costs were in the
$1,400/cow range--meaning their planned herd expansion had a price tag
of $175,000. Their additional infrastructure needs were calculated at
$2,000/cow, resulting in a $250,000 expense. At the time expected
income over feed costs on the farm would have provided for a milk
margin on $13.00/hundredweight (cwt). Based on this information,
expected additional debt load, and projected energy and family living
costs, it was determined that the business plan showed sufficient
equity and cash flow to make this plan a reality.
Fast forward to 2009--just 2 years into the additional debt load
and expenses--and the income over feed costs milk margin that was at
$13.00/cwt had plummeted to $6.50/cwt, about 50 percent of what had
been projected. Coupled with increased energy and family living costs,
the farm was struggling to keep up with expenses.
As this milk price drama unfolded, the real estate crisis drove
down land values, reducing the equity built up over generations. In
addition, cow prices were declining, meaning the herd the family had on
hand was worth less--regardless of milk production. The farm's debt now
exceeded existing equity.
The family was aware and took advantage of programs designed to
assist them, restructuring operating expenses to a lower percentage
term loan through the USDA Farm Service Agency and working with their
other lenders who held the infrastructure debt.
While this family was able to survive the downturn in 2009, they
are still facing its challenges and realities. Cash reserves are low
and cash flow is only now in 2010 starting to meet their operating
expense needs. They have additional term debt through the restructuring
of 2009 operating expenses, and equity on the farm--while increasing--
will likely not allow for further infrastructure investments or
emergency actions should a building or equipment need replacing.
Consequently, their operating expense lines of credit with their
lenders have been reduced, creating more risk and uncertainty as the
children of the new farm partners evaluate the potential for them to
continue on this family operation when they complete college. This
story is not unique to the family in question and is, in fact, playing
out on numerous farms in Pennsylvania--with much more dire results in
many cases.
Assistance for agriculture and especially the dairy industry exists
at many levels of government. However, we must not become complacent in
what exists and we must look at bolstering existing programs and
exploring new ways to maintain a vibrant diary industry. Most of the
dairies that have survived to-date will find it difficult to say the
least to make it through another downturn, especially one as protracted
as the crisis we are still working through.
I share this example to emphasize the important role our financial
institutions play in supporting the dairy industry. Agriculture is a
business without walls, but it is every bit a business and we must take
strides to ensure that our farmers have access to the capital and
resources needed to survive today so they can thrive tomorrow.
While we are exploring all options with Congress and the USDA, let
me assure you we are doing the same right here in Pennsylvania. We are
fortunate to be one of a small number of states that have a state
pricing mechanism to assist dairy farmers. The Milk Marketing Law was
first enacted in 1937. The Pennsylvania Milk Marketing Board (PMMB) has
exercised its authority under the statue in various ways since then in
an effort to be responsive to changing market conditions. The Governor
and the Department continue to work with the Board to ensure farmers
are receiving the full benefit of the over-order premium, as we know
well the value of this additional income.
I have said often that you never want to waste a crisis. We didn't
want this challenge, but there is no better time for good thinking than
when you are under fire. It is imperative that we listen, learn and
lead during this time of crisis. We do this through sessions like
today's hearing where we can engage in discussions about the industry
and its future. We also meet this prompt by evaluating the tools at our
disposal to support the industry and investigating new ways to price
our products, protect farm-level margins and income, and secure
financial resources for dairy operations.
Our actions here today do far more than bolster the leading sector
of Pennsylvania agriculture. Our voices, our actions and our leadership
recognize that the dairy industry is an important part of our nation's
heritage--and set the path for this industry to be a vibrant part of
our future.
Having the right state and Federal dairy policies in place will be
critical to improving farm income, capturing international markets and
encouraging investments at all levels of the industry--from the farms
to the processors. For these reasons, I want to thank you for your
continued good work and willingness to challenge all of us to think
creatively about possible solutions both short- and long-term. It is
our goal to see from this crisis a dairy industry that is stronger,
both here in the U.S. and around the world.
Thank you.
The Chairman. Thank you very much, Mr. Secretary. It was
great, very much on-point testimony and we probably have some
back-and-forth to do.
We appreciate you being with us, Dr. Dunn, and we
appreciate you being with the Committee and welcome to the
Committee. We look forward to your testimony.
STATEMENT OF JAMES W. DUNN, Ph.D., PROFESSOR OF
AGRICULTURAL ECONOMICS, PENNSYLVANIA STATE
UNIVERSITY, UNIVERSITY PARK, PA
Dr. Dunn. Thank you, Mr. Chairman, and thank you for the
invitation to participate. My job, apparently, is to provide a
little background of what has been going on.
Two thousand-nine, was a very bad year for dairy farms. The
previous 2 years we had conditions internationally, in
particular, the severe drought in New Zealand and Australia
which are two of the major dairy exporting countries, and the
weak dollar made our exports very competitive and we exported a
lot more product then we had traditionally. Our milk prices
soared and many dairy farmers across the country expanded their
herds. This is important because unlike most agricultural
products in the United States, we are proximately self-
sufficient. We export about ten percent of the world's dairy
products and we import about ten percent of the world's dairy
products. But the demand for dairy products is not very
sensitive to the price in the United States and so if we have
more milk, the price really goes down sharply which, of course,
is what we saw last year.
The European Union is also a very important exporter of
heavily subsidized exports, I might add, unlike Australia and
New Zealand. Since 2009 began, the world economy collapsed and
the dollar went up very sharply in value and it began to rain
in Australia and New Zealand and our exports were no longer
competitive. However, now we had more cows then we had had in
the past, our domestic economy was weak and in order to get rid
of the milk the price went down very sharply.
Pennsylvania all-milk price was at $23.90 per hundredweight
in 2007, and averaged $20 for 2008, and averaged $14.38 in 2009
and was as low as $12.90, so essentially half of what it had
been 2 years before, a very big shock for everybody. The market
started to come back in the fall but many farmers lost $500 a
cow. Some lost $1,000 per cow. One of my friends who is in the
banking business said his clients lost $332 per cow or $1.36
per hundredweight. I believe that portfolio is a little bit
better than the typical portfolio in losses were generally
worse than that. So as a result, farmers were having trouble
paying their bills, servicing their debt and feeding their
families. The prices had been that low early in the decade, but
in 2009, the feed costs were very high and the cost of other
goods, such as petroleum products and things like that were
also very expensive. The purchasing power of the dollar had
eroded in the meantime so that $13 milk in 2009 doesn't do as
much for you as the $13 milk did in the year 2000. In 2006, we
essentially had the same prices as we did in 2009, but because
of the feed cost in particular, 2009 was much worse.
As the year went on, the national dairy herd decreased and
so what happened is that the price went up and then there was a
bearish calf report at the beginning of this year. The price
started to come down again but the average milk price for the
year, based on the work that I have been doing, is going to end
up for the Pennsylvania all-milk price to be about $17.50. This
would be a very reasonable price within the context of the past
decade were it not for what had just happened, and essentially,
most farms now have a lot of debt on their balance sheet.
Planting is coming up. They are going to have to go out for
more borrowing, perhaps the third time they have done so in the
last 15 months considering the situation now is much worse. If
they had $4,000 to invest per cow 15 months ago, it is $5,000
now and they are running out of collateral. They are running
out of borrowing capacity and the ability to service debt, and
although all farmers are not the same, in some cases their
survival is very much in doubt, especially people who didn't
really take advantage of the high price system, cut their debt
in the past. And so the net effect of all of this, of course,
in the industry as the Secretary said has many participants who
are on very thin ice and when they go back to their borrowers,
the borrowers are not going to be universally enthusiastic
about coming up with more money given their situation.
[The prepared statement of Dr. Dunn follows:]
Prepared Statement of James W. Dunn, Ph.D., Professor of Agricultural
Economics, Pennsylvania State University, University Park, PA
Two thousand-nine, was a very bad year for dairy farms. In 2007 and
2008 conditions internationally, including severe drought in New
Zealand and Australia and a weak dollar, made the United States a much
bigger dairy exporter that had been true before. Milk prices soared and
many dairy farmers expanded their herds. Unlike most U.S. agricultural
products, the U.S. dairy industry serves primarily the domestic market.
We sell about 10% of the world's dairy exports and buy about the same.
The European Union is the biggest exporter, followed by New Zealand,
the U.S., and Australia. As the world economy collapsed and it began to
rain in the Antipodes, our exports were no longer as competitive.
However, we had more cows producing and our domestic economy was weak,
hurting domestic demand as well. Prices dropped sharply. The
Pennsylvania all-milk price, which had hit $23.90/cwt. in 2007, fell to
the $13/cwt. range for several months, with a low of $12.90 in June
2009. For all of 2009, this price was $14.38.cwt., compare to $20.04
for all of 2008. The market came back in the fall, but many farmers
lost $500/cow and some $1,000/cow. One source told me that based on his
analysis of his clients they lost $332/cow or $1.36/cwt. Farmers had
trouble paying their bills, servicing their debt, and supporting their
families. Prices had been that low earlier in the decade, but in 2009
feed costs were much higher and the costs of other inputs were more
expensive, and of course, the purchasing power of the dollar has eroded
with inflation. The profits from $13 milk in 2009 are less than $13
milk in 2000. Figures 1 and 2 illustrate these points. The milk price
in 2009 was about the same as in 2006, however the amount available to
pay the bills after paying for feed (income over feed costs) was much
less.
A national reduction in cow numbers drove a late-year price
increase in 2009, but prices fell after a bearish calf report in late
January, 2010. The latest value is $17.30/cwt. This value is a bit
higher than the average for the last 10 years. However, most farms now
have more debt on their balance sheets and with planting coming soon,
farmers may need to borrow additional funds. For many, this is the
third time they have needed more money in a year. Depending on their
financial situation in December 2008, farmers now are in a somewhat
worse situation or a much worse situation than they were then. If they
had $4,000 debt/cow Jan. 1, 2009, they may now have $5,000. Many needed
a new loan last spring and another in late summer. They now need to
make this debt manageable by restructuring. Some are running out of
collateral, borrowing capacity, and the ability to service debt. For
everyone, the break-even milk price is now higher than it was 15 months
ago.
All farmers are not the same, but for some, the farm's survival is
in doubt. Many farms that recently expanded are now on thin ice. Many
small farms are struggling. A lot depends on what the debt load was 2
years ago and how focused the farm is on controlling costs. I might add
that some of the big farms in California and other western states were
hit very hard by 2009. Cow numbers dropped 4.2% in California in 2009
and by 1.9% in Pennsylvania.
The expected prices for 2010 are okay, but not great. They will
probably be a bit above the average values for the past decade. In a
different year they would not be notable, but after last year dairy
farmers could really benefit from higher prices.
Figure 1: Pennsylvania All-Milk Price
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Figure 2: Pennsylvania Dairy Income Over Feed Costs
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Thank you very much, both of you, for that great testimony and we will
now move to questions. I will first yield to the Vice Chairman
for questions.Mr. Holden. Well, thank you, Mr. Chairman.
Secretary Redding, you and your predecessor, Secretary Wolff, I
take it is here today, did an excellent job in increasing on the crop
side participation in the Commonwealth of Pennsylvania and you talked a
little bit about it in your opening remarks. Can you elaborate on what
you learned from that experience and how you think that it could be
applied to the dairy program?
Mr. Redding. Congressman, thank you. The work over the last 10 or
15 years has taught us a couple of things. There is a three-legged
stool when we talk about insurance. One, you have to have a product
that actually is real. You have to have something that is really
workable that the producers find value in. So you need to have a
workable product. Two, it has to be affordable. You have to use the
best product. You have to be able to afford it. And three, is
education, and all three of those legs of that stool need to be
imported to the dairy conversation and at this point we don't have
that.
As I mentioned in my testimony, we have the LGM Dairy which is a
new product, 2008 was its introduction. As you know, when we proffer
legislation, new product development is a role of the private sector
and this is a private sector product owned by a firm out of Iowa and
that we can partner on, that is the Department of Agriculture. But it
is a private product so we are at their wishes in terms of how they
want to move forward with that, but we need to sort of focus in on the
risk management tool. I think it is really the piece that while some of
the other pricing mechanisms will require some additional thought and
work while international trade comes back into balance on dairy, while
some of the Federal reform is to talk about habits, the one thing we
can do today is really to use the authority of the Risk Management
Agency. So I would just look at that and say we have a product that is
in its infancy, but it needs support from both Congress and the USDA.
We believe the LGM Dairy has great potential if we can put some
subsidy under it to really incentivize participation. We need to do a
very active education campaign just because the producers--we have not
thought about how you can manage risk through an insurance policy in
the dairy industry. We just haven't done that, so it is going to take
some work to really make sure that producers understand what they are
doing. I would add that the crop insurance industry is a full
participant in that. We have a lot of crop insurance agents who look
great on the economic side but when you start talking about livestock
products, particularly dairy, that is not something that is universal,
right. So I just put that on the table as the Committee is considering
the standard insurance agreement and those issues of insurance. That is
one of those we need a full participant in the private insurance
industry. So the long answer is to say we have taken a step. We have
some lessons learned that we think are invaluable to moving us forward.
We think long-term that the answer for the industry, one of the
critical tools at least, is risk management. We just need the support
to subsidize, educate and some flexibility in terms of how to approach
it.
Mr. Holden. What would be the result if the entire Commonwealth
were added to the Federal Order?
Mr. Redding. Instead of what we have today?
Mr. Holden. Yes.
Mr. Redding. Oh, how much time do you have? I mean I hate to give
you an answer. This may be a better question for the economists to talk
about. I would just say that really at this point you have Federal
Order and non-Federal Order pockets. I think there is some benefit to
having some uniformity of a particular state in a Federal Order versus
the pockets that we have right now.
Dr. Dunn. It is my understanding there are only four or five non-
Order plants so within the context of Pennsylvania it is not a
particularly big problem. But, symbolically, it is probably more
important that it is otherwise the fact that we do have one set of
rules for almost everybody and there is another set of rules for a few
people.
Mr. Holden. Thank you, Mr. Chairman. I yield back.
The Chairman. I thank the gentleman.
The gentleman from Texas, Mr. Neugebauer.
Mr. Neugebauer. Thank you, Mr. Chairman.
Mr. Secretary, a couple of things you mentioned in your testimony.
One is that you mentioned that price discovery still continues to be a
problem and you mentioned that you had some conversations with
Secretary Vilsack. Where are those discussions and where do you think
the Secretary is on that? And what are some of the suggestions that you
put forward to the Secretary?
Mr. Redding. Yes, a couple points. Thank you, Congressman, for the
question.
First of all, the conversations with the Secretary have been
fruitful and productive and desired by the Secretary to implement the
provisions of the 2008 Farm Bill. The limitation is money. We
understand that there is a cost to do the price discovery and just to
build the IT systems or to do the compilation of the information. I
don't know the exact number on that, but another thing we are looking
at need for some additional monies, several million dollars over
several years to actually do that implementation on a 2 year timeline.
The other part of the discussion is really then what are the different
points for you to collect. Our general sense has been we have to look
at something more then the Chicago Mercantile, right. The difficulty we
have today, part of the difficulty is we really don't know the value of
the product. We know the price but we don't know the value of the
product. So the discovery ought to be what is the product worth in the
marketplace, a full-range of products, right, from manufactured
products to fresh products of all these different product lines that we
have for the dairy industry. We really ought to use all of those to
form what the price ought to be, and then the second part of that is to
what extent the other economic indicators might be, the price index and
some of those econometric pieces ought to be used as the price and
formula. So we have had a general conversation with them that I would
characterize as very supportive. I am encouraged all we need are some
additional resources to implement and the discussion of what the sort
of bucket of indicators are and certainly be taken.
Mr. Neugebauer. And also, Mr. Secretary, I agree with you that our
risk management is not just due to the fact that our costs need some
fine tuning. I have been kind of leading that charge on the Agriculture
Committee, and I know Chairman Peterson is interested in seeing if
there is a way we can make that better. I want to go back to something
that Dr. Dunn said though is that, ``prices soared and producers
expanded their herds,'' and one of the things that we will be looking
at policy-wise here is we need to make sure that we are not a part of
the problem here. And so I guess one of the things that I would ask you
is when we are looking at a risk management policy, how do we make sure
that the government is not increasing, encouraging excessive
production. When I talk to some folks in, I have one of the fastest
growing dairy areas in the country, what people say about this is all
the way from do nothing, just leave us alone and let the supply and
demand make the markets equalize, to people saying we need some safety
nets and some other things. But how do we design a safety net that
doesn't manipulate the normal supply and demand that should happen in
the marketplace?
Dr. Dunn. Well, clearly the scene we have up until now has been not
very supportive, the century since 1888 the price occasionally hits us
but it really doesn't amount to anything within the context of the last
200 years but a risk management tool is tied to the market prices. So,
to the extent it is designed effectively and used then something such
as the dairy loss gives us the opportunity to do that in the same
context as other risk management tools, but it doesn't encourage risky
behavior as such.
Mr. Neugebauer. Mr. Secretary, do you want to comment on that?
Mr. Redding. It is a great question, and I have thought a lot about
this trying to figure out what is the right answer because you send
signals. Even the dairy loss and payments in December sent a signal,
right. The product purchases of the USDA sent a signal and so I don't
know how you balance all the signals and reform, right. In a certain
light we focused in on the risk management piece. You know, there comes
a point in the industry where we have to make a decision about what is
the perfect role for government. As I have looked at it personally, we
have this Dairy Price Support Program which is buying excess product. I
just think we are not sending the right signals in terms of technology,
innovation and creativity when you have a buyer call the government who
is prepared to take whatever product coming out of the plant that is
not absorbed in the marketplace, right. That is not a good signal and
that is unfortunately one of the signals, historical signals in the
industry that are creating part of our challenge today. Building a
topside signal of Congress providing some dairy product support instead
of payments, loss payments, so you have sort of the bookends covered.
What do you do with the center, right? That ought to be sort of the
marketplace decision, but the one area that I think we can agree that
no matter what size dairy you are and no matter where you are in this
country is that we really ought to have a product that will catch your
margin and that is a decision we should have with them to make that
decision is to what is your margin. Right now we are trying to have a
policy that is going to fit small herds and large herds, and East and
West. Kind of the philosophy, the one place that we can really be
helpful to producers is to give them a product that they then decide I
will take product by the way that they decide to what extent they want
to protect their margin and it is their margin. It is not the
government's margin and it is not the, somebody else's margin. It is
their margin. So to your question, the signals, if we had a product
that is really available and workable and affordable is that you could
point to folks, the producer, you make the decision about your margin
and as a government we are prepared to sort of work with you as we do
with crop insurance. That is a personal decision to make and then
transition out of the Dairy Price Support Payment. Use those dollars to
really pay for the insurance program, right. So I mean that is where I
would be on that just to make sure that long-term you get some
alternative to coming back to the Congress on a continual basis and
asking for resources or simply buying product off of the bottom where
you don't have a viable market for it, right. So I mean if we did the
insurance piece, the signal would be that that is where we want you to
go to buy your protection versus expecting it to come from either
product purchases or on an appropriation request to Congress.
The Chairman. I thank the gentleman and I will just weigh in on
this point. I fully agree that we have to develop a risk management
tool for dairy, I think you are on the right line and I would go beyond
that. I would say that we need to expand insurance so that it covers
all agriculture products and livestock. The long-term reality is that
that is going to be what we have left at the end of the day, 10 years
from now, 20, whenever we get there, that is going to be probably what
is left in terms of government support or government help in managing
the risk in agriculture.
In regard to the price discovery, we examined that whole bit in the
2008 Farm Bill and my sense at that time was the dairy industry wasn't
ready completely at that point. But, people may not be aware but the
mandatory price warning has to be reauthorized before September. One of
my goals is to address this issue in dairy like we have done in some of
the other areas. Last Friday I had a meeting with AMS going over one of
the provisions I put in the farm bill to make the price authority more
useable for the average people out there. They have contracted and gave
me an overview of what this is going to look like, and I think they are
on the right track and it is very useful the way that this is
presented. You know, if you are a big guy and you have all these folks
that work for you that can work on this stuff everyday, you could take
that information and figure out what is going on. If you are an average
guy out there, a farmer, and you log onto the Internet and see all this
information, it is pretty hard to put together.
So we are going to try to pull that stuff together and apparently
that is going to be ready to roll-out at the end of July, so we have to
figure out some way to get this dairy stuff into that system and
available to producers. I think it would be a big step to get that, to
get some of the issues that are out there.
I have been dealing with this for a long time. Way back when the
Green Bay Cheese Exchange was the bogeyman 10 years ago or whenever it
was that was the problem. We just had to get rid of the Green Bay
Cheese Exchange because it was not giving us the right information. I
looked into it quite a bit. I thought it was a mistake to move to get
rid of the Green Bay Cheese Exchange. I think it was working fine. It
cost about $600,000, and it was run on a private basis. I felt at the
time we went to the CME and we had a thinly traded market that would
not be acceptable, but everybody was wanting change and here we are. I
think what I was afraid of at the time turned out to be correct, and I
don't think we can go back to the Green Bay Cheese Exchange but we do
have to have some way to do a better job with this.
We are committed to working with you and would appreciate your
ideas as we go forward with that but I am encouraged by what is going
on within the industry. I think there is consensus building across the
country. I think the only good thing that came out of this problem that
we have been through is that everybody now understands that we have to
change, I think that is it. I am hopeful that we are going to come out
of this with a much better program that is more market-oriented and
gives the tools to the producers that they want.
All right, I recognize the gentleman from Iowa, the Chairman of the
Subcommittee that deals with crop insurance and we will leave it to him
to fine tune this and make it work at the end of the day. So the
gentleman is recognized.
Mr. Boswell. Thank you, Mr. Chairman, and thank all of you for
being here today and, Mr. Secretary and Doctor, I appreciate your
testimony. We appreciate it very much and I am not going to ask a lot
of questions. I appreciate what you had to share. I really think you
are right on the uniformity and accessibility, and I agree with the
Chairman that the price is certainly something that all across the
board on agriculture we have to have. Our leading producers have one,
so it is very much needed, and I also say, particularly, with having
just been on the road that on the livestock and dairy that we have to
have a smooth flow from the producer with the processor. There are not
very many provisions out there that make sense and they have to have
reliability and uniformity as well. I think that we need to look at
this whole thing and how does that farmer out there have protections
for his entire operation whether it is a different varieties we all get
involved in sometimes. I think we are at that state where we need to do
something like that, so we will be looking forward to continuing to
hear from you and in our Committee so that we will hear what is going
on here. We appreciate that very much and the rest of your delegation
and it is just good to be here.
I thank you and I am going to yield back, Mr. Chairman.
Mr. Redding. Congressman and Mr. Chairman, let me pick up with your
comments about the whole farm. You know, the USDA and the Risk
Management Agency developed the Adjusted Gross Revenue, AGR Program
several years ago. The Department of Agriculture in Pennsylvania was
the only State Department of Agriculture in the nation to sort of take
the AGR and develop our own whole farm insurance product called AGR
Light. That was borrowing sort of the best of the AGR and by putting it
into a little more of a Pennsylvania agriculture setting which had a
lot of livestock in it. And I can tell you that from the USDA and the
RMA, our challenge has been how the agency sort of manages livestock,
right, and it is really an interesting discussion. It is not wrong.
They just are not sure what to do with it, right, and the Committee has
dealt with this issue as well. We agree wholeheartedly though that the
model is to have a whole farm policy, right, and that way you are
wrapping all of those things into your operation that are part of your
income strength. So if you are a specialty crop producer or a dairy
producer with some diversified portfolio of enterprises, all of that
should be included as part of protection of your operation, right. Our
job should be protecting your paycheck but not wondering about whether
one particular segment of the operation has more value than another.
Let's insure it all. Long-term, I think that is where we have to get
to, but it will take some additional work on the mechanics of managing
livestock within those whole farm policies. But, we agree that
absolutely that is the answer long-term. Thank you.
The Chairman. Thank you. I recognize the gentleman from
Pennsylvania, Mr. Thompson.
Mr. Thompson. Well, thank you, Chairman, and thank you so much for
bringing this hearing to the Keystone State. It is greatly appreciated.
Agriculture is our number one industry here. It is a tremendous part of
our heritage, our history and what it does today to feed and provide
food security. This hearing is important because we need it to be part
of our future too and especially when it comes to dairy. Thank you to
Secretary Redding for your vision and your leadership for Pennsylvania
and agriculture which is greatly appreciated. And, Dr. Dunn, we talked
before and I look forward to reading your white papers every time they
come to my desk. I was so proud to have a resource like you right in my
back yard at Penn State.
So we, actually my first question is from your comments, Secretary
Redding, I really appreciate all the testimony today. Your testimony
really, both yours kind of looked to the future, looking forward to the
next farm bill which will be, hopefully will be 2012. But, you had
mentioned about credit and called it a bridge to a better year because
we do need the short-term too. You know, we have lost I don't know how
many farm operations we have lost in Pennsylvania, dairy specifically
just this past 15 months--2 years. When we lose them they turn into
malls and housing developments and we don't get them back and that is
just bleeding our agriculture to death. So I was really curious to just
follow-up a little bit with your bridge to the future credit and
needing the cooperation of the lenders and understanding that troubled
assets is anything defined as more than 90 days, and that means there
are a whole bunch of troubled assets on most farms. And you had
mentioned about certainty with regulatory changes, are there any
specific recommendations that you had to make, to be able to allow our
lenders to meet the needs of our farmers today?
Mr. Redding. Congressman, thank you, that is a good question. I
appreciate the focus on the credit issues. It is one of those issues
that have come to us recently as these farmers have gone back to secure
their operating loans for this crop season. This issue is now starting
to appear where you have the conversation occurring between the
borrower and the lender saying I am not so sure that we can make that
loan or its condition. So we have had in the last 10 days,
conversations with the Bankers Association have raised this issue
saying, we really want to work with these customers. They have been
good customers for this long and in some cases, customers for
generations, but we are going to be forced, given the new regulatory
environment we are living and working in to place those loans if they
are in accounts that go 90 days past due, are going to have to be
forced to put them in. It is not a discretionary point that we have. We
are simply going to have to place them into this troubled assets
account and that will mean certain things in terms of whether we can
work with that producer or borrower.
