[Senate Hearing 111-522]
[From the U.S. Government Publishing Office]



                                                      S. Hrg. 111-522



                         LEGISLATIVE RESPONSES
                          TO THE DAIRY CRISIS:
                    REFORMING THE PRICING STRUCTURE

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

                             FIELD HEARING

                              [before the]

                       COMMITTEE ON AGRICULTURE,
                        NUTRITION, AND FORESTRY
                          UNITED STATES SENATE

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               ----------                              

                            AUGUST 27, 2009

                               ----------                              

                       Printed for the use of the
           Committee on Agriculture, Nutrition, and Forestry








                                                        S. Hrg. 111-522

                         LEGISLATIVE RESPONSES
                          TO THE DAIRY CRISIS:
                    REFORMING THE PRICING STRUCTURE

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

                             FIELD HEARING

                               before the

                       COMMITTEE ON AGRICULTURE,
                        NUTRITION, AND FORESTRY

                          UNITED STATES SENATE


                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION


                               __________

                            AUGUST 27, 2009

                               __________

                       Printed for the use of the
           Committee on Agriculture, Nutrition, and Forestry


  Available via the World Wide Web: http://www.agriculture.senate.gov





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           COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY



                       TOM HARKIN, Iowa, Chairman

PATRICK J. LEAHY, Vermont            SAXBY CHAMBLISS, Georgia
KENT CONRAD, North Dakota            RICHARD G. LUGAR, Indiana
MAX BAUCUS, Montana                  THAD COCHRAN, Mississippi
BLANCHE L. LINCOLN, Arkansas         MITCH McCONNELL, Kentucky
DEBBIE A. STABENOW, Michigan         PAT ROBERTS, Kansas
E. BENJAMIN NELSON, Nebraska         MIKE JOHANNS, Nebraska
SHERROD BROWN, Ohio                  CHARLES E. GRASSLEY, Iowa
ROBERT P. CASEY, Jr., Pennsylvania   JOHN THUNE, South Dakota
AMY KLOBUCHAR, Minnesota
KIRSTEN GILLIBRAND, New York
MICHAEL BENNET, Colorado

                Mark Halverson, Majority Staff Director

                    Jessica L. Williams, Chief Clerk

            Martha Scott Poindexter, Minority Staff Director

                 Vernie Hubert, Minority Chief Counsel

                                  (ii)









                            C O N T E N T S

                              ----------                              
                                                                   Page

Field Hearing(s):

Legislative Responses to the Dairy Crisis: Reforming The Pricing 
  Structure......................................................     1

                              ----------                              

                       Thursday, August 27, 2009
                    STATEMENTS PRESENTED BY SENATORS

Gillibrand, Hon. Kirsten E., U.S. Senator from the State of New 
  York...........................................................     1
Lee, Hon. Christopher, U.S. Representative from the State of New 
  York...........................................................     3
Massa, Hon. Eric, U.S. Representative from the State of New York.     4

                                Panel I

Church, Robert, Herd Manager, Patterson Farms....................     7
Hanselman, Barbara, Dairy Farmer, Bloomville, New York...........     5
Keller, Robin, Dairy Farmer and President, Genesee County Farm 
  Bureau.........................................................     9
Krupke, Bruce, Executive Vice President, Northeast Dairy Foods 
  Association....................................................    11
McCormick, Ron, former Representative, National Dairy Board......    13

                                Panel II

Norton, Dean, President, New York Farm Bureau....................    22
Novakovic, Andrew, Director, Cornell Program on Dairy Markets and 
  Policy.........................................................    24
Pickard-Dudley, Kim, Chief Dairy Economist, Upstate Niagara Co-op    28
Wellington, Bob, Chief Economist, AGRI-MARK......................    26
                              ----------                              

                                APPENDIX

Prepared Statements:
    Church, Robert...............................................    38
    Hanselman, Barbara...........................................    46
    Keller, Robin................................................    54
    Krupke, Bruce................................................    58
    McCormick, Ron...............................................    63
    Norton, Dean.................................................    69
    Novakovic, Andrew............................................    74
    Pickard-Dudley, Kim..........................................    83
    Wellington, Bob..............................................    89
Document(s) Submitted for the Record:
Novakovic, Andrew:
    ``U.S. Dairy Price Policy Options and Consequences'', Council 
      Program on Dairy Markets & Policy..........................    94
    State of New York, Department of Agriculture & Markets, 
      prepared statement.........................................   150
    Various letters and prepared statements from farmers and 
      organizations..............................................   154
Question and Answer:
Krupke, Bruce:
    Written response to questions from Hon. Kirsten Gillibrand...   334


 
                         LEGISLATIVE RESPONSES
                          TO THE DAIRY CRISIS:
                    REFORMING THE PRICING STRUCTURE

                              ----------                              


                       Thursday, August 27, 2009

                                       U.S. Senate,
          Committee on Agriculture, Nutrition and Forestry,
                                                        Batavia, NY
    The Committee met, pursuant to notice, at 2 p.m., at 
Genesee Community College, Batavia, New York, Hon. Kirsten 
Gillibrand, presiding.
    Present: Senator Gillibrand.
    Also present: Representatives Lee and Massa.

STATEMENT OF HON. KIRSTEN E. GILLIBRAND, U.S. SENATOR FROM THE 
                       STATE OF NEW YORK

    Senator Gillibrand. Good afternoon, everyone. Thank you for 
joining us. I am pleased to be here at Batavia, the birthplace 
of Western New York.
    Since this is a formal Senate hearing, only the panelists 
will have the opportunity to present their testimony and 
participate in the question and answer period. However, anyone 
can submit written testimony within the next 5 days, which will 
be submitted for the official record.
    There is no question that the dairy industry is in crisis. 
Imagine running a business where you are doing backbreaking 
labor 7 days a week and losing money every single day. That is 
exactly what is happening to our farmers in Batavia, across all 
of New York State and across the Country. Farmers are forced to 
sell their milk for less than it costs them to produce it, and 
the MILC government safety net program does not even begin to 
make up the difference.
    I would like to welcome the distinguished panelists and 
thank them for making the time to come here and share their 
knowledge and personal experiences in testifying before the 
Senate Agriculture Committee.
    I want to thank my colleagues from the House, Congressman 
Lee and Congressman Massa, for their work on this issue and for 
joining me today to address this crisis.
    The current pricing system is simply not working for the 
hardworking dairy farmers of New York. Since February, prices 
per hundredweight have fallen over $6 below cost of production. 
In New York, farmers are paying nearly $18 to produce 
hundredweight and being paid around $12.
    As I travel the State, I see the despair on farmers' faces 
as they show me the balance books that simply do not add up. I 
hear stories of families that see generations of hard work 
simply vanishing into foreclosure.
    Dairy farmers are the backbone of many of New York's rural 
communities. In fact, dairy farmers are responsible for the 
single largest share of New York's diverse and vital 
agricultural output, generating $2.4 billion a year, 
stimulating local economies, creating jobs and supporting a 
cultural heritage and bright future for our communities all 
across New York State.
    But beyond the agricultural communities in our State, the 
loss of locally producing, family owned dairies poses a huge 
threat to the safety of the American food supply. This trend 
will result in a race to the bottom. Instead of nourishing our 
families with products made by our neighbors, we will be 
importing food from wherever costs are lowest, places like 
China, where we cannot have the same confidence in the safety 
of consumer products. Giving up our ability to produce our own 
food is something we cannot afford to do as a Nation and is a 
grave national security risk.
    Given the current crisis, it is important that we take 
action to help the farmers both in the short term and in the 
long term. I have introduced two pieces of legislation to 
provide farmers with immediate assistance to make up for money 
that they are losing every single day by improving the MILC 
program's ability to provide a true safety net during this 
crisis. However, there is certainly something fundamentally 
wrong with the way dairy farmers are paid for their work.
    We must develop new solutions to address this problem over 
the long term and ensure that this crisis does not happen 
again. My colleagues in Congress and agriculture advocacy 
groups across the Nation have been working on a number of 
proposals to help remedy the many problems facing the dairy 
industry.
    I hope this hearing will give us an opportunity to have a 
frank discussion about all of the proposals that are currently 
out there and help members of the community to develop a 
solution that works for dairy farmers, processors and American 
families. We will certainly discuss Senate Bill 889, a piece of 
legislation introduced by Senator Specter and Senator Casey, 
both from Pennsylvania, and Senator Schumer's legislation, 
Senate Bill 1542, which increases the tariff on milk protein 
concentrates, MPCs. I also hope to discuss the USDA's price 
support system, price support program, as well as the different 
supply management ideas that are out there.
    Today's hearing will serve as a critical starting point for 
discussions as we begin working on the next Farm Bill, and I 
pledge to go back to Washington with these ideas and work with 
my colleagues to develop comprehensive legislation that fixes 
the problems in the industry, once and for all.
    I would like to remind panelists that they have 5 minutes 
to deliver their testimony. When you have 30 seconds remaining, 
a yellow light will appear. When you have exceeded your 5 
minutes, a red light will appear. Any part of your testimony 
that you are not able to get to, we can submit in writing into 
the record.
    I also encourage all attendees not on the panel to see my 
staff at the end of the hearing if you are interested in 
submitting written testimony for the record. We will take your 
name and your email and your number to make sure that testimony 
gets in.
    I now open the floor to Congressman Chris Lee to make his 
opening statement.

STATEMENT OF HON. CHRISTOPHER LEE, U.S. REPRESENTATIVE FROM THE 
                       STATE OF NEW YORK

    Mr. Lee. Thank you, Senator.
    It is nice to actually look around the room and see some 
familiar faces and people that I have had an opportunity to 
talk to and get to know over the past several months, and I 
truly appreciate your willingness to put this together because 
this is a critical issue.
    I live and breathe this every day, based on my district, 
and how important dairy is to this part and truly throughout 
New York State. It is a vibrant industry, and, if we do not get 
our arms around it, we could quickly see it vanish.
    The part that frustrates me as we are talking about small 
business owners, those, and what you find quickly about dairy 
farmers is these are some of the hardest working Americans in 
this Country, who have a job that is 365 days a year, 24-7, and 
it is not a day you can leave these cows. It is a very tough 
way to make a living, and it is unfortunate in the fact that 
the way this pricing scheme is right now is a deterrent. That 
is where we want government to come up and find ideas on how we 
can help you, not deter your ability to be successful.
    I look at, right now, the projections, and that you talk 
about Genesee County potentially losing $28 million this year 
in the dairy business, Wyoming County, $60 million, Livingston 
County, $23 million--all of these within my district. It is a 
major concern, and dairy being such an important economic 
driver for this community is something we have to get corrected 
now.
    When I came to Washington in January, the one thing that I 
do know, I come from the private business sector and 
manufacturing, but I was not a dairy expert. I am not a crop 
farmer expert. But what I was smart enough to do was put 
together an advisory board so that I could hear from people 
like yourselves because that is where the true answers come 
from.
    The solutions come from you, not a bunch of people in 
Washington. You are the ones who give us the ideas, and that is 
why again I am pleased to be a part of this function.
    What I would like the panel to potentially comment on today 
are just a few topics that maybe you can make note of, but 
areas that I think have some promise, of somewhere along the 
lines making sure we talk about:
    The California milk standard and whether or not to adopt 
that on a national basis and the need for the USDA to implement 
the 7.5 cents promotion fee that importers right now do not pay 
but our national producers of milk are paying 15 cents and 
talking about a fairness issue here, the fact that only 5 
percent of our products are exported. Again, how do we get the 
government to help you, allow us to export more product which 
even a 1 or 2 percent uptick in exporter produce will have a 
huge impact on the price of milk?
    The MILC program is a safety net in case of large 
fluctuations, but it obviously is a system that is broken right 
now and talking about how to fix that.
    And then, last, the USDA Federal Milk Marketing Order 
system, among other things, we need to find better price 
discovery transparency because right now it is a system that it 
penalizes producers in areas that have higher cost of 
production.
    So, again, with that, I appreciate the Senator for calling 
this hearing, and I look forward to your testimony and coming 
up with some real ideas to help those people who I truly 
admire, who work in a very difficult industry, and we want to 
see it flourish here in New York State. So, thank you for 
having me here.
    Senator Gillibrand. Congressman Eric Massa.

