[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

                              ----------                              
                                                                   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

                              ----------                              


                        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 [email protected].

                              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.

                                  
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