So I don't have a specific request for you yet. We have just
started to talk this through. We understand the words, troubled assets,
and what that means to our nation and our state and how those words
brought us to where we are, so we are very cautious of about that. We
believe in this industry of agriculture where seasons are important,
cycles are important, that when you are dealing with a food system it
has multiple benefits to both sustain in that maybe it requires a
different level of review and management then simply placing them into
a 90 day past due account. So it may be a conversation between the
committees, the Agriculture and Banking to really look at is there any
way for us to manage those assets past the 90 day period so we don't
have to place them into a troubled asset category, right. Not a simple
thing to do but we think that is the bridge to a better year. We may
not be able to change the price, but at least if we can ensure that the
farm families are secure in their ability to work with the lenders who
want to work with them to get them to the next year, right to the next
season, we think that may be from our standpoint the best thing that we
can do. It buys us time too to get some of these policy pieces right,
but you need to be able to work with somebody who is in a difficult
financial circumstance. We know that is an FSA issue in part with the
USDA, but there are a lot of private lenders in the Bankers Association
who are living by the larger credit quality issues of banking.
Mr. Thompson. Thank you, sounds like we need to allow them to keep
that discretion.
Dr. Dunn, from your perspective what are the full impacts from a
supply management system and is it possible for the U.S. to remain
competitive in the world market with a supply management system?
Dr. Dunn. I am not really much of a fan of supply management. The
places that we have it, it works okay for a little while and then it
kind of runs away. It makes it difficult for farmers to adjust to
changing conditions and things like that. I spent a year in Australia
and a year in Ireland and kind of saw the worst of it in both cases
because what happens is to the extent that the policy succeeds, it ends
up being capitalized in the prices of the cows in the case of dairy and
things like that where the farmer has more wealth but not more income.
So, in my opinion, supply management will not work over a very long
period of time. Certainly, if you look back on the PEDA Program there
is pretty strong evidence of that.
Mr. Thompson. Thank you.
Thank you, Mr. Chairman.
The Chairman. I thank the gentleman.
I now recognize the Chairman of the Livestock, Dairy, and Poultry
Subcommittee, Mr. Scott from Georgia.
Mr. Scott. Thank you very much.
Good morning, everyone. It certainly is good to be here. Thank you,
Mr. Chairman. It is good to be here with my distinguished friends from
Pennsylvania, Congressman Holden, Congress Lady Dahlkemper and
Congressman Thompson, all fine representatives of Pennsylvania. Please
do your utmost to send them back because they do such a great job for
us there, and I also feel that I am a Pennsylvanian, grown up in
Scranton, a little to the north of here with elementary school and
eventually my education at the University of Pennsylvania's Wharton
School in Philadelphia. So while I am from Georgia, once a
Pennsylvanian, always a Pennsylvanian is the way I look at it. But, I
really have deep affection for the people of Pennsylvania, and I
certainly appreciated coming back to one of my home states.
Certainly, Secretary Redding and Dr. Dunn, thank you very much. We
have had a number of hearings in our Subcommittee on Livestock, Dairy,
and Poultry and it seems to me that the paramount issue is very
complex, complicated. It is the most significant and troublesome issue
facing all of agriculture, in my opinion and this sort of stemming on
about four major concerns of pricing, supply, profitability and
stability. And so I would like to ask you, each of you to just comment,
first of all on stability and how we can bring some stability to this
issue and with that would you think that moving to a single nationwide
market Order, would that bring stability, more stability in each of
your opinions?
Dr. Dunn. They tested me right away. That is interesting. A
nationwide marketing Order is a very controversial issue in dairy
because some parts of the country would be beneficiaries of some of the
news. However, I don't think that it is the regional marketing Orders
that are really the source of the instability, but rather some of the
other issues. The biggest problem of course is the farmers can't turn
on and off the milk supply. It is relatively small amounts of changes
in the milk supply that send the prices going all over the place. So to
the extent that you are going to affect the stability it is not really
going to come from a single nationwide marketing Order. There may be
some things that you can do to the marketing Orders to introduce more
stability. An example might be for example to have the Class I milk
price not be a single month's average, but maybe a moving average of
several months. So, at least that portion of the milk check would not
be moving around as much, and so that the farmers' price would have a
little bit more stability. A farmer can't adjust to the month to month
changes in prices irrespective of what they are. To have them move as
fast as the market price for the cheese and the other products is
counterproductive, in my opinion.
Mr. Scott. So you come down on the side of no on that?
Dr. Dunn. No, as in the nationwide marketing Order?
Mr. Scott. Yes.
Dr. Dunn. I don't know that I am necessarily opposed to it
philosophically. I don't think it really solves the problem. Other
places have a single marketing Order. Not countries as big as this one,
but the reason we have the market interest we have now may have not
been changed as transportation systems and things make a nationwide
marketing or make more sense.
Mr. Scott. And you mentioned that some regions will lose, some
regions will win under a nationwide marketing Order. Which regions win?
Which regions lose?
Dr. Dunn. Well, for example, your region, that loses because you
have a very high proportion of Class I drinking milk usage of your
total milk supply. Regions such as the upper Midwest where they have a
lot of manufactured products they would win. Pennsylvania would lose
but it has been a very thorny issue. When I worked on the 1995 Farm
Bill, that was one of the issues that essentially kept dairy out of the
first draft of the farm bill, the industry couldn't decide.
Mr. Scott. Do you concur, Mr. Secretary, with his idea?
Mr. Redding. With the nationwide marketing Order? Yes, I would
concur. I mean there are other things that are probably more beneficial
to providing some sustainability and predictability and profitability
that we probably should put our efforts into versus worrying about the
one nationwide marketing Order.
Mr. Scott. And I have one more point I want to just ask you at this
point too about pricing and profitability. Do you think that as we
consider our new foreign policies that we should begin to emphasize
more profitability over pricing? Now it seems that we have a greater
emphasis on final pricing for the product as opposed to the overall
profitability of the farm.
Mr. Redding. That is a great question. I would say that the
emphasis really ought to be on sort of the profitability and how do we
help ensure that. I guess that is to both ensure and insure through the
risk management, is our ability to help ensure that. I mean you have so
many moving parts. It is very difficult for us to guarantee someone is
going to be profitable. I think we can help facilitate that by our
right market policies or trade policies or credit policies in providing
the opportunities for producers, but we ought to in all of that make
sure that we have some way for that producer to manage the risk that
they are exhibiting--encountering every day. I think that is one piece
that really can help us. The insurance program sort of helps to
guarantee a payday, right, and right now up in the dairy industry we
don't have that. On the crop side we do. You could argue whether it
really gives the full guarantee of a payday, but compared to what we
are experiencing with dairy, that you have this wild ride, up and down
with no ability to really give some stability, but the income is going
to be for the family. I think that is the one area that I would really
come back to and focus on long-term to the four points you talked about
in terms of pricing, supply, profitability and sustainability. It is
our ability to manage risk long-term is probably the single most
important policy decision we can make, and the best indicator whether
we really are going to be able to sustain these operations is the
ability to manage that risk.
But yes, I want to pick up on the first question you talked about
sustainability and some of the indicators. I mention in the testimony
and it is probably worth noting here that part of the rapid increase
that we experienced in 2007 and 2008, came out of the national
marketplace, right. And 11\1/2\ percent of our production is exported
and so as we look to the changes occurring around the globe, we are
moving from a six billion population to a nine billion population. I
would argue that that is a piece of our future, right. It is a huge
piece, three billion people over the course of the next 40 years are
going to be added to this planet. So we are going to want protein and
we are in that business. We really don't want to short-circuit as we
talk about what the right policies are, going forward, is let's not
lose sight of the best benefit to an up market has been the
international marketplace.
Number two, this risk management needs to be really focusing on
finding some good tools for that. And the final point, I mentioned in
this sort of rebuilding of some of the infrastructure and the process
inside. We don't necessarily have that today. I know that folks will
argue that point, but if we are looking long-term at where the growth
is in certain product categories and then you overlay that with where
we are with the processing infrastructure in this country, you come up
with this list of things we need to do. We need to reinvest again in
some of the product processing. Somebody needs to do that, inherently
expensive plants to build, but it is going to be a part of both finding
the domestic markets but also allowing us to feed this international
market. So I put that on the third piece of sustainability is
reinvesting in the processing capacity of our industry and our nation
from a dairy product standpoint. That is really a key part.
The Chairman. I thank the gentleman.
Oh, we have, oh I missed Kathleen as well. I now recognize another
outstanding Member of the delegation, the Pennsylvania Delegation from
the great Pennsylvania area, Mrs. Dahlkemper.
Mrs. Dahlkemper. Thank you, Mr. Chairman. I appreciate you coming
to Pennsylvania because it is a beautiful state and bringing this
hearing to the Harrisburg area. I certainly want to thank Secretary
Redding, who is a wonderful asset to this state. I had numerous chances
to meet with you and talk with you, and you bring a lot of knowledge
and insight into this issue. Dr. Dunn, obviously a wonderful asset also
at Penn State University, a great facility that we have here, a great
educational facility to help us in our agricultural policy, going
forward. And I want to thank the other Members of the Committee for
joining us here today, particularly those who came from other states
and get a chance to see our beautiful Commonwealth of Pennsylvania.
I want to actually touch on a couple of issues that you just
brought up, Mr. Secretary. And I guess first I want to talk about
imports a little bit and maybe, Dr. Dunn, you can address this question
first. Talking about imports and exports, they are obviously when I go
around my district there are a number of people who bring up this
discussion with me and are concerned regarding some of the other
markets internationally. Can you tell us now exactly where and what
type of imports you are seeing come into the United States, and where
we are exporting, and where you see that in terms of some of the trade
agreements that we are currently investigating on a Federal level?
Dr. Dunn. We have, as I said, about ten percent of the dairy
industry. We import about ten percent of the world's exports and we
export about ten percent so we have a balance on imports and exports.
We tend to bring in a lot of high-value products, cheeses and things
like that. We also bring in a variety of other things, some of which
are quite controversial in the industry in particular, milk protein
concentrates. The issue with imports is kind of a hot-button issue for
the industry. Having said that I think it really misses the point
because unless we start to satisfy the worldwide community that the
Secretary referred to, we are going to have a domestic industry
continue to shrink as far as numbers of farms. Farms decrease anyway
but we essentially have fewer cows every year over time because of
productivity on the farm increases faster than the domestic demand for
milk and unless we export, we are not going to maintain the herd size
and things like that grow as we have with the other products that we
export which is essentially most of our domestic agriculture. But trade
is a very important issue and we buy and we sell approximately in
demand in loss years.
Mrs. Dahlkemper. Where do you see the market moving in terms of our
exports? Where would you see potential and maybe this also could be
answered, Secretary Redding, because I know you talked about new
innovative products, some of the things that we are probably not
looking at. Not everyone is eating cheddar cheese any longer or there
are new products, milk products that I think we need to be looking at,
but where do you see the potential for growth in this area?
Dr. Dunn. Well first, the most valuable things you could export are
high-value products which we produce some of them in the United States
but we import a lot of them for various reasons. But if you think about
the growth in the rest of the world's demand for dairy products, almost
the opposite is true that the most of these new people in the world are
going to be poor people, and they are not going to be buying brie or
expensive cheeses. Rather, they are going to be buying storable dairy
products, which we already produce in large numbers, but we are a
little bit out of line with the world prices at this point.
Mrs. Dahlkemper. Do you see any particular places where the market
could increase? I am looking I guess for specifics. Are there certain
regions of the world where we should be looking at?
Dr. Dunn. Well, obviously the places that have the most people and
the least food, Africa is a good example. Unfortunately, most of those
countries also have the least money so the talking about it is a lot
easier then the actually finding the market there.
Mrs. Dahlkemper. So you don't really see a change in what is
currently happening with ten percent import and ten percent export in
the near future?
Dr. Dunn. Well, actually we are starting. We are a net exporter
right now on a small scale and it looks like based on what is happening
in the world right now we are going to be doing more of that. The big
question is whether it is going to disappear quickly as it did 15
months ago or whether we are going to be hanging in there continuing to
have our exports grow. That depends on world supply and demand, and
weather in various places, and things like that.
Mrs. Dahlkemper. I have one other question and then both of you may
answer this. As you look at the increased price transparency, what do
you see as the effects on not the producer but also the processor of
the entire industry?
Mr. Redding. I think transparency is good. The sunlight is helpful.
You know, that is part of our challenge is we really don't know, again
to the point earlier, that we don't know the value of the products. It
is difficult then to construct a pricing system that gives the producer
the right price and a fair price without knowing what the value of the
product is. I think that is part of what the Chairman mentioned about
in these difficult times, the crisis, there is nothing better than a
crisis to bring things into focus, right. This is one of those moments
when we look at it and said we really have some issues with the import
piece, Congresswoman, to your point, and then folks start to ask
questions about where is the product coming from. I mean who are we
doing business with? What products are coming into the marketplace? All
of those are fair questions but unfortunately we are doing our thinking
under crisis when we really ought to be doing that in a everyday,
transparent way, and that is a challenge for us to then comprehend the
impact of the importance of that course. But to the point of--I don't
see a downside to transparency. It is really tough when you are talking
about an industry that has to accommodate producers, and processors and
consumers. It has to have all of us in that conversation, but we ought
to at least understand who we are doing business with and what the
value of our product is, and use that to inform what the right
construction of the pricing mechanism moving forward would look like.
Just on the import side, I just want to mention a couple of points.
When we look at the issue of imports, I know we have had many, many
conversations about this. I mean there are folks who want to sort of
close the borders, right, and it is so difficult. If you look at
American agriculture and say okay, we are just going to lock this down
until the economy improves, the impact of that is that you can just
have an entire production system that is in a pause mode, right, and
you can't make decisions, going forward. We have to commit ourselves. I
think as an industry we have, but in this environment when folks are
calling for us to be restrictive in our trade policies, we need to go
find the consumers, right, and the United States of America is five
percent of the available stomachs on any given day. So 95 percent of
your market is somewhere other than the borders of the United States of
America. So I don't know of any industry that can grow and say I don't
want to access 95 percent of the market and that is what we are up
against right there, and that this conversation is playing out right
now is important. We can't expect to be a reliable supplier in the
world market and at the same time restrict access. Now, that is not
saying we do that haphazardly. I think we have to do it in a
constructive way, but I would hope that as we move forward with our
dairy policy, whatever that looks like in the coming months and years,
is that we build in a significant part of an export development
program, and really take a look at both in terms of a committed
supplier to the world market providing products that the world wants.
Not what we are wanting to buy, right, but what the world wants, and
that is a very different conversation than the one that we have been
having. And that is to the point of the opening statement about
reinvesting in the infrastructure of our processing is we have to
change the mind-set if we want to have products available on the world
market, but we have a changing consumer around the world. They don't
necessarily want the products we have in inventory, so it is just a
general comment that exports are important. Imports are a part of the
conversation about how do we generally support agriculture, and on
general commerce we need to be understanding that is a two-way street.
But most important is for us as an industry to just say if we are going
to be in the world market then we have to commit ourselves to provide a
product that the world market wants.
Mrs. Dahlkemper. Thank you. I yield back, Mr. Chairman.
The Chairman. I thank the gentlelady and again, thank you to the
panel. Your testimony was very helpful to the Committee and your
answers to the questions, and I look forward to working with both of
you as we move through this process.
Mr. Redding. All right, thank you.
The Chairman. So the panel will be dismissed and we will call the
second panel to the witness table. Mr. John Frey, Executive Director of
the Center for Dairy Excellence in Harrisburg, Pennsylvania; Mr. Rod
Hissong, dairy producer, Mercer Vu Farms, Mercersburg, Pennsylvania;
Ms. Lauren Mosemann, dairy producer, Misty Mountain Dairy,
Warfordsburg, Pennsylvania; Mr. Kent Heffner, dairy producer from Pine
Grove, Pennsylvania; Mr. Daniel Brandt, dairy producer from Brandt View
Farms in Annville, Pennsylvania; and Mr. Todd Rutter, President of
Rutter's Dairy in York, Pennsylvania, so welcome to the Committee. We
appreciate all of you making the time to be with us today and, Mr.
Frey, I understand you have a time commitment problem at 11:30 so we
will try to recognize that and so all of your statements will be made a
part of the record in their entirety. We would like to have you
summarize and try to stay within the 5 minute timeframe and so welcome
to the Committee. Mr. Frey, you are recognized.
STATEMENT OF JOHN FREY, EXECUTIVE DIRECTOR, CENTER FOR DAIRY
EXCELLENCE, HARRISBURG, PA
Mr. Frey. Thank you, Chairman Peterson, Vice Chairman Holden and
distinguished Members of the Committee on Agriculture. Thank you for
inviting the Center for Dairy Excellence to participate in this
important discussion today.
Our industry is changing very rapidly. In 1975, there were 84,000
dairy farms in the United States. Today in 2010, there are about 55,000
dairies and about 84 percent of the U.S. milk production is actually
produced on slightly under 16,000 dairy farms, so clearly the industry
is changing. It is that supply that meets domestic needs and also that
supply that is helping us to become a major supplier to the world.
So how do we lead and create policy in what clearly is a new era in
the U.S. dairy industry? This is something we at the Center for Dairy
Excellence have been thinking about very often over the past year. I
have a few things I would like to share relative to that today.
Our profitability crisis in this industry is clearly progressing in
severity. According to Ag Choice, a Farm Credit System here in
Pennsylvania, based on about 150,000 cows on their annual profitability
summary, there is an average negative margin on Pennsylvania dairy farm
of $2.60 in 2009. So how did dairy farms survive last year? On average,
according to that summary, dairy farms incurred about $600 new debt per
cow and they decreased variable expenses about $500 per cow. Of course,
that is repair, supplies, reinvestment, things greatly impacted from a
negative standpoint the infrastructure here in Pennsylvania.
A dairy farmer here in Pennsylvania by the name of Erick Coolidge
who serves on the USDA Dairy Advisory Committee made a comment to me
just the other day. He said while we are having discussions about long-
term dairy policy, it is critical that we don't lose sight of the
short-term needs impacting all dairy farmers as we go to the fields to
plant here in the spring and then prepare for summer and fall harvest.
And to that end I would strongly recommend that this Committee
encourage the FSA organization through USDA to make additional
guaranteed operating loans available and any potential for short-term
loan funding to get us through the next 6 months.
I would like to change my direction a little bit to talk about a
roundtable discussion that happened here in the Commonwealth in 2006,
led by former Secretary of Agriculture, Dennis Wolff and current
Secretary, Russell Redding. There was a document developed called,
Growth and Opportunity for the U.S. Dairy Industry. That document was
not only relevant then but it is critical today. There were six points
that were included in that document and I would like to comment on two
of those. In particular, the first one listed the need for improved
systems of price discovery and market transparency. As you are well
aware, we have based many of the prices for dairy on a scant number of
trades that happen on the Chicago Mercantile Exchange. It has been
called numerous times the market of last resort if you are a milk
buyer. What is needed is daily reporting of sales and inventories of
multiple products. Certainly, this would greatly improve the integrity
and quality of the information from which to base management, risk
management and investment decisions on.
I would like to draw your attention to the bottom of page two and
the top of page three of my formal testimony where I reference what the
beef industry did through the USDA Packers and Stockyards Act. This Act
was implemented to assure fair competition and fair trade practices, to
safeguard farmers and ranchers, to protect consumers, and to protect
members of the livestock industry from unfair and deceptive practices.
This appears to be a model for consideration for the dairy industry.
And reading on, I know of no other industry which can be successful and
make objective business management or investment decisions based on
incomplete data, and certainly the dairy industry shouldn't be in a
position to do that as well.
That leads me to my second point relative to that document that was
built here in Pennsylvania where we talked about the importance of new
and meaningful risk management tools. And clearly since then we have
really experienced the next generation of risk management tools like
the livestock gross margin for dairy which we think is a great step
forward. And yet, it is estimated only about five percent of U.S. dairy
producers use fundamental risk management tools, and in part it goes
back to the lack of comprehensive information from which to base risk
management decisions on, but it also goes to the reality of today's
tools are very costly and we lack education. So we certainly encourage
any additional funding for subsidies and education around those tools.
I would like to end by talking about the Center's involvement in
what is called the Northeast Dairy Leadership Team. The Center
coordinates the efforts of that group which is comprised of the three
largest dairy states in the Northeast Agriculture secretaries and then
about 40 other stakeholders, including many dairy producers. That group
spent much of 2009 reviewing different dairy policy proposals that were
being circulated across the country.
Now, drawing your attention to the bottom of page three in my
formal testimony where we talk about what the NEDLT believes any form
of pricing or policy structure should include. Number one and first and
foremost it should be market-oriented. It should be responsive to
quickly changing market conditions. It should be global in nature. It
should be national in scope and have minimal government involvement.
And to that end there was a policy proposal that was presented to the
NEDLT late last year called the Dairy Growth Management Initiative
which essentially establishes a dairy board which would have at its
disposal a number of tools from which to use to attempt to mitigate
price volatility.
I will draw your attention to the middle of my fourth and final
page of my written testimony where it talks about it would also have at
its disposal something called a marginal milk program. This would be a
program that would be used to manage unbridled growth in milk supplies
during times of extremely low milk prices relative to feed costs. This
concept is intended to only price that extreme surplus milk according
to its marginal value only during those times when prices fall below a
preset level.
I would like to end my testimony by saying thank you to this
Committee for the opportunity to represent the Pennsylvania dairy
industry.
[The prepared statement of Mr. Frey follows:]
Prepared Statement of John Frey, Executive Director, Center for Dairy
Excellence, Harrisburg, PA
Chairman Peterson, Vice Chairman Holden, and distinguished Members
of the Committee on Agriculture, thank you for inviting the Center for
Dairy Excellence to be a part of this important hearing reviewing dairy
policy. Since 2004 the Center for Dairy Excellence has been the
organization in Pennsylvania which has served as the central office for
dairy and have had as our mission to coordinate resources, create
initiatives and partnerships, and grow both the size and profitability
of our industry. One of the primary functions of the center is to
coordinate the Pennsylvania Dairy Task Force which is comprised of over
100 producers and industry stakeholders.
Just 10 years ago in 2000, there were 83,000 dairy farms in the
U.S.; today there are 55,000. 84% of the nations milk supply comes from
15,800 farms. Pennsylvania, while still the 5th largest dairy state, is
generally comprised of smaller dairy farms. While we may not have the
efficiency advantages of some of our western counterpart states, access
to water supplies and forages for feed and access to the vast northeast
and southeast population and markets make Pennsylvania a viable and
critical state for future dairy production.
The core priorities of the center have included making resources
available to dairy farm families to help them be more competitive.
Resources like dairy profit teams and succession planning teams have
enabled producers to assemble resources around the kitchen or office
table and work through key decisions impacting the business. Dairy
Decision Consultants and Practical Dairy Advisors are available for one
on one consultation through the center. Hundreds of Pennsylvania dairy
farms have used these resource programs to help guide them and chart a
course for business direction. Educational programs like our annual
Dairy Profitability Forums, Summer Dairy Tours, Mastering the Dairy
Business Learning Series, and DAIRY PRO's seminars have helped
thousands of dairy farm owners, employees, and industry support
professionals navigate this increasingly volatile and challenging
industry. The center has become a weekly source of information through
our Markets and Management Report and Dairy Week in Review. In
addition, dairy producers across Pennsylvania leverage the expertise of
the center in helping understand the important resources available like
LGM for dairy and other tools designed to protect margins and aid in
marketing plans. Last, resources like on line business planning
templates and costs of production calculators are valuable tools for
dairy business management available through the center.
The center is optimistic about the future opportunities we see to
support a growing and dynamic dairy industry. Our strategic plan
includes a focus on modernization, technology, and innovation in dairy.
Renewable energy systems and beneficial environmental practices pose
tremendous opportunities for the region. However, the situation our
dairy industry finds its self in has progressed in severity as margins
remain significantly below break even for a majority of producers. To
put this in perspective, I'd like to reference financial summary data
from 2009. One such study which represented over 150,000 cows on dairy
operations in the northeast reflects a ``break-even milk price'' of
$17.08; according to the CDE Pennsylvania Dairy Industry Scorecard, the
average monthly all-milk price for 2009 was $14.45. This reflects a
negative margin of $2.63 per hundred lbs. of milk (cwt) on these farms.
According to Scott Owens of Ag Choice Farm Credit, ``to cash flow these
losses, new debt per cow increased an average of $600.00 and average
farm expenses were cut $500.00 per cow, which represents a nearly 20%
reduction in variable expenses like feed, labor, needed repairs, family
living, reinvestment, etc.'' Not only can these ``expense
efficiencies'' not be sustained long term, some of the added daily
operating debt has been amortized longer term and has added in excess
of $1.00/CWT to annual Cost of Production (COP). The short term debt
incurred is reliant on significantly improved margins which, even after
15 months, simply are not being realized. Mike Evanish from MSC
Business Services commented, ``our preliminary business performance
data from 288 dairy farms suggests 16% showed positive net earnings in
Pennsylvania.'' Clearly, we find ourselves as an industry in waters
unchartered that could forever change the landscape of dairy farming.
For short term immediate relief, I strongly recommend congress explore
opportunities for low interest and additional guaranteed funds made
available through the Farm Service Agency to support this new debt.
Long term needs are as complex for our industry. In 2006, the
center participated in the roundtable discussion which led to the
document entitled ``Growth and Opportunity for the U.S. Dairy
Industry.'' This document developed by former PA Secretary of
Agriculture Dennis Wolff, highlights key priorities for dairy policy
and addressed changes needed to maintain a viable dairy industry in the
U.S. The priorities identified then, remain critical to the long term
viability of our U.S. dairy industry. I would like to comment on two of
these here today.