  STATEMENT OF HON. ERIC MASSA, U.S. REPRESENTATIVE FROM THE 
                       STATE OF NEW YORK

    Mr. Massa. Thank you, Senator.
    Thank you, Chris, for inviting me to your district and for 
inviting me to sit and listen and learn. My congressional 
district is adjacent to yours, running south throughout most of 
the New York/Pennsylvania border, where this industry is a 
particular cruciality, and I have the honor of serving on the 
House Agriculture Committee.
    To all the farmers who are here, who may not have an 
opportunity to offer verbal testimony, I look forward to 
reading any written testimony that you submit or meeting with 
you, either one on one or as a group.
    I have learned one overarching and critical factor about 
what we face today, and that is the incredible and often 
tremendously unfair impact that our import/export policies have 
upon local, domestic dairy production. Testimony before the 
House Agriculture Committee has shown us that a fluctuation of 
less than 3 percent in the total global market has put us where 
we are today.
    Literally, if a butterfly sneezes in New Zealand, farmers 
in Western New York State go out of business, and, frankly, 
that is just not right. We need to put in place the kind of 
shock absorbers that are absolutely so critical, so that 
domestic production is not held hostage by fluctuations in 
foreign markets over which we have absolutely no control nor 
desire to have control over.
    I understand we live in a very interconnected global 
market, but that interconnected global market has placed our 
domestic industries of all kinds and particularly those of a 
perishable nature, such as dairy. No product is more perishable 
on an hour-to-hour basis than milk. These kinds of unprotected 
fluctuations in New Zealand and in Australia absolutely are 
killing us.
    We are being held hostage by the threat of being overrun 
from foreign imports that have absolutely no product safeguards 
associated with them at all, none. We have invested 
generations--generations of effort--into ensuring our food 
supply is safe for our children, and we do better, I believe, 
than anyone else in the world. Hats off to the USDA and to the 
cooperative nature of all those farmers across a broad spectrum 
that have given us a safe food supply. Yet, now we are on the 
verge of importing more foodstuffs than we make ourselves.
    Nowhere is that more dangerous than in milk concentrate. We 
have to figure out how to encourage a domestic market, a 
domestic production market capability. We all understand what 
we have to overcome to do that. It is very, very capital 
intensive. The margins are, at best, unpredictable and 
fleeting, and that is where a public-private partnership can 
help encourage domestic industrial growth in this sector.
    So I look forward to hearing the opinions of the experts 
who will testify before us today, and I am exceptionally 
grateful for the leadership of both Senator Gillibrand in the 
Senate Agriculture Committee and for your Congressman Lee who 
has been very much involved in this and liaisoning directly 
with our office as we present that information before the 
sister committee in the House.
    Thank you again for being here, and let's get started.
    Senator Gillibrand. Thank you, Congress members.
    I would like to turn it over to the first panel. Each 
panelist will introduce themselves. We have Barb Hanselman. We 
have Robert Church, Robin Keller, Bruce Krupke and Ron 
McCormick.
    And, before we start, I just want to thank Dr. Stuart 
Steiner, our host, the President of Genesee Community College. 
Thank you, Doctor.
    I also want to recognize two of our local elected leaders 
who have joined us. Senator Maziarz is here as well as 
Assemblyman Hawley. Thank you for joining our hearing. I 
appreciate it very much.
    Barb, you can start.

 STATEMENT OF BARBARA HANSELMAN, DAIRY FARMER, BLOOMVILLE, NEW 
                              YORK

    Ms. Hanselman. Good afternoon. My name is Barbara 
Hanselman. My husband, Ernie, and I farm in Delaware County. We 
milk 60 cows. We have seven children who have contributed to 
the success of our operation. Because of the lows and highs of 
the dairy industry, we have also learned to be enterprises, and 
so, in addition to the dairy, we also have a crop enterprise. 
We do a farm stand, and I bake and cater.
    With that, I would like to thank you, the very Honorable 
Kirsten Gillibrand, for allowing me to speak on behalf of dairy 
farmers. I would like to convey to you, Senator, Congressman 
Massa, Congressman Lee and other officials and my fellow 
dairymen, about my concerns and hope for the future of the 
dairy industry and all its breadth in the United States.
    I must say, and I am the eternal optimist, that this is a 
very difficult time. There are forecasts that 25 percent of the 
current dairy farms will be forced out of their livelihood 
before our industry rights itself. As we struggle to survive 
through this time, we need to make changes to ensure our dairy 
industry's long-term strength and viability.
    The variety, size and number of U.S. dairy farms located 
throughout our Country is key to homeland security and our 
Country's rural infrastructure. The U.S. dairy farmer provided 
over $37 billion to the economy of the U.S. last year.
    The greatest challenge I have today as a producer, is the 
disjunction between the price I am paid for the milk I produce 
and the expenses it costs me to produce it. I have no control 
over the price I am paid. In the first 8 months of this year, 
the average price paid me per 100 was $13.22. My cost of 
production was $15.79, and this was without being paid for our 
labor and management, which this is our cost of living.
    If I have no guarantee of being paid for my production 
costs, I have no understanding of why Federal policy guarantees 
processors their cost of production. This is called the make 
allowance. If the price of milk falls below the level that will 
cover this expense, farmers have it deducted from their milk 
check. The price of this component was low enough from October 
of last year to May of this year, so that producers had money 
removed from their checks to cover the processors' guaranteed 
make allowances.
    As our prices ride the highs and lows, the retail price 
bounces with it. When our price increases, the retail price 
surges with it. When our price slides backwards, the retail 
price never slides back to the low we are experiencing. Where 
does the excess go?
    The farmer pays for the hauling even though we relinquish 
the risk at the time of pickup. We have very little say about 
the variability and the changes in our hauling costs. Producers 
pay a hauling charge, a stop charge and a fuel surcharge as 
their transportation costs. These costs are deducted from the 
gross pay in our milk checks.
    The price of milk is decided by the trading of less than 2 
percent of the milk produced in this Country on the Chicago 
Mercantile Exchange. The pricing structure is formatted so that 
the cheese traded today will dictate the price of milk 3 months 
from now.
    The fact that such a small percentage of the Country's milk 
production is being traded to dictate the other 98 percent's 
price, as well as having so few participants in the trading--it 
is a very thinly traded market--it would seem that there could 
be a great change for anti-competitive conduct. There have been 
concerns of price fixing, price manipulation and predatory 
behavior.
    There are four classes of milk. The blend price paid 
farmers is based on the utilization of these classes by the 
Federal order it is produced in. There are now way more 
products manufactured than can be clearly defined by these 
parameters.
    Another concern in the dairy industry today is the role of 
the cooperatives and the role of the processors. I am not sure 
that the huge cooperatives that dominate our industry always 
have the farmers' best interest as their primary interest.
    In the dairy industry, the mega-processors, such as Dean 
Foods, dictate a lot of how our cooperatives interact with us 
as producers. They have played a huge role in dictating how the 
consumer decides to buy what milk, what technology should be 
used in producing milk and what milk is good or bad for them. 
They have initiated changes in the standards of milk quality 
that help them have the ability to move milk around the Country 
and extend shelf life in the grocery, not to ensure a safer, 
better tasting product to the consumer.
    I am not opposed to change, but I am opposed to it when it 
is at my expense and their increased profitability.
    Relative to the global market, it is paramount that the 
standards of production of milk products be held to the same 
level for imports as they are domestically. They also need to 
be required to pay tariffs as a food when they are used in food 
manufacturing in this Country. I realize that it is a global 
economy, but we as U.S. consumers need to know that the same 
standards and regulations that U.S. dairy producers uphold 
exist for the products that are imported.
    I am in support of a mandatory supply management system. 
The global and domestic market processors, cooperatives and, 
most of all, producers would benefit from a more stable milk 
supply and price. These highs and lows are killers for 
producers, but they cause issues with other parts of our 
industry, including the services that support dairy production. 
Each low time changes the infrastructure of our dairy industry 
that cannot be reclaimed or rebuilt during the highs.
    History has shown that our Country usually has a year-over-
year increase in demand for dairy of about 3 percent. Something 
needs to be addressed to stabilize our prices toward this.
    Last, this is an industry that needs young people. Dairy 
farming is physically demanding. It is an industry filled with 
stress because you are not only at the mercy of the volatility 
in milk prices; you are also at the mercy of the weather, crop 
and animal health, volatility of input costs, and labor issues. 
An industry is only vital when there are young minds and 
strengths to fuel the future, to guarantee its perpetuation.
    Thank you, and I would be happy to answer any questions.
    [The prepared statement of Ms. Hanselman can be found on 
page 46 in the appendix.]
    Senator Gillibrand. Thank you for your testimony.
    Robert Church.

