    [Senate Hearing 111-797]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 111-797

                        RESPONDING TO LOW DAIRY PRICES:
                      EXPLORING AVENUES FOR FEDERAL ACTION

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

                                    HEARING

                                   before the

                      SUBCOMMITTEE ON DOMESTIC AND FOREIGN
                        MARKETING, INSPECTION, AND PLANT
                               AND ANIMAL HEALTH

                                    and the

        SUBCOMMITTEE ON PRODUCTION, INCOME PROTECTION AND PRICE SUPPORT

                                     of the

                           COMMITTEE ON AGRICULTURE,
                            NUTRITION, AND FORESTRY

                              UNITED STATES SENATE

                         ONE HUNDRED ELEVENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                OCTOBER 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

                     BLANCHE L. LINCOLN, Arkansas, Chairman

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

     SUBCOMMITTEE ON DOMESTIC AND FOREIGN MARKETING, INSPECTION, AND PLANT
                               AND ANIMAL HEALTH

                     KIRSTEN GILLIBRAND, New York, Chairman

    KENT CONRAD, North Dakota            MIKE JOHANNS, Nebraska
    MAX BAUCUS, Montana                  RICHARD G. LUGAR, Indiana
    E. BENJAMIN NELSON, Nebraska         MITCH McCONNELL, Kentucky
    AMY KLOBUCHAR, Minnesota             PAT ROBERTS, Kansas

        SUBCOMMITTEE ON PRODUCTION, INCOME PROTECTION AND PRICE SUPPORT

                   ROBERT CASEY, JR., Pennsylvania, Chairman

    PATRICK J. LEAHY, Vermont            PAT ROBERTS, Kansas
    TOM HARKIN, Iowa                     THAD COCHRAN, Mississippi
    KENT CONRAD, North Dakota            MIKE JOHANNS, Nebraska
    MAX BAUCUS, Montana                  CHARLES E. GRASSLEY, Iowa
    SHERROD BROWN, Ohio                  JOHN THUNE, South Dakota

                   Robert Holifield, Majority Staff Director

                        Jessica L. Williams, Chief Clerk

                Martha Scott Poindexter, Minority Staff Director

                    Anne C. Hazlett, Minority Chief Counsel

                                      (ii)

                                C O N T E N T S

                                  ----------
                                                                       Page

    Hearing(s):

    Responding to Low Dairy Prices: Exploring Avenues for Federal
      Action.........................................................     1

                                  ----------

                           Tuesday, October 27, 2009

                                  ----------

                        STATEMENTS PRESENTED BY SENATORS

    Casey, Hon. Robert P., Jr., U.S. Senator from the State of
      Pennsylvania...................................................     1
    Gillibrand, Hon. Kirsten E., U.S. Senator from the State of New
      York...........................................................     2
    Johanns, Hon. Mike, U.S. Senator from the State of Nebraska......     3
    Klobuchar, Hon. Amy, U.S. Senator from the State of Minnesota....     5

                                    Panel I

    Ooms, Eric, Dairy Farmer, Old Chatham, New York..................     6
    Souza, Ray, President of Western United Dairymen, Mel-Delin
      Dairy, Turlock, CA.............................................    10
    Toft, Paul, President, Associated Milk Producers Inc., Midwest
      Dairy Coalition, Rice Lake, Wisconsin..........................     8
    Nuttelman, Doug, Dairy Farmer, Nuttelman Dairy, Stromsburg,
      Nebraska.......................................................    13

                                    Panel II

    Gallagher, Ed, Vice President of Economics And Risk Management,
      Dairylea Cooperative Inc. Syracuse, New York...................    24
    Kruse, Paul W., Chief Executive Officer And President, Blue Bell
      Creameries, L.P., Brenham, Texas...............................    29
    Redding, Russell C., Acting Secretary, Pennsylvania Department Of
      Agriculture, Harrisburg, Pennsylvania..........................    27
    Sjostrom, Lucas S., Government Relations Specialist and
      Communications Assistant, Holstein Association USA, Inc.,
      Brattleboro, Vermont...........................................    31
                                  ----------