1. In this report, improved systems of price discovery and market
transparency were identified as being fundamental to any new
dairy policy. Transparency in pricing is vital as markets need
to both understand and have confidence in how prices are
arrived at. This is the foundation for all critical marketing
decisions. It has been my observation that U.S. dairy producers
are eagerly anticipating improvements in a system which lacks
transparency and the ability to deliver real time reflections
of product value. Successful commodity markets have access to
information from heavily traded markets. Livestock markets have
cash market prices reported every day. Earlier this year, at
the request of U.S. Senator Arlen Specter's office, we
submitted a paper entitled ``The Case for Mandatory Daily
Reporting of Dairy Products.'' In it we referenced the U.S.
beef industry, and the USDA Packers and Stockyards Act. This
Act was implemented ``to assure fair competition and fair trade
practices, to safeguard farmers and ranchers . . . to protect
consumers . . . and to protect members of the livestock, meat,
and poultry industries from unfair, deceptive, unjustly
discriminatory and monopolistic practices.'' This appears to be
a model for consideration for our industry. In dairy, the
Federal Milk Marketing Order's depend on NASS surveys of dairy
commodities. The problem with the latter is that the NASS
survey creates a lag in pricing information (1-2 weeks). What
is needed are improvements in the NASS surveys; eliminate the
lag, apply it to more dairy products sold, and make reporting
on a daily basis mandatory in the same way other protein
commodities report. The current system results in producer
skepticism, and perhaps worst of all is an inadequate source
from which to base risk management and investment decisions on.
I know of no other industry which can be successful and make
objective business management or investment decisions based on
incomplete data--and dairy shouldn't have to either.
2. The 2nd area, from this report, I would like to discuss is the
need to explore whether our current tools for Dairy Risk
Management are adequate, accessible, and affordable. Currently,
it is estimated that less than 5% of U.S. dairy producers
utilize fundamental risk management tools. In part, I believe
this is due to the lack of comprehensive and transparent data
from which to base risk management decisions on. It is also
based on a system which is more complex than need be. As
Secretary Redding indicated in his testimony, progress has been
made with tools like LGM for dairy. Improving this resource,
providing subsidies as is done with other commodity protection
programs and re-launching the Dairy Options Pilot Program would
increase usage of this important aspect of dairy business
management.
The Center for Dairy Excellence is involved in other discussions
involving changes in dairy policy. We provide coordination for the
Northeast Dairy leadership Team (NEDLT) which is comprised of the
Secretaries and Commissioner of Agriculture from Pennsylvania, Vermont,
and New York as well as approximately 50 producers and industry
stakeholders from throughout the Northeast. This group has been meeting
and working through issues impacting our regional dairy industry. As
the economic recession has unfolded and has had a severe impact on our
regions dairy industry, the NEDLT has intensified discussions and
developed policy points of agreement.
Based on these discussions, the NEDLT developed a position paper
last year outlining what we believe revised dairy policy needs to
include; this document was updated in February to include the
following.
The NEDLT believes any dairy policy or pricing structure should:
Be market oriented to allow for growth both domestically &
internationally.
Be responsive to quickly changing market conditions.
Have 100 percent financial participation by producers.
Be global in nature to consider the impact of imports and
exports.
Be national in scope with the ability to implement
regionally.
Have minimal government involvement.
The NEDLT has been reviewing policy and pricing proposals from
across the U.S. to evaluate how each proposal would align with these
objectives. Last month, the NEDLT committed to fund a comprehensive
analysis of specific program options intended to reduce dairy price
volatility. This analysis is to be completed by Dr. Chuck Nicholson of
Cal Poly San Luis Obispo and Dr. Mark Stephenson of Cornell University
by June 1st.
The analysis will include, as part of the study, a Dairy Growth
Management Initiative concept proposed by a U.S. coalition including
cooperatives, breed associations, and other stakeholder organizations.
This initiative would include the establishment of a new dairy board
made up largely of dairy producers, which would have at its disposal
several tools to use to reduce extreme volatility. Some of those tools
include:
Herd reduction programs.
Export assistance.
Dairy commodity production incentives that allow for the
displacement of imported dairy products, such as casein.
Programs to enhance risk management tools and opportunities
among producers, cooperatives, and customers.
Managing inventories of dairy commodities to limit price
volatility.
In addition, the Board would have authority to implement a program
to manage unbridled growth in milk supplies during times of low milk
prices relative to feed costs. An example of this is the Marginal Milk
Pricing plan proposed by Agri Mark Cooperative. This concept is
intended to price ``surplus milk'' according to its marginal value only
during those times when prices fall below a pre-set level.
In their analysis, Stephenson and Nicholson will look at the impact
on volatility, exports, and revenue for producers and processors. The
NEDLT will be reviewing the findings of this analysis and communicating
them with our Northeast Congressional delegation.
I'll conclude my testimony by relating a conversation I had last
week with a very successful young dairy producer here in Pennsylvania,
who said, ``so far this year I have had three neighbors sell their
herds; we are losing jobs and critical mass infrastructure and it is
looking more and more like a lonely business to be in.'' In summary,
the U.S. dairy industry has been based on incentive, growth, and
opportunity. Farmers have been fortunate to be able to begin each day
with incentive to compete and to improve their dairy business and reap
rewards for their effort. Communities have benefited from
infrastructure established in large part, to serve agriculture and in
particular the dairy industry. However, the situation we face today
will not remedy itself on its own; and change is not optional. The
viability of this industry is at stake. Thank you for this opportunity
to speak on behalf of the Pennsylvania dairy industry and for your
ongoing support of the U.S. dairy industry.
The Chairman. Thank you, Mr. Frey.
Mr. Hissong, welcome to the Committee.
STATEMENT OF ROD HISSONG, CO-OWNER, MERCER VU FARMS INC.; PAST
PRESIDENT, PROFESSIONAL DAIRY
MANAGERS OF PENNSYLVANIA, MERCERSBURG, PA
Mr. Hissong. Thank you, Chairman Peterson and the rest of
the Committee on Agriculture.
My name is Rod Hissong. I appreciate the opportunity to
visit with you this morning about dairy policy. My family and I
own and operate Mercer Vu Farms in Mercersburg, Pennsylvania.
On our dairy in Franklin County we milk 1,600 cows, raise 1,400
heifers, farm 1,800 acres and haul over 42 million pounds of
milk a year from our dairy with our own trucks to Land O'
Lakes. We have 26 full-time employees that are dedicated to
producing high-quality milk, efficiently, safely, and
profitability as to benefit management, employees, cows, the
environment and the community in which we live. Our dairy
supports over 170 agricultural jobs and provides over $22
million of economic stimulus to our region.
While I am here to speak on behalf of my own operation and
my own views, I am also here to speak to you as past President
of the Professional Dairy Managers of Pennsylvania. PDMP is a
professional dairy organization that has a positive, can-do
attitude about the dairy industry in Pennsylvania. We like to
look at the long-term solutions instead of short-term band-
aids, and while these are tough times in the dairy industry, we
focus on things that we can change instead of complaining about
the things we can't.
After the last 12 to 14 months, issues related to and
concerning milk pricing seem to be at the forefront of dairy
policy issues. Attached to my testimony is a 2009 position
paper published by PDMP that concisely relays our message and
organization's thoughts on what needs to be done to ensure the
long-term viability of the dairy industry as it relates to
dairy pricing. It states the PDMP believes that in general, the
dairy industry would be best served if the government stopped
purchasing excess dairy products, many of which are not made to
world specifications. These products need to be replaced by
products that can be sold on the world marketplace. As long as
the government continues to purchase our products like butter,
cheese and powder that are not made to world specifications,
the dairy industry will remain complacent and not change what
it makes. Manufacturers will keep making what they always make
because they know eventually their products will be bought by
the government at a profit. It would be better for the long-
term prosperity of our industry to make products that
strengthen our ability to compete in the international markets
that have a growing need for dairy products.
PDMP believes that there needs to be an overhaul to the
Federal Order System. Currently, our milk is priced using the
CME, a mechanism on which only one percent of the nation's milk
production is sold. This market is thinly traded and has very
few buyers and sellers, yet this mechanism is allowed to price
all of our milk, is being viewed by many as the future of how
we price milk and how we either lock-in profits or losses. The
industry will be better in the long-term if we stop reliance on
the CME and develop a more transparent pricing system that pays
producers for what they produce and take into consideration the
cost of producing it. We need a Federal Order System that is
easier to understand, has greater transparency and is more
reliable at pricing milk.
PDMP believes that the industry should be focused on
economic growth rather than supply management. It is essential
for our industry to operate under a growth model. Growth is a
key business concept to our dairy producers and industry
infrastructure because a business that is not growing tends to
be moving backwards. We need to encourage our system to be
developing new products and models that allow growth in the
industry. We believe in letting the marketplace decide who has
cows and who doesn't. Given the honest opportunity to compete
in the world marketplace, the dairymen in the industry that can
adapt and manage effectively will succeed.
PDMP believes that direct government payments are short-
term solutions to long-term problems. Continuation of programs
that provide direct payments to farmers do not provide for any
long-term relief. Direct payments are viewed as welfare for the
dairymen that do not reflect well on the industry. These funds
would be better used to help provide long-term solutions and
plans that help our industry compete in the world marketplace.
Personally, I believe that the lowering of the somatic cell
limit to 400,000 is a win-win for everyone, including farmers,
processors and the consumers. It aligns us with international
standards of milk quality, eliminates the lower quality milk
for the market and is a positive move for our industry.
International markets and more recently the European Union
demand it and it is time that we deliver.
I believe that calls for increased accuracy in pricing and
inventory reporting is just. The call to enforce policy like
electronic NASS reporting and auditing and import assessments
to dairy promotion, which are already part of the last farm
bill, seems to make sense.
While milk pricing and milk-related issues are at the
forefront of the dairy issues at the moment, there is one other
important issue I would like you to indulge me with for a
little bit, but it relates to dairy policy, and it has the
potential to be just as harmful to dairy farm families such as
mine. Dairymen are desperately in need of a workable guest
worker program for agriculture. Many Americans are unwilling to
work the jobs that diary farms have to offer. This has caused
many dairies large and small to look to foreign workers to fill
that void. In our case, the Hispanic community has been a
source of hardworking, reliable and trustworthy labor. They are
good with animals and help to ease the demand of a 24 hours a
day, 365 days a year business. On our dairy, many of our
foreign workers are paid quite well and many have moved beyond
entry-level positions to become integral management caliber
employees. Without them, the work of feeding our nation would
come to a screeching halt. We need a guest worker program that
secures our borders, allows foreign workers to pay their fair
share of the tax burden, allows workers to stay for a
reasonable length of time, cuts through all the red tape, is
fast and efficient to obtain, is economical to obtain, and
simplifies the documentation process.
Like it or not, foreign born workers have become an
integral part of our workforce and play a vital role in our
food supply chain. While a comprehensive guest worker program
may seem like a steep hill to climb, I would urge you to
consider a guest worker program for agriculture and dairy that
would ease the burden on the food supply chain.
Many farm families such as my own have suffered financial
hardships like never before. We own a business that is
demanding and requires a complete, total commitment. Why else
would we crawl out of bed this winter to milk the cows or
deliver a calf? All that we have are in our dairy operations.
Many of us feel we are left to the mercy of a broken system. I
look at dairy policy like an old, tattered barn. Do you remodel
or do you tear it down and start from scratch? With dairy
policy we have been remodeling for decades and I feel that we
have reached a crossroads where, in many cases, we need to tear
down and start from scratch.
I am not here for a handout. I am here to ask you to do the
difficult work that needs to be done to fix a broken system.
You have started by taking the time to do what you are doing
today. I commend you for listening to all of us and for
allowing me to participate. Thank you.
[The prepared statement of Mr. Hissong follows:]
Prepared Statement of Rod Hissong, Co-Owner, Mercer Vu Farms Inc.; Past
President, Professional Dairy Managers of Pennsylvania, Mercersburg, PA
Good morning Chairman Peterson and the rest of the Committee on
Agriculture. My name is Rod Hissong. I appreciate the opportunity to
visit with you this morning about dairy policy. My family and I own and
operate Mercer Vu Farms Inc. in Mercersburg, Pennsylvania. On our dairy
in Franklin County we milk 1,600 cows, raise 1,400 heifers, farm 1800
acres and haul over 42 million pounds of milk a year from the dairy
with our own trucks to Land O' Lakes. We have 26 full time employees
that are dedicated to producing high quality milk, efficiently, safely,
and profitably as to benefit management, employees, cows, the
environment and the community in which we live. Our dairy supports over
170 agricultural jobs and provides over $22 million of economic
stimulus to our region.
While I am here to speak on behalf of my own dairy operation and my
own views I am also here to speak to you as past President of the
Professional Dairy Managers of Pennsylvania. PDMP is a professional
dairy producer organization that has a positive, can-do attitude about
the dairy industry in Pennsylvania. We like to look at long term
solutions instead of short term band-aids and while these are tough
times in the dairy industry, we focus on things we can change instead
of complaining about the things we can't.
After the last 12-14 months issues related to and concerning milk
pricing seem to be at the forefront of dairy policy issues. Attached to
my testimony is a 2009 position paper published by PDMP that concisely
relays our organization's thoughts on what needs to be done to ensure
the long-term viability of the dairy industry as it relates to milk
pricing.
It states that PDMP believes, in general, that the dairy industry
would be best served if the government stopped purchasing excess dairy
products, many of which are not made to world specifications. These
products need to be replaced by products that can be sold on the world
marketplace. As long as the government continues to purchase our
products, like butter, cheese, and powder that are not made to world
specifications, the dairy industry will remain complacent and not
change what it makes. Manufacturers will keep making what they always
make because they know eventually their products will be bought by the
government at a profit. It would be better for the long-term prosperity
of our industry to make products that strengthen our ability to compete
in international markets that have a growing need for dairy products.
PDMP believes there needs to be an overhaul of the Federal Order
System. Currently our milk is priced using the Chicago Mercantile
Exchange (CME), a mechanism through which only 1% of the nation's milk
production is sold. This market is thinly traded and has very few
buyers and sellers. Yet, this mechanism is allowed to price all of our
milk and it is being viewed by many as the future of how we price milk
and how we either lock in our profits or loses. The industry will be
better in the long-term if we stop reliance on the CME and develop a
more transparent pricing system that pays producers for what they
produce and takes into consideration the cost of producing it. We need
a Federal Order system that is easier to understand, has greater
transparency and is more reliable at pricing milk.
PDMP believes that the industry should be focused on economic
growth rather than supply management. It's essential for our industry
to be operating under a growth model. Growth is a key business concept
for our dairy producers and industry infrastructure because a business
that is not growing tends to be moving backwards. We need to encourage
our system to be developing new products and models that allow growth
in the industry. We believe in letting the marketplace decide who has
cows and who doesn't. Given the honest opportunity to compete on the
world marketplace, the dairymen in the industry that can adapt and
manage effectively will succeed.
PDMP believes that direct government payments are short-term
solutions to long term problems. Continuation of programs that provide
direct payments to farmers does not provide for any long term relief.
Direct payments are viewed as welfare for the dairymen and do not
reflect well on the dairy industry. These funds would be better used to
help provide long term solutions and plans that help our industry
compete on the world marketplace.
Personally I believe that lowering of the somatic cell (SCC) limit
to 400,000 is a win-win for everyone including farmers, processors and
the consumer. It aligns us with international standards of milk
quality, eliminates the lower quality milk from the market and is a
positive move for our industry. International markets demand it and it
is time we deliver.
I believe the calls for increased accuracy in price and inventory
reporting is just. The call to enforce policy like electronic NASS
reporting and auditing and import assessments to dairy promotion which
are already a part of the last farm bill seems to make sense.
While milk pricing and milk relates issues are at the forefront of
dairy issues at the moment there is one other important issue related
to dairy policy that has the potential to be just as harmful to dairy
farm families such as mine.
Dairymen are desperately in need of a workable guest worker program
for agriculture. Many Americans are unwilling to work the jobs that
dairy farms have to offer. This has caused many dairies, large and
small, to look to foreign workers to fill that void. In our case the
Hispanic community has been a source of hard working, reliable and
trustworthy labor. They are good with animals and help ease the demand
of a 24 hour a day, 365 days a year business. On our dairy many of our
foreign workers are paid quite well and many have moved beyond entry
level positions to become integral management caliber employees.
Without them the work of feeding our nation would come to a screeching
halt. We need a guest worker program that secures our borders, allows
foreign workers to pay their fair share of the tax burden, allows
workers to stay for a reasonable length of time, cuts through all the
red tape, is fast and efficient to obtain, is economical to obtain and
simplifies the documentation process. Like it or not foreign born
workers have become an integral part of our workforce and play a vital
role in our food supply chain. While a comprehensive guest worker
program may seem like a steep hill to climb I would urge you to
consider a guest worker program for agriculture and dairy that would
ease the burden on our food supply chain.
Many family farm dairies, my own included have suffered financial
hardships like never before. We are in a business that is demanding and
requires a complete and total commitment. Why else would we have
crawled out of bed this winter to milk the cows or deliver a calf? All
that we have are in our dairy operations. Many of us feel we are left
to the mercy of a broken system. I look at dairy policy like an old
tattered barn. Do you remodel or do you tear down and start from
scratch? With dairy policy we have been remodeling for decades and I
believe we have reached a crossroads where in many cases we just need
to tear down and start from scratch. I am not here for a handout. I am
here to ask for you to do the difficult work that needs to be done to
fix a broken system. You have started by taking the time to do what you
are doing today. I commend you for listening to all of us and thank you
for allowing me to participate. Thank you.
Attachment
Long-term Viability of the Dairy Industry
A Position Paper from the Professional Dairy Managers of Pennsylvania
The Professional Dairy Managers of Pennsylvania is driven by a very
clear mission. It is on all PDMP documents and it is central to all
that the organization does. PDMP exists to advance the dairy industry
in Pennsylvania through improved productivity and profitability. Dairy
producers who chose PDMP membership want to be in a position to be in
the business for the long haul.
The industry is at a critical juncture. In the current economic
climate and with the growing pressures on how dairy farms operate, the
future of the industry is at stake. PDMP leadership believes it is this
organization's responsibility to examine what it will take to ensure
that our members can realize their dreams. The industry must act to
guarantee that it will continue to be a leading force in the U.S. and
World economies, and that consumers will continue to have access to a
supply of dairy products produced within its own borders.
Many forces have come into play to create a situation where dairy
producers are not able to make enough money on their production to
support the basic costs of doing business.
In keeping with the positive, progressive-minded attitude of this
association's membership, the Board of Directors is making
recommendations on dairy policy.
Given these desperate times, many solutions are being proposed by
various sectors of the industry. Some of these solutions would provide
immediate short-term relief from our current problems; however, they
are not long-term solutions for the industry. The PDMP Board has been
guided by the overall philosophy that it is in the best interests of
the industry to make constructive changes based on a desire to create
permanent, long-term solutions that will ultimately make the dairy
industry stronger.
In a meeting on September 24 the PDMP Board of Directors
established the following four position statements that summarize our
core beliefs:
1. PDMP believes that, in general, the dairy industry would be best
served if the government stopped purchasing excess dairy
products, many of which are not made to world specifications.
These products need to be replaced by products that can be sold
on the world marketplace.
Government purchase of excess products in the past provided a
safety net and allowed our industry to grow. Today this safety
net continues to allow our industry to grow but it has caused
manufacturers to become complacent in the products that they
produce. Manufacturers are not producing products that meet the
world demand, which has resulted in world markets looking to
the United States as a last stop for what they need. As long as
the government continues to purchase our products (i.e.,
butter, cheese, & powder) that are not made to world
specifications, the dairy industry will not change what it
makes. Manufacturers will keep making what they always make
because they know eventually their products will be bought by
the government at a profit. It would be better for the long-
term prosperity of our industry to make products that
strengthen our ability to compete in international markets.
While it is agreed that certain issues are best maintained as
part of the government regulatory process, the dairy industry
should be allowed to operate in a free market system just as
other businesses do. If the government ceases to buy the
products that no one wants, then manufacturers will stop making
them. They will instead produce products that everyone wants
and that can be sold in the growing world marketplace that is
in need of dairy products.
2. PDMP believes that the Federal Pricing System needs to be
overhauled.
The $350 million Dairy Assistance proposal is a short-term bandage
with no long-term solutions. We believe funds should be
earmarked for the overhaul of the Federal Order System.
Currently our milk is priced using the Chicago Mercantile
Exchange (CME), a mechanism through which only 1% of the
nation's milk production is sold. This market is thinly traded
and has very few buyers and sellers. Yet, this mechanism is
allowed to price all of our milk and it is being viewed by many
as the future of how we price milk and how we either lock in
our profits or loses. The industry will be better in the long-
term if we stop reliance on the CME and develop a more
transparent pricing system that pays producers for what they
produce and takes into consideration the cost of producing it.
3. PDMP believes that the industry should be focused on economic
growth rather than supply management.
It's essential for our industry to be operating under a growth
model. Growth is a key business concept for our dairy producers
and industry infrastructure because a business that is not
growing tends to be moving backwards. We need to encourage our
system to be developing new products and models that allow
growth in the industry. We may need to operate under a more
controlled growth, and rely more on the world market versus the
domestic market. Thus, PDMP's points 1 & 2 are essential to
having growth occur. Supply management gives unfair advantages
to certain geographical locations and certain size farms. We
believe in letting the marketplace decide who has cows and who
doesn't. Given the honest opportunity to compete on the world
marketplace, the dairymen in the industry that can adapt and
manage effectively will succeed.
4. PDMP believes that direct government payments are short-term
solutions to long-term problems.
Continuation of programs that provide direct payments to farmers
does not provide for any long term relief. Direct payments are
viewed as welfare for the dairymen and do not reflect well on
the dairy industry. These funds would be better used to help
provide long term solutions and plans that help our industry
compete on the world marketplace.
The Chairman. Thank you, Mr. Hissong, I appreciate your
testimony.
Ms. Mosemann, welcome to the Committee.
STATEMENT OF LAUREN MOSEMANN, DAIRY PRODUCER, MISTY MOUNTAIN
DAIRY LLC, WARFORDSBURG, PA; ON
BEHALF OF MARYLAND & VIRGINIA MILK PRODUCERS
COOPERATIVE ASSOCIATION, INC.; NATIONAL MILK
PRODUCERS FEDERATION
Ms. Mosemann. Chairman Peterson and most honored Committee
Members, thank you for allowing me to testify today about dairy
policy on behalf of my cooperative, Maryland & Virginia Milk
Producers and the National Milk Producers Federation.
My name is Lauren Mosemann and I farm with my husband, Mark
and his family in Warfordsburg, Pennsylvania. We have
approximately 375 milking cows. My primary job is to manage the
300+ replacement heifers and calves. Mark and I have been
active participants in our co-op, served as Outstanding YC
Couple, have enjoyed participating in the YC visits to the
Congress.
Mark is the third generation on his family's home farm and
I was third generation on my farm which is, unfortunately, no
longer in business. Although we both could have had other
career opportunities, and today's dairy economy naturally
creates us to have second thoughts, we are thankful to be doing
the work that we love and raising our children on the farm.
Two thousand-nine, presented an unprecedented financial
catastrophe for our dairy producer community. U.S. dairy
exports had grown strongly from the equivalent of about five
percent of U.S. milk production in 2002, to about 11 percent in
2008. Exports collapsed as the recession deepened worldwide to
a low of less than eight percent of production in January 2009.
What has become clear to the dairy producer community from
this extraordinary strain is that we need a combination of
approaches to deal with the current situation. Last year, NMPF
created a Strategic Planning Task Force to seek consensus
across the dairy producer community and create a solid
``Foundation for the Future.'' Our co-op has been an integral
part of this process. The goal of this task force has been to
analyze and develop a long-term, strategic plan that will have
a positive impact on both supply and demand for milk and dairy
products.
Both the Dairy Product Price Support Program and the MILC
Program are inadequate protections against not just periodic
low milk prices, but also destructively low profit margins that
occur when input costs, especially feed prices, shoot up. The
Price Support Program, in particular, has outlived its
usefulness and hinders the ability of U.S. and world markets to
adjust to supply-demand signals. Neither was designed to
function in a more globalized market where not just milk
prices, but also feed costs and energy expenses are more
volatile and trending higher. In the future, the solvency of
dairy farms will depend more on the margins than just the milk
price alone.
In order to address this dilemma, NMPF is proposing a new
program called the Dairy Producer Income Protection Program
that can help insure against the type of margin squeezes that
farmers experienced in 2009. It would offer a combination of a
base level of insurance coupled with voluntary supplemental
coverage, and will allow farmers of all sizes in all regions to
protect themselves from periodic margin squeezes caused both by
both high input costs and low milk prices.
The base level of coverage subsidized by the government
covers a portion but not all of a farms historical annual milk
production, and protects against a modestly negative margin
between milk prices and feed costs. The second level would be
optional and allow a farmer to purchase a greater level of
coverage with a portion of that insurance subsidized by the
government.
The goal of this effort is to develop a pricing system that
compensates producers fairly, reduces price volatility and
creates a more dynamic dairy industry. The key in doing so is
to establish a competitive pay price for milk that doesn't
depend on the current milk pricing formulas that can distort
signals sent both to producers and processors.
The Strategic Planning Task Force also proposes to revamp
Federal Orders so we can encourage the movement of milk to its
highest value uses. For the past 7 years, NMPF Cooperatives
Working Together Program has voluntarily helped to address the
supply side of the supply-demand equation that ultimately
determines milk prices. We need to both revitalize CWT and
evaluate other approaches that will address the extremes in
price volatility impacting producer profit margins. The
Foundation for the Future is focused on a program that will
increase demand, and when necessary, send a signal that less
supply is needed.
There are other issues that are very important to us in the
dairy industry. The Child Nutrition reauthorization is critical
to the funding of school and breakfast meal programs which
provides our children with more opportunities to receive their
drinking milk.
Comprehensive immigration reform is long overdue. For
example, we have always tried to hire locally and at reasonable
rate but unfortunately our last job ad resulted in four phone
calls, one interview and no returns.
Estate tax laws must be reformed, too. As our family works
out our partnership agreement this year, uncertainty about
generational transfer of the farm assets is a major factor.
I thank you for the opportunity to testify today on the
issue of dairy policies and I look forward to answering any
questions the Committee may have. Thank you.