   STATEMENT OF ROBERT CHURCH, HERD MANAGER, PATTERSON FARMS

    Mr. Church. Good afternoon. My name is Robert Church, and I 
am a partner and dairy manager at Patterson Farms located in 
Auburn, New York. Our dairy currently is milking about 950 
cows; we have 720 heifers; and we farm about 2,500 acres of 
land. We are a sixth generation farm and have demonstrated the 
passion for the stewardship of the land the cattle we care for.
    Thank you for allowing me the opportunity to discuss with 
you the current economic crisis in the dairy industry. I 
commend your desire to address this issue by hearing firsthand 
from all parties involved regarding the current milk price that 
farmers are receiving.
    The problem farms are facing today is that revenues are not 
large enough to cover the expenses necessary to produce milk. 
This is resulting in producers using the equity in their 
businesses that would have been saved for retirement to finance 
daily operations.
    I would like to discuss the following points this 
afternoon: changing input costs, debt and financial health of 
dairies after extended down cycles, Federal Milk Marketing 
Order, Commodity Credit Corporation's usage of dairy products, 
imports and exports, and milk inventory management programs.
    Escalating input costs have eroded our ability to produce 
milk for what would have been, a few years ago, an acceptable 
milk price. Purchased feed costs are typically the biggest line 
item expense in our budgets. In 2006, the average feed costs 
per cow were $978. In 2008, the average feed costs per cow were 
$1,445. This is a 47 percent increase.
    Labor costs have risen 20 percent. Fuel costs have risen 63 
percent. Increasing fuel costs have a twofold impact on dairy 
farmers:
    We pay freight costs of both inputs and outputs, making our 
situation unique. Fundamentally, this is wrong. We should not 
bear the burden of hauling expenses on both ends.
    When the expenses are greater than the income, there is 
only one option. That option is to borrow more money to pay for 
the expenses, and that is how most farms are surviving the 
current situation. It is only a matter of time before the 
lending institutions stop lending money to struggling dairy 
farmers.
    Many farmers are now experiencing losses in excess of $100 
per cow per month. This is taxing our ability to remain in a 
financial position that will support sustainability. It will 
require strong prices for three to 4 years straight for farms 
to pay back this debt. Without some reform to our safety net 
levels and pricing structure, we will undoubtedly continue to 
see the dairy industry struggle for a prolonged period of time.
    Changes that will impact both the short-term and long-term 
health of the dairy industry:
    The need to evaluate the Federal Milk Marketing Order is 
necessary to support prosperity of the dairy industry. This 
system needs to reflect not only the utilization of our 
products but also the costs associated with producing these 
products. Changes to the FMMO might include ensuring all milk 
produced is pooled in the order, changing the make allowances 
to reflect our input costs, setting a floor support price for 
Class I milk and putting the burden of transportation costs on 
the processor.
    Within the industry, there is a lot of disagreement about 
the effectiveness of the MILC program. I would suggest that a 
better use of the assets of this program would be to support 
the efforts of the Commodity Credit Corporation. Increased 
consumer usage of dairy products will be the best way to help 
farmers obtain a higher price for their product.
    The Commodity Credit Corporation has the ability to affect 
the market in a profound way. The largest limiting factor in 
the efficiency of this program is the packaging. Processors 
have no real economic incentive to package solely for this 
program and therefore do not do so.
    The solution to this problem seems simple. The CCC needs to 
have the ability to purchase products that are sized and 
packaged for consumer sales. Support of this program would 
result in prompt changes in the price received at the farm for 
milk sold and have no negative impacts on the product's 
consumers.
    In respect to the global economy, the U.S. dairy economy 
must be positioned to both receive imported milk products and 
export them as well. The first issue to address is the 
enforcement of assessing imports the promotional fee. All milk 
and milk components benefit from the use of this money. 
Imported milk products should not be exempt from this.
    Second, milk protein concentrates continue to enter our 
domestic milk shed without regulation. These products need to 
become a part of the existing policies that regulate imports. 
In the short term, the USDA should fully utilize the Dairy 
Export Incentive Program.
    The leaders of our industry, both producers and processors, 
should be selected and appointed to work on assessing the 
impact of a National Inventory Management Program. In the short 
term, supporting the efforts of risk management programs 
offered by our cooperatives will help dairy farmers secure 
their future.
    In summary, the dairy industry is in a state of severe 
crisis. Food, air and water are the essential elements needed 
to support life. It is the farmers in this Country that provide 
the food. Without a united front to protect our natural 
resources, our citizens will go hungry.
    Sustainability has become the latest buzzword and 
rightfully so. I would encourage all of us to band together, 
put aside the individual agendas and tackle the issues that 
threaten our ability to sustain our resources.
    Thank you for your support.
    [The prepared statement of Mr. Church can be found on page 
38 in the appendix.]
    Senator Gillibrand. Thank you for your testimony.
    Robin Keller.

STATEMENT OF ROBIN KELLER, DAIRY FARMER AND PRESIDENT, GENESEE 
                       COUNTY FARM BUREAU

    Ms. Keller. Hello. My name is Robin Denniston-Keller, and I 
am a proud American dairy farmer. My husband and I milk 100 
Jersey cows and take care of another 100 young stock about 10 
minutes from here in Byron, New York.
    It is a privilege and honor to speak today.
    I am not an economist or expert on milk pricing, but I do 
feel I have common sense and a strong work ethic which have 
served me well so far in life. I milk my own cows every day, 
and being up to my elbows' in the results of lactation and 
excretion, generally not at the same time, gives me a certain 
sense of reality.
    On our farm, our paid price for our milk produced in July 
of 2009 was $13.26 a hundredweight. Put in consumer terms, that 
is $1.14 a gallon. This includes protein and quality premiums 
received from Sorrento, the cheese plant we supply with pure, 
fresh Jersey milk.
    Last year, our July paid price was $24.23 per 
hundredweight, or $2.08 a gallon.
    I could spend my next 3 minutes ranting about the 
volatility and injustice of this, but that is not constructive, 
and you can figure out on your own how I do the math. We pay 
for our own health insurance, groceries, feed for the cows and 
calves, fuel for the tractors, hauling and fuel surcharge costs 
to send the milk to the processor and the numerous other bills 
staring me in the face each month.
    Our 100-cow dairy benefits from the MILC program. We are 
the perfect size to maximize our usage of the program. Our MILC 
government payments are currently a little more than 10 percent 
of our monthly income.
    Solutions to milk pricing issues: Time heals all wounds. 
However, how do we stop the bleeding now?
    My first suggestion is to increase solids-nonfat fluid milk 
standards. I like to call this the No More Blue Skim Milk 
suggestion. Since 1962, California has had higher minimum 
standards for nonfat solids in fluid milk than the rest of the 
United States.
    Raising the United States standards to match the California 
standards will accomplish the following:
    Improve the nutrition benefits of milk. For example, 
California 2 percent milk has 21 percent more calcium than does 
2 percent milk in other States. In addition, higher solids 
result in better tasting milk. I am talking protein and calcium 
here, not fat.
    Utilize more milk solids in consumer products and reduce 
the amount of nonfat dry milk produced for CCC purchase. This 
June, Dairy Farmers of America estimated that if the California 
standards had been in effect for the rest of the U.S. during 
2008 an additional 300 pounds of milk solids would have been 
included in fluid milk sales. This represents more milk solids 
than were in all the CCC nonfat dry milk purchases through 
July, 2009.
    And, finally, California retail milk prices have remained 
competitive with, not higher than, the rest of the U.S.
    My second suggestion is urge Agriculture Secretary Vilsack 
to have USDA purchase cheese for nutrition programs. This 
single action would accomplish several goals: help to bolster 
milk prices and ease the current crisis faced by many dairy 
producers across the Country; reduce outlays in dairy safety 
net programs such as MILC payments and CCC purchase; by 
donating the purchased cheese to food banks and other 
charitable organizations, USDA would be providing humanitarian 
nutrition services.
    Cheese inventories are poised to be much higher than 
normal, heading into this fall. This supply is weighing on the 
market and suppressing prices. A purchase of 100 million pounds 
of cheese would bring inventories more in line with the past 
and would help our farm milk prices.
    Overhaul the dairy price discovery program. I believe that 
our current milk pricing structure is based on the trading of 2 
percent of the cheese in this Country on the Chicago Mercantile 
Exchange. This small amount of cheese determines my mailbox 
price, or, in other words, what the check I get in the mail 
says I will be paid for the product I spent the last month 
getting covered in manure and other fine things to harvest.
    This whole process goes against my good old common sense. 
Large milk processors were convicted for price manipulation as 
recently as 2006. Clearly, a more fair and broad-based pricing 
mechanism is needed. We need a new set of tools in our milk-
pricing toolbox.
    Sometimes I wonder why I am in a business where I buy 
everything retail and sell my product wholesale and the pricing 
mechanism is based on what I would call a house of cards.
    Fourth, imports, charge a promotion fee on imports. United 
States dairymen contribute 15 cents for every hundredweight of 
milk we produce toward dairy promotion. I believe the Farm Bill 
instructs USDA to charge importers 7.5 cents for every 
hundredweight.
    Dairy promotion basically helps us with a larger market. 
Importers benefit from the increased demand for dairy that our 
domestic producers have paid for, so it only seems fair to have 
importers contribute into promotion program.
    Proceed with extreme caution implementing growth management 
or supply management programs. Some producers and organizations 
are promoting this, but I have some issues with it.
    And, I have run out of time. So if anyone would like my 
issues, I would be happy to share them with you.
    [The prepared statement of Ms. Keller can be found on page 
54 in the appendix.]
    Senator Gillibrand. Thank you for your testimony.
    Ms. Keller. Thank you.
    Senator Gillibrand. Bruce Krupke.

STATEMENT OF BRUCE KRUPKE, EXECUTIVE VICE PRESIDENT, NORTHEAST 
                    DAIRY FOODS ASSOCIATION

    Mr. Krupke. Senator Gillibrand, Congressmen Massa and Lee, 
thank you for the opportunity to appear before you today and 
provide you with statements regarding U.S. dairy pricing 
structure.
    My name is Bruce Krupke. I am the Executive Vice President 
for the Northeast Dairy Foods Association which was formed in 
1928. I am here representing the 111 member companies of our 
full-service trade association of fluid milk processors, 
distributors, manufacturers of ice cream, yogurt, cheese, sour 
cream, cottage cheese, cream cheese, butter, whipped cream and 
dips, among many others.
    Collectively, these companies employ over 18,000 people 
here in New York State. Most importantly, these companies are 
the buyers of raw milk and the customers of dairy farmers.
    As you and the United States Agriculture Committee consider 
the national dairy pricing system, I would like to provide you 
with our association's positions on a few critical issues.
    Our association supports the current Federal Milk Marketing 
Order system. It is our position that the Federal Milk 
Marketing Order system is working as created and as intended. 
We support the system because the formulas USDA uses to 
calculate monthly producer prices is based on supply and demand 
factors.
    Our association believes it is very important any system 
mandated by the Federal Government, which ultimately prices raw 
milk is based on competitive policies and encourages 
efficiencies within the entire dairy industry. Another policy 
we regard as very important for any pricing system is that it 
be fair for all participants--producers, processors and 
consumers.
    We support the ability of dairy producers to compete for 
buyers of their raw milk, either as members of cooperatives or 
as independents.
    We do not support policies that artificially inflate the 
raw milk price that is not based on supply and demand and is 
not fair and competitive. We do not support state programs that 
usurp or interfere with the Federal Milk Marketing Order 
program.
    New York State has approximately 600 companies licensed and 
engaged in processing, manufacturing, hauling, distribution or 
that are bargaining agencies. Of those 600, about 300 
distribute milk and dairy products to retail and food service 
locations. Of the 300, there are 31 pasteurized milk plants and 
69 manufacturing plants.
    For perspective, 25 years ago in 1983, there were 100 milk 
plants and 71 manufacturing plants. Our industry, like the 
number of dairy farmers, has dramatically contracted and 
consolidated.
    Here in New York State and the Northeast U.S., we are 
blessed with an adequate raw supply of milk. There is not a 
milk shortage. In a week, schools across the State will open, 
and our milk plants will easily be able to service their 
customer. The reason there will not be a problem is because 
milk production overall per cow here in New York State and key 
areas of the Nation have steadily increased over time.
    As customers of raw milk, our customers are similar to any 
customer. We need a consistent and adequate supply of quality 
raw milk for our processing and manufacturing plants. They want 
a good price, a good quality and sufficient supply to choose 
from, although these wants are really more like mandatory 
needs.
    New York State, and the Northeast for that matter, are 
fortunate to be in close proximity to both the raw milk supply 
and to millions of consumers. We have a very good mix of all 
types of Class I, II, III and IV milk and dairy product plants 
that provide us operating efficiencies.
    It is very important for you to understand our milk 
processing and dairy product manufacturing plants need to be 
competitive. We compete with companies from all across the 
United States. What we need is to have access to a good supply 
of raw milk, but, even more importantly, we need producers that 
are efficient and cost-productive.
    Our members' survival requires them to produce and procure 
raw milk at the best competitive price. If other regions of the 
Country have lower priced raw milk, producers in our region, as 
well as our association members, will lose market share. We 
will be beat out by our competition from the West and Upper 
Midwest.
    What should the Federal Government do when considering 
changes to the current system?
    First and most important, any program, whether it is a 
government program or a voluntary industry initiative, needs to 
focus on increasing consumption and sales of milk and dairy 
products. We have lost sales of fluid milk to competing 
beverages, which has been the single largest reason why prices 
are lower for producers. Any program, law or regulation that 
stymies milk consumption should not be implemented or passed. 
This includes changes to the National School Lunch program or 
WIC.
    Before any changes to the Federal Milk Marketing Order are 
proposed or enacted, they should be carefully reviewed by 
experts from the industry who clearly understand milk marketing 
from farm to consumer.
    Any changes to the Federal Milk Marketing Order system 
should mandate and include all dairy producers in the Nation. 
How can a fair program be established if some producers are not 
participating while others enjoy advantages or protections, 
either regional or by State? Participation should be mandatory 
for all U.S. producers in any milk marketing program.
    Any program changes should be implemented to allow 
producers to compete on a world market. We cannot survive if we 
do not have a world marketplace to sell excess products at 
competitive prices.
    Programs that try to manage raw milk supplies should be 
discouraged. Supply management only decreases cost 
efficiencies, technologies and growth. To be a world leader, we 
need all three of these examples to compete and survive.
    And, in summary, if I may, dairy producers in other parts 
of the Country are currently finding and implementing new 
methods and technologies that will make them more competitive 
with New York producers. We encourage New York and Northeast 
producers to utilize the many public and private options to 
increase revenues, protect costs and lock in prices.
    The dairy industry needs practical, market-driven 
solutions. The industry needs to build a consensus between 
producers and processors to find equitable solutions.
    The government needs to listen carefully to the entire 
dairy industry, to help implement effective and lasting 
improvements for dairy producers, processors and manufacturers.
    Thank you for your time.
    [The prepared statement of Mr. Krupke can be found on page 
58 in the appendix.]
    Senator Gillibrand. Thank you, Mr. Krupke.
    Ron McCormick.