                                    APPENDIX

    Prepared Statements:
        Casey, Hon. Robert P., Jr....................................    44
        Roberts, Hon. Pat............................................    46
        Gallagher, Ed................................................    47
        Kruse, Paul W................................................    69
        Nuttelman, Doug..............................................    81
        Ooms, Eric...................................................    91
        Redding, Russell C...........................................    96
        Sjostrom, Lucas S............................................   101
        Souza, Ray...................................................   108
        Toft, Paul...................................................   121
    Document(s) Submitted for the Record:
        Dairy Farmers of America, prepared statement.................   128
        Resolution Urging Federal Response to the Economic Crisis of
          the Dairy Industry.........................................   132
    Question and Answer:
    Thune, Hon. John:
        Written questions for Lucas S. Sjostrom......................   136
        Written questions for Paul W. Kruse..........................   137
        Written questions for Doug Nuttelman.........................   137
    Kruse, Paul W.:
        Written response to questions from Hon. John Thune...........   138
    Nuttelman, Doug:
        Written response to questions from Hon. John Thune...........   140
    Sjostrom, Lucas S.:
        Written response to questions from Hon. John Thune...........   141

      RESPONDING TO LOW DAIRY PRICES: EXPLORING AVENUES FOR FEDERAL ACTION

                                  ----------

                           Tuesday, October 27, 2009

                                  United States Senate,
                Subcommittee on Domestic and Foreign Marketing,
                       Inspection, and Plant and Animal Health,
                 Subcommittee on Production, Income Protection,
                                             and Price Support,
             Committee on Agriculture, Nutrition, and Forestry,
                                                         Washington, DC
        The Subcommittees met, pursuant to notice, at 2:41 p.m., in
    room SH-216, Hart Senate Office Building, Hon. Kirsten
    Gillibrand, Chairman of the Subcommittee, presiding.
        Present: Senators Gillibrand, Casey, Klobuchar, and
    Johanns.
        Senator Gillibrand. I call this meeting to order. I would
    like to recognize my Co-Chairman, Senator Casey, and allow him
    to make his opening remarks.

     STATEMENT OF HON. ROBERT P. CASEY, JR., U.S. SENATOR FROM THE
                         STATE OF PENNSYLVANIA

        Senator Casey. Thank you very much, Senator Gillibrand. I
    wanted to welcome everyone to our hearing today. We will be
    here for a while, as is appropriate for this topic, and we are
    grateful that we have two Subcommittees represented here. And I
    am grateful that Members of the Senate who are concerned about
    this issue are with us today, Senator Klobuchar as well as our
    Chair, Senator Gillibrand, and Senator Johanns as well.
        I will submit a fuller statement for the record, but I do
    not think I need to highlight or impress upon anywhere here the
    urgency in the gravity of the issue that brings us here today--
    the crisis that is dairy farming today, the crisis that the
    families and communities have been living through. Even in the
    midst of a terrible economic recession that so many families
    have lived through, I do not think there is a category of
    families or a group of families that have been more hard hit
    than those who are dairy farmers all across the Commonwealth of
    Pennsylvania as well as so many other States that are
    represented here today.
        So we have, I think, an obligation, those of us in the
        United States Senate broadly, but especially those of us
    who have agricultural interests in our States--in Pennsylvania,
    for example, we have a lot of important sectors, a lot of
    strong sectors of our agriculture economy, but dairy is the
    largest and one that we have real concern about.
        We have as a region, beyond Pennsylvania, in the
    northeastern corner of the United States, the projection--we
    hope it does not materialize or come true, but the projection
    that we could lose up to 25 percent of our family dairy farms
    throughout the time of this crisis. In total, it is some 40,000
    jobs in the Northeast at risk when I talk about this crisis.
        My top priority--and I think it is the top priority of
    everyone here--is to make sure that our agriculture in any
    State, but across the country, can compete nationally but also
    internationally. I think that is something we can all agree on.
    So whether you are a milk producer, a manager of a co-op, a
    plan operator, a food manufacturer, we all need a healthy
    industry. And we all gather here today to explore ways to get
    through this crisis, to provide short-term help but also long-
    term help for our families and for our communities.
        So, with that, I will turn it back to our Co-Chair--I guess
    we are Co-Chairs today.
        Senator Gillibrand. Yes.
        Senator Casey. Two Subcommittees meeting at the same time.
    It does not happen very often around here. And I think it is
    important that we note the diversity of this audience in terms
    of geographic diversity as well as the diversity of this panel.
    And we are grateful that so many are here. Thank you.
        [The prepared statement of Senator Casey can be found on
    page 44 in the appendix.]