[The prepared statement of Ms. Mosemann follows:]
Prepared Statement of Lauren Mosemann, Dairy Producer, Misty Mountain
Dairy LLC, Warfordsburg, PA; on Behalf of Maryland & Virginia Milk
Producers Cooperative Association, Inc.; National Milk Producers
Federation
Chairman Peterson, Ranking Member Lucas and House Agriculture
Committee Members: thank you for allowing me to testify today about
dairy policy on behalf of my cooperative, Maryland & Virginia Milk
Producers, and the National Milk Producers Federation (NMPF). Maryland
& Virginia markets milk for its 1,500 farmer owners from Pennsylvania
to Georgia. Just over 700 of those farmer members dairy right here in
the Commonwealth of Pennsylvania. 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.
My name is Lauren Mosemann and I am from Warfordsburg, PA. My
husband Mark and I farm with Mark's family in Misty Mountain Dairy. We
milk approximately 375 cows and have about the same number of
replacement animals. In fact, my primary job is the care of those
replacement heifers and calves. Mark and I have been active
participants in the Maryland & Virginia Young Cooperators Program and
have also attended YC visits to the Congress coordinated by NMPF. Mark
and I were honored to be the Maryland & Virginia Outstanding YC Couple
in 2007-2008.
Mark and I have made a conscious decision to raise our children on
the dairy farm and we do not rely on any outside income. We have also
made a commitment to be involved in our community. Mark is on the local
school board and I volunteer with the local Farm Bureau for their
Mobile Ag Lab. I have also just signed up to help promote the ``Fuel Up
to Play 60'' nutrition and physical activity program launched recently
by the dairy promotion and research Check-Off and the National Football
League.
Both Mark and I come from long lines of dairy farmers. Mark is the
third generation of his family on the home farm and I was the third
generation on my family farm that is, unfortunately, no longer in
business. Looking back on our decision to dairy, we both had other
career options. While today's dairy farm economy naturally creates a
second thought or two, this is the decision we made about how we wanted
to raise our children.
Mark and I have friends at church with a college age son who would
like to return to the farm. That family is debating whether that is an
economically viable decision for their son to make. Mark and I see
ourselves in that same situation with our children in 15 years or so
and we'd like to think that some of the policy decisions we're
considering here today will improve that opportunity for our family.
As NMPF and others have testified before this Committee, 2009
presented an unprecedented financial catastrophe for the dairy producer
community. Last year, dairy farmers in the United States experienced
their worst year financially in anyone's memory. U.S. dairy exports had
grown strongly from the equivalent of about five percent of U.S. milk
production in 2002 to about 11 percent of production in 2008, peaking,
on a monthly basis, at almost 13 percent of production in August of
2008. Then, over the following 6 months, exports collapsed as the
recession deepened worldwide, to a low of less than eight percent of
production by January 2009.
Although exports recovered steadily, to average 9.3 percent of
production for the year, and domestic dairy product sales were strong
despite the economy, this could not counterbalance losing the
equivalent of five percent of total commercial sales during the second
half of 2008. Milk prices fell far below the costs of production for
all dairy farmers, who incurred losses estimated at almost $8 billion
last year. Prices recovered gradually during the second half of 2009,
as the cumulative effects of removing about 250,000 cows through the
voluntary Cooperatives Working Together (CWT) program plus recovering
exports slowly began to reestablish a supply-demand balance in the
market. Milk prices rose briefly above break-even around the first of
this year, but have subsequently retreated back below cost levels in
the past 2 months, as residual dairy product stocks remain too large to
sustain prices above costs at the percent time.
The current dairy and grain futures markets indicate that milk
prices will rise again above costs around mid-year and remain there for
the remainder of the year, but not to the extent that dairy farmers
will make much headway in rebuilding the huge losses of equity in their
dairy farms that they experienced last year. Financial recovery may
likely prove impossible for many, while some farms are currently in
receivership, with their lenders waiting only for the value of dairy
cows and the land, their main sources of collateral, to recover equity
before they proceed to liquidate them.
A Way Forward:
What has become clear to the dairy producer community from this
extraordinary strain is that we need a combination of approaches to
deal with the current situation. To address the underlying problems
that caused this crisis and the many industry factors that have
contributed to its depth and protracted nature, we need to focus on
solutions that avoid recurrences of this situation in the future.
Towards that end, last year NMPF created a Strategic Planning Task
Force to seek consensus across the dairy producer community and create
a solid ``Foundation for the Future.'' My co-op, Maryland & Virginia
Milk Producers, has been an integral part of this process. The goal of
the Strategic Planning Task Force has been to analyze and develop a
long-term strategic plan for consideration by the NMPF Board of
Directors that will have a positive impact on the various factors
influencing both supply and demand for milk and dairy products. It is
extremely important to develop workable and realistic solutions that
will garner broad support from dairy producers nationwide in order to
unify behind an approach as this Committee begins to consider the next
farm bill.
As Albert Einstein said, ``We can't solve problems by using the
same kind of thinking we used when we created them.''
NMPF's new roadmap for U.S. dairy policy, called the Foundation for
the Future, will drastically change many aspects of current policy,
some of which have existed for decades. Our existing dairy policies and
programs were designed in an earlier time to operate in a relatively
closed domestic market. However, today's market for U.S. dairy farmers'
milk is greatly influenced by global demand and supply, as the record
prices of 2008--and their disastrous plunge in 2009--clearly
demonstrated.
Rather than offering just one solution, the Foundation for the
Future program is multi-faceted: it seeks to refocus existing farm-
level safety nets; create a new program to protect farmers against low
margins; revamp the Federal Order milk pricing system; and establish a
way to better balance dairy supply and demand. I would like to touch on
each aspect of this approach.
1. Refocusing Current Safety Nets
Both the Dairy Product Price Support Program and the MILC program
are inadequate protections against not just periodic low milk
prices, but also destructively low profit margins that occur
when input costs, especially feed prices, shoot up. The Price
Support Program, in particular, has outlived its usefulness and
hinders the ability of U.S. and world markets to adjust to
supply-demand signals.
Discontinuing the Dairy Product Price Support Program (DPPSP) would
allow greater flexibility to meet increased global demand and
shorten periods of low prices by reducing foreign competition.
Additionally, shifting resources from the DPPSP toward a new
income protection program would provide farmers a more
effective safety net.
As this Committee may recall, NMPF vigorously defended the
importance of the price support program, albeit modified to
make improvements in certain respects, in the 2008 Farm Bill
process. But at the end of the day, it is clear at this point
that the dairy product price support program is not the best
use of Federal resources to establish a safety net to help
farmers cope with periods of low prices and is not the most
effective way of achieving this goal.
The DPPSP reduces total demand for U.S. dairy products and
dampens our ability to export, while encouraging more
foreign imports into the U.S.
The price support program effectively reduces U.S. exports, by
diverting some of our milk flow into government warehouses,
rather than to commercial buyers in other nations. It
creates a dynamic where it's harder for the U.S. to be a
consistent supplier of many products, since sometimes we
have products to export, and at other times, we just sell
to the government.
The Program acts as a disincentive to product innovation.
It distorts what we produce, i.e., too much nonfat dry milk, and
not enough protein-standardized skim milk powder, as well
as specialty milk proteins such as milk protein
concentrate, that are in demand both domestically and
internationally. Because the price support program is a
blunt instrument that will buy only nonfat dry milk--and
because that's what some plants have been built to produce,
as opposed to other forms of milk powder--it puts the U.S.
at a competitive disadvantage to other global dairy
vendors.
DPPSP supports dairy farmers all around the world and
disadvantages U.S. dairy farmers.
Further aggravating measures, the current program helps balance
world supplies, by encouraging the periodic global surplus
of milk products to be purchased by U.S. taxpayers. Dairy
farmers in other countries, particularly the Oceania
region, enjoy as much price protection from the DPPSP as
our farmers. Without USDA's CCC buying up an occasional
surplus of dairy proteins in the form of nonfat dry milk, a
temporarily lower world price would affect our
competitors--all of whom would be forced to adjust their
production downward--and ultimately hasten a global
recovery in prices.
The DPPSP isn't effectively managed to fulfill its
objectives.
Although the DPPSP has a standing offer to purchase butter,
cheese and nonfat dry milk, during the past 12 years, only
the last of that trio has been sold to the USDA in any
significant quantity. In essence, the product that the
DPPSP really supports is nonfat dry milk. Even at times
when the cheese price has sagged well beneath the price
support target, cheese makers choose not to sell to the
government for a variety of logistical and marketing-
related reasons. We have tried to address these problems,
but USDA has to date been unwilling to account for the
additional costs required to sell to government
specifications. Once purchased, powder returning back to
the market from government storage also presents
challenges, and can dampen the recovery of prices as
government stocks are reduced.
The price levels it seeks to achieve aren't relevant to
farmers in 2010.
Even though the $9.90 per hundredweight milk price target was
eliminated in the last farm bill, the individual product
price support targets: $1.13/lb. for block cheese, $0.85
for powder, and $1.05 for butter--essentially will return
Class III and IV prices around $10/cwt. But in an era of
higher cost of production, that minimal price isn't
acceptable in any way, shape or form. The chart below
depicts the U.S. average cost of production and the
effective level of support the program provides for the
average price dairy farmers receive for milk in the U.S. As
is clear from this graph, this effective price support
level is far below today's cost of production.
We believe that with the current funding constraints facing
Congress, we are unlikely to see increased support prices.
Even if it did, however, we would likely face the same
barriers described in the prior point.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
2. Dairy Producer Income Protection Program.
As mentioned above, existing safety net programs (the price support
program, and the MILC program) were created in a different era.
Neither was designed to function in a more globalized market,
where not just milk prices, but also feed costs and energy
expenses, are more volatile and trending higher. In the future,
the solvency of dairy farms will depend more on margins (the
difference between input costs and milk prices) than just the
milk price alone. In order to address this dilemma, NMPF is
proposing a revolutionary new program called the Dairy Producer
Income Projection Program (DPIPP). It will help insure against
the type of margin squeeze farmers experienced in 2009, and
also at other points in the past when milk prices dropped, feed
costs rose--or both conditions occurred in tandem.
In developing the Dairy Producer Income Protection Program, a few
important principles are being followed:
Losses caused by either low milk prices or high feed costs
need to be covered.
A farmer's cost for basic protection must be kept low or
nonexistent.
The level of protection available should be flexible, and
producers should be able to purchase a higher level of
protection if they choose.
The program should be voluntary, national in scope, and
open to all dairy farmers, regardless of size.
The program should not provide incentives to create
artificial over-production.
The program must be easy to access by all producers
through a simple application process or through the
assistance of their cooperative.
Essentially, the Dairy Producer Income Protection Program (DPIPP)
is intended to be a farm-level safety net program focused on
margins, rather than just on prices, in order to create a
better tool to deal with global price volatility. DPIPP would
offer a combination of a base level of insurance, coupled with
voluntary supplemental coverage, will allow farmers of all
sizes in all regions to protect themselves from periodic margin
squeezes caused both by high input costs and low milk prices.
As a substitute for the other two safety nets, DPIPP would involve
two levels of insurance against negative margins. The first
would be a base level of coverage, subsidized by the government
that covers a portion (but not 100%) of a farm's historical
annual milk production, and protects against a modestly
negative margin between milk prices and feed costs. The second
level would be optional, and allow a farmer to purchase a
greater level of coverage, with a portion of that insurance
subsidized by the government.
Key elements include:
Defining margin as the difference between the national
all-milk price and key feed inputs.
The all-milk price is the best proxy to define what an average
nationwide price is for milk each month. Feed costs are
represented by corn, soybean meal, and alfalfa hay, and the
cost of those is also tracked monthly by USDA. The
difference between the per hundredweight price of milk, and
the cost of feeding cows, will establish this program's
margin.
The government will invest to help defray the cost of a
basic level of margin insurance for all farmers.
A significant portion--but not 100%--of a farm's historic
production base will be eligible for coverage. Indemnifying
against part, but not all, of that farm's milk volume will
ensure that the program does not stimulate overproduction.
Once the numerical margin target is established, it will be
fixed for the life of the farm bill. USDA will calculate
actual margins on a monthly basis and make indemnity
payments quarterly, as market conditions dictate.
Producers will have the option of purchasing an additional
level of coverage.
For a fee, farmers who wish to insure a higher level of margin
protection will have that option, with the premium
partially subsidized by the government. The premium will be
calculated by the probability or frequency of payments of
the specific level of coverage selected. Producers will
have a year after implementation of the farm bill to sign
up for additional coverage.
The DPIPP will be equitable and national.
This program is designed to have no payment limitations, or
production caps, thus ensuring that dairy farms of all
sizes will be covered proportionately. The DPIPP will allow
for new entrants, i.e. new farming options, but only under
strict parameters so the system can't be gamed. The program
will be administered by the USDA through the Farm Service
Agency (FSA) or the Risk Management Agency (RMA).
This approach is really no different than the concept of private
property or auto insurance, where premiums adjust to the
coverage desired. But under the DPIPP, the base level of
coverage would be the government's obligation to fund, while
the supplemental coverage would be a combination of farmer and
government cost. And nowhere in here is there a price
assurance; the goal is margin insurance, an important
distinction. We believe this would provide a much more
effective safety net for dairy producers.
3. Federal Milk Market Order Reform
The goal of this effort is to develop a pricing system that
compensates producers fairly, reduces price volatility, and
creates a more dynamic dairy industry. The key in doing so is
to establish a competitive pay price for milk that doesn't
depend on the current milk pricing formulas that can distort
signals sent both to producers and processors. By revamping
Federal Orders, we can encourage the movement of milk to its
highest-value uses.
4. Production Management
For the past 7 years, NMPF's Cooperatives Working Together (CWT)
program has voluntarily helped to address the supply side of
the supply-demand equation that ultimately determines milk
prices. We need to both revitalize Cooperatives Working
Together, and evaluate other approaches that will address the
extremes in price volatility impacting producer profit margins.
The Foundation for the Future is focused on a program that will
trigger, when necessary, a signal to farmers that less supply
is needed. This can be blended with elements of the CWT
programs. NMPF recognizes that there is considerable interest
in action on this point and will be happy to provide greater
details on this element to the Committee once it is further
developed.
All of these potential changes will ultimately require a new way of
thinking about dairy economics. NMPF is not underestimating the size of
the shift in attitude necessary on the part of producers to give these
proposed programs a fair evaluation. The dairy farmers I know recognize
something has to be done before all the farms are gone and if there is
one lesson to be learned from the past year, it's that change is
needed.
Other Critical Elements Impacting the Dairy Industry:
I have focused the bulk of my testimony on the primary dairy-
specific Federal policies and particularly those aspects that will most
likely be part of the 2012 Farm Bill consideration process. However,
there are other issues with significant impact on the dairy industry
and I would like to take the time here to touch on each of those key
areas.
1. Importance of Dairy in Nutrition Programs
Milk contains a complete nutrient package of nine essential
nutrients. In addition to being an excellent source of calcium
and vitamin D, it is a good source of Vitamin A, protein and
potassium. In fact, milk is the top contributor in our diet for
calcium, potassium and magnesium. (All milks--whole, low-fat,
fat-free, flavored and lactose-free--contain the same amount of
calcium) Bones continue to grow in density and strength until
about age 35. After that, drinking milk and eating milk
products help prevent further bone loss. Milk provides all five
of the five nutrients of concern for children and adolescents:
calcium, potassium, fiber, magnesium, and vitamin E.
The Child Nutrition Act, which is scheduled to be reauthorized this
year, accounts for more than 5% of the total milk consumed in
the United States through the school meal programs. The
Healthy, Hunger-Free Kids Act of 2010, approved March 24, by
the Senate Agriculture Committee, invests an additional $4.5
billion in child nutrition programs over the next 10 years. The
bill both protects milk's current position in several critical
child nutrition programs and offers significant opportunities
to increase milk consumption by school-age children nationwide.
The House Education and Labor Committee should be releasing
their draft of the child nutrition bill soon and we are hoping
to see a similar positive outcome.
The child nutrition programs play a vital role in helping children,
especially those in low-income families, achieve access to
quality nutrition, child care, and educational and enrichment
activities while improving their overall health, development,
and school achievement. These programs are proven to work, but
too many children continue to miss out on their benefits
because of low participation rates and unnecessary access
barriers.
NMPF supports the efforts by the Food Research and Action Center
(FRAC), School Nutrition Association (SNA) and the Center for
Science in the Public Interest (CSPI) to:
--Expand the Afterschool Meal Program to all 50 states.
--Improve the area eligibility test so more communities can operate
afterschool, summer, and family child care food programs.
--Provide funds for grants to support the start-up and expansion of
universal and in-classroom school breakfast programs in
low-income schools and provide breakfast commodity support.
--Invest in Summer Nutrition Programs by providing funding for
start-up, outreach, and transportation grants.
--Allow child care centers and homes the option of serving a third
meal.
--Eliminate unnecessary paperwork that is a barrier to
participation through data-based eligibility systems in
schools in high-poverty areas and through improved direct
certification systems.
--Streamline afterschool nutrition rules to allow community-based
and local governments in all states the ability to provide
meals and snacks year-round through the rules and paperwork
of the Summer Food Service Program.
NMPF also supports increasing the Special Milk Program and
increasing the reimbursement rate for the school meal program.
As has been stated over and over, hungry, under-nourished
children have difficulty learning.
2. Immigration Reform
Now, more than ever, dairy producers urgently need Congress to act
on agricultural immigration reform. Immigrant labor plays a
very important role in contributing to the success of America's
dairy industry; a large percentage of the hired workers on
dairy farms are immigrants. This is true for a great number of
dairy farmers across this country, both large and small. NMPF
strongly supports the type of broad immigration reform for the
agriculture sector that AgJOBS (H.R. 2414) contains and the
visa program proposed by H.R. 1660, the Dairy and Sheep H-2A
Visa Enhancement Act.
Dairy farmers share the concerns of all Americans about securing
our borders & protecting this country and they are not willing
to sacrifice its security. However, failing to provide for
orderly flows of greatly needed workers is creating enormous
economic consequences for our industry and do very little to
enhance our border protection. We urge Members of Congress to
join as cosponsors of H.R. 2414 and H.R. 1660 to once and for
all address the endemic labor shortage in the dairy farming
sector and allow for dairy producers to work within the
agricultural visa system.
It is a common misperception in our community and others that
immigrant workers take jobs from local workers. It is our
experience on my family's farm that this is simply not the
case. We've tried to hire local workers and jobs on our farm
pay well above minimum wage. Our last job ad resulted in four
phone calls. Just one person showed up for an interview but
never came back.
3. Estate Tax reform
NMPF supports permanent and meaningful estate tax relief. If estate
taxes are allowed to be reinstated at the beginning of 2011
with only a $1 million exemption and top rate of 55 percent,
the negative impact on our industry will be significant. We
support permanently raising the exemption to no less than $5
million per person and reducing the top rate to no more than 35
percent. It is also imperative that the exemption be indexed to
inflation, provide for spousal transfers and include the
stepped-up basis.
Family farmers and ranchers are not only the caretakers of our
nation's rural lands but they are small businesses too. The
2011 change to the estate tax law does a disservice to
agriculture because we are a land-based capital intensive
industry with few options for paying estate taxes when they
come due. The current state of our economy, coupled with the
uncertain nature of estate tax liabilities make it difficult
for family-owned farm and ranches to make sound business
decisions. We urge Congress to pass permanent estate tax reform
now.
As our family works out the partnership agreement, uncertainty
about generational transfer of the farm assets is a major
factor we must deal with. We strongly support estate tax relief
as outlined above, which provides the greatest relief and
certainty for agriculture.
4. Climate Change Legislation and Regulation
I thank Chairman Peterson for introducing H.J. Resolution 76
disapproving the EPA rule that uses an endangerment finding to
regulate six greenhouse gases under the Clean Air Act.
Regulation of GHG emissions should be done only at the
direction of the Congress and NMPF supports this attempt to
reassert that authority. Agriculture will be one of the
industries most affected by climate change regulation and that
issue deserves to be fully debated and decided by our elected
representatives.
5. Trade
NMPF has been a strong supporter of balanced trade agreements that
present net benefits for America's dairy producers. Good
examples of agreements that fit this bill are the three pending
free trade agreements with South Korea, Colombia and Panama. Of
those three, the FTA with Korea offers the greatest prospects
for increased U.S. dairy exports, but the latter two agreements
would also provide useful new opportunities. As a result, NMPF
has strongly supported the passage of all three.
Another good opportunity to expand the market for U.S. dairy
products is Chairman Peterson and Representative Moran's Travel
Restriction Reform and Export Enhancement Act, H.R. 4645, which
NMPF testified in support of before this Committee last month.
NMPF believes that efforts to help regain the exports we lost
last year are essential to helping farmers and putting the U.S.
dairy industry on a firmer footing going forward and H.R. 4645
represents one such positive step in the right direction to
increase demand for U.S. dairy products.
A critical threat to the future health of the dairy industry also
exists, however, in the prospect of open dairy trade with New
Zealand as part of the Trans-Pacific Partnership FTA. Expanded
dairy trade with New Zealand offers an entirely one-way street
since the FTA would open up no effective new opportunity for
the U.S. dairy industry in New Zealand and even the prospect of
increasing access to other markets within the TPP is limited.
Because of this, producers everywhere throughout the U.S., as
well as many leading dairy processors, are seeking the full
exclusion of U.S.-New Zealand dairy trade from the TPP.
6. Additional Useful Near-Term Measures
Some measures exist that could be taken prior to the next farm bill
that are of concern to dairy producers in Pennsylvania and
throughout the country. NMPF and most other dairy producers
have been supportive of legislation to apply tariff rate quotas
(TRQs) to imported milk protein concentrates, casein and
caseinates in order to close a major loophole that currently
exists in our trade structure. We support H.R. 3674 which would
create a path to achieve this important goal.
Additionally, those of us engaged in selling safe and wholesome
milk to the marketplace would like to see stronger efforts to
discourage the sale of unpasteurized milk. Pasteurization is
widely used in the U.S. and around the world because it helps
ensure that the final dairy product sold to consumers will be
safe. Raw/unpasteurized milk is currently permitted to be sold
in many states under certain conditions, but this creates the
possibility for consumers to get sick from these unpasteurized
products for which appropriate safety measures have not been
taken. The last thing the dairy industry needs at this point is
a food safety scare.
Closing:
Thank you for the opportunity to testify on the issue of dairy
policies here today. My family and I, Maryland & Virginia Milk
Producers and NMPF look forward to working with the Members of this
Committee on issues of critical importance to the dairy industry. I
look forward to answering questions from the Committee.
The Chairman. Thank you very much.
Mr. Heffner, welcome to the Committee.
STATEMENT OF KENT HEFFNER, PRESIDENT, SCHUYLKILL/CARBON COUNTY
FARM BUREAU; DAIRY PRODUCER, PINE GROVE, PA
Mr. Heffner. Good morning, Chairman Peterson, Vice Chairman
Holden and Members of the full House Committee on Agriculture.
My name is Kent Heffner. I milk 160 Jersey cows with my
brother in Pine Grove, Schuylkill County. We grow our own
forage crops on approximately 700 acres, part of which is
rented. It is a pleasure to offer testimony today based upon my
experiences as an individual producer. I also serve as
President of the Schuylkill/Carbon County Farm Bureau.
As I mentioned, my family milks Jersey cows. We sell our
milk to a small, independent dairy that is not in a Federal
Milk Marketing Order. The milk we ship is highly desirable
because it is five percent butter-fat content. While the prices
I receive are generally higher than that of other producers,
the milk alone does not tell the entire story. My farm still
lost money.
My farm is not just a dairy. We also have a roadside market
and winery. These direct-market opportunities add diversity to
our operation and certainly keep things interesting. However,
diversification was not enough to mitigate our risk. Across the
entire operation, the farm still experienced a net loss in
2009, despite what would normally be a good year for the winery
and roadside market.
On my farm I have seen an average increase of 20 percent in
the price of alfalfa hay, feed concentrate and roasted soybeans
per ton when comparing prices between 2007 and 2009. During the
same period, seed prices increased by an average of 30 percent,
fertilizers and chemicals by as much as 125 percent. Those
increases are even more troubling when considering the gross
value of my milk check decreased by 41 percent from July of
2008 to August of 2009.
I appreciate the House Agriculture Committee examining this
issue as a starting point for the next farm bill debate. I also
recognize that dairy policy is largely complex, divisive and
regionally charged. While discussing the critical issues of
milk price volatility and dairy farm profitability, I encourage
Congress to consider the following: the Federal Order
structure, formulas and price classes used to compute milk
prices must better reflect current market conditions and
enhance transparency, as well as take into account regional
differences in the cost of milk production. Changes are needed
to ensure long-term market development of value-added products
that can encourage the domestic production of milk protein
concentrates mitigating concerns of these products being
imported. The development of a price discovery method that
utilizes more milk and expands mandatory reporting and auditing
of prices and inventories including penalties for inaccurate
reporting, the California standards for solids-non-fat in fluid
milk should be implemented at a national level. From the
current 8.25 percent raise it to 8.75 percent. This I feel
would give the consumer the higher quality product and help
keep excess milk off our market.
Farmers are entrepreneurs who believe that dairy policy
should be market-oriented and consistent with worldwide trade.
After all, global demand and exports contributed to the 2008
prices. In order to see better prices, American dairy farmers
and processors need to be able to move products around the
globe. Dairy policy is no longer confined to the dairy farm.
Agriculture also operates within a global economy.
While seeking changes to the Federal Order to reduce price
volatility, Congress must ensure that producer safeguards
remain in place. Continuation of a countercyclical program like
the Milk Income Loss Contract should be key components to any
future farm bill discussion.
Current promotion mechanisms, such as the industry funded
``Got Milk'' campaign should continue and be complemented by an
expanded national dairy product promotion program. Current
self-help programs show promise such as the Cooperatives
Working Together and is an industry driven program privately
funded that culls cows when the supply-demand imbalance needs
to be corrected.
On the other hand, the risk management tool such as the
Livestock Gross Margin for Dairy, a crop insurance tool shows
great promise. Unfortunately, the Federal premium subsidy does
not apply to this very costly price tag. Additionally, the crop
insurance sticker shock goes up when producers learn the entire
premium for the covered time period is due up-front in one lump
sum payment. Congress could direct changes to this product to
make it more affordable and user-friendly.