  STATEMENT OF RON MCCORMICK, FORMER REPRESENTATIVE, NATIONAL 
                          DAIRY BOARD

    Mr. McCormick. Good afternoon, Congressmen, Senator. Thank 
you very much for being here today.
    As you said, I am Ron McCormick. I am a dairy farmer. Our 
farm was established in 1854 when my great-great grandfather 
came over from Ireland. My wife and I formed an LLC with our 
two sons and their families. If we can survive this financial 
crisis, I can see the seventh generation, my two grandsons, 
continuing on my family farm.
    We milk 400 cows 3 times a day, with 5 employees. My 
daughter-in-law raises all the calves. We raise all our own 
crops--corn and alfalfa--on 500 acres. And, our main mission on 
our farm is quality milk, cow comfort and leave the land and 
water in better condition for the next generation.
    The problem: Too much of a good thing. The demand in the 
United States has remained the same or has increased a bit in 
the last years. Last year, however, the U.S. exported the 
equivalent of 11 percent of our milk that was produced in the 
United States--this year, only 4 to 5 percent, which leaves a 
difference of between 5 and 6 percent of the milk that we have 
to find a way to get rid of.
    I, as a dairy producer, produce the most nutritious, safest 
food for our Nation. With thousands of starving people around 
the United States and around the world, it is hard for me to 
understand why we have to cut production or go broke.
    The current milk marketing order is based on demand. Two 
proven ways to increase sales and demand for our dairy products 
are through the New Look of School Milk program and Breakfast 
in the Classroom program. Not only do these programs help sell 
dairy products now, but they will help build lifelong dairy 
consumers, which will improve our children's health and 
nutrition.
    Another win-win for the farmers in the United States, and 
the consumers, is to require that all fluid milk in the United 
States be fortified with extra milk solids by using the 
California standards. Such fortification benefits the consumers 
by adding nutrients without adding fat to their diets. 
Furthermore, most customers would prefer the white color of 
fortified nonfat milk instead of the blue color of traditional 
skim milk. Farmers will benefit because more milk and milk 
solids will be consumed.
    Another problem facing our dairy farmers is when consumers 
require us not to use modern technology that has been approved 
by the USDA as being safe, for example, when customers refuse 
to take milk from our cows which have been given rBST. This 
means that our farmers either have to pay more to produce the 
same volume of milk or pay higher hauler costs to transfer 
their milk to a processor who will take it.
    Traditionally, milk orders enable farmers to be paid 
depending on the factors such as protein, butter fat, cell 
count that can be determined by lab tests. However, farmers 
need to be compensated fairly for their increased production 
costs when their milk must meet the requirements for rBST-free 
or organic and other such new demands that might come down in 
the future. If customers require producers not to use legal, 
approved farming technology, we have to find a way to pay for 
it.
    In the last two Farm Bills, it was required that all milk, 
even imported, pay the 15 cents for promotion and research. As 
of today, the USDA has still not written the regulations to 
collect the 15 cents that was passed by two Farm Bills, which 
will help level the playing field. If the 15 cents is 
collected, U.S. processors will be able to make MPCs which will 
enable them to compete against world imports. We all know that 
our milk in the United States is the most regulated and the 
safest in the world.
    Our government has to find a way to feed the hungry people 
of the world and the United States. Give food, not money. It 
will not only help feed the hungry but will help balance our 
budget, trade deficit.
    This crisis is real--hitting my farm by the end of the year 
with a loss of approximately $1,000 a cow or $400,000. Thank 
you very much for stimulating the MILC payment. But, on my 
farm, I am $400,000 in debt, and my payment was $49,226.02, and 
I am done receiving it.
    Most farmers are on interest only with their banks, but the 
bigger problem is how it is affecting the families and owners 
and the employees of other infrastructures of our community, 
such as feed dealers, vets and fuel providers. In Wyoming 
County, these families, accounting for more than 70 percent of 
the jobs directly or indirectly, depend on our cows.
    Senator Gillibrand, your proposal to double the MILC 
payment from March to this November, although most of our 
farmers would rather get the money from the marketplace, will 
sure help our farm and the many more farmers who are wondering 
how they are going to pay for their open accounts.
    [The prepared statement of Mr. McCormick can be found on 
page 63 in the appendix.]
    Senator Gillibrand. Thank you, Mr. McCormick.
    Mr. McCormick. Thank you very much for listening to us 
today and thank you for wanting to help our dairy farmers and 
our employees in all the small communities. Thank you.
    Senator Gillibrand. Thank you.
    We are now going to ask you some questions. I will ask a 
few, and then I will turn it over to my colleagues to ask 
additional questions.
    I wanted to start with something that Barb raised about the 
make allowance, and I want to ask Mr. Krupke if he could please 
address the concern that came up through Barb's testimony and 
other testimony about having to pay the make allowance. What is 
the purpose of the make allowance and why should dairy farmers 
pay it?
    Mr. Krupke. I am not an expert on the make allowance. I 
understand what it is and what it does.
    It is designed more for manufacturing plants. As the cost 
of production goes up at a manufacturing plant, it is based in 
the Federal Milk Marketing Order formula, that allows an 
increased cost production to go to manufacturing plants. That 
is my basic understanding of what it does.
    It has been changed occasionally, most recently within the 
past year or so. It had taken a good year or so, year and a 
half, after it was proposed by a regional company for a change 
in that make allowance. It went through a series of hearings.
    What we find is as the make allowance is proposed to be 
changed, it takes quite a long time for it to actually go 
through the approval process, so that by the time it actually 
gets changed the cost of production has actually increased even 
more so. So it always seems to be in arrears. But, basically, 
the make allowance is the factor that is allowed in the Federal 
Milk Marketing Order formula, that allows a change for the cost 
of production built into the price that the farmers paid. That 
is my general understanding.
    Senator Gillibrand. I am sorry. I do not understand what 
you just said.
    [Applause.]
    Senator Gillibrand. I am sorry. We will start again.
    The concern that is raised is why should it be paid by the 
producer?
    Mr. Krupke. Well, it basically comes out of the price that 
the producer is paid. It is not actually something that they 
would pay, but it is a deduction.
    Senator Gillibrand. It gets deducted. But why does that 
cost? In your view as a representative of the industry, why 
should it be a cost that accrues to the producer?
    Mr. Krupke. The way, from my understanding, the way it is 
just built into the price, it is a formula. It is part of an 
overall formula. It can be debated whether or not it is good or 
bad.
    A manufacturing firm has the basic cost of doing business. 
All I can say is it is built into the formula and that it is 
something that was approved as part of the Federal order 
process system.
    Senator Gillibrand. A long time ago.
    Mr. Krupke. Possibly, Dr. Novakovic or Mr. Wellington could 
give you a further explanation.
    Senator Gillibrand. We will ask the next panel as well.
    Similarly, the other question that came up a lot was the 
cost of transportation. In your view, why should the producer 
pay both parts of transportation?
    Mr. Krupke. Transportation is, if you look back in history, 
again, that is debatable. It is something that is within the 
industry that is debatable and can be discussed.
    If you look back in history, how did milk get from the farm 
to the milk plant, the dairy farmer would put it in milk cans, 
put it on the back of the truck and haul it to the milk plant.
    Over time, evolution, better trucking, refrigeration, 
highways, firms that developed that haul milk for a living--it 
is what they do. It is another part of the business or it is 
part of the overall distribution system. So a farm that belongs 
to a cooperative would either have the cooperative hauling milk 
for them or they will hire a firm to do it for them or the milk 
plant will have a truck and go and get it. But it is just the 
standard within the industry.
    If you use other examples, if you have a lobster fisherman 
and they are out on the boat in the ocean, they have got to get 
the product from the ocean back to store. They are paying for 
their hauling.
    It is a standard within the agriculture industry that the 
producer pay to get their products to market. If a producer 
goes to a farmer's market in the middle of a city, they have to 
pay to get their product to market. So it is just the standard.
    If there is a discussion whether or not hauling should be 
paid for by the buyer, that is something that could be 
discussed in the national forum.
    If it is eventually decided upon that it should be paid for 
by the processor or the manufacturer, it can easily be done 
universally through the whole Federal order system. You could 
not have just one State, for instance, implement a law that 
says, well, in this State, the processor is going to be 
mandated to pay for hauling. Well, then that would just create 
a competitive disadvantage for the processor in that particular 
State. They would be forced to go in another State and buy the 
farm milk there. So that is why it would have to be done on a 
national basis.
    Senator Gillibrand. So if we are looking between now and 
the next Farm Bill, on all of these issues, could you see a 
world where the farmer did not absorb the costs of hauling and 
the farmer did not absorb the costs of the make allowance?
    Mr. Krupke. I think the general point of a manufacturer or 
processor is that is current law and we abide by it. If it 
changes, then we will have to abide by it.
    Somebody has got to pay to get the milk from the farm to 
the consumer, and, ultimately, it is going to be built into the 
price, one way or the other. Currently, the system is just set 
up so that the farmer, producer pays for the price to get it to 
market.
    Senator Gillibrand. The last issue I would like to raise, 
and then I will turn it over to my colleagues, is many of you 
mentioned this issue of requiring milk solids to be in milk. 
What is the downside of that?
    We had some testimony on this in front of the Agriculture 
Committee on the House side in the last 2 years, and some 
people opposed the idea, although it is a good way to make 
money, because it was affecting what is actually in the milk. 
So you are not having milk as produced being offered for sale. 
It was milk that was affected and changed by adding more 
protein solids.
    What is the downside?
    Go ahead, Robin.
    Ms. Keller. From a dairyman's perspective, I am not sure 
there is a downside.
    From your processor or your middleman, they are going to 
have to get different equipment, I believe. I am not a 
processor, so I cannot speak for them. But I think they are 
going to have to purchase more milk solids in order to fortify 
the milk.
    But, as far as the consumer goes, they are going to get a 
better quality tasting glass of milk.
    From the producer's perspective, we are going to be able to 
minimize the excess milk in the Nation. The powdered milk that 
we will fortify the liquid milk with, California is a strong 
producer of powdered milk.
    Senator Gillibrand. Is it better tasting though?
    Is it, Barb? Barb told me about this taste test she did, 
and she could tell which milk came from a Jersey cow, which 
milk came from all the different cows she had in the taste 
testing. Some had higher fat content. Some had other protein 
content. She could tell by the nature of the cow.
    Are tastes not more regionally based?
    Ms. Keller. Taste is a personal thing.
    Senator Gillibrand. Right. So why would it necessarily 
taste better if it had more protein?
    Ms. Keller. I think my answer to that is, from talking to 
neighboring dairy farmers who have been on vacation or at 
conferences in California and their kids go with them, the kids 
will sit at the table at breakfast with them and say, dad, this 
milk tastes different than ours at home.
    Senator Gillibrand. Different or better?
    Ms. Keller. Better, different.
    Senator Gillibrand. OK.
    Ms. Keller. It has a creamier mouth feel.
    Senator Gillibrand. Barb?
    Ms. Hanselman? From that standpoint, protein provides a lot 
of flavor and mouth feel to milk and because we have taken away 
butter fat. Butter fat is an enhancer, but our public wants low 
fat, non-fat milk.
    But, interestingly, in Texas, they were having huge issues 
with kids buying or participating in the school program and 
drinking their milk. And so, in Texas, they have something 
called Texas Two-Step Milk, and that is where they did this 
same process where they put the solids, protein solids back 
into the milk. It increased consumption hugely, and this was no 