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

        Senator Gillibrand. Thank you, Senator Casey.
        I am so pleased that I have the opportunity to co-chair
    this hearing with my fellow Subcommittee Chairman Senator
    Casey. I would like to thank Ranking Member Johanns for also
    being here, as well as the other Senators--Senator Klobuchar, I
    appreciate you being here--to engage these distinguished
    panelists in a dialogue about the crisis that is now facing the
    dairy industry.
        The cost of doing business continues to surpass the price
    farmers are receiving for their product. There are not many
    businesses where people do back-breaking labor 7 days a week
    and come out financially worse for their trouble. Since
    February, prices per hundredweight have remained well below the
    cost of production. In my home State of New York, farmers pay
    over $18 to produce a hundredweight of milk. After action this
    summer by Congress and the USDA, prices have only risen to
    $15.80--still a losing game for our farmers. The pricing system
    simply does not work for America's hard-working dairy farmers.
        As I met with farmers from across New York State, I saw the
    absolute anguish and despair on their faces as they showed me
    their balance books that simply did not add up. I heard stories
    of families quickly seeing generations of hard work simply
    vanishing into foreclosure. Dairy farmers compose the economic
    backbone of many of America's rural communities. Over 60,000
    American families directly earn their livelihoods from the
    dairy industry. Dairy farms also have a multiplier effect,
    creating support jobs that strengthen local economies.
        In addition to hurting our agricultural communities, losing
    our local producing family-owned dairies will pose an enormous
    threat to the safety of America's food supply. Instead of
    purchasing products made to satisfy American food safety
    standards, a race to the bottom will mean importing food from
    wherever costs are the lowest, such as China.
        As experience has shown us over the last few years, giving
    up our ability to produce our own food is something we cannot
    afford to do as a national security priority. I hope this
    hearing will give us an opportunity to have a very frank
    discussion about the proposals currently out there and help
    members of the Committee develop solutions that will work for
    our dairy farmers, processors, and our American families.
        With the sustained low prices we have seen over the last
    few months, it is important that we provide farmers with the
    short-term assistance they need to make up for the money they
    are losing every day. In order to achieve this goal, I have
    introduced two pieces of legislation designed to improve the
    MILC Program's ability to provide a true safety net during such
    a crisis.
        It is my hope to work with other Members of Congress to
    ensure that this crucial aid becomes a reality so we do not
    lose any more farms. However, as we have been seeing, there is
    something fundamentally wrong with the way dairy farmers are
    paid for their work. We must develop new solutions to ensure
    that this does not happen again.
        My colleagues in Congress and agricultural advocacy groups
    across the Nation have been working on a number of proposals to
    help remedy the many problems that are currently facing the
    dairy industry. Today's hearing will focus on these solutions
    in order to determine the opportunities they present and the
    shortcomings that they may face.
        I am dedicated to developing comprehensive legislative
    fixes that will ultimately fix the problems the industry has
    once and for all. Today's hearing will serve as a starting
    point for those discussions as we begin working on the next
    farm bill.
        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 illuminate, and at the end of 5 minutes,
    you will see a red light illuminate. Any part of your testimony
    that you are not able to get to will be submitted for the
    written 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 testimony for the record.
        I am now opening the floor to Senator Johanns to make his
    opening statement.

    STATEMENT OF HON. MIKE JOHANNS, U.S. SENATOR FROM THE STATE OF
                                NEBRASKA

        Senator Johanns. Well, thank you very much. Let me start
    out and just acknowledge the good work of both Chairs, and
    thank you for putting this hearing together.
        Before I begin with my statement, I would like to note that
    Senator Pat Roberts, the Ranking Member of the Production,
    Income Protection, and Price Support Subcommittee, could not be
    with us today, but he will submit an opening statement for the
    record.
        I am pleased to be here to be a part of this hearing today.
    Having grown up on a dairy farm myself, I have always had a
    very strong and special interest in the issues that affect this
    very important industry.
        Dairies in the United States currently face a whole host of
    significant challenges. Significant increases in the cost of
    feed, energy, unpredictable foreign markets, and the current
    global economic downturn have all certainly contributed to the
    decreased demand for dairy products and a decline in milk and
    dairy product prices.
        The numbers are all too familiar to those that are in this
    room and to those who will testify today, but they really tell
    the story very clearly.
        The Congressional Research Service recently released a
    report on the dairy industry. I would recommend it. It states
    that the Milk Income Loss Contract--MILC--payments have been
    triggered every month since February of this year, and as of
    last month, total payments for the year were over $700 million.
    Anyone who knows something about the MILC Program will tell you
    that happens only because of very, very poor prices. The report
    also states that from January through September of this year,
    the all-MILC price received by farmers was 36 percent below a
    year ago.
        Administering the dairy program as the Secretary of
    agriculture provided me great insight into the intricacies and
    complications inherent in the Federal dairy policy. In fact, I
    had one reporter say to me at one point, he said, ``Mr.
    Secretary, when you come to understand the dairy program, you
    have probably been in Washington too long.''
        Any changes in Federal policy must seek to strike an
    appropriate balance between providing producers with a reliable
    and a predictable safety net during times like these while at
    the same time not encouraging overproduction or inhibiting
    other sectors within the agricultural community.
        Today should provide us a productive forum to examine the
    existing challenges and positive solutions for the U.S. dairy
    industry.
        If I could take a moment just to welcome a panelist who is
    a friend of mine, Doug Nuttelman, from Stromsburg, Nebraska,
    Doug is a dairy owner and operator. As I said, he is a good
    friend, and he operates what I would describe as a ``family
    farm.'' I have known Doug for many years. He has worked very
    closely with me as I was the Governor of Nebraska.
        I have had an occasion to visit Doug's family-run operation
    in Stromsburg and the great work that is done there. Doug's
    impressive bio has been made available today with all the other
    hearing materials, but I just wanted to take a moment to
    personally attest to his leadership in agriculture. It is awful
    good to have Doug here.
        In addition to his involvement with Dairy Farmers of
    America, the National Milk Producers Federation, and the
    Nebraska Dairy Council, Doug is a member of my Ag Advisory
    Council, which is a collection of Nebraskans who are involved
    in production agriculture. I value Doug's input, his
    perspective, and his friendship so, again, thank you.
        Let me just wrap up my comments today and say I look
    forward to the hearing, and I look forward to the testimony of
    all the witnesses. I think we are going to have a very
    productive discussion. And, again, I want to thank our Chairs
    for putting this together.
        Senator Gillibrand. Thank you so much, Ranking Member.
        I would like to now invite Senator Klobuchar to give
    opening remarks.