In closing, farmers are not looking for handouts. Producers
in this industry choose to be dairymen because of a love of the
work, the independence, the satisfaction of participating in
the lifecycle of cattle, and putting food on the table in homes
across the nation. Dairy farmers simply want the ability to
continue to make an honest living. It would be silly of me to
ask for an economic climate within dairy that did not have
volatility, but I do respectfully ask Congress to help lessen
the volatility and help mitigate large swings between market
highs and lows.
Thank you again for the opportunity to testify today. I
would welcome any questions.
[The prepared statement of Mr. Heffner follows:]
Prepared Statement of Kent Heffner, President, Schuylkill/Carbon County
Farm Bureau; Dairy Producer, Pine Grove, PA
Good morning Chairman Peterson, Ranking Member Lucas and Members of
the full House Committee on Agriculture. My name is Kent Heffner and I
milk 160 Jersey cows with my brother in Pine Grove, Schuylkill County,
only 35 miles from today's hearing in Pennsylvania. We grow our own
forage crops on approximately 700 acres, part of which is rented land.
It is a pleasure to offer testimony today based upon my experience as
an individual producer. I also serve as President of the Schuylkill/
Carbon County Farm Bureau.
As you will hear during today's proceedings, dairy farmers have
struggled through one of the worst periods of dairy prices in memory,
but the volatility of the market is certainly not behind us. Some
economists are projecting another dip in prices in the near future. In
late 2008 and throughout 2009 reduced demand for exports, excess milk
and dairy product supply, and high feed and energy costs created a
perfect storm within the dairy industry, driving prices so low that the
very survival of dairy farmers was (and still is) threatened.
I think it is important to give you a bit of perspective on how the
last few years have affected dairy farmers. In 2006, milk prices were
extremely low, straining dairy farmers' budgets to the limit and
forcing us to make difficult decisions around the farm. For example, we
might consider how much we could reduce our fertilizer usage without a
significant reduction in our crop output. As milk prices climbed in
2007 and much of 2008, we tried to get caught up on bills, and where
possible, make improvements around the farm. However, higher input
costs offset the gains from strong milk prices and we were again facing
hard decisions.
In 2009, dairy prices plummeted beyond the levels seen in 2006.
Across the industry, producers worked diligently to cut costs and
increase efficiency. However the global price dip was beyond the
influence of any individual practices a farmer can implement with his
cows. Frankly, the efforts of dairy farmers across the nation to keep
their own head above water--by increasing efficiency or producing more
milk--contributed to the supply-demand imbalance.
As I mentioned earlier, my family milks Jersey cows. We sell our
milk to a small, independent dairy that is not in a Federal Milk
Marketing Order. The milk we ship for processing is highly desirable
because of its 5% butter-fat content. While the price I receive is
generally higher than that of other producers, the milk price alone
does not tell the entire story. My farm still lost money.
My farm is not just a dairy. We also have a road-side stand and a
winery. These direct-market opportunities add diversity to our
operation and certainly keep things interesting on the farm. However,
diversification was not enough to mitigate our risk. Across the entire
operation, the farm still experienced a net loss in 2009, despite what
would normally be a ``good year'' for the winery and road-side stand.
The margin between price received and input costs is critical. One
does not need an economics degree to understand that milk prices must
be higher than input costs for farmers to see positive returns. During
2009, as margins were seriously in the red, we saw farmers increasing
their debt to pay for monthly operating costs--hoping their credit
worthiness would last long enough to experience significantly higher
milk prices and actually see profit margins.
Today, milk prices are higher than 2009. However we are seeing
farmers think about selling off their cows, their land and going out of
business. This not only has consequences on the farmer and his family,
but also on the local economy and the agricultural infrastructure. The
Pennsylvania Farm Bureau has data showing a 100 cow dairy farm has a
local economic impact of $1.3 million. Farmers do business locally.
Keeping dairy farms profitable and in operation keeps the local economy
moving. In my world, cows equal jobs--cows create jobs--cows keep jobs.
On my farm, I have seen an average increase of 20 percent in price
of alfalfa hay, feed concentrate and roasted soybeans per ton when
comparing prices between 2007 and 2009. During the same period, seed
prices increased by average of 30 percent, fertilizers and chemicals by
as much as 125 percent.
Those increases are even more troubling when considering that the
gross value of my milk check decreased by 41 percent from July 2008 to
August 2009.
I truly believe that the worst may be yet to come for the dairy
industry, unless we see some relief in significantly higher milk
prices. I've read estimates that say dairy farmers have lost between
$100 and $300 per cow per month in 2009. Based on Pennsylvania's
average sized herd of 68 cows, at $100, that's $6,800 a month for a
yearly loss of more than $80,000. And at $300, it's over $228,000 a
year.
2010 is showing a slight improvement in milk prices, but the
futures market indicates a significant amount of volatility. Recent
projections by Penn State University indicate that the price may
continue a very slow rise throughout the rest of the year. However, the
profit margin is not likely to be near enough for dairy farmers to pay-
off the debt incurred last year.
I appreciate the House Agriculture Committee examining this issue
as a starting point for the next farm bill debate, and I also recognize
that dairy policy is largely complex, divisive and regionally charged.
There has been much discussion regarding what should be done to help
dairy farmers weather this economic downturn. Some people have joked
that if there are two dairy farmers in the same room, you'll hear three
different opinions on national dairy policy.
While discussing the critical issues of milk price volatility and
dairy farmer profitability, I would encourage the Congress to consider
the following:
The Federal Order structure, formulas and prices classes
used to compute milk prices must better reflect current market
conditions and enhance transparency, as well as take into
account the regional differences in the cost of milk
production.
Changes are needed to ensure the long-term market
development of value-added products, and encourage the domestic
production of MPCs--mitigating concerns of these products being
imported.
The development of a price discovery method that utilizes
more milk and expands mandatory reporting and auditing of
prices and inventories, including penalties for inaccurate
reporting.
The California standards for solids-non-fat in fluid milk
should be implemented at a national level.
Farmers are entrepreneurs who believe that dairy policy
should be market oriented and consistent with worldwide trade--
afterall, global demand and exports contributed to the 2008
prices. In order to see better prices American dairy farmers
and processors need to be able to move dairy products around
the globe. Dairy policy is no longer confined to the dairy
farm--agriculture also operates within a global economy.
While seeking changes to the Federal Order to reduce price
volatility, Congress must also ensure that producer safeguards
remain in place. Continuation of a countercyclical program like
MILC, should be a key components to any future farm bill
discussion.
Current promotion mechanisms--such as the industry funded
``Got Milk'' campaign--should continue, and be complemented by
an expanded national dairy product promotion program.
Current self-help programs for dairy producers show promise, but
also have their limitations. The Cooperative Working Together (CWT)
program is an industry driven (privately-funded) program that culls
cows when the supply-demand imbalance needs to be corrected. CWT has
done a tremendous job in reducing the national herd size; however, it
is limited in resources as it has about 80% participation by producers.
The program would be more effective if more producers were part of the
program. However, I don't believe that the dairy industry is at a point
to ask for--or even welcome--government intervention in the CWT
program.
On the other hand, a risk management tool is available to dairy
farmers, but few people use it. Livestock Gross Margin (LGM) for Dairy
is a crop insurance tool that shows great promise. Unfortunately, the
Federal premium subsidy does not apply to the very costly price tag.
Additionally, the crop insurance ``sticker-shock'' grows exponentially
when producers learn that the entire premium for the covered time
period is due up front, in one-lump sum payment. Congress could and
should direct changes to this product to make it more affordable and
user friendly for producers.
In closing, dairy farmers are not looking for handouts. Producers
in this industry choose to be dairymen because of a love of the work,
the independence, the satisfaction of participating in the life cycle
of cattle and putting food on the table in homes across the nation.
Dairy farmers simply want the ability to continue making an honest
living. It would be silly of me to ask for a economic climate within
dairy that did not have volatility, but I do respectfully ask Congress
to help lessen the volatility and help mitigate large swings between
market highs and lows.
Thank you again for the opportunity to testify today. I would
welcome any questions.
The Chairman. Thank you, Mr. Heffner
Mr. Brandt.
STATEMENT OF DANIEL BRANDT, VICE CHAIR, CHARTER BOARD, DAIRY
POLICY ACTION COALITION; PARTNER, BRANDT VIEW FARMS, ANNVILLE,
PA
Mr. Brandt. Good morning. I would like to thank Chairman
Peterson and Congressman Holden for the opportunity to address
our concerns regarding Federal dairy policy.
My name is Daniel Brandt and I am a partner in Brandt View
Farms with my brother, Karl, my father, David, my son, Mark,
and nephew, Nathan will now be the fourth generation. They are
just graduated and they are the fourth generation to work on
our family farm there. We currently have about 370 registered
Holsteins and market the offspring and embryos worldwide from
some of the top pedigreed cows in our herd, and we have
consistently been fortunate enough to have a top ten herd
average in the Commonwealth of Pennsylvania, and we also raise
all of our own forage on about 155 acres cropland. I am also
state director with the Pennsylvania Holstein Association, and
a board member of the Lebanon County Farm Bureau, and vice
chair of the DPAC charter board, which is a grassroots
coalition of dairy producers in 23 states.
The past 14 months have been the most challenging of my
career as a dairy farmer. All farms, regardless of size, have
suffered significant losses and show significant decrease in
net worth because of low milk prices and high input costs. Like
most dairy farmers, not only is dairy farming my occupation,
but my way of life. The vast number of skills needed to be a
dairy farmer today include being an expert in animal husbandry,
agronomy, genetics, a mechanic and accountant, and this doesn't
even include the knowledge required for the regulations we farm
under today to ensure we are farming in an environmentally
responsible way and producing a safe and wholesome product for
the consuming public.
There are many opinions on how to improve our Federal dairy
policy and make it a better system. The suggestions range from
supply management, to formula changes and revenue insurance,
and the industry is divided on many of these issues, and we
know the frustration this creates in Congress. There is,
however, one issue all dairy producers agree on, the need for
improved price discovery and market transparency. I know our
Secretary has touched on that and others, and the repetition,
going back to that issue, helps us solidify the need for it.
You know, in trying to understand how we are paid for our
milk is like navigating rapids in muddy water. You know, we can
feel all the currents taking us but we can't see what is under
the water. Today's milk pricing is a bit like the wizard behind
the curtain. You know, you pull the lever and that lever keeps
the people of Oz from seeing what was really on the other side,
just as an example. But, when we pull that back, we can see
what value, the true value of the products in the marketplace
and how is the value of so many dairy products being passed
back through the system to the farm. Dairy farmers are
absolutely united on one major point, pull away the curtain and
introduce price discovery that is simple and transparent so we
can be fully informed participants in the market of our
products.
On a Federal level, price discovery should include more
products reported more frequently and without the lag times
that are signs of an old system long past due for an update.
For example, wholesale cheese prices reported on the USDA NASS
Survey for the first 2 weeks of the month are used as a
starting point for announcing the Federal minimum Class I price
for fluid milk sales for the entire month. The NASS Survey
includes reported sales transactions that were priced up to 30
days before that and now you have a 2 week lag turning into a 6
week lag. We are seeing this right now when you compare the
world price for cheese and powder which is much higher than the
current USDA NASS Survey prices on which our milk prices are
based. The cheese sales reported on the NASS Survey are priced
off the Chicago Mercantile Exchange where only one percent of
the cheese is even traded by a few buyers and sellers, and that
drives our farm milk prices. The announced Federal minimum
fluid drinking milk price for all of May will be based on
wholesale cheese and powder sales negotiated back as far as
early March.
The 2007 Farm Bill allows us to move forward with this
critical change and improve price discovery and market
transparency. We need to fund section 1510 of the 2007 Farm
Bill. This section was included because of the leadership of
Congressman Holden and others who realized this basic change
must take place before we consider any other changes. We,
especially, would like to thank Congressman Holden for pursuing
funding and also appreciate the support we received from
Congressman Thompson and Congresswoman Dahlkemper. Section 1510
needs to be a priority of the Congress as the 2011 Agriculture
Appropriations Bill is written. USDA estimates the cost at
$600,000 to adapt software already used for daily reporting
written, daily reporting, excuse me, in the livestock and meat
industry, along with some additional dollars to educate
manufacturers on the process and to do the quarterly audits
that are part of section 1510. This is a very reasonable
expense and a first big step toward improving price discovery
and market transparency in the dairy industry and can make it a
reality.
Once electronic reporting is implemented, we want to see it
expanded to include more products. Fresh Italian cheeses, for
example, are 40 percent of the cheese market, but this value is
not reported or considered in the present pricing formula.
Another part of price discovery is to implement mandatory
reporting of inventory with auditing. Every effort must be made
to reduce the influence of the thinly traded CME which the GAO
has determined is vulnerable to manipulation and where only
storable commodities are traded.
In addition, there are other areas of Federal dairy policy
that should be addressed. The Dairy Price Support Program could
be replaced with a recourse loan program to encourage
processors to update their facilities and processes to produce
products currently in demand in the U.S. and the world and that
are not currently being manufactured in the U.S. Other areas to
look at are the benefits of the two class system for pricing
milk, the relationship of fluid milk to manufacturing use, the
function and level of Class I differentials, and the effect of
set make allowances on industry decisions to produce more
storable commodities that can be sold to the government instead
of targeting new product development for increased use of dairy
products.
The negative margins and equity losses on our dairy farms
throughout 2009 are a stark backdrop to the record profits in
the processing sector and comparatively high prices for dairy
products paid by consumers at the retail level. This has caused
a loss of faith in the value and effectiveness of traditional
safety nets, as dairy farmers see the dollars are there is the
marketplace, but they are not reaching back to the farm. These
are important discussions however, it is imperative that an
effective of price discovery and improved market transparency
be the top priority. When a few players have the opportunity to
move the CME and then that price is considered the market
factor for determining contracts throughout the supply chain,
and those contracts are then validated by a weekly NASS Survey
for use in Federal Order milk pricing, the consensus is that
something other than supply and demand often dictates the value
of milk back to the original producer in the supply chain.
Otherwise, there would be a more direct correlation to what
farmers are paid for their milk and what consumers pay for the
many dairy products made from our milk.
I would like to thank all the Committee Members for their
time. Thank you.
[The prepared statement of Mr. Brandt follows:]
Prepared Statement of Daniel Brandt, Vice Chair, Charter Board, Dairy
Policy Action Coalition; Partner, Brandt View Farms, Annville, PA
Good morning, I want to thank Chairman Collin Peterson and
Congressman Tim Holden for the opportunity to address our concerns
regarding Federal dairy policy.
My name is Daniel Brandt and I am a partner in Brandt View Farms
with my brother Karl and father David. My son Mark and my nephew Nathan
are the fourth generation in our family to work on this farm. We
currently have 370 registered Holsteins and market the offspring and
embryos worldwide from top pedigreed cows. We have consistently rated
in the top ten herd averages in Pennsylvania and we raise all of our
own forages on 155 acres of cropland. I am also the state director of
the Pennsylvania Holstein Association, a board member of the Lebanon
County Farm Bureau and vice chair of the DPAC charter board, a
grassroots coalition of dairy producers in 23 states.
The past 14 months have been the most challenging of my career as a
dairy farmer. All farms, regardless of size, have suffered significant
losses and show a significant decrease in net worth because of low milk
prices and high input costs. Like most dairy farmers, not only is dairy
farming my occupation, but a way of life. The vast number of skills
needed to be a dairy farmer today includes being an expert in animal
husbandry, agronomy, genetics, a mechanic and an accountant. This does
not include the knowledge required for the regulations we farm under
today to insure we are farming in an environmentally responsible way
and producing safe and wholesome food for the consuming public.
There are many opinions on how to improve our Federal dairy policy
and make it a better system. The suggestions range from supply
management to formula changes and revenue insurance. The industry in
divided on many of these issues, and we know the frustration this
creates in Congress. There is, however, one issue all dairy producers
agree on: The need for improved price discovery and market
transparency.
Trying to understand how we are paid for our milk is like
navigating the rapids in muddy water. We can feel which way the current
is taking us but we sure can't see what's under the water. Today's milk
pricing system is a bit like the ``wizard behind the curtain,'' pulling
this lever and that lever to keep the people of ``Oz'' from seeing
what's really on the other side: What is the true value of our product
in the marketplace? And how is the value of so many dairy products
being passed back through the system to the farm? Dairy farmers are
absolutely united on this one major point: Pull away the curtain and
introduce price discovery that is simple and transparent so we can be
fully informed participants in the market for our products.
On the Federal level, price discovery should include more products
reported more frequently and without the lag times that are signs of an
old system long past due for an update. For example, wholesale cheese
prices reported on the USDA NASS Survey for the first 2 weeks of the
month are used as the starting point for announcing the Federal minimum
Class I price for fluid milk sales for the entire next month. The NASS
Survey includes reported sales transaction that were priced up to 30
days before that and now you have a 2 week lag turning into a 6 week
lag. We are seeing this right now when you compare the world price for
cheese and powder, which is much higher than current USDA NASS Survey
prices on which our milk prices are based. The cheese sales reported on
the NASS Survey are priced off the Chicago Mercantile Exchange, where
only 1% of the cheese is even traded by a few buyers and sellers, and
that drives our farm milk prices. The announced Federal minimum fluid
drinking milk price for all of May will be based on wholesale cheese
and powder sales negotiated back as far as early March.
The 2007 farm bill allows us to move forward with this critical
change and improve price discovery and market transparency. We need to
fund section 1510 of the 2007 farm bill (see attached). This section
was included because of the leadership of Congressman Holden, and
others, who realized this basic change must take place before we
consider any other changes. Section 1510 needs to be a priority of
Congress as the 2011 Agriculture Appropriations bill is written. USDA
estimates the costs at $600,000 to adapt software already used for
daily reporting in the livestock and meat industry, along with some
additional dollars to educate manufacturers on the process and to do
the quarterly audits that are part of section 1510. For this very
reasonable expense a first big step toward improving price discovery
and market transparency in the dairy industry can become a reality.
Once electronic reporting is implemented we want to see it expanded
to include more products. Fresh Italian cheeses, for example, are 40%
of the cheese market but this value is not reported or considered in
the present pricing formula. Another part of price discovery is to
implement mandatory reporting of inventory, with auditing. Every effort
must be made to reduce the influence of the thinly traded Chicago
Mercantile Exchange, which the GAO has determined is vulnerable to
manipulation and where only storable commodities are traded.
In addition, there are other areas of Federal dairy policy that
should be addressed. The Dairy Price Support Program could be replaced
with a recourse loan program to encourage processors to update their
facilities and processes to produce products currently in demand in the
U.S. and the world that are not currently being manufactured in the
U.S. Other areas to look at are the benefits of a two class system for
pricing milk, the relationship of fluid milk to manufacturing use, the
function and level of Class I differentials, and the effect of ``set''
make allowances on industry decisions to produce more storable
commodities that can be sold to the government instead of targeting new
product development for increased use of dairy products.
The negative margins and equity losses on our dairy farms
throughout 2009 are a stark backdrop to the record profits in the
processing sector and comparatively high prices for dairy products paid
by consumers at the retail level. This has caused a loss of faith in
the value and effectiveness of traditional safety nets, as dairy
farmers see the dollars are there in the marketplace, but they are not
reaching back to the farm. These are important discussions; however, it
is imperative that an effective method of price discovery and improved
market transparency be the top priority. When a few players have the
opportunity to move the CME, and then that price is considered the
``market factor'' for determining contracts throughout the supply
chain, and those contracts are then validated by a weekly NASS Survey
for use in Federal Order milk pricing . . . the consensus is that
something other than supply and demand often dictates the value of milk
back to the original producer in the supply chain. Otherwise there
would be a more direct correlation to what farmers are paid for their
milk and what consumers pay for the many dairy products made from our
milk.
I would like to thank the House Agriculture Committee for coming to
Pennsylvania and hope that the information presented here today will be
valuable as you tackle this complex and important issue.
Attachment
Sec. 1510. Mandatory Reporting of Dairy Commodities.
(a) Electronic Reporting._Section 273 of the Agricultural Marketing
Act of 1946 (7 U.S.C. 1637b) is amended--
(1) by redesignating subsection (d) as subsection (e); and
(2) by inserting after subsection (c) the following:
``(d) Electronic Reporting._
``(1) In general._Subject to the availability
of funds under paragraph (3), the Secretary
shall establish an electronic reporting system
to carry out this section.
``(2) Frequency of reports._After the
establishment of the electronic reporting
system in accordance with paragraph (1), the
Secretary shall increase the frequency of the
reports required under this section.
``(3) Authorization of appropriations._There
are authorized to be appropriated such sums as
are necessary to carry out this subsection.''.
(b) Quarterly Audits._Section 273(c) of the Agricultural Marketing
Act of 1946 (7 U.S.C. 1637b(c)) is amended by striking paragraph (3)
and inserting the following:
``(3) Verification._
``(A) In general._The Secretary shall
take such actions as the Secretary
considers necessary to verify the
accuracy of the information submitted
or reported under this subtitle.
``(B) Quarterly audits._The Secretary
shall quarterly conduct an audit of
information submitted or reported under
this subtitle and compare such
information with other related dairy
market statistics.''.
The Chairman. Thank you, Mr. Brandt.
Mr. Rutter.
STATEMENT OF TODD M. RUTTER, PRESIDENT, RUTTER'S DAIRY, YORK,
PA
Mr. Rutter. Mr. Chairman, Congressman Holden and Members of
the House Committee on Agriculture, thank you for the
opportunity to appear before you today.
My name is Todd Rutter and I am the President of Rutter's
Dairy, a family-owned, small to mid-sized processor located in
York, Pennsylvania. We sell products into four states and next
year my family will celebrate 90 years of being in the dairy
industry.
I am here today as a representative of my company and of
our industry as an individual member of it. I am not here today
on behalf of any organizational group, therefore, my answers
and opinions are purely those of my own beliefs.
Rutter's gets the majority of its raw milk from family
operated farms in Pennsylvania and Maryland and the balancing
supply comes from a co-op that also buys milk from family farms
in our region. To my knowledge, the largest farm we get milk
from milks about 250 cows, but the average farm milks about 110
cows. Most of our farms are in the second and third, and some
fourth generations of family farms working with us as
suppliers. We have not had any farms go out of business in the
last year, but I know several of them were very close to the
brink had the prices not started to turn around.
I like to think that the constant coaching we gave them
throughout the end of 2007 and 2008 when prices were record
high helped them. We preached loud and often then that during
those record high prices they needed to pay off debt, avoid new
debt and put money in the bank because historical patterns made
it very clear that the prices were headed for a nosedive. This
planning ahead for price cycles is what people in the business
would refer to as risk management, and in dairy we need
programs that will help small farmers manage this risk.
I cannot sit here today and tell you that I have a full
understanding of all the current Federal dairy policies, or
even how all the current regulations and programs work. I would
like to share the experiences I have gained working with local
farmers and consumers of milk and dairy. Hopefully, these
insights can be of some help in your decision making process.
I believe that American family-owned agricultural
businesses are very important to our country. I would like the
future of dairy policy to help ensure the survival of family-
owned businesses in the dairy industry to the greatest extent
practical, farmers, haulers, processors, and distributors and
all other businesses that revolve around these core groups.
Most times processors are made out to always be at odds with
milk producers, but from my perspective, the family farmer and
the family processor face and deal with a lot of similar
issues. Mostly, it is just when the farmer is not happy with
his milk check, the only person he has to yell at is the person
that wrote him the check so inherently there is always possible
friction in that relationship. At least in our case there is
just a lack of understanding on the farm of how little control
the processor has over the amount of the milk check, and how
often we are audited to ensure we are paying properly. We pay
what we are mandated to pay by state and Federal Programs and
we pay premiums that are necessary to attract a milk supply. We
must balance that against our need to keep raw milk cost
competitive relative to our other processors with whom we
compete.
I do not have a magical solution to the issues, but the
fundamentals need to be based on the ability to somehow help
stabilize the farmers' income so that they do not have these
peaks and valleys with their income stream. At the same time,
it is critical that the Congress recognize that the burden of
helping the dairy farmer cannot be borne by the Class I
processor alone. We have to make sure that any policy change is
studied to determine what the impact would be on consumers.
Everyone in dairy has the same end consumer, that being the
person in the store picking up the items off the shelf.
Consumers are very fickle in today's world and we know that
they are price-sensitive based on our experience with the last
period of record high prices. We also know that consumers have
choices and that they can and will choose alternatives to dairy
when the prices cross their mental threshold of value.
I am not here today to support any specific legislation nor
any specific policy proposals because I have been busy running
my family business, and thus haven't been putting my energy
into studying the different ideas that are on the table. But, I
very much appreciate that you have taken the time to come to
Pennsylvania to hear the issues facing members of our dairy
industry from Pennsylvania. Since I operate at the interface
between the farmers and consumers, and I value both my
suppliers and my customers, I hope you will consider both when
you evaluate future policies.
One last point and another area of concern I have within
the dairy industry is the aging infrastructure and access to
credit. From the farm all the way through to the delivery
channels, our industry is not investing back into itself,
especially at the family-owned business level. Even before the
current banking mess, it was extremely difficult to talk to
bankers about the dairy industry. When your sales income
fluctuates up and down by as much as 20 percent per year with
the price of milk, it is very hard for bankers to understand
that you still have a stable business. So loans at competitive
rates and without unreasonable collateral requests are very
challenging to get for our industry. I respectfully suggest
that additional loan money be made available to create loans
for family businesses across all sectors of the dairy industry
to reinvest, upgrade or expand their businesses. This will
increase our demand for raw milk, help us serve more customers,
and if the industry as a whole waits too much longer, the cost
of upgrading will be so steep that it will be unrealistic and
small family businesses will be forced to close or sell out.
This is my first time ever participating in something like
this and I hope that I am able to be a meaningful contributor.
I thank you for the invitation to participate. I am happy to
answer any questions you may have. Thank you.
[The prepared statement of Mr. Rutter follows:]
Prepared Statement of Todd M. Rutter, President, Rutter's Dairy, York,
PA
Mr. Chairman, Congressman Holden and Members of the House Committee
on Agriculture, thank you for the opportunity to appear before you
today.