fat milk, which was a very positive thing there because there 
were huge issues with concerns with obesity because people were 
drinking high fat milk but then also refusing milk, and so 
there were the health issues on that side.
    Senator Gillibrand. Bruce, any thoughts?
    Mr. Krupke. Yes, I do.
    This is a perfect example of the differences between 
standards throughout the United States. You have one State, 
California, that sets a standard for milk and another standard 
for the rest of the United States.
    What happens in California, I am not an expert in this area 
either, in California, but it is my understanding that the 
fortification of protein in milk, in Class I, when you ask what 
are the downsides of something if you implemented that program 
nationally. It costs more for the consumer. It costs more to 
put that into the product. It is more of something that is 
there that has got to be paid for and gets passed on to the 
consumer.
    So I guess a simple answer is the downside is consumers pay 
for it.
    But the other part that you all see, that you all probably 
in the room recognize is when you see a happy cow commercial 
from California, why are they advertising happy cows in New 
York State? It is really not the happy cows; it is the happy 
farmers and the happy processors in California that have a 
price advantage.
    The reason they have a price advantage is because the Class 
I sales in California, because of this protein-fortified 
product, it helps subsidize their manufactured products in 
California and allows them to manufacture them, ship them all 
the way out here in New York State, in New York City, Buffalo, 
Batavia, and you will see California cheese here. The reason 
they can do that is because their pricing system in California 
is outside of the Federal order system.
    And, this gets back to my testimony that you need to 
question whether or not that system in California should be 
allowed to continue. Why do we not have a national Federal 
order program and allow one State to do it and have different 
standards of identity and products and pricing where there are 
different competitive levels throughout the Country?
    Senator Gillibrand. Robin.
    Ms. Keller. I can discuss that a little further. In my 
testimony, from sources that I have, California retail milk 
prices have remained competitive with, not higher than, the 
rest of the U.S. So I think that kind of goes against what Mr. 
Krupke said. So I am not sure who is right and who is wrong, 
but I want that to be on the record.
    Senator Gillibrand. Right.
    Mr. Krupke. I did not mean necessarily retail prices that 
the consumer buys. I am talking about the formula price for 
Class I milk in California.
    Senator Gillibrand. You are saying the formula price for 
Class I milk in California is higher than the Class I price for 
New York milk?
    Mr. Krupke. Yes, that is correct. It is my understanding 
that the way the formula works in California is it is higher 
and it helps to subsidize the manufacturing process, but it 
does not have anything to do with retail.
    Senator Gillibrand. We can ask the next panel. They will 
have some data on that.
    Mr. Church. If I can comment on that real quick, as 
farmers, our primary objective is to get product usage by 
consumers. If we have a tool that we can provide a better 
product or a healthier product and we can market it that way 
and have consumer acceptance of it, those are all good things 
for our industry.
    Senator Gillibrand. Thank you.
    I am turning over to Congressman Lee.
    Mr. Lee. I think I am going to stay on that line of 
questioning because I guess at the end of the day what we can 
do to help drive demand and provide a better product to the 
market seems like a win-win, where we can. I like white milk, I 
like brown milk, but I do not like blue milk, and I have had 
that in New York State. So the opportunity to put real solids 
and make it a better tasting product that, by the way, that 
helps drive demand, helps our producers, it seems like an area 
that we definitely want to explore.
    We hope that outside of California it sounds like a very 
simple way and a healthier way to get people to drink skim way. 
So I think that is a very worthwhile point.
    Another area, and I just want to make sure, and maybe I can 
direct this toward--I think a few people brought it up--maybe 
to Robin. On this issue of the fact that we have a promotion 
fee, I want to make sure I understand this for the rest of the 
panel as well. My understanding is that U.S. producers pay a 
15-cent promotion fee. I believe it is 5 cents of that is going 
nationally and 10 cents locally, and that is used to go out and 
actually promote the values of milk and try to increase the 
market.
    I am one who believes in fair competition, but what you are 
doing here is actually helping to grow the market, which is a 
wonderful thing. That is what we want.
    But you are saying importers right now, who are going to 
benefit from all of that promotion, both locally and 
nationally, do not have to pay a penny. Is that correct?
    Ms. Keller. That is my understanding, yes.
    Mr. Lee. Then I think what you also said is that the USDA 
has been instructed through the 2002 and 2008 Farm Bills to 
enact this, but no such legislation or ruling has occurred.
    Ms. Keller. Correct. I think that is our issue, that USDA 
has not implemented the legislation that is on the books. The 
speediness of that activity is not impressive. It is on the 
Farm Bill for two times now, and it has not been done.
    I guess I support Senator Schumer's suggestion to tariff or 
tax milk protein concentrates, MPCs. However, I think this 
promotion fee on all imported milk products may be a more WTO-
friendly way of getting around that.
    Mr. Lee. I would agree.
    Ms. Keller. No promotion fees come back to dairy farmers in 
expanded markets. Whereas, a tariff, I am not sure whether that 
comes back to us as dairy farmers at all.
    Mr. Lee. Do you know what the instruction was, the full 15 
cents or was it 7.5 cents? Do you know what that instruction 
was?
    Ms. Keller. I think the instruction was 7.5 cents.
    Mr. McCormick. It was 15 cents, but during negotiations 
they cut it down to 7.5 cents, and that 7.5 cents would go 
right to the National Dairy Board, and then they use it for 
research on what else we could you use our milk for--MPCs or 
development or develop new products.
    Ms. Keller. Ultimately, I would like to see the 15 cents. I 
would like to have it be a level playing field rather than 
slightly lopsided. But I will take 7.5 cents if that is what is 
on the books already.
    Mr. Lee. Let me ask one other question. This is open too. 
We have 5 minutes here, and I want to make sure that we are 
fair to the other panelists as well and make sure Mr. Massa has 
time.
    The one thing I am also a huge believer in is that it is 
government's role to help support businesses in this Country 
but not deter their ability to succeed. One thing I get 
concerned about is, as I said, I am not on the Agriculture 
Committee. But I sit on an advisory board, and I sit on 
financial services, and we are creating a whole host of 
regulations. My concern is regulation that, at the end of the 
day, does not help farmers or dairy farmers, based on EPA or 
Clean Water or the COFA.
    Can anybody elaborate on areas that you think really are 
non-value added, because what you talked about is we only 
export 5 percent of our product? Is it putting us at a cost 
disadvantage so that we are going to ultimately continue to be 
pressed by imports?
    I am curious if anyone has any thoughts on areas that you 
think that, from a regulation standpoint, should be relooked 
at, that truly are non-value added. Anyone have any thoughts?
    Mr. Church. I would comment on some of the environmental 
regulations and that whole train of thought. As dairy 
producers, we make our living with the land, and I do not think 
there is another group of people out there that want to 
conserve our resources as much as this group does.
    You know in terms of are those programs bad, no, none of 
those programs are bad. When we can protect our resources, all 
those things are good, and they are going to benefit us at the 
end of the day, and we know that. It may not be tangible 
dollars that we can put our hands on today or tomorrow, but we 
know that is going to protect us.
    To abide by some of those regulations comes with a cost. If 
we can find ways to help offset that cost, that would be a big 
advantage to us, whether it is low-interest loans or grant 
funding, some of that, some of the regulations that come down 
on local businesses and particularly dairy farmers.
    Mr. Lee. Something specific, like Clean Water, to get 
there, the initial capital funding?
    Mr. Church. Yes, that is exactly the kind of thing that I 
am speaking to. Grant funding and may very low-interest loans 
or no-interest loans will go a long way in helping us fund 
those projects and meet the requirements and live up to being 
good stewards of the land.
    Senator Gillibrand. Thank you, Congressman.
    Congressman Massa.
    Mr. Massa. Thank you.
    Mr. Krupke, you and I are going to tangle a little bit here 
because I was a little concerned about some of the things I 
heard. I have never milked a lobster in my life. I am not quite 
sure of the analogy.
    But you did say very specifically that you want to move 
toward market-driven solutions. Got it. Market-driven solutions 
would lead me to believe that there is an ability for a dairy 
farmer to choose from where that dairy farmer is going to take 
his or her product to try to obtain the best deal possible.
    Yet, as you are a student of history, as illustrated by 
your analogy of milk in cans, I think we can all understand 
that the whole reason we have a hyper-regulated dairy market is 
because milk is so incredibly perishable, and dairy farmers 
have been historically been held hostage by a take it or leave 
it policy that leaves them only one choice--to accept a price 
that is given to them regardless of their choices or to destroy 
their commodity.
    So the entire concept of market-driven solutions favors 
those that you represent, but in my opinion has absolutely 
nothing to do with the reality that actual dairymen face. So I 
am not sure that I understand how we implement market-driven 
solutions for dairy farmers in the Northeast.
    The second thing I would like to bounce back off you, sir, 
you have said at least four times that you are looking for 
homogenous national policies, one size fits all. Having visited 
and gone to many dairy farms in, yes, go figure, New Mexico or 
in the deserts of Arizona or in the plains of nontraditional 
dairy farming areas in California, I can tell you that what 
they do there in dairy farming is about as similar to what we 
do here as Mars is to Pluto. Dairy farming in California, New 
Mexico and Arizona, maybe there they do in fact milk lobsters 
because that would be something that would be in fact more 
similar.
    And, I am not in favor of one size fits all. My job is to 
protect New York. Let me be very clear about that. That is what 
I am here to do.
    [Applause.]
    Mr. Massa. I am absolutely, positively not interested in 
happy California cows. I am absolutely committed to thriving 
and surviving New York farms. And, if that makes a lot of 
Pennsylvanians angry, well, then maybe we can figure out how to 
work across borders.
    But, you get west of the Mississippi, sir, and it has got 
nothing to do with what we do here. So I need to express that 
very clearly to you because these arguments are at the base of 
a lot of things that are hurting us.
    And, I do not think one size fits all is benefiting what we 
deal because we do not even begin to farm the same way. The 
farms in New Mexico, California and Arizona do not have 
contiguous cropland because, guess what, they do not have 
water, and they do not even begin to fit the same problems that 
we fit as far as producing those kinds of costs. I lay that as 
a marker for the record.
    Now, having said that, my question to you is this: We have 
heard, and I will just use the numbers today although there are 
many others available, that milk went from $24.23 a 
hundredweight to $13.22. That is roughly a cut of 50 percent. 
My wife tells me that we have seen no such drop in the price of 
a gallon of milk at home. So where is the money going?
    Mr. Krupke. I have an ad here--upstate farms, half gallon 
of milk, 1 or 2 percent or skim for 99 cents. It is happening 
here in New York State.
    Mr. Massa. Not by 50 percent, sir.
    Mr. Krupke. Well, that is $2, less than $2 a gallon. If the 
dairy farmer is getting a dollar----
    Mr. Massa. So you are saying that the retail price of milk 
during the same period of time reflects the drop in the 
wholesale price.
    Mr. Krupke. The retail price is reflective.
    Mr. Massa. I am sorry. It is a yes or no.
    Mr. Krupke. Yes.
    Mr. Massa. It does?
    Mr. Krupke. Yes, sir.
    Mr. Massa. OK. For the record, you stand on that?
    Mr. Krupke. Yes.
    Mr. Massa. All right, fair enough. Thank you.
    Senator Gillibrand. Well, I would like to thank all our 
panelists for their very helpful and informative testimony. We 
are extremely grateful for your time and your expertise, and I 
invite you to stay along for the second panel. We are going to 
be hearing from a panel of economists that will continue this 
conversation.
    So, thank you for your time and your attention.
    [Applause.]
    Senator Gillibrand.--Andrew Novakovic, Bob Wellington and 
Kim Pickard-Dudley.
    Dean, why do you not start us off.

   STATEMENT OF DEAN NORTON, PRESIDENT, NEW YORK FARM BUREAU

    Mr. Norton. Thank you, Senator Gillibrand, Representative 
Lee, Representative Massa, for inviting me to testify before 
you today.
    My name is Dean Norton, and I address you as a dairy 
farmer, agricultural consultant and President of New York Farm 
Bureau, the State's largest general farm organization. I 
represent more than 30,000 family farm members, including many 
dairy farm families struggling under the weight of this 
economic crisis.
    Dairy farms throughout New York, the Northeast and the 
Nation are indeed facing the worst economic crisis they have 
ever experienced. This crisis is impacting every farm 
regardless of size or geography. The combination of extremely 
low milk prices, well below those of 25 years ago, along with 
very high fuel, feed, energy, fertilizer and other operating 
costs have resulted in unprecedented losses for all dairy 
farms.
    Even with the inclusion of the feed cost adjuster in the 
Milk Income Loss Contract payments, which we owe to your 
efforts during the negotiations of the 2008 Farm Bill, farmers 
are not able to cover their costs of production. In simplest 
terms, farm families are getting paid nothing to cover their 
living expenses and bills and then losing money per 
hundredweight on top of that.
    It is important to remember that dairy cows are not like a 
water faucet. You cannot turn them on and off when you need or 
do not need milk. Production takes a relatively long time to 
gear up, and after production has increased lower demand can 
result in overproduction and, thus, lower prices. For this 
reason, it is critical that there be price stability at the 
farm level.
    There is enormous frustration that the Federal Milk 
Marketing Order system does not offer adequacy or stability in 
pricing. It is clear that a systemic review and overhaul of the 
Federal Milk Marketing Order system and its relationship to the 
Chicago Mercantile Exchange should be undertaken in an effort 
to avoid extremely cyclical downturns so that dairy farmers are 
not forced to seek emergency government assistance simply to 
survive.
    While the Milk Income Loss Contract program has helped New 
York dairy farmers, a regional pricing program that extracts 
its value from the market instead of the taxpayers, similar to 
the Northeast Dairy Compact that expired in 2001, would be far 
more effective.
    Because of the movement of milk and milk products across 
state lines, no State acting alone can solve the milk price 
issue within its boundaries. The Northeast Region is a major 
milk shed to some of the Nation's largest population centers. 
Under the milk marketing order, our dairy farm families are 
currently reliant upon a nationally based pricing system which 
balances national supply and demand but does not always 
recognize the regional production needs throughout the entire 
Nation. This system also tends to penalize areas with higher 
costs of production which are closer to existing population 
centers, such as in our geographic region.
    Recognizing this, the Northeast State Farm Bureaus and 
their producers are working together to capitalize on our 
assets and ensure that milk pricing structures work for our 
region. It is clear to the Northeast Farm Bureaus that the 
Federal order system must be reformed to accommodate regional 
variations in fluid milk production, in order to keep milk 
supply near population centers. Several weeks ago, New York 
Farm Bureau and 12 other Northeast State Farm Bureaus sent a 
joint letter to USDA Secretary Tom Vilsack, making such a 
request.
    We ask that you consider other options that accomplish 
profitability and stability within the dairy industry. New York 
Farm Bureau suggests that the congressional authority be 
granted to legislatively allow two or more States to work 
cohesively to best utilize their milk pricing laws. Allowing 
States to work together to establish over-order prices for 
fluid milk will prevent disruption of movement of manufactured 
dairy products but achieve some stability and retention of 
farms in the region.
    Dairy promotion fees are dedicated to building consumer 
demand for dairy products. They should also be collected on all 
imported MPCs, casein, dairy and cheese products. Our foreign 
competitors are currently enjoying the benefits of national 
dairy advertising being paid by our U.S. dairy farmers. It is 
like we are giving away our retail market to our foreign 
competitors and paying them to take it from us.
    U.S. dairy farmers have been contributing 15 cents each 
hundredweight of milk they sell to fund national advertising 
and nutrition research, to increase U.S. milk product 
consumption. The USDA is currently delaying implementation of 
regulatory proposals to assess 7.5 cents per hundredweight on 
all dairy imports, including cheese and butter products as well 
as dry ingredients such as casein and MPCs. Statutorily 
authorized under the 2008 Farm Bill, we recommend that USDA 
enact this promotion assessment on all imported MPCs 
immediately and require that this fee on imports be equal to 
what is paid by U.S. farmers, which is currently 15 cents.
    In order to fill the workforce gap, passing and enacting a 
viable agricultural guest worker program, either as a 
standalone initiative such as AgJOBS or part of comprehensive 
immigration reform, is one of our highest legislative 
priorities. NFYB asks for your co-sponsorship of AgJOBS and 
advocacy within the Senate leadership to bring the issues of 
agricultural guest labor to the Senate floor by the end of this 
session.
    If you will allow me to finish, please, in closing, there 
is no question that finding a solution to the cyclical dairy 
pricing crisis is a significant challenge, but I am confident 
that enough people, from producers to consumers, recognize that 
something must be done so that the depth and length of price 
downturns can be avoided in the future.
    Thank you, and I would be happy for any questions that you 
may have.
    [The prepared statement of Mr. Norton can be found on page 
69 in the appendix.]
    Senator Gillibrand. Thank you, Mr. Norton.
    Mr. Novakovic.

  STATEMENT OF ANDREW NOVAKOVIC, DIRECTOR, CORNELL PROGRAM ON 
                    DAIRY MARKETS AND POLICY

    Mr. Novakovic. Madam Senator and Congressmen, thank you. 
Thank you for coming. Thank you for being in New York. Thank 
you for inviting me to participate.
    If I may, I would like to say I am pleased to see that this 
meeting is both bicameral and bipartisan. We New Yorkers are 
not always used to that kind of behavior, and so it is a 
pleasure to see it at least in our U.S. Congress.
    My name is Andrew Novakovic. I am the E.V. Baker Professor 
of Agricultural Economics at Cornell University. I am also the 
Director of the Cornell Program on Dairy Markets and Policy. I 
have been working on dairy policy issues for about 30 years, 
professionally, and was interested in it for a bit before that, 
before I became a professor.
    I provided you with a packet of information. This includes 
written remarks, a short paper that I did which looks at a 
history of dairy prices, just for the basic data, and also a 
rather lengthy PowerPoint type review of basic programs. 
Obviously, I will not be reading those, but they are there for 
your information if that is useful.
    I have been asked to discuss current dairy policy and some 
options, and I would like to briefly do that.
    Let me begin by getting just a wee bit philosophical. As 
you know and as you have heard, the situation for dairy farmers 
today is dire indeed. I do not know exactly how you measure how 
bad is bad, but my feeling is it is probably the worst 
situation for dairy farmers since the Great Depression.
    I will not try to recount the different ways you might 
measure this; you have heard testimony. But, before I begin 
jumping into policies, let me say a couple things about how we 
might work to understand the nature of the problem.
    My colleague used two words that I am fond of. When I talk 
about pricing, I remind people that there are three dimensions 
to pricing that are important to understand: stability, 
certainty and adequacy.
    We often use the word stability as some kind of proxy for 
the other two, but that in fact can be misleading. A price can 
be stable and totally inadequate, and the problem today really 
is adequacy. People are associating the fact that we have 
highly unstable prices, with prices that occasionally dip 
really low, but let's not lose sight of the fact that the 
problem we have to solve is adequacy. Stability is an issue but 
probably not the most important issue today.
    When we think about it from that perspective, we begin to 
understand that some programs, either ones we have or ones we 
might have, may work really well on one issue, maybe not so 
well on another.
    Federal orders: Federal orders have been much cussed and 
discussed. They are complicated. They are described often as 
incomprehensible. I think they are comprehensible; you just 
have to work really hard at it.
    We have been discussing reform in Federal orders for about 
20 years. Let me simply say you will hear many proposals for 
reforming Federal orders. I do not believe any of those will 
address the problem of adequacy now. They may deserve 
discussion on their own merits, but I do not believe they are 
the appropriate tools to be dealing with the current issue.
    The price support program is in fact the perfect tool for 
dealing with low prices. It is exactly what it is supposed to 
deal with. Unfortunately, we found this tool incredibly heavy 
to lift recently. There are budget issues that have prevented 
us from using this program for 20 years until August 1st. There 
are WTO issues. We may ask, are we using it enough or should we 
use it longer, but at least it is a tool we ought to think 
about.
    MILC is also a help. One of my concerns with MILC is the 
very thing it is intended to do to help you get through a bad 
time may actually prolong how long it is bad. I think we have 
to give some serious thought to how well we wield that tool. As 
you have a chance to read my testimony, you will understand 
that I have some ideas about how we might improve that.
    Others have talked about growth management. I am going to 
skip over that, and I want to introduce one topic that is 
controversial.
    Let me be most clear. I am not an advocate, but we had a 
program 20 years ago called the Dairy Termination program, more 
popularly known as the buyout. It lives today as a voluntary 
program under CWT. If we wanted to have a rather rapid effect 
on the price of milk and give at least some group of farmers 
some dignity in exiting of their choosing, we might consider 
dusting off that set of regulations and doing another buyout 
program. Now that conversation could unfold in a much longer 
discussion, and, if you would like to talk about it further, I 
would be happy to do so.
    I look forward to your questions later or at any other time 
in the future. Thank you.
    [The prepared statement of Mr. Novakovic can be found on 
page 74 in the appendix.]
    Senator Gillibrand. Thank you, Doctor.
    Bob Wellington.