My name is Todd Rutter and I am the President of Rutter's Dairy, a
family owned small to mid-size regional dairy processor located in
York, PA. We sell products in four states and next year my family will
celebrate 90 years of being in the dairy industry.
I am here today as a representative of my company and of our
industry as an individual member of it. I am not here today on behalf
of any organization or group. So therefore my answers and opinions are
purely those of my own beliefs.
Rutter's gets the majority of its raw milk from family operated
farms in PA and MD and the balancing supply comes from a Co-Op that
also buys from family farms in the region. To my knowledge the largest
farm we get milk from milks about 250 cows and the average farm milks
about 110 cows. Most of our farms are in the second and even third
generation of family members working with us as suppliers. We have not
had any farms go out of business in the last year, but I know several
of them were very close to the brink had the prices not started to turn
around.
I like to think that the constant coaching we gave them through the
end of 2007 and 2008 when prices were at record highs helped them. We
preached loud and often during those record high prices that they
needed to pay off debt, avoid new debt, and put money in the bank
because historical patterns made it very clear that the prices were
headed for a nose dive. This planning ahead for price cycles is what
people in the business world refer to as ``risk management'' and I
think in dairy we need programs that will help small farmers manage
this risk.
I can not sit here today and tell you that I have a full
understanding of the current Federal dairy policy or even how all the
current regulations and programs work, but I would like to share the
experience I have gained working with local farmers and consumers of
milk and dairy; hopefully these insights can be of some help in your
decisions.
I believe that American, family owned agricultural businesses are
very important to our country. I would like future dairy policy to help
ensure the survival of family owned business in the dairy industry to
the greatest extent practical including: farmers, haulers, processors,
distributors, and all other businesses that revolve around those core
groups. Most times processors are made out to always be at odds with
milk producers. But from my perspective the family farmer and the
family processor face and deal with lots of similar issues. Mostly, I
think when the farmer is not happy with his milk check, the only person
he has to yell at is the person that wrote him the check. So
inherently, there is always possible friction in that relationship. At
least in our case there is a lack of understanding on the farm of how
little control the processor has over the amount of the milk check and
how often we are audited to ensure we are paying properly. We pay what
we are mandated to pay by state and Federal programs and we pay
premiums that are necessary to attract a milk supply. We must balance
that against our need to keep our raw milk cost competitive relative to
other processors with whom we compete.
I do not have a magical solution to the issues but the fundamentals
need to be based on the ability to somehow help stabilize the farmers'
income so that they do not have these peaks and valleys with their
income stream. At the same time, it is critical that Congress recognize
that the burden of helping the dairy farmer cannot be borne by the
Class I processor alone. We have to make sure that any policy change is
studied to determine what the impact would be on consumers. Everyone in
dairy has the same end consumer; that being the person in the store
picking the items off of the shelf. Consumers are very fickle in
today's world and we know that they are price sensitive based on our
experience with the last period of record high prices. We also know
that consumers have choices, and that they can and will choose
alternatives to dairy when the prices cross their mental threshold of
value.
I am not here to support any specific legislation, nor any specific
policy proposals because I have been busy running my family business
and thus have not been putting my energy into studying the different
ideas that are on the table, but I very much appreciate that you have
taken the time to come to Pennsylvania to hear the issues facing
members of the dairy industry from Pennsylvania. Since I operate at the
interface between farmers and consumers, and I value both my suppliers
and my customers, I hope you'll consider both when you evaluate future
policies.
One last point, and another area of concern I have within the dairy
industry is the aging infrastructure and access to credit. From the
farm all the way through to the delivery channels our industry is not
investing back into itself, especially at the family owned business
level. Even before the current banking mess it was extremely difficult
to talk to bankers about the dairy industry. When your sales income
fluctuates up and down per year by as much as 20% with the price of
milk, it is very hard for bankers to understand how you still have a
stable business. So loans, at competitive rates and without
unreasonable collateral requests, are very challenging to get for our
industry. I respectfully suggest that additional loan money should be
made available to create loans for family businesses across all sectors
of the dairy industry to re-invest, up-grade, or expand their
businesses. This will increase our demand for raw milk, and help us
serve more customers. If the industry as a whole waits too much longer
the cost of up grading will be so steep that it will be un-realistic
and family business will be forced to close or sell out.
This is my first time ever participating in something like this. I
hope that I am able to be a meaningful contributor and I thank you for
the invitation to participate. I am happy to try to answer any
questions you may have for me. Thank you.
The Chairman. Thank you very much and I thank all the panel
for your testimony.
I recognize the Vice Chairman for questions.
Mr. Holden. Well, thank you, Mr. Chairman.
Following up on Mr. Rutter's comments and comments of the
Secretary, I would like to ask our producers about the credit
situation. Are the banks lending or are we depending upon farm
credit or FSA and it is not just your personal situation just
other producers that you have conversations with, anybody.
Mr. Hissong. Yes, no, the credit is definitely an issue,
equity tends to be the big one. It has definitely changed the
standards and they are against Federal mandates as well, and
they are trying to protect themselves. So, you understand where
they are coming from, but we are all kind of in one big mess so
I will stand down.
Mr. Brandt. Yes, one comment on that is I know some of the
lenders, what they are doing is that since it is a farmer they
have had a little bit more on credit then the next farm, maybe
using newer equipment or something. They are working with you
on extending some credit but then they want to make the
decision on whatever your purchases are. It really limits your
management ability where if you sign on well, we will give you
more credit but then they want you to come through them on any
major purchases that you are going to make, and they will say
whether you can make it or not. So this kind of dictates your
farming practice which is certainly not what you want to do as
a producer.
Ms. Mosemann. I also have a concern that there are less
creditors that are familiar with the dairy industry, less that
understand how the business works, and as a result many of them
don't even want to touch dairy just because of the volatility.
Mr. Holden. Mr. Rutter, do you feel processors could
increase their reporting to NASS and how would increased
reporting impact your business?
Mr. Rutter. In Pennsylvania, we report just about
everything there is to report already to the Pennsylvania Milk
Marketing Board so I don't know that we could report anymore
knowledge than we already do. I know the rest of the country
probably does not report as much as we are but in our world, I
don't know that there is much more data that we could report.
Mr. Holden. Mr. Brandt, in your testimony you mentioned
replacing the Dairy Price Support Program with a Recourse Loan
Program to encourage processors to update their facilities to
produce products currently in demand in the U.S. but not
currently manufactured here. Can you explain further why you
believe a recourse loan would be better then the existing Price
Support Program?
Mr. Brandt. Well, it was mentioned earlier by the
Secretary, and some different people, but what the Price
Support Program does, it doesn't encourage any kind of new
product development because the processor then realizes,
``Well, if I produce a little extra of this product, I have
that safety net to go back on a product that is not moving in
the market.'' The government is going to buy it up and then
that is still in inventory and that doesn't do anything
necessarily to move product. Unless of course they are giving
it to a third world country, maybe in Haiti, a situation or
something like that. But if we replace it with something that
is an incentive program like they develop a new product or
something like that, that will come back. They will be funded
in that through this program by the government to help them
build facility or research new product. I mean the MPC is one
thing that you can always fall back on. We are fussing about it
being an import but why couldn't we have developed it here in
the U.S. earlier. It is because there was no incentive really
to go after new product and by doing this, it not only helps
the processor and the farmer, but it also helps us as producers
because it moves our product and can also help exports.
Mr. Holden. Thank you. How many do you milk?
Mr. Heffner. We milk 160.
Mr. Holden. What do you think the average herd size is in
Schuylkill County?
Mr. Heffner. In Schuylkill County, the average herd would
be around 70 cows.
Mr. Holden. And what about Lebanon?
Mr. Brandt. I think it is probably similar, 70-80 cows.
Mr. Holden. Is Berks a little larger?
Mr. Brandt. I don't think there is a whole lot of change
between the three counties, now. Then towards Lancaster County
it is going to get less. There are a lot of smaller farms down
there.
Mr. Holden. In Dauphin and Perry it would be about the
same?
Mr. Brandt. I would think.
Mr. Holden. Thank you, Mr. Chairman.
The Chairman. I thank the gentleman.
The gentleman from Texas, Mr. Neugebauer.
Mr. Neugebauer. Thank you, Mr. Chairman.
Mr. Hissong, you mentioned in your testimony that
basically, ``It would be best served if the government just
stopped purchasing excess dairy products, many of which are not
made to the world's specifications.'' So if we had the program
change to only buy products that meet the world's
specifications so that they would be marketable from an export
standpoint, I think I heard some of the witnesses say that
there is not the capacity to process that? Would that create a
problem?
Mr. Hissong. Well, somewhat of the MPCs are a big thing
that people are upset about and it is about the fact that MPCs
are not the problem. The problem is that we don't produce many
of them in the United States. They are produced in other
countries that rely on their export markets so they invested
money in that infrastructure and they produce MPCs. So, U.S.
companies, Kraft and such have found that, ``Well, I need this
product so I will get it from New Zealand or whomever.'' We
just haven't seen, and you have heard that theme a few times,
that there just hasn't been that investment in innovative
products. And so it is not the fact that MPCs are out there, it
is the fact that if they can produce them in New Zealand we can
certainly produce them here. I think that is the kind of thing
that we are talking about, products like that that we need to,
we produce a lot of powder that is non-fat. We produce salted
butter and the world wants unsalted butter. Just things that
seem to me to be fairly simple to say let's shift a few things
around here and produce it. It can be easy, as complicated as
MPCs and as simple as producing unsalted butter. It seems
pretty logical to me.
Mr. Neugebauer. And the current policy encourages us to not
produce those products is what you are saying?
Mr. Hissong. Correct, yes, I mean they know that okay, we
can hold onto this, prices go down, the government is going to
buy it and they will deal with it. I can basically get rid of
whatever I need to get rid of.
Mr. Neugebauer. And, there has been a lot of talk about
being able to manage your margins and of course margins consist
of the revenue and the expenses and so the difference between
that would be your margin. What are producers, obviously we
have talked about the CME which does not provide a very good
opportunity for price discovery and isn't an effective tool for
the price side, but what about on the cost side? Are producers,
are dairymen using futures for grain or other inputs to hedge
or to manage the cost side?
Mr. Hissong. I would say the average producer in
Pennsylvania probably produces most of their own grain and so
in a sense they are kind of doing that. In my case, we buy all
of our grains so we do do that side where we will lock in corn,
soybean meal, cotton seed, different commodities and try to
play that. That is one thing that is a little bit more
frustrating is those markets are a little bit more of a chore
and I can lock in my bases and do different things that I can't
do on the milk side. And so you look at that and say is there
some lessons that we can learn there on the milk side to make
it a reasonable tool. But, you talk about margins, the biggest
frustration from dairymen, in general, is that we feel like we
have taken the brunt of this economic downturn, whether it be
on not necessarily all the processors. You look at lenders. You
look at my semen company, I go to annually, this is the time of
the year that you get annual reports and they don't make money.
You know, everybody made money, but the dairymen took the brunt
of it, so we buy everything retail and sell everything
wholesale and that makes it tough and you definitely feel the
squeeze.
Mr. Neugebauer. Mr. Brandt, you brought up the discovery
issue again. If you had one price that you wanted to know
today, in other words all across the country, what is that one
price that you would like to know?
Mr. Brandt. Well, I guess one price, well, there is the
cheese price rather than being less than one percent because
cheese really is the greatest use of our dairy product with
peaks and everything else. I would like to see a daily report
on that cheese price where it more reflects what the actual
market trade value is. You know, you like to see the processor
make a little profit, but you see the cheese price today is our
milk price that gets into our milk actual on-farm price is
something that is priced 6 weeks ago on the Chicago Mercantile
Exchange. That is not a good transfer of price and the other
thing there is we are not saying that we don't want to make
money, but like Rod said we like to see a little bit more of a
balance between this. You can't have farmers having record
losses, and the processor having record profits.
Mr. Neugebauer. So you want to know what the cheese prices
are today?
Mr. Bradnt. Yes, I would like to know how the cheese
prices, especially the more popular cheeses are traded daily.
It should be a daily report just like the beef or the pigs or
whatever.
Mr. Neugebauer. Thank you.
The Chairman. I thank the gentleman.
The gentleman from Iowa, Mr. Boswell.
Mr. Boswell. I thank you, Mr. Chairman.
Mr. Chairman, we have heard over and over the need for
transparency and being able to see what the prices are and Mr.
Brandt is kind of excited about it and I can understand why.
What is the impact on, any of you, that if you don't access to
it? I think I know, but I want you to have an opportunity to
express it. What happens to you in your operation if you are
not aware of the discovery of prices as you are trying to do
your market buying and actually market? Why don't we start with
you, anybody?
Mr. Hissong. Well, I think one of the issues I brought up a
little bit earlier was like on the grain side. I can lock in my
bases which is basically our PPD on milk pricing or our bases
between our, which makes up our bases when you look at a Class
III price versus my cash price. You know, we are talking about
LGM and locking in milk and some of that and we had done that
several years ago. We were burnt pretty bad because we thought
we had locked in a certain price and our PPD went negative and
basically our bases, normally which runs $2.50 or so, shrunk to
all but nothing. And so I thought, I locked in one price and I
get my check and it is $2 lower, and so how can I use that type
of product to lock in a margin where I have to wait until I get
my check, and low and behold it is $2 lower. You know, I can
feel like I am doing the right thing, but until I get that
check, you don't know, and so that is where some of this
transparency and some of these products need to be more
effective. If I lock in a certain price, I need to be sure that
when that check comes, I am receiving that price.
Mr. Boswell. Thank you. Anybody else? I want to ask you
just down the line, the one thing that we can do to make your
operation more viable and the entire industry don't answer it
one side, just what is something that you think we could do in
the farm bill where it could come back to you most and the
best? One thing you are talking about. Anybody have half-a-
dozen just give me your top one. Start right down the table.
You don't have to answer. If you want to pass if what you want
to.
Mr. Frey. I am not a producer but it would seem to me that
the whole issue of price discovery would probably be number one
right now.
Mr. Hissong. Yes, I would have to agree with that. Just
like I mentioned, it is hard to use some of these other tools
when we don't know what makes up all of that and things change.
It just makes it hard to use any of these other tools, so it
does seem like we probably have to start there.
Ms. Mosemann. It is similar we just need a vehicle to deal
with this price volatility. We are price takers and I don't
know how that can change exactly but that is where it is
hitting us the hardest.
Mr. Heffner. I would say the price discovery method, it
would make us a lot, it would give us a lot more information
when we go about our daily business and budgeting and just
running everyday business.
Mr. Brandt. Yes, definitely, it is the same down the line
and it appears but yes, they do price discovery as the
foundation on how everything is built. You know, the world
dairy, one thing that shows how the world dairy pricing can
help, the world dairy prices are consistently higher then the
U.S. prices on the same products. One thing, just to use an
example of how this daily reporting could help, in the past the
powdered milk in this reporting that you might remember from
2007, the estimated cost to the American farmer is about over
$50 million. With daily reporting we would have discovered
those errors much earlier, but they were so far behind with
their reporting. They were 6 weeks past with a large error like
that and it cost us as farmers a lot of money and it just would
take out some of those errors or manipulations and stuff.
Mr. Rutter. Without a good steady source of milk, my world
pretty much goes away as well so assuming that the price
volatility can be, the price visibility can be solved, I still
think the small, family farmers have an issue with the market-
driven price. I am a firm believer of market-driven prices. I
am not implying that I want to go away from a market price, but
the peaks and valleys with their income checks is something
that they are not all good at planning for it, and preparing
for it and saving. The history of milk--forever always--is a
roller-coaster, up and down, and just recently we have seen
that roller-coaster go higher and go lower, and we always know
the higher it goes, the lower it goes. So if there are tools to
help mitigate the high and lows, or even voluntary funds that
farmers can participate in that when their price is above a
certain level that they pay into the fund, and kind of a
voluntary savings account. Kind of like a Christmas club, so to
speak, and then when the price goes below the fund pays them
back. So, that they can have a reasonable level of certainty
that for the next 3 years or however it is, I am going to be at
least guaranteed this much of a hundredweight for my milk so
that I can make a loan. I can expand my barn. I can buy more
cows. Then I can go to the bank and give an intelligent
business proposal that says here is what I am relatively
assured that because I am in this program that my income is
going to be. I am going to be able to pay you back for this
loan because I am going to give in when it is high and I am
going to take back when it is low, so that I have a cash flow
every month that I can pay my bills with.
Mr. Boswell. Thank you very much. I understand and I agree
with you, and I thank all of you for giving us your time today
and just keep in touch and maybe together we can do something
real good.
Thank you. I yield back.
The Chairman. I thank the gentleman.
The gentleman from Pennsylvania.
Mr. Thompson. Thank you, Chairman. Thanks to the panel for
taking the time and coming in and on what is absolutely a
critical issue.
I want to start with Mr. Frey. Thanks for your leadership
at the Center for Dairy Excellence. We are just blessed to have
that resource here in Pennsylvania. You said that the Northeast
Dairy Leadership Team has been reviewing policy and pricing
proposals across the United States to evaluate how each
proposal would align with your objectives. Have you found any
one proposal that would help reduce the volatility in the dairy
market that your organization supports?
Mr. Frey. There isn't one that we have found that we would
support at this point, however, there was a policy that was
presented approximately 6 weeks ago to this group. It was
called the Dairy Growth Management Initiative. I try to detail
just a bit about in the back page and what we have done with
that is we have supported a comprehensive analysis by Cornell
and Cal Poly to study that particular proposal and evaluate
what the impact would be on volatility.
Mr. Thompson. Okay, thank you.
Mr. Heffner we have heard a lot of discussions from milk
protein concentrates, MPCs. I hear a lot of those from time to
time at home as well and I actually have serious doubts about
the effect imports have on milk prices. As one piece of
evidence, I try to look at is the imports are at a 5 year low,
however, you suggested something does need to be done to
encourage the domestic production. I think I take from some of
the discussion I have heard here today the current safety net
that price supports just really hinders innovation. It is safer
it seems like to stay the course with what products are being
supported by government. I don't know if that is your take, but
my question is how would you suggest that we encourage domestic
production of innovation such as milk protein concentrates?
Mr. Heffner. On that issue I am not real familiar with,
however, I am more of a marketer since I deal with direct
marketing on our farm, and I know people are complaining about
the MPCs coming in and ruining our milk price. Well, if that is
what they are doing maybe we should look into this and start
producing them here. We have the milk. We have the best quality
milk anywhere in the world. Why aren't we doing it here? Let's
get out there and get in this market and compete, but that is
all I can say about it.
Mr. Thompson. Anyone else from the panel have any thoughts
in terms of why it is difficult to, I guess launch these new
innovations, these new dairy products, opportunities to expand
our markets?
Mr. Brandt. Yes, I think one thing that it has to come
through the processor. I mean as farmers we don't have our own
processing plants. We can't develop any products and the
processors have been protecting themselves and until recently
most of the farmers have been content to farm at their farm and
not speak up a little. The processors are making a nice profit
so why shouldn't they, and then they are protected like you say
in support prices if something does drop. Their margins haven't
gotten worse. They actually were better in 2009, so I think
that is probably one of the big things that does not help to
develop new product in the United States. The processors have
been content with the large profits. Why take a risk on
something when you are already making a nice profit. That is
why the program that I mentioned there where if we give some
kind of incentive where if they develop a new product, half
funded by the government and if this works they get rewarded
for what they develop.
Mr. Thompson. Okay, thank you.
Ms. Mosemann, it is good to have another Nittany Lion
alumni on the panel. I think there are a number of graduates
from that fine land-grant university here today. Among the key
elements that National Milk's proposal is to discontinue the
Dairy Product Price Support Program and the Milk Income Loss
Contract Program and instead use a new income protection
approach. Is it your view that the MILC and the Price Support
Program have outlived their usefulness and what are your
thoughts in that area?
Ms. Mosemann. In today's dairy economy, I think it has
passed. We have obviously stepped beyond that and I think it is
holding us back now.
Mr. Thompson. Okay, thank you.
And, Mr. Hissong, the Professional Dairy Managers which I
am proud to say are also located in the Fifth District, I
believe up in the Bellefonte area. What do they think that the
government should focus on, long-term or short-term in terms of
dairy farmer assistance?
Mr. Hissong. Well, our organization's views have always
been more of a long-term-type approach, I think that the
position paper states a lot of the short-term band-aids such as
direct payments and such are not a good long-term solution, and
I think that is what we have been doing for decades. And not
just PDMP, but I think that is a general consensus we are
hearing from every organization is, ``Now is the time to look
at long-term-type fixes to some of these problems.''
Mr. Thompson. Thank you. I just want to say thank you to
all of the panel for your contributions today.
The Chairman. I thank the gentleman.
The gentleman from Georgia, Mr. Scott.
Mr. Scott. Thank you, Mr. Chairman.
In dealing with our desire in the next farm bill to put a
greater emphasis on profitability as opposed to price, first of
all, let me ask each of you are your operations profiting?
Mr. Hissong. If you were to look at a 5 year average on our
operations, we are profitable even despite last year, but
anything that was made in the previous 2 or 3 years was
definitely erased last year, but it's a very slim profit thanks
to 2009.
Mr. Scott. Is that pretty much the situation facing each of
you that you may have been profitable 5 years ago but you
wouldn't say you are profitable now?
Mr. Brandt. Yes, one thing I would say towards that is 2009
was definitely a challenge. I mean and this was kind of across
the industry. The better managers naturally were making a
profit there in the previous years and a nice profit, but most
of us took on about $1,000 a cow debt owed on our credit lines
just to make ends meet due to 2009. We have started to be able
to pay some of that back here at the beginning of the year and
then the price took another hit here in April, so it is
certainly a concern.
Mr. Scott. So would you say then that the price of milk is
the determinate factor in profitability for you?
Ms. Mosemann. The factor but we really need to start
looking at the variable input costs. I mean we have to look at
fuel feeds. It is more emerging now. Now, I just feel like we
need to look more at what we are long-term. You can't look at
the milk price and say oh yes well, $17 sounds good compared to
a couple years ago until you look at the variable costs going
into it.
Mr. Scott. So just going farther as we begin to look far
and we are looking for new policies for the farm bill, what
would be your one or two or three top recommendations for this
Committee to look at that would increase your profitability if
it is not the final price of milk? That is it? What can we do?
What are those points that we should consider? What are your
recommendations? That is you are the ones we are trying to help
to become profitable. What are the things you would tell us to
do?
Mr. Heffner. I would say whatever you can do to move more
products. New product development, new markets overseas,
anything that we can get more milk to the consumer, to the
buyers, that in turn would increase our profits on the dairy
farm. On the other hand, we do have the input costs, the fuel,
the fertilizer and chemical seed prices all went up. A lot of
that probably had something to do with the ethanol craze we had
a couple of years ago that those prices seem to be backing off
a little bit. Other, well, as far as the prices of the inputs,
we can't really do a whole lot about. We were just subject to
the market. There was a run on the market. Hopefully, they will
come down a little bit and stabilize. Other than that we have
to just learn to be better business managers, I guess. But, as
far I have always been a big proponent of getting out there and
marketing your product and that is about all I can say. We need
to push our product.
Mr. Scott. Well, let me ask you about the do you believe
that the Federal Milk Marketing Orders, do you believe that
they are serving their purpose bringing stability?
Mr. Heffner. Well, not being in a Federal Milk Marketing
Order, I don't feel that I am qualified to answer that.
Mr. Hissong. I am not an expert on it, but I feel a sense
that they are. The Secretary and Dr. Dunn expressed that pretty
well that it does, the people that are marketing to a fluid
market are seeing a little bit of a premium. The ones that are
having manufactured products are a little bit different. Should
it be separated by state or region, I don't know. I think maybe
the classes of milk, simplifying them and then not having so
many and simplifying that a little bit would probably be a
better move than the Federal Orders.
Mr. Brandt. I kind of agree with him there. I think the
Federal Orders kind of like you were saying, you are from
Georgia, that area there has a lot higher consumption of fluid
milk and you had mentioned earlier about just a one Order for
the whole nation. I think that will definitely affect the
farmers in your area. It is a little bit harder to produce the
milk with the heat and humidity and everything like that. They
need the price adjusted for the region or the area that you are
in and also for demand in their area for fluid milk. And
another thing with the two class system which I mentioned in my
testimony where you would have a manufacturer class and a Class
I would simplify being able to understand how the milk is
priced, and that you won't have the processors which they can
do now. They can say okay, this milk is Class IV and that is
how they are paying you and they take it off your farm, and
then they can move it to a Class II and they can get a better
price, and that really isn't, they aren't regulated in any way
in doing that. They might be paying you for Class IV and then
selling it as a Class II and getting a little better price for
their product and increasing their margin. That manipulation
does happen and if they go to a two-price system that will take
away that ability for them to manipulate that.
Mr. Scott. Yes, this, gentlemen, is the last one, I would
like to find out if all of the other members of the panel agree
with Mr. Brandt. In his testimony he mentioned that Dairy Price
Support Program should be replaced with a Resource Loan
Program. Is that a consensus with the group that?
Mr. Hissong. I agree that the Dairy Support Price Program
has had its time and it is time for something else. Whether it
is replaced by something like that, I think that general
thought that there needs to be a reinvention and new things out
there, cutting-edge stuff to manufacture. Yes, there needs to
be some sort--we talked about that earlier. I think one of the
reasons, to be fair to the processor, that technology is not
cheap and it is expensive to reinvest in new capital machinery
and things to produce different products. Part of some
government help to do that and to support that innovative
approach would certainly be helpful.
Mr. Frey. Our nation's Check-Off organization, DMI,
recently championed a comprehensive review of what
international export opportunities are for the next 20 years
for the dairy industry, and to do that they commissioned what
they called the Bing Study. And the Bing Study clearly
indicated that the U.S. dairy industry when it comes to our
export marketing opportunities has a very narrow window of
opportunity to take advantage of. So your question about the
Federal Order System, the Price Support Program, both of those
to some extent come under attack, particularly the Price
Support Program suggesting that we are not innovative. We are
not in large part because of that support price not taking
advantage of current and future marketing opportunities. So I
would say that based on what I have heard from the Bing Report
that yes, we need to do something differently then the Federal
Price Support Program.