    STATEMENT OF BOB WELLINGTON, CHIEF ECONOMIST, AGRI-MARK

    Mr. Wellington. Thank you for this opportunity to appear 
before you.
    My name is Bob Wellington. I am the Economist for Agri-Mark 
dairy co-op. Agri-Mark is a co-op that just markets milk here 
in the Northeast. We have about 1,250 dairy farmer members. Our 
members milk, on average, about 100 cows, so our average is not 
very large. We do have all size members. However, our largest 
member is still smaller than the average size member in 
California.
    And, I cannot miss the opportunity to say that I have been 
to many farms in California. The type of farming they have, if 
those are cows are happy, then they must be eating what other 
people are smoking out there. It is a different type of 
agriculture.
    [Laughter.]
    Mr. Wellington. Our farmers, our biggest block of farmers 
is here in New York, and we own four plants because we are 
trying to get closer to consumers. Three of those plants were 
closing by their owners, and so we ended up buying them. The 
farmers in our co-op bought them, and we operate them.
    We turned one of them into a business called Cabot Cheese, 
that has won the world cheese championship twice in the last 10 
years. The other one was the most recent up at McCadam Cheese 
in Chateaugay, New York. We are pleased to say that was 
struggling because of their quality when we bought them, and 
last year they won the award for the best cheese in the U.S. So 
farmers have been able to turn around these things quite well.
    I just want to go over a couple quick points. I believe 
that the problems and the legislative responses we should be 
looking at should be looked at two levels. The first is the 
fundamentals of supply and demand that affect price. The second 
is the pricing structure itself that determines prices paid to 
farmers.
    Small differences in supply and demand can result in large 
differences in prices. A general rule of thumb that I have used 
is that a 2 percent discrepancy in supply and demand balance 
often leads to a 20 percent change in price. This has worked to 
both moving milk prices up and down. While there is no 
documentation that this 10-fold price increase still applies at 
larger imbalance levels, that certainly appears to be the case 
when growing international demand for U.S. dairy products drove 
farm prices above $20 per hundredweight in 2007 and then 
declining demand and small supply increases collapsed prices 
below $12 in 2009.
    Most dairy farmers have the freedom to choose how many cows 
they wish to milk and how much milk they wish to produce. 
Unlike in other commodities, dairy farmers in most areas, such 
as the Northeast, have rarely been hampered by the need to find 
a market if they planned on expanding. Federal orders and 
cooperative marketing have played a role in these freedoms. 
However, because farmers have not taken into consideration 
demand for their production, they pay a bitter price of severe 
price volatility and a depressed income when more milk is 
produced than demanded at acceptable price levels.
    Most farmers recognize this problem but are very 
independent dairymen and do not like others restricting their 
farm business decisions. What many do not recognize is that the 
lack of any production discipline likely created more price-
related restrictions on their business than anything else.
    When there is too much milk in the marketplace relative to 
demand, the market needs to send a low price signal to lower 
supply. Unfortunately, the farmers' reaction to lower prices is 
if the price goes down, they make more milk to keep up their 
cash-flow; if the price goes up, they make more milk because 
they try to get more profit and return back to their farm. So 
they are in Catch-22. We need to send the right signals back to 
farmers.
    In terms of the price support program, that has been 
operating since 1949. Those prices actually peaked in 1980 to 
over $13. Currently, they are less than $10--so, an older 
program that has been going downhill.
    I usually describe the price support program as a safety 
net lying untethered on a concrete floor. If the price hits 
that level, the damage done to farm operations is usually 
extreme. Efforts by many legislators, including our own 
Northeast Senators, to urge Secretary Vilsack to temporarily 
raise support prices for cheese and powder were needed and 
greatly appreciated.
    We also support the amendment to the Senate Ag Committee 
that would give USDA an additional $350 million. It is 
important that USDA use these funds to actually purchase dairy 
products, to increase demand and lessen the burden of high 
inventories built up early this year.
    It was a great disappointment to see the market price for 
cheese fall below the support price for much of the year, yet 
not a pound of product was sold to the CCC. I believe that the 
support price was used by many in the industry as a benchmark 
to set the market price, not as an alternative outlet for milk 
supplies.
    Had the cheese price been 20 or 30 cents higher throughout 
the year, I estimate that little, if any, cheese would still 
have been bought by the government. With food banks and other 
low income feeding programs clamoring for product donations, 
CCC cheese purchasers would have found a welcome home and would 
not be around to further aggravate supply and demand imbalances 
today. We do believe there need to be changes in the Federal 
order system, but we also believe that that system is really 
more of a messenger of the problem. But there are some other 
changes that need to be made, and I would be happy to talk to 
you about them in the question period or beyond this meeting. 
Thank you.
    [The prepared statement of Mr. Wellington can be found on 
page 89 in the appendix.]
    Senator Gillibrand. Thank you, Bob.
    Kim Pickard-Dudley.