Ms. Mosemann. On your question about the insurance program,
I think that is kind of outlined in my testimony, we decided to
stand behind the National Milk Proposal. That is the worse
problem we seem to have in the dairy industry is you put two
farmers in the room and there are two different ideas on where
to go forward. There are so many proposals out there and no one
is going to be happy with every aspect of it. So we are looking
at what we think is going to be the best opportunity for our
farm to stay in business and hopefully be there for the next
generations. I would say that is the program that would put us
there.
Mr. Scott. Thank you.
The Chairman. I thank the gentleman.
The gentlelady from Pennsylvania, Mrs. Dahlkemper.
Mrs. Dahlkemper. Thank you, Mr. Chairman, and thank you to
the panel, I appreciate your testimony today.
Mr. Frey, in your testimony in terms of the Center for
Dairy Excellence, I know you have a number of resources to help
our dairy farmers remain competitive and you talked a little
bit about some of the tools that you have used. Let me ask you
just what particular tools you were able to use prior to this
past downturn that maybe helped some farmers stay more
competitive, stay viable in their operations? What do you find
is working well?
Mr. Frey. Thanks for the opportunity to answer that
question. It would seem that the tool that we have used that
has been the most impactful has been something we call Dairy
Profit Team. Essentially, what that is, is in a formal way,
pulling the resources that consult to a dairy farm family
around the table in a formal way, provide some funding for that
to happen and get that farm family in an ongoing mode of
business and discussion and decision-making.
Mrs. Dahlkemper. Who would be on that team?
Mr. Frey. Typically, the professionals that serve the farm,
the veterinarian, a nutritionist, potentially the accountant,
potentially the consultant and/or lender, someone like those
types of folks, they have been very impactful and we have had
hundreds of farm families take advantage of those. I would say
in addition to that, educational programs particularly focusing
on business management and risk management have had a big
impact, I believe, here in the Commonwealth.
Mrs. Dahlkemper. And participation level, what would you
say of that in terms of farmers turning to you for help in this
area?
Mr. Frey. Farmers turning to us?
Mrs. Dahlkemper. Yes, farmers turning to you for help.
Mr. Frey. Yes, thank you, the Center has really become the
organization. We have a number of employees that are dedicated
full-time to providing resources and when I talk about the
Profit Team Program, we have had hundreds, almost 300 farm
families that have used that program. And our educational
initiatives, I would like to think nearly half of the producers
in the state and we have about 8,000 producers, have leveraged
our educational programs at one time or another.
Mrs. Dahlkemper. Do you see a particular population,
smaller farms, larger or just sort of across the board?
Mr. Frey. Yes, when I look at who has leveraged the Center
it is those farm families that are interested in continuing
their farm business into the coming years and that is, I have
to believe, \3/4\ of the farm families in the state.
Mrs. Dahlkemper. Okay, I appreciate that. Thank you.
Ms. Mosemann, I want to ask you a question. I am a
dietician by training so and I believe dairy products and milk
are an important part of a nutritious diet. In your testimony
you talk a little bit about some barriers to access, and you
talked about nutrition programs. So I was just wondering what
you were saying, what you think those unnecessary access
barriers are that was when you were talking about the Child
Nutrition Programs.
Ms. Mosemann. Okay, oh, in my full testimony? I am sorry.
Mrs. Dahlkemper. Yes, in your full testimony, I am sorry.
Yes, you talked about the Child Nutrition Programs and you were
talking about too many children miss out on those benefits
because of low participation and unnecessary access barriers.
So I guess I was wondering what those access barriers are.
Ms. Mosemann. Obviously, I am not the pro on this.
Mrs. Dahlkemper. I am sorry. If you want to get back to me
on that, you can. As we look at this program, I just want to
have an idea of what that is so that we can address that.
Ms. Mosemann. She is talking about higher reimbursement
rates that I am just now getting involved in the Fuel Up to
Play, that kind of thing. I am just now starting to get
involved in our school and getting interested in the Nutrition
Program so I am honestly not familiar with that.
Mrs. Dahlkemper. Okay, well, if you know, if anybody has
any information on that as we deal with this reauthorization I
would like to know what kind of access barriers that might be
needing to look at so I appreciate that. I am sure somebody can
probably get back to me.
Ms. Mosemann. Okay, and we can get that to you.
Mrs. Dahlkemper. And then I guess my last question just for
all of you, I know we have a supply and demand problem, and as
you retire a part of your herd, what happens to that cow? Where
does that cow go to and is there any issue in terms of the beef
markets regarding that?
Ms. Mosemann. She doesn't go to the pool.
Mrs. Dahlkemper. She what?
Ms. Mosemann. She doesn't go to beef or the pool.
Mrs. Dahlkemper. No, I figured not but I mean is there any
problem though in terms of the beef markets? Is there any push
back, I guess?
Ms. Mosemann. It is actually in a month's time, it is
actually less than one percent of the beef that goes to
slaughter so in the grand scheme of things over and how CWT has
spread it out it really is not that huge of an impact on the
beef industry.
Mr. Brandt. And the beef price is rather strong right now
for the cows. It is as good as it has been in the last 3 or 4
years.
Mrs. Dahlkemper. Okay, thank you. Thank you, all, very
much. I yield back.
The Chairman. I thank the gentlelady and thank the panel
for being with us today, and for your patience and answers that
were very helpful, and so you are dismissed and we appreciate
everybody being here today. I think we received some great
information and we will take that back in our deliberations in
what we do not only on the farm bill but in the long-term. We
will be having many more discussions on this issue and other
issues as we move toward the next farm bill.
I recognize the Ranking Member of the Livestock, Dairy, and
Poultry Subcommittee, Mr. Neugebauer, for any closing remarks.
Mr. Neugebauer. Well, Mr. Chairman, I just want to thank
you for having this hearing and I want to thank the panel. I
want to thank the people that came to this hearing, as well.
This is very important. This is the way that this democracy is
supposed to work, is that you the people and you have selected
some of the folks on this dais to represent you. I think that
it is very important that we get this right as we embark on a
new farm bill. I think it is valuable input but I would also
encourage you to keep thinking about it. We have heard some
good ideas today, but if there are other good ideas out there,
we certainly want to incorporate those into the farm bill
because long-term what we are all trying to do is provide for a
long-term, stable agricultural economy in this country, and try
to avoid the zigs and the zags, and actually provide the forum
where producers can plan, and make business plans, and execute
those plans, and be profitable for the long-term, so I thank
all of you for being here.
The Chairman. I thank the gentleman. I thank all the
Members for their involvement here today, as well. Thank you,
Mr. Holden, for helping us put it together and hosting us here
in his district.
Mr. Holden. Thank you all for being here.
The Chairman. And under the rules of the Committee, the
record of today's hearing will remain open for 30 calendar days
to receive additional material and supplementary responses from
the witnesses to any questions posed by a Member. And this
hearing of the Committee on Agriculture is adjourned.
[Whereupon, at 11:57 a.m., the Committee was adjourned.]
[Material submitted for inclusion in the record follows:]
Submitted Statement by Gerald Carlin, Dairy Farmer, Meshoppen, PA
Why We Need a New Milk Pricing System
Since the early days of a commercial dairy industry in the United
States, there has been a recognition that because milk is highly
perishable and has to be marketed on a daily basis, that there was a
need for government oversight to provide some sort of minimum pricing
structure, in order to protect dairy farmers. Cost of Production is not
a new concept. The only time that dairy farmers have thrived has been
when cost of production or parity pricing was enforced.
For nearly 30 years, the ``Free Market'' has determined the milk
price. The major problem with this concept is that competition has
decreased in the marketplace with fewer players and collusion has
increased, while at the same time it is illegal for dairy farmers to
unionize. Dairy farmers have no power on their own to set a fair milk
price. At the same time, the Chicago Mercantile Exchange (CME) trading
on a thin speculative market, with no outside oversight has been
setting the milk price for all U.S. dairy farmers. Secrecy, self-
policing, and small volume of trading, as well as manipulation and
corruption on the CME have rendered it completely unreliable as a means
of establishing a real value for milk. The National Agricultural
Statistics Survey (NASS) merely reflects the CME prices on a delayed
basis. This does not constitute a Free Market. The resulting rural
decay is self evident.
The Supply Management we have had under this system has been to run
farmers out of business through low milk pricing. The result has been a
financially anemic dairy farm sector with those who ``survive'' being
virtually slaves to the dairy industry.
There are basically two entities that can set a fair milk price.
One entity is the Co-op structure that was set up to work in the best
interest of its membership. For the most part, this entity has long
since departed from its original purpose and now works on behalf of the
processors. The other entity that has the power to set a fair milk
price is the Federal Government if it has the will to put America's
farmers first and exercise food sovereignty which is well within the
rights of a sovereign nation, trade agreements notwithstanding.
The Federal Government is faced with a clear choice to either put
the needs of dairy farmers first by ensuring that they are justly
compensated, from the marketplace, for their work and investment, or
continue to pander to the interest of corporations and the global free
traders at the expense and ultimate demise of U.S. dairy farmers.
Farmers don't need or want more schemes, scams, and band aids. We
need cost of production and inventory management to make it work. The
Federal Milk Marketing Improvement Act of 2009 (S. 1645) is the only
legislation/proposal that provides real solutions to the very real
crisis being experienced by dairy farmers today.
Induded are reasons why the Federal Milk Marketing Improvement Act
of 2009 would better serve dairy farmers and also answers to a National
Milk Producers Federation (NMPF) questionnaire.
Attachment 1
Reasons Why the Federal Milk Marketing Improvement Act of 2009 (S.
1645) Would Better Serve U.S. Dairy Farmers if Passed by
Congress
Authored by LoriJayne M. Grahn, Pelican Rapids, MN and Gerald Carlin,
Meshoppen, PA, 3/13/10
S. 1645 WILL value manufactured milk based on 100% of the
national average total economic cost of production as
determined by the Economic Research Service (ERS) of the United
States Department of Agriculture (USDA). This data has been
collected for years. Class I differentials would remain the
same in all Federal Orders. All manufactured dairy products
would be classified as Class III. The milk pricing system would
be greatly simplified. This pricing system is superior to the
target price to cover operating expenses as determined by the
board in the Dairy Price Stabilization Program (DPSP) proposal
which would continue to rely on the current flawed price
discovery system. Supply management alone does not assure fair
milk pricing as demonstrated in California in 2009.
S. 1645 WILL establish accountability in regard to the
volume of dairy imports and exports and the amount of milk that
they represent. This accountability extends to casein and Milk
Protein Concentrate (MPC). No supply management program can be
implemented unless U.S. dairy exports exceed imports by both
milk displacement and dollar value. The purpose is to insure
that dairy imports do not undercut our dairy farmers prices or
their ability to provide for our domestic markets. Imported
dairy products will not be allowed to destroy domestic farm
prices. Neither the DPSP proposal nor the Dairy Producer Income
Protection Program (DPIPP) addresses import issues.
S. 1645 provides for a guarantee of at least 97\1/2\% of the
total economic cost of production for those who do not increase
production. No farmer that maintains production at or below the
previous years level will be assessed more than the possible
2\1/2\% from the national average total economic cost of
production. The DPSP and the DPIPP do not guarantee fair milk
prices and still rely on the CME to determine the value of
milk.
S. 1645's supply management program is funded by farmers.
The funds would be used to remove excess product from the
market. Hopefully this food would go to those who really need
it. This program will work well if the government and industry
want it to work and let it work. The DPSP supply management
program is also farmer funded with money going back to farmers.
The DPSP does not address removing excess product from the
market, thereby possibly leading to low milk prices and the
need for CWT or MILC payments.
S. 1645 would save taxpayers the most money of the three
ideas. S. 1645 uses existing entities including ERS, FSA,
Foreign Agriculture Statistics (FAS) and Market Administrators
to collect data. Little additional overhead expense should be
required. The MILC and price support programs would be
unnecessary.
S. 1645 does not interfere with existing state or Federal
Orders nor does the DPSP.
S. 1645 could be implemented as stand alone legislation
without opening the farm bill. The DPSP and DPIPP have not been
introduced as bills. The DPIPP is likely to pop up in the next
farm bill and would only add another burden to dairy farmers
without solving any problems.
If an amendment to a given Federal Milk Marketing Order
(FMMO) receives a negative vote during the referendum process,
S. 1645 protects the continuation of the FMMO and will not
allow the negative vote to terminate the FMMO. Neither the DPSP
nor DPIPP address this issue.
S. 1645 encourages new producers by allowing new farmers to
produce up to 3 million pounds of milk during the first year of
operation without penalty. The DPSP imposes penalties on up to
all milk produced by a new farmer in the first year. This will
make It even more difficult for new farmers to start up.
S. 1645 eliminates Make Allowances. The DPSP and DPIPP do
not.
S. 1645 is not a government takeover. It merely sets a
reasonable price much like they did prior to 1981. No farmer
will be told that he/she can not expand. However, if there is
too much milk on the market, those who increase production
could receive less money (maybe much less) for the portion of
milk production that exceeds the previous years production. The
integrity of the program would be maintained by those who have
the responsibility of collecting cost data (ERS), production
data (Market Administrators or FSA), and import/export data
(FAS).
Attachment 2
Answers to NMPF Strategic Planning Task Force Advance Questionnaire
Prepared by Gerald Carlin at the request of Pennsylvania Farmers Union,
6/30/09
I. The Basics With Respect to the ``Federal Milk Marketing Improvement
Act of 2009'' formerly S. 889 now re-introduced as S. 1645.
S. 889 Objectives:
1. S. 889/S. 1645 would stabilize farm milk prices at a level that
will provide dairy farmers with sufficient income to cover the
national average total economic cost of production.
2. Create price stability for processors and consumers.
3. Create stability for lenders and revive a dying rural
infrastructure.
4. Create official transparency in regard to the amount of milk
represented by imports and exports and encourage domestic milk
production sufficient to meet domestic demand.
5. Allow for dairy farmer-funded domestic supply management
sufficient to maintain a supply and demand balance and maintain
a fair price to farmers.
6. Create accountability in the Federal Order amendment process by
allowing proposed amendments to fail without eliminating the
Federal Orders.
How would it work?
The Economic Research Service (ERS) of the United States Department
of Agriculture (USDA) already collects cost information for producing
milk. The national average cost of production would become the minimum
farm price for manufactured milk which would all be classified as Class
II. This price would be in effect for all 48 contiguous states. The
Secretary of Agriculture would announce the minimum Class II price by
November 1st for the following year based on the national average cost
of production from data collected by the ERS. The price would be
adjusted quarterly. This price would include operating cost and
allocated overhead. Class I differentials would remain the same. The
Secretary would also be required to report on import/export volume,
milk displacement and dollar value. The Secretary would be authorized
to implement a supply management program only when dairy exports exceed
dairy imports by both the amount of milk represented and by dollar
value.
The first phase of supply management would affect all dairy
producers by reducing the Class II price by up to 50 percent on up to
five percent of production. This could be seen as a signal to hold
production down.
Under the second phase when the Secretary would announce a reduced
price on all-milk production that is in excess of the producer's
preceding year's production. A 3,000,000 pound exemption would apply to
new start-up producers for the first 12 months of operation. The funds
collected from the supply management assessments would be transferred
to the Commodity Credit Corporation (CCC) to be used to remove excess
product from the market. Essentially, the Secretary would be using
producer money to purchase dairy products at full market value. The
support program would be superseded by the farmer-funded program. These
funds may also be used to export product.
Would it require government authorization or would it operate without
government oversight?
S. 889/S. 1645 would require government authorization.
Would participation be voluntary or would it be a mandatory program?
Participation would be mandatory.
How, and by whom (e.g., producers, government, government-appointed
body) would key operating decisions be made?
The Secretary of Agriculture would announce the minimum Class II
price based on the national average cost of production data collected
by the ERS. The Secretary would also be responsible for implementation
of the supply management when proper criteria is met.
How would S. 889's/S. 1645's participation be maintained?
This is a mandatory program and all farmers would participate.
How would S. 889's/S. 1645's integrity be maintained?
The integrity of the program would be maintained by those who have
the responsibility of collecting cost data (ERS), production data
(Market Administrators or Farm Service Agency (FSA), and import/export
data (Foreign Agriculture Service (FAS)).
How would the cost of S. 889/S. 1645 be determined?
The cost of S. 889/S. 1645 would be minimal since it would use
existing entities such as ERS, Market Administrators, FSA and FAS. Much
of the required data collection is already being done or could be done
with little additional expense.
Who would pay for the cost of S. 889/S. 1645?
Farmers would pay for the cost of S. 889/S. 1645 through supply
management provisions. Tax payer dollars would not be necessary for
Milk Income Loss Contract (MILC) program or price support program.
II. The Impact of S. 889/S. 1645 on Producers
Would it apply to all producers the same?
Yes, the program would apply to all existing producers the same.
There is a provision for new producers to produce up to 3,000,000
pounds in the first year without penalty.
Would all farms of all sizes be treated the same or would S. 889/S.
1645 affect varying farm sizes differently?
All size farms would be treated equally as per the answer to the
preceding question.
Would producers in different geographic regions be treated the same or
would S. 889 affect various regions differently?
Producers in all geographic regions would be treated the same.
What limits, obligations, costs, or burdens would S. 889/S. 1645 impose
on individual producers? Processors?
All farms would be affected by the first phase of supply management
by a reduced price on up to five percent of their milk production. Any
increase in production from the previous year may also be assessed if
phase two of supply management is implemented. There are no production
limits. Any cost of the program is offset by a fair base price for raw
milk. Thus, we would not consider this plan to be a burden on
producers.
Processors would be obligated to pay the announced Class II price
plus any applicable Class I differentials. However, this price would be
far more stable and predictable than the current pricing formula and
would finally provide a fair base price for farmers.
If S. 889/S. 1645 provides for potential assessments or rewards for
every producer based on their individual milk production or
milk marketed, relative to a production history (e.g., last
year's production):
a. Describe how that history (past production) would, or would not
become capitalized (monetized) into the value of each affected
operation.
There would be no monetary value placed on production history.
Production history (base) cannot be bought or sold. The production
history is used solely to determine what production is valued at full
price and what production would be eligible for assessment.
b. Describe how S. 889/S. 1645 might help or hinder new producers from
entering the industry.
S. 889/S. 1645 does not hinder in any way new producers who produce
up to 3,000,000 pounds of milk in the first year. Production over
3,000,000 pounds is eligible for assessment.
c. Describe how S. 889/S. 1645 might help or hinder producers from
operating their businesses in an efficient manner.
With a fair price producers will be enabled to operate in an
efficient manner with less stress and with greater financial efficiency
and accountability within their rural business economic infrastructure.
III. S. 889/S. 1645 In Practice
Describe in detail how S. 889/S. 1645 would have operated during this
period and how milk prices and dairy farm incomes would have
been different under S. 889 from those actually experienced in
the industry.
S. 889/S. 1645 would have provided a stable price to dairy farmers
and a stable cost to processors and consumers. There would have been
less incentive to import dairy products since doing so could not have
reduced the domestic price. The export market could have remained
viable if farmer funds from supply management would have been used to
export dairy products. However, from 2000 to 2006, the United States
had a significant negative balance in dairy trade. The primary
objective of S. 889/S. 1645 is to ensure a fair price for milk used for
domestic use and to discourage disruption of milk prices by imports
being used to create an appearance of overproduction. Farm milk prices
would not have been as high under S. 889/S. 1645 during the summer and
fall of 2007 but would have been higher most of the rest of the time in
the last decade. Dairy farm incomes would have been stable and much
more acceptable.
More specifically, one of the reasons why milk prices were high in
2007 and 2008 was the export market because we exported in excess of
10% of our domestic production.
How would S. 889/S. 1645 affect the competitiveness of the U.S. dairy
industry in the world market?
The Chicago Mercantile Exchange (CME) tends to be a trend setter in
world dairy prices. It is our belief that each nation has a right and
indeed a moral obligation to ensure a strong and sustainable domestic
agricultural infrastructure. Imports of food should be driven by need
not by greed. Providing bottom dollar exports is not in the best
interest of farmers regardless of the volume of product exported.
However, the U.S. could be competitive in the world marketplace under
this legislation.
How would S. 889/S. 1645 affect the export of U.S. dairy products when
world prices are high and when they are low?
When world prices are high exports may increase. We hope that S.
889/S. 1645 will be a trend setter that farmers around the world be
treated fairly and that the world prices would not reach deep lows.
How would the operation of S. 889/S. 1645 be affected when world prices
are high and when they are low?
The operation of S. 889/S. 1645 would not be affected by world
prices.
IV. Political Considerations Regarding S. 889/S. 1645
If S. 889/S. 1645 requires Congress to enact legislation to provide
potential assessments or rewards for every producer for taking
specific production decisions, do you believe S. 889/S. 1645
can be accepted by the necessary majority of producers and
other interested parties to achieve political consensus
nationally. What opposition do you see, If any, with respect to
gaining widespread support for S. 889/S. 1645?
We believe this legislation would be widely accepted by farmers who
understand it. The main roadblocks would be put forth by those who
believe that cheaper is better regardless of the human or environmental
cost. Those who see the farmer's labor as a way to increase their own
profits will oppose this legislation. The global free trade crowd that
sees people as economic pawns will oppose this legislation.
Is S. 889/S. 1645 consistent with the U.S.' WTO obligations?
Since supply management is farmer-funded, the main target is
domestic supply and demand and the legislation does not rely on
government subsidies, we believe it is consistent with the U.S.' WTO
obligations.
Will S. 889 require changes to the current tariffs and quotas
pertaining to imports of dairy products into the U.S.?
No changes in current tariffs and quotas would be required under
this legislation.
How would the proprietary processor sector view S. 889/S. 1645?
We believe that the proprietary processor sector would view this
legislation favorably since they will have consistent cost and farmers
would be responsible for curbing oversupply.
How would the public (i.e., taxpayers and consumers) view S. 889/S.
1645?
Taxpayers should view this legislation favorably since it is not
taxpayer funded. If consumers are properly educated to realize that the
current farm milk price volatility keeps ratcheting retail prices
higher and that a stable, fair, farm milk price does not have to mean
excessive retail prices, they will view this legislation favorably.
Without a system that pays farmers fairly for their milk very few
farmers will remain in business to provide fresh local milk, dairy
products and beef for our domestic communities.
______
Submitted Material by Bryan Gotham, Dairy Farmer, St. Lawrence County,
NY
Simple Dairy Policy Goals for Farm Bill 2012
New price discovery rather than Chicago Mercantile Exchange
(CME) driven. The CME only sells surplus cheese. Why is the
average cheese price based off the surplus?
Provide a milk price that is adequate and supports the
``Average'' sized farm. Without this, any policy is not
sustainable without extreme government subsidies, such as those
we have today. With adequacy, the MILC program can be
eliminated.
Remove make allowance and support price. Processors and need
more responsibility for the burden of the oversupply with
financial signals of their own. Farmers also need to be more
responsible; they should not be able to market every drop of
milk that they want.
The USDA inspects 1% of imported food for quality, but 100%
of domestic food is tested and sampled for quality. Imported
food needs to meet the same standards and regulation as
domestic food. If imported dairy products cannot meet domestic
standards, they should not be put into our food.
Provide quality incentives in the Federal formulas.
Class I fluid prices need to be paid on regional cost of
production factors to truly reflect the real value of producing
fresh, local milk.
Reporting of cheese inventory needs to be mandatory.
The value of cheese needs to be determined by the entire
market from high value to low value cheese. The value needs to
be broad based and electronically driven.
All dairy products wholesaled need to be included in the
pricing of manufactured dairy products for dairy farmers.
If the burden for the oversupply is completely placed onto
the farmer through a supply management system than a financial
allowance for this financial burden needs to be in the Federal
formulas for farmers. This would remove the taxpayers'
financial responsibility today.
______
Submitted Statement by Arden Tewksbury, Manager, Progressive
Agriculture Organization *
---------------------------------------------------------------------------
* The testimony is supported by Progressive Agriculture
Organization, Meshoppen, Pennsylvania; Pennsylvania Farmers Union,
Millville, Pennsylvania; New York Chapter, National Farmers
Organization; National Family Farm Coalition, Washington, D.C.
---------------------------------------------------------------------------
April 20, 2010
Hon. Collin C. Peterson,
Chairman,
Committee on Agriculture,
U.S. House of Representatives;
and Members of the Committee.
Mr. Chairman,
My name is Arden Tewksbury. I reside at [Redacted].
I have been a dairy farmer all of my life. Since 1991, I also have
been the manager of the Progressive Agriculture Organization located at
[Redacted], Meshoppen, Pennsylvania. In the past, I also have done a
substantial amount of work for the Pennsylvania Farmers Union, and I
have been a member of the Dairy Committee of the Pennsylvania State
Grange. In addition, I was a member of the Board of Directors of the
Regional Cooperative Marketing Agency (RCMA) and a member of the Board
of the Regional Cooperative Bargaining Agency, a subsidiary of RCMA.
I was a member of the Board of Directors of the former Eastern Milk
Producers for 9 years, serving as Vice President for 2 years and
President for 5 years. One of our foremost accomplishments was to bring
Leprino Foods into South Waverly, Pennsylvania, near Waverly, New York,
in a joint venture with Eastern Milk Producers. This mozzarella cheese
plant ended up providing a market for the milk of hundreds of dairy
farmers. The need for this milk plant became necessary when many
proprietary milk handlers went bankrupt and other milk handlers
terminated a marketplace for hundreds of other dairy farmers.
However, entering into a joint venture with Leprino Foods and full
supply contracts with other milk handlers never caused me to lose sight
of the main objective of a dairy cooperative, and that is to obtain a
fair milk price for dairy farmers.
This is what is bringing us to the table today: the need for a fair
milk price for all dairy farmers.
Many dairy farmers have been on a collision course with financial
disaster since April 1, 1981. This is the date on which the United
States Congress froze the support price on manufactured milk products.
In addition, Congress prohibited any further upward adjustment on the
milk support price. Previously, the U.S. Secretary of Agriculture was
required to adjust the support price twice a year.