STATEMENT OF KIM PICKARD-DUDLEY, CHIEF DAIRY ECONOMIST, UPSTATE 
                         NIAGARA CO-OP

    Ms. Pickard-Dudley. Good afternoon and thank you for giving 
me the opportunity to testify today on behalf of Upstate 
Niagara and for your steadfast work in support of our dairy 
industry, especially through these difficult times.
    My name is Kim Pickard Dudley, and I am Chief Dairy 
Economist of Upstate Niagara Dairy Cooperative. We are made up 
of 400 dairy farm families. We market about a billion and a 
half pounds of milk annually, and we also own and operate four 
dairy plants in Western New York and employ about a thousand 
people in Rochester, Buffalo and Batavia.
    In my role as Chief Dairy Economist, I have direct access, 
direct responsibilities and direct involvement with our dairy 
farmer members, with our commercial operations and sales staff 
as well as with our commercial customers. I interact with all 
these stakeholders on any and all issues relating to milk 
pricing, including price forecast and risk management 
strategies.
    My full testimony is set forth in my written testimony. In 
my oral remarks, I will focus on actions that the Senate can 
take to improve the U.S. dairy industry, discussing primarily 
changes in the Federal Milk Marketing Order system which I will 
refer to as the Federal Orders.
    Since Upstate Niagara is owned by dairy farmers who operate 
plants, we are well suited to seek real-world solutions for all 
stakeholders in the dairy industry, from dairy farm families to 
processors to retailers to consumers.
    We strongly believe that while there are some changes that 
need to occur in the Federal Orders, it is essential not to 
overlook the many benefits that the orders provide to all dairy 
industry stakeholder. Federal Orders provide a regulatory 
framework in which the industry has functioned for decades 
while serving consumers with a broad array of delicious, 
wholesome and safe dairy products. Federal Orders help to 
maintain a system of orderly marketing by establishing minimum 
prices that processors pay and blend prices that farmers 
receive for their milk.
    Right now, the dairy industry is in crisis. That is why we 
are here. However, it would be wrong to assign the blame for 
the current dairy prices to the Federal Orders. Rather, this 
crisis is the result of the greatest financial and economic 
collapse since the Great Depression which, in turn, led to a 
collapse in dairy demand for our products both here and abroad.
    The dreadfully low milk prices announced by the Federal 
Orders have been the messenger of this bad news. So we should 
not kill the messenger when in fact the grim message behind the 
terribly low milk prices spells out this stark reality: Demand 
for dairy products has collapsed, and, therefore, painful 
reductions in the supply of milk must occur.
    We do, however, have suggestions for how the messenger can 
more appropriately deliver the message so that farmers, 
processors, retailers and consumers are not whipsawed every 
time a change in market conditions occurs. Our suggestions deal 
with improving price discovery.
    We believe that the core of the price discovery problem is 
this: On the CME, only a scant amount of product is bought and 
sold by a scant number of buyers and sellers. This very small, 
seemingly insignificant sample has huge economic significance 
because it is the basis of all Federal Order pricing. In other 
words, it is a small quantity of milk that is used to set 
pricing that all federally regulated processors pay and that 
all dairy farmers ultimately receive for their milk.
    What we see therefore as being a solution to this pricing 
structure dilemma is to find ways to use a broader basket of 
price discovery tools that are more reflective of the current 
and future supply/demand situation to be the basis of the price 
that processors pay and dairy farmers receive for their milk.
    For example, we could use additional products in the 
pricing formula such as mozzarella cheese. We should use 
additional markets in the formula such as futures markets. We 
should use actual prices paid for dairy products such as in 
pricing surveys. And, last, we should use gauges of input costs 
in the pricing formulas, by using such indices such as CPI and 
others that track certain costs such as corn and energy.
    Such a basket of price discovery tools has several 
benefits:
    First, by using a variety of price discovery tools from a 
variety of sources--cash and futures markets, pricing surveys 
and indices--you inherently improve the integrity of the 
marketplace by, one, adding liquidity to the market and, two, 
smoothing out random, extreme and perhaps unwarranted price 
fluctuations.
    Second, by using a variety of price discovery tools, it 
allows the industry to learn the advantages and disadvantages 
of each factor gradually. The benefit of this gradual learning 
curve in developing price discovery tools is best seen from the 
unintended adverse consequences that have developed since the 
last major change to price discovery 10 years ago.
    At that time, the Federal Orders started using a system 
called end product pricing to determine minimum prices. The 
USDA's decision was based on much learned testimony from 
experienced dairy economists. Nevertheless, real-world 
experience has revealed a number of harmful drawbacks to 
producers and processors as a result of end product pricing.
    I spell this all out in detail in my written testimony, 
namely the problem of make allowances, but, suffice it to say, 
this system is causing huge problems for both processors in 
recovering real costs from the marketplace as well as blatant 
unfairness to producers.
    To summarize, and I know I am out of time, it is my view 
that a necessary first step in reforming the pricing structure 
of the Federal Orders is to fix the flawed system of price 
discovery. This system has created huge problems for 
processors, blatant unfairness to producers and has fostered 
extreme price volatility--$20 milk 1 day and $10 milk the next 
is unhealthy and destructive for dairymen, processors, 
retailers and consumers alike.
    I would be glad to answer questions.
    [The prepared statement of Ms. Pickard-Dudley can be found 
on page 83 in the appendix.]
    Senator Gillibrand. Thank you all for your testimony.
    I would like to start with you, Dr. Pickard-Dudley. One 
thing you said struck me. You said that the current crisis is 
due to the economic collapse. But if we are getting paid $12 a 
hundredweight, that just does not seem consistent with the 
volatility we have seen over the last 25 years.
    Just to note that this is the price volatility, we have had 
$12 a hundredweight of milk on and off since the eighties, the 
last of which was being in the 2005-2006 cycle it got down to 
about $12 a hundredweight.
    Ms. Pickard-Dudley. Right.
    Senator Gillibrand. That is so soon to see it go from $12 
to $24 in a very short time.
    I guess my question is everyone always says it is supply 
and demand. Are we taking on so many cows so quickly that we 
are very much ratcheting up production so that demand cannot 
keep up or is something at work? It does not seem that this 
kind of volatility could be possibly caused by supply and 
demand.
    Ms. Pickard-Dudley. The reason that prices rose so rapidly 
and have fallen off so rapidly, is that we have just 
experienced back-to-back years of extreme situations. In 2007, 
we rode on the tails of emerging markets, and the export 
business of the United States grew from about 4 to 5 percent of 
the total U.S. milk supply to 11 percent. Now that is a lot.
    In 2007, the world could not produce enough dry milk powder 
to serve the world, and so what happens in that regard is that 
milk prices respond. They get very, very high to attract, to 
send signals to producers to produce. There was literally not 
enough milk powder to serve the world. So that was one very 
extreme situation, and that is just part of the story.
    Just as dairy farmers responded across the world to this 
price signal, just like this, the rug was ripped out from under 
them when we had the financial collapse, the economic collapse, 
in the same way that oil prices went from $147 a barrel to $34 
a barrel over dinner.
    Senator Gillibrand. Right, but there has been so much 
testimony developed over the last 2 years that supply and 
demand in fact was not the cause of those wild swings in oil, 
that manipulation and speculation had some role.
    So the reason why I question that testimony is because we 
have the same fluctuation from $19 a hundredweight in February, 
2004, through July, 2005, and then back down to $12 by 
December, 2006. So that is not the collapse. Was there a great 
shortage of milk at the end of February, 2004?
    Ms. Pickard-Dudley. There are so many factors that impact 
this business and yield price volatility. There is a huge 
seasonal variation in milk production patterns. There is also a 
huge seasonal variation in when consumers buy products, right? 
For example, when kids go back to school, we see a huge influx 
of demand.
    So you have these forces really working in the opposite 
way. When producers make less milk, it is demanded more. And 
so, that is a part of the story.
    But also, there is another part of the story, and that is, 
in the year 2000, when we went through this Federal Orders 
reform process, we changed the system from what was then a 
competitive pay price system called what used to be the MW and 
then the BFP, the Basic Formula Price. In 2000, we switched 
over to a system called ``end product pricing,'' which I have 
laid out in much greater detail in my written testimony.
    From the time that we switched over to that system, 
certainly, the markets have been more volatile simply because 
of the way that the pricing formulas work.
    Senator Gillibrand. Thank you.
    Congressman would you like to ask some questions?
    Mr. Lee. Sure. Thank you.
    It has been very enlightening, and I appreciate again your 
coming in here today and trying to educate us on a few of the 
ideas that you had.
    If I can start first briefly with Andrew. I know you had 
said you outlined it in your testimony, but I have not had a 
chance to read it. I was curious on the MILC program, in terms 
of you said you had some ideas. I am just curious because I 
want to get to one other question, but if you give me one or 
two of the major ideas, if it is anything like indexing to 
inflation or whatever, that would help ensure that we do not 
have this same stagnant formula.
    Mr. Novakovic. There are several things that potentially 
could be useful, that are sort of technical details, but let me 
focus on a couple of key items.
    One is the fundamental concept of the MILC program is to 
pick some trigger price that somehow represents something good 
and compare it to what you really have and try to make up the 
difference. For various historical reasons, we have picked a 
certain trigger, and we have taken a percentage of the distance 
between actual and that trigger.
    Personally, I think it would be more transparent, easier 
for farmers to understand, and operationally more successful to 
modify that somewhat. Instead of using our current trigger, 
which is based on a portion of the market in one part of the 
Country, to look at the U.S. average all-milk price as our 
trigger and figure out an appropriate level at which to trigger 
those payments, at which point you can talk about 100 percent 
payment difference between the gap as opposed to some 
percentage.
    I also think that it might be helpful, particularly 
realizing there is just only so much money to spend, to think 
about a graduated scale of payments. So maybe if the distance 
between the trigger and the actual is relatively small, you do 
not have full restitution. But, at some point, you say we are 
going to completely make up the difference between the actual 
and the trigger so that as the gap becomes greater you help 
more. I think clearly that current percentage is feeling like 
we are falling short.
    Mr. Lee. Andrew, excuse me, I want to make sure with my 
time I have left. But, thank you, and I will go through the 
rest of the details you provided.
    I wanted to go over to Mr. Wellington because I liked his 
approach. I think you talked a little bit about it is an 
interesting market because the high degree of price elasticity. 
As you mentioned, a 2 percent fluctuation in supply can have a 
20 percent change in price, and that is a difficult situation 
to deal with.
    To your point, if we can somehow push demand up, we can get 
to a much better price point. I am curious. You were starting 
to mention a few ideas that you had. Is there anything else 
that you thought was of value that we should be hearing and to 
the audience?
    Mr. Wellington. Well, I think that 2 percent rule is a 
horrible situation when the price is going down, but it is also 
a tremendous opportunity when the price is going up. It is the 
reason why farmers had prices exceeding $20 in 2007 and had one 
of their better years.
    And so, what we have to do is look at both supply and 
demand and try to drive demand any way we can. That is why 
farmers give money for promotion.
    On the other hand, farmers have to look at the supply and 
produce for the marketplace, and farmers are really good at 
increasing their production, from a cow, number of cows, 
whatever, and sometimes they are their own worst enemy because 
what they do for their farm, OK, that is good for their farm, 
is bad for the marketplace. That is why we have to try to 
coordinate that.
    So we are looking at saying, is there a way that we can 
send the right message to farmers? If it is 3 or 4 percent too 
much milk, why have that drop the price 96 percent? Why can we 
not say, that milk is worth less?
    So maybe you do not want to produce that milk if it is 
worth three or four dollars. Get rid of that in the marketplace 
and bring that supply and demand in balance again.
    So there are ways we are looking at trying to do that, but 
the biggest issue we have is farmers agreeing on what kind of 
program to do and getting a consensus because farmers are 
independent-minded, as you guys know, and they do not like 
restrictions on their farms, which we all understand. But they 
have to start producing for the marketplace because, otherwise, 
they create their price imbalance.
    Mr. Lee. Thank you.
    Senator Gillibrand. Congressman Massa.
    Mr. Massa. Thank you, Senator.
    Just very quickly, Mr. Norton, we have had a wonderful 
relationship. I literally flood your office with legislative 
questions. Is it true--and this gets back to a real pet peeve 
of mine, and it was brought up earlier--that the 15 cents per 
hundredweight advertising fee is in fact funding the California 
happy cow program here in New York?
    Mr. Norton. Here in New York?
    Mr. Massa. Yes.
    Mr. Norton. The 15 cents is mandated.
    Mr. Massa. Is that what funds those advertisements?
    Mr. Norton. No, no.
    Mr. Massa. I mean can we do the same thing, just out of 
curiosity? Let's get some Steinbrenner cows over in California.
    It is a rhetorical question because I do not understand 
what we get in New York out of California cows. I mean I do 
not. Why?
    Mr. Norton. Keep in mind that there are two promotions. 
There is a part of the money that goes nationally for 
everything, like Got Milk, milk mustaches, things like that.
    Mr. Massa. Right.
    Mr. Norton. And then, there is part of the milk that stays 
local. OK. That California milk stays local. The California 
money that stays local is the happy cows. You see a little tag 
line.
    Mr. Massa. Yes, but I do not see a lot of locality between 
Sacramento and Batavia. So that is where I am.
    Mr. Norton. Well, we have some money in New York, in the 
Northeast, that stays local.
    Mr. Massa. So let's invade California. I mean that is my 
point. I am interested in regional things we can do, but that 
answers my question.
    Mr. Norton. Well, keep in mind California also is the 
biggest dairy State in the Country. So they have the most money 
out of anybody too.
    Mr. Massa. OK.
    Mr. Norton. They need a way to spend it.
    Mr. Massa. That is a good point.
    Bob, if I could have a follow-up question with you, sir, so 
you talk a lot about supply and demand. Would I be correct to 
open and reexamine--and I will not ask the question in a way 
that taints my opinion--would I be correct to open and examine 
the incredible, obnoxious, negative, counterproductive program 
that we have now to flood our schools with Coca-Cola and soft 
drink products?
    Mr. Wellington. I think they are addressing some of that 
now.
    Mr. Massa. Again, I do not want to flood my personal 
opinion on it.
    [Laughter.]
    Mr. Wellington. I saw that, but I am just saying that I 
think we are starting to address that. OK?
    But I would caution you on one thing with the California 
milk standards. We support that at my co-op. OK? But when you 
add those extra solids, you are also adding lactose, no sugar.
    Mr. Massa. No. I understand that.
    Mr. Wellington. I am just saying, there are a lot of 
different pros and cons, but we would support that effort.
    Mr. Massa. Bob, I would rather have a fight between 
different kinds of milk rather than a fight between milk and 
Sprite. And, I do not mean to single out products, but when I 
go to a high school and I realize that high school students are 
drinking three, four, five sodas a day because there is an 
agreement between soft drink distributors and manufacturers in 
funding school boards, I find that to be hideously 
counterproductive to our national health standards.
    So I would rather have a fight about what kind of milk we 
are supplying in schools.
    Mr. Wellington. There is a problem in New York City that 
you guys should be aware of, and that is New York City has 
started taking out any of the whole milk or 2 percent milk. So 
they all want to do is leave the skim milk, the blue milk. OK? 
And, you can say, well, that is good, it is healthy for them, 
but a lot of students do not drink it.
    Mr. Massa. No one has died from drinking 2 percent milk.
    Mr. Wellington. That is what I am saying. So I mean we have 
issues ourselves, even locally, on how to try to address that.
    Mr. Massa. Last question, Doctor, you are probably very 
erudite in this. But I have listened all day to experts who 
know a lot more about this than I do, and I opened my remarks 
by saying, gee, is it not odd that something went wrong in New 
Zealand and now all of the dairy farms in my congressional 
district are getting ready to go under?
    I have not heard anyone tell me what I can do to stick it 
to our international competitors. I am sorry. I am just a 
plain-spoken Navy guy. I do not have a Ph.D. in economics. I 
spent my whole life going to war in the United States Military. 
I kind of frame things that way.
    And, I am a little bit concerned that everything we come up 
with is a form of self-flagellation, and we are not going after 
our foreign competitors. So here is an idea I would like you to 
tell me about.
    I was asked to sign off on God only knows how much money. 
Chris keeps track of these things because he holds me 
accountable for everything we spend. It was about a, who knows, 
$500 billion foreign aid bill where we give stuff away all over 
the world. What I come to find out is some of that U.S. foreign 
aid buys foreign food to be delivered as emergency aid in 
foreign ships to foreign countries.
    Why should we not create a law that says every dollar of 
emergency U.S. foreign food aid has to come out of a U.S. farm 
and why can we not do that? Is that a bad idea or a good idea?
    Ms. Pickard-Dudley. It sounds like a great idea to me.
    Mr. Massa. All right. Everybody here in concurrence?
    [Applause.]
    Ms. Pickard-Dudley. If I may----
    Mr. Massa. Doctor, here is the problem. I cannot ship whole 
milk to India or to some other country that needs it badly. 
What I need is some help about what we can ship, and that comes 
back to you need to come tell me, or you all do, what do we do 
to incentivize the creation of milk concentrate plants here in 
the United States.
    Ms. Pickard-Dudley. I am so glad that you asked. Actually, 
I do have about a paragraph and a half in my testimony that I 
was hoping to get to.
    USDA needs--desperately needs--to resolve the Federal 
Orders product classification issue that has been tied up in 
the hearing process now for about 5 years. We need a decision 
out of the USDA that will encourage the production of dairy 
proteins, the domestic production of dairy protein ingredients 
such as MPCs.
    We see tremendous opportunity in all sorts of dairy-source 
protein ingredients that are lower in carbs and calories, and 
we would like to see the production of those protein 
ingredients be produced right here in our own borders, so that 
dairy farmers right here in the United States of American can 
benefit, and not foreign dairy farmers.
    Mr. Massa. Doctor, if I could just ask because this is 
where the rubber hits the road--a lot of erudite things we have 
to do. I would like you to draft a letter that I will sign, and 
I think I can find other people to help, and we will sign it 
out to the head of the USDA, to a little building on 
Pennsylvania Avenue called the White House and wherever else we 
have to go to force that action to happen quickly, if you think 
that that will help the situation.
    Ms. Pickard-Dudley. Yes. I will absolutely do that.
    Mr. Massa. Good. OK.
    Ms. Pickard-Dudley. Also, as it relates to this aim issue 
of domestic MPC production there has been a capital expansion 
project at the O-AT-KA Milk Products plant right here in 
Batavia, New York, that has been on hold since 2005, awaiting a 
decision out of USDA.
    Mr. Massa. OK, so the call for action. I do not know if I 
can speak for the Senator and Chris on this, but I struggle at 
hearings with, all right, give me the action that I want.
    You know you put 200 dairymen in a room, you get 250 
opinions. And, if you stay for 3 hours, you have a civil war.
    So what I want is tell me my homework, and I will take a 
bite of the apple, and we will do it. So thank you very much, 
and we will make it happen.
    I yield back my balance, Senator.
    Senator Gillibrand. Thank you.
    Thank you so much for your testimony. Thank you for your 
expertise. Thank you to our audience for your participation as 
well.
    And, again, anyone who wants to submit their own testimony, 
you have 5 days to do so, and my staff is around the room. This 
is Cheyenne Roy. Please stand up, Cheyenne. He is our 
agriculture specialist in our Senate office. Please speak to 
him directly before the end of the day.
    Thank you so much.
    Hearing adjourned.
    [Whereupon, at 3:45 p.m., the Committee was adjourned.]
      
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