Through the 1980's and 1990's, the U.S. Congress made several
attempts to resolve the dairy crisis. Such programs, such as the Dairy
Herd Termination Act, the Milk Diversion Program, and the Gramm-Rudman-
Hollings Balanced Budget and Emergency Deficit Control Act of 1985,
only added additional turmoil on many dairy farms across the United
States for two main reasons:
1. The lack of a milk pricing formula that accounted for the cost
of producing milk on our farms.
2. The lack of a true inventory management program, which could be
funded by dairy farmers to be sure the production of milk
stayed in line with the domestic needs for milk.
In the late 1990's, milk hearings were held in Alexandria,
Virginia, to consider a new milk pricing formula for paying dairy
farmers. Some of us testified vehemently that a new pricing formula was
needed to enable dairy farmers to cover their cost of production.
However, our voices were drowned out by those who insisted that the
dairy industry must impose a product pricing formula which contained
the infamous ``make allowance'' for milk processors that would allow
the processors the opportunity to cover their cost of operations. What
a great idea!! But, what about the dairy farmers' cost of
operations????
I have written hundreds of editorials in my lifetime, but the one I
am proudest of was written after ``Order Reform'' was implemented on
January 1, 2000. The title was: ``ORDER REFORM: A Processor's Dream and
a Dairy Farmer's Nightmare.''
Now, today, many of the people who disagreed with us in the late
1990's are clamoring for changes in the milk pricing formula.
Certainly, a change is needed and needed immediately.
In January 2009, we estimated that dairy farmers across the United
States would collectively lose nearly $15 billion. Unfortunately, this
figure proved to be correct. Now we are almost through a third of 2010
and still nothing substantial has been done to correct the serious
financial inequities facing dairy farmers from California to Vermont.
We are seeing dairy farmers continually going out of business. We are
witnessing the dairy infrastructure of rural America on the verge of
final destruction. Dairy farmers in many areas are unable to receive
credit for their needs. Many dairy farmers cannot repay loans they
obtained during 2009.
The dairy farmers' crisis must be addressed NOW. Dairy farmers
cannot wait for the next farm bill to solve their immediate crisis.
Actions can and must be taken now.
The original RCMA proved that there were more funds in the
marketplace than what dairy farmers were receiving. The Northeast
Interstate Dairy Compact proved that there was more money in the
marketplace for dairy farmers than what they were receiving.
Consumers are paying an additional nearly 30 cents per gallon for
milk as a result of actions taken by the Pennsylvania Milk Marketing
Board (PMMB). This equates to about $3.00 per cwt on milk used for
fluid purposes (not milk used for manufacturing purposes). While many
dairy farmers are wondering where all this extra money goes, it does
prove that the marketplace can absorb a much greater price than what
the present pricing system allows. And, finally, a milk handler in the
Northeast is paying his shippers an unqualified premium on all the milk
they ship which again proves that there is substantial room in the
marketplace to pay all dairy farmers much needed funds.
Immediate emergency action must be taken for a SHORT-TERM
resolution to the current crisis.
1. Either the U.S. Secretary of Agriculture or the U.S. Congress
must raise the support price of manufactured milk products up
to $18.00 per cwt. OR
2. Either the U.S. Secretary of Agriculture or the U.S. Congress
must establish a floor price under all classes of manufactured
milk at a level between $18.00 and $20.00 per cwt. Existing
Class I differentials must be added to the manufactured milk
price to determine the value of Class I milk.
3. If needed, the U.S. Congress could use the milk supply
management program contained in ``The Federal Milk Marketing
Improvement Act of 2009'' (S. 1645) to deal with any fear of
overproduction.
These steps or other comparable steps must be taken immediately for
the sake of our dairy farmers and their dairy support businesses.
For a LONG-TERM solution to the problems overwhelming the majority
of dairy farmers, we strongly urge that the U.S. House Agriculture
Committee give serious and much-needed consideration to a companion
bill to ``The Federal Milk Marketing Improvement Act of 2009'' (S.
1645) as a reasonable cure for the ruinous low raw milk prices dairy
farmers have been subjected to over the past many years.
S. 1645 would price manufactured milk on the national average cost
of production. Existing Class I differentials would be applied to the
manufactured price which is basically the current practice now being
used to determine the value of fluid milk for bottling.
S. 1645 contains an inventory management program which would be
funded by dairy farmers. S. 1645 also calls for the U.S. Secretary of
Agriculture to be sure that imports of dairy products do not exceed the
amount of exported dairy products. No longer should imported dairy
products be allowed to depress milk prices paid to American dairy
farmers.
S. 1645 mandates that the U.S. Secretary of Agriculture must adjust
the raw milk prices on a quarterly basis.
S. 1645 also eliminates processor ``make-allowances'' which are
currently being deducted from the value of milk products before dairy
farmers are paid.
S. 1645 also calls for the continuation of the Federal Milk
Marketing Orders in the event that a proposed Amendment to the Order is
rejected.
However, the most important item in S. 1645 is the realization that
the dairy farmers' pay price will have a direct relationship to their
cost of production for the first time since the early 1980's.
The pricing formula in S. 1645 will be supported with a true milk
supply management program which will not cost the taxpayers any direct
money for payments.
All the meetings we have held recently with nearly two thousand
dairy farmers indicate that they support S. 1645. During the last year,
we have collected signatures from over 2,000 dairy farmers and
consumers in support of a new pricing formula for dairy farmers based
on the dairy farmers' cost of production.
However, even more dramatic is the fact that during the last 10
years, we have had over 150,000 consumers profess to us that they are
deeply concerned about the demise of the countless number of family
dairy farmers who have been pushed out of business by years of low raw
milk prices. These consumers always claim with conviction that they
would be willing to pay more for milk if the dairy farmers received the
additional funds.
It is time for the dairy farmers to receive a fair price from the
marketplace. Dairy farmers do not want Milk Income Loss Contract
(``MILC'') payments, and, contrary to the message delivered by some
people, I have found no dairy farmers who believe that they should be
compelled to buy into some highfalutin insurance program to compensate
for inadequate raw milk prices.
Let's give dairy farmers a fair price from the marketplace. Dairy
farmers will then have an adequate cash flow to do their part and plays
major role in revitalizing rural America.
Thank you.
Attachment 1
Accessed 8/13/2009 from http://thomas.loc.gov/cgi-bin/query/
z?c111:S.1645:
S. 1645 IS
111th CONGRESS
1st Session
S. 1645
To amend the Agricultural Adjustment Act to require the Secretary
of Agriculture to determine the price of all milk used for manufactured
purposes, which shall be classified as Class II milk, by using the
national average cost of production, and for other purposes.
In the Senate of the United States
August 6, 2009
Mr. Specter introduced the following bill; which was read twice and
referred to the Committee on Agriculture, Nutrition, and Forestry
A Bill
To amend the Agricultural Adjustment Act to require the Secretary
of Agriculture to determine the price of all milk used for manufactured
purposes, which shall be classified as Class II milk, by using the
national average cost of production, and for other purposes.
Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled,
Section 1. Short Title.
This Act may be cited as the `Federal Milk Marketing Improvement
Act of 2009'.
Sec. 2. Prices Received for Milk Under Milk Marketing Orders.
Section 8c(5)(B) of the Agricultural Adjustment Act (7 U.S.C.
608c(5)(B)), reenacted with amendments by the Agricultural Marketing
Agreement Act of 1937, is amended--
(1) in the first clauses (i) and (ii), by inserting `(based
on the blended price of all milk covered by the order)' after
`uniform prices' each place it appears; and
(2) in clause (b) of the matter following the first clause
(ii), by inserting `and the component value' after `quality'.
Sec. 3. Class II Milk Pricing.
Section 8c(5) of the Agricultural Adjustment Act (7 U.S.C.
608c(5)), reenacted with amendments by the Agricultural Marketing
Agreement Act of 1937, is amended by adding at the end the following:
`(P) Class ii milk pricing.--
`(i) Minimum price.--The Secretary shall base the
minimum price for Class II milk on the average cost of
producing all milk in the 48 contiguous States, as
determined by the Economic Research Service of the
Department of Agriculture in accordance with clause
(ii) (referred to in this subparagraph as the `national
average cost of production').
`(ii) National average cost of production.--For
purposes of this subparagraph, the national average
cost of production shall equal the national average of
the operating cost and the allocated overhead cost of
producing all milk.
`(iii) Survey.--For purposes of clause (ii), the
Secretary shall survey producers and associations of
producers subject to Federal and State milk marketing
orders and in all unregulated areas applicable to all
milk.
`(iv) Price announcement.--
`(I) In general.--Not later than November 1
of each calendar year, the Secretary shall
announce the minimum price for Class II milk
for the next calendar year, as determined in
accordance with clause (i).
`(II) Adjustments.--Using the most currently
available national average cost of production,
the Secretary shall adjust the price announced
under subclause (I) for a calendar year on
April 1, July 1, and October 1 of the calendar
year.
`(v) Basic formula price.--
`(I) In general.--The Secretary shall use the
Class II milk price announced under clause (iv)
as the basic formula price for all Federal and
State milk marketing orders and all unregulated
milk production areas.
`(II) Class i milk.--
`(aa) In general.--The price of Class
I milk in all Federal and State milk
marketing orders and all unregulated
milk production areas shall be equal
to--
`(AA) the basic formula price
under subclause (I); plus
`(BB) the applicable Class I
milk differential under Federal
and State milk marketing
orders.
`(bb) Unregulated areas.--For
purposes of item (aa)(BB), the
Secretary shall assign comparable Class
I milk differentials to each
unregulated area.
`(vi) Estimation of annual milk production and
domestic consumption.--Not later than November 1 of
each calendar year and taking into consideration the
import projections and export projections for all milk
products, the Secretary shall estimate the quantity of
all milk to be produced in the 48 contiguous States and
marketed by producers for commercial use during the
next 12 months.
`(vii) Inventory management program.--
`(I) Identification and determination of
dairy products.--
`(aa) In general.--Not less
frequently than once each quarter, the
Secretary shall--
`(AA) identify all dairy
products (including cheeses,
curds, butter, butterfat,
butter oil, buttermilk,
anhydrous milk fat, dairy
spreads, milk, cream,
concentrated milk, condensed
milk, nonfat dry milk powder,
whole milk powder, skim milk
powder, all other forms of
powdered milk, yogurt, ice
cream, whey, whey powder, dried
whey, whey protein concentrate,
all other forms of whey
products, milk protein
concentrate, milk protein
isolate, casein, caseinates,
lactose, food preps containing
milk, and milk chocolate)
imported into, or exported
from, the United States; and
`(BB) determine the quantity
of raw milk contained in each
such product.
`(bb) Inclusions.--In identifying
dairy products under item (aa)(AA), the
Secretary shall include any current or
projected future imports or exports of
a product used for dairy, a dairy
substitute, or ingredient, including
any product that does not have the
status of `generally recognized as
safe', as determined by the
Commissioner of Food and Drugs.
`(II) Milk production totals.--Not later than
February 1 of each calendar year, the Secretary
shall determine the total quantity of all milk
produced by each producer or farming operation
during the preceding calendar year.
`(III) Excess production determination.--Not
more than once every 2 months, if the
Secretary, acting through the Commodity Credit
Corporation, has purchased the maximum quantity
of milk and milk products as required by law to
administer programs including child nutrition
programs (as defined in section 25(b) of the
Richard B. Russell National School Lunch Act
(42 U.S.C. 1769f (b)), feeding programs
administered by the Secretary of Defense,
institutional programs, and any other mandated
Federal food or feeding programs, the Secretary
shall determine whether an excess quantity of
milk and milk products is being produced for
the national domestic market.
`(IV) Reduction in price received.--
`(aa) In general.--Subject to item
(bb), if the Secretary determines under
subclause (III) that there is excess
production, the Secretary may provide
for a reduction in the price received
by producers for not more than 5
percent of all milk produced in the 48
contiguous States and marketed by
producers for commercial use.
`(bb) Limitation.--The Secretary
shall not provide for a reduction in
the price received by a producer under
item (aa) unless the Secretary
determines that there exists a positive
trade balance in dairy products
described in subclause (I)(aa)(AA) that
are imported into, or exported from,
the United States, based on--
`(AA) dollar value; and
`(BB) the quantity of
milk represented by imports and
exports, as determined under
subclause (I)(aa)(AA).
`(V) Amount.--The amount of the reduction
under subclause (IV) in the price received by
producers shall not exceed half the minimum
price of Class II milk.
`(VI) Additional reduction.--If the Secretary
determines that the reduction described in
subclause (IV) is insufficient to reduce excess
production, subject to subclauses (VII) and
(VIII), the Secretary may reduce the price
received by any producer or farming operation
that has increased the production of all milk
in a calendar year, as compared to the
immediately preceding calendar year.
`(VII) Application.--A reduction in price
under subclause (VI) shall apply only to the
quantity of milk produced in excess of the
quantity of milk produced during the previous
calendar year.
`(VIII) New producer exception.--A new
producer, as defined by the Secretary, shall--
`(aa) during the 1 year period
beginning on the date on which the new
producer commences operation, be exempt
from any applicable price reduction
relating to the first 3,000,000 pounds
of milk produced by the new producer;
`(bb) in the case of any milk
produced in excess of 3,000,000 pounds
during that 1 year period, be subject
to each price reduction described in
subclauses (IV), (V), and (VI); and
`(cc) after that 1 year period, be
subject to each price reduction that
applies to existing producers.
`(IX) Appeals.--
`(aa) In general.--A producer subject
to an additional reduction under
subclause (VI) may appeal to the
Federal or State milk marketing
administrator to provide evidence that
the producer did not increase
production in the calendar year that
the reduction was in effect when
compared to the immediately preceding
calendar year.
`(bb) Submission of appeal.--A
producer that ships to an unregulated
milk handler may submit any appeal of
the producer to the Secretary or to the
designated representative of the
Secretary.
`(X) Extraordinary circumstances.--In
deciding an appeal submitted by a producer
under subclause (IX), a Federal or State milk
marketing administrator (or, in the case of an
appeal under subclause (IX)(bb), the Secretary
or the designated representative of the
Secretary) shall take into consideration
production losses due to, at a minimum, fire,
severe weather conditions, or severe disease
outbreaks.
`(XI) Collection.--Except as provided in
subclause (XII), reductions in price required
under subclause (IV) or (VI) shall be collected
by Federal and State milk marketing
administrators and timely remitted to the
Commodity Credit Corporation to offset the cost
of purchasing excess milk products.
`(XII) Collection in unregulated areas.--
Reductions in price required for unregulated
areas under subclause (IV) or (VI) shall be
collected by the Secretary and timely remitted
to the Commodity Credit Corporation to offset
the cost of purchasing excess milk products.
`(viii) Prohibition on certain charges.--In carrying
out this Act, the Secretary shall not impose charges on
producers for the cost of the conversion of raw milk to
manufactured products.
`(ix) Responsibilities of milk purchasing handlers.--
A milk handler that purchases milk from a producer
shall assume title for the milk at the time at which
the milk is pumped into a milk truck provided by or
otherwise delivered to the milk handler.
`(x) Applicability.--This subparagraph applies to all
producers and handlers of milk in the 48 contiguous
States.'.
Sec. 4. Amendments to Federal Milk Marketing Orders.
Section 8c(17) of the Agricultural Adjustment Act (7 U.S.C.
608c(17)), reenacted with amendments by the Agricultural Marketing
Agreement Act of 1937, is amended by adding at the end the following:
`(H) Orders covering milk and milk products.--In the case of
an order covering milk or milk products, disapproval of an
amendment to the order shall not be considered to be
disapproval of--
`(i) the order; or
`(ii) other terms of the order.'.
Attachment 2
Estimated Pay Price to Dairy Farmers Under the Federal Milk Marketing Improvement Act of 2009 (S. 1645)
----------------------------------------------------------------------------------------------------------------
Class II Basic Class I Price Paid to Class I
Federal Order Formula Differential Class I Dairymen Utilization
----------------------------------------------------------------------------------------------------------------
1--Boston $22.00 $3.25 $25.25 $23.51 46.5%
5--Appalachian $22.00 $3.10 $25.10 $24.05 66.3%
6--Florida $22.00 $4.00 $26.00 $25.36 84.0%
7--Southeast/Atlanta $22.00 $3.10 $25.10 $23.83 59.3%
30--Midwest/Chicago $22.00 $1.80 $23.80 $22.28 16.0%
32--Central/Kansas City $22.00 $2.00 $24.00 $22.63 31.4%
33--Mideast/Cleveland $22.00 $2.00 $24.00 $22.77 38.4%
124--Pacific NW/Seattle $22.00 $1.90 $23.90 $22.56 29.5%
126--Southwest/Dallas $22.00 $3.00 $25.00 $23.09 36.4%
131--Arizona $22.00 $2.35 $24.35 $22.88 37.5%
California $22.00 $1.90 $23.90 $22.34 18.0%
----------------------------------------------------------------------------------------------------------------
* This revised formula was compiled by Arden Tewksbury, Manager, Progressive Agriculture Organization to more
effectively equalize the prices paid to dairy farmers in the United States. Figures used are 2009 figures.
Pro Ag can be reached at (570) 833-5776 or proagorg@yahoo.com.
Attachment 3
The Following Is a Summary of the Specter-Casey Dairy Bill S. 1645
``The Federal Milk Marketing Improvement Act of 2009''
(1.) ALL milk produced in the United States will be priced on the
national average cost of producing milk on the dairy farms.
(2.) ALL milk used for fluid purposes will be classified as Class
I.
(3.) ALL milk used for manufacturing purposes will be classified as
Class II.
(4.) The Class II price will be the national average cost of
production. This price will be uniform in all Federal and state Orders
as well as unregulated areas. The Class I price will be determined by
using the Class II price plus the existing Class I differentials that
are currently in place in each Federal Order. The State of California
and other unregulated areas will be assigned a Class I differential by
the U.S. Secretary of Agriculture.
(5.) ALL Federal and State Milk Marketing Orders will remain
intact. Each Milk Marketing Order will be responsible for determining
the component value of milk.
(6.) S. 1645 prohibits any cost of operating milk manufacturing
plants (commonly called ``Make Allowance'') to be levied on dairy
farmers.
(7.) The U.S. Secretary of Agriculture will adjust the value of
milk four times a year.
(8.) S. 1645 calls for an inventory supply management program. The
program is aimed at preventing a build up of domestic milk products and
prevents foreign milk products from destroying dairy farmer prices.
(9.) The inventory management program can not be implemented unless
the imports and exports of dairy products are in balance.
(10.) ALL dairy farmers will fund the inventory management program.
If and only if the program is necessary then all dairy farmers will
receive a lower price on up to 5% of their production. This price will
be \1/2\ of the value of manufactured milk. However, the dairy farmers
will receive the correct price on 95% of their milk. PIease remember if
the inventory management program is not implemented, then the dairy
farmer's will receive the full price. Also, the U.S. Secretary of
Agriculture may decide that only a reduction of one or two percent of
total production may be sufficient.
(11.) If this reduction is insufficient to reduce excess
production, the Secretary may reduce the price for producers who have
increased production over the previous year. This reduction only
applies to the volume of increased production.
(12.) A new producer may produce milk up to 3 million pounds in
theMilk Marketing Order he is regulated under before he is subject to
the provisions of the inventory management program described in point
``11.'' This relates only to his first year.
(13.) The intent of S. 1645 is not to tell dairy farmers how much
milk they can produce. However, over-production will be addressed in
the inventory management program.
(14.) An inventory management program is necessary to prevent a
small amount of milk from forcing $20.00 per hundredweight milk down to
$12.00 per cwt.
(15.) The beauty of S. 1645 is that this bill will be farmer-funded
and will NOT cost the USDA any direct cost. The dairy farmer's reward
for funding the bill (if necessary) is for the first time the dairy
farmers will receive fair/stable prices for his/her efforts.
(16.) Rejection of proposed FMMO amendments will not result in the
elimination of the FMMO.
(17.) S. 1645 allows milk hauling charges to be levied on dairy
farmers. The cost of production figures by the USDA pick up the hauling
charges. Again, the dairy farmers' hauling costs are in the cost of
production figures.
______
Submitted Statement of Ralph E. Moyer, Dairy Producer, Myerstown, PA
You have heard all the numbers, seen the research, and are aware of
questionable practices at the Chicago Board of Trade. You have also
heard how Dean's Foods, and other dairy processors, have had record
profits this past year. I'm not going to bore you with more of that; I
want to make it more personal. I want to share a little about how dairy
pricing affects a family run dairy farm, the local community, and the
country.
My name is Ralph Moyer. My wife, Crystal, and I own and operate
Mor-Dale Farms, a dairy and crop farm in Berks County, Pennsylvania. We
have three adult children. My parents and our family moved to Berks
County in 1967. Through many years of hard work and sacrifices, my
family built a successful dairy and crop farm.
Crystal and I worked into the business and have spent 30 years
improving and growing our family-owned business. Five years ago we
started to look at our options. We had old dairy facilities that would
be costly to renovate. We looked at options for new facilities that
would provide a long term, viable business that would appeal to future
generations. We also provide school and community educational events
and this was important for us to consider in our decision.
In the spring of 2009, we started construction on a new, four-unit,
Lely robotic milking facility that will milk up to 250 cows. This
includes increased feed storage to provide year-long storage of
livestock feed. A new manure storage and biogas digester system is
being completed this summer. This will turn methane gas into electric
to run our operation, with an added benefit of providing extra energy
for our community. This will create a long-term, environmentally sound,
community friendly, family-owned business.
This construction job created many jobs for local businesses over
the last year and a half and will continue to provide a significant
influence on the local economy in service, equipment and supply
purchases.
We used a conservative $16.00/cwt for our milk price while doing
our budgeting and feasibility study. This past year has been and
continues to be a serious financial struggle with no real end in sight.
When I was in high school in the late 1970's my parents were receiving
over $15.00/cwt for their milk, that's more than we averaged for the
last year on our farm. Agriculture in general and dairy farming in
particular, is different than many other businesses. We buy most of our
inputs and supplies at retail prices. We then grow or produce a
product, in this case milk, and sell it at wholesale prices.
We pay for the hauling for almost everything we buy, and then when
we sell our milk, we are charged the hauling cost to deliver it to the
processor. A make allowance, or the amount the processor needs to
produce the end product, like cheese, is taken out of our price. The
advertising of milk and related products is deducted from the amount we
receive.
We contribute to the CWT program, which is designed to remove
product from the market to improve our prices. The problem is, as we
remove safe, locally produced milk; then imported, unregulated,
questionable-quality products are brought in to replace them. The
United States does not produce a surplus of dairy products; the last
number I heard was that we produce a deficit of about 1 billion pounds.
The worst part is that a large percentage is being replaced with
products like Milk Protein Concentrates and other ingredients that do
not need to meet our quality standards. Some are not approved to be
used in food, but are allowed into the United States for glue or
construction use. This is why a quota or supply management program will
not be successful in this country. Many articles have been written
about how milk pricing is unfair and the ability of a few large buyers
to control the price in their favor.
One of the most important things we can do for the strength and
security of our country is utilizing locally produced food. We must
keep our dairy farms profitable in order for our country and economy to
prosper. Dollars generated by dairy farms are multiplied several times
over by being reinvested back into other local businesses. The amount
of other businesses that are impacted by dairy farms in a community is
astounding. To list a few we personally deal with; bank, equipment
dealer for purchases and service of farm equipment or milking
equipment, trucking, custom operators, feeds purchased, veterinary
services, nutritionist, and accounting. Many are quality, well paying
jobs, creating tax revenues to provide for our schools, roads, and
other necessary services in our communities. We would like to provide
the opportunity for a young person or couple to be part of our business
but unless the financial picture improves that will not be possible.
______
Supplemental Material Submitted by Lauren Mosemann, Dairy Producer,
Misty Mountain Dairy LLC
In response to Rep. Kathy Dahlkemper's question for Lauren Mosemann
regarding the barriers to access in the Child Nutrition
Reauthorization, NMPF is submitting the following for the record:
The three most recognized barriers to participation in federal
child nutrition programs are restrictions on eligibility, excessive
paperwork, and the stigma associated with being a public assistance
recipient. The child nutrition bill currently making its way through
Congress offers an excellent opportunity to address all three barriers.
Eligibility Expansion
The Senate-passed bill expands afterschool meals from 13 states to
all 50 states, making 140,000 more at-risk kids eligible for meals--as
opposed to snacks--after school. The Senate bill also loosens
restrictions on children participating in the Summer Food Program,
includes $10 million to establish more local Summer Food Programs, and
requires schools to promote the availability of Summer Food Program
sites. All these provisions expand eligibility for child nutrition
programs. Not in the bill but supported by the School Nutrition
Association is expanding free meals to all kids in families with
incomes below 185 percent of poverty. Also not in the Senate bill but
supported by USDA and SNA is providing commodity support for school
breakfasts. A third of the children who participate in the school lunch
program do not receive a school breakfast. Federal commodity support
would be an incentive for schools to offer breakfasts.
Paperwork Reduction
The Senate bill includes a number of provisions that simplify or
eliminate paperwork requirements for child nutrition programs. Among
them, the bill allows schools in high-poverty areas to offer free
school meals to all students without applications, expands automatic
certification for free school meals to kids whose families receive
Medicaid, offers bonuses to states that improve direct certification
programs, and adds foster children to the list of those who are
automatically eligible for free meals. The bill eliminates the need for
day care centers and their sponsors to submit duplicative paperwork to
participate in the Child and Adult Care Food Program (CACFP) and allows
the WIC program to share educational materials with CACFP, reducing the
administrative burdens on CACFP.
Stigma Reduction
The Senate bill transitions from paper coupons to electronic
benefits in the WIC program, as has already been successfully done for
food stamps. EBT is one proven way to reduce the stigma of public
assistance programs. Another is to make all children eligible for
school meals. The Senate bill expands ``universal'' school breakfast
programs--in which all kids in a school are eligible for a free
breakfast--and encourages innovations in offering breakfast, including
breakfast-in-the-classroom. These programs expand eligibility while
they reduce the stigma of participating in federal assistance programs.