    STATEMENT OF HON. AMY KLOBUCHAR, U.S. SENATOR FROM THE STATE OF
                               MINNESOTA

        Senator Klobuchar. Thank you very much, Madam Chairman, and
    thank you, Senator Casey as well for co-chairing this. I would
    like to first extend a welcome to our witnesses, including Mr.
    Toft, who, although he is from Wisconsin, is the Chairman of
    the Associated Milk Producers, which is based out of New Ulm,
    Minnesota. Like Brett Favre, he is a guy from Wisconsin who has
    seen the virtues of joining a Minnesota-based organization.
        You know, nowadays when we hear the word ``crisis,'' it is
    not always an appropriate description of reality. I have a 14-
    year-old daughter, so I know this firsthand. Today's hearing,
    however, addresses a real crisis--a crisis that has hurt dairy
    farmers across our country.
        My State, the sixth largest dairy-producing State, is home
    to nearly half a million dairy cows who together produce nearly
    9 billion pounds of dairy products each year. Our farmers have
    seen the price of milk drop severely.
        Now, in the 2008 farm bill, we worked hard to include the
    MILC Program into--actually improve the MILC Program to help
    ensure stability for our Nation's dairy farmers. In the summer
    of 2008, when we passed the farm bill, we were seeing dairy
    prices peak. After that, however, dairy prices began to fall,
    eventually reaching their lowest levels in 20 years. And while
    dairy prices were falling, input costs remained high, creating
    a perfect storm for the nearly 70,000 dairy farmers around the
    country.
        In the past year, I have met many times with our dairy
    farmers, including just recently last month. One family I met
    with, the Krieger family, offered this letter expressing the
    crisis that their family was facing: ``I am writing out of
    desperation for the situation at hand. We are on the verge of
    losing everything we have worked for, for many, many years,
    including our home. Expenses to purchase fuel, grain feed, hay,
    electricity to produce the milk, medical expenses for the
    animals are all high, and there is no relief in sight. In spite
    of this, the prices we are receiving for our milk have remained
    low and, in fact, just went down again.''
        To address the short-term crisis and help farmers get back
    on their feet, we were able to amend the agriculture
    appropriations bill to provide, as you know, $350 million in
    additional relief. But in the long term, we need to consider
    how to change our dairy policies to prevent a future crisis.
        The National Milk Producer Federation's Strategic Planning
    Task Force recently announced four actions to help address
    long-term problems with price volatility in the market. These
    include: revamping the safety nets of the Dairy Product Price
    Support and Milk Income Loss Contract Programs; creating a new
    Dairy Producer Income Insurance Program; addressing the need to
    improve participation in the producer self-help program, which
    is called ``Cooperatives Working Together,'' while allowing it
    to better address periodic imbalances in the milk supply; and
    reforming the Federal Milk Marketing Order Program.
        Madam Chair, there was no single cause for this crisis, and
    farmers in Minnesota and across the country, our dairy farmers,
    are still not out of the woods. I look forward to hearing our
    witnesses' thoughts on these long-term solutions as well as
    what we can do in the short term, and I look forward to working
    with all of you.
        Thank you very much.
        Senator Gillibrand. Thank you.
        [The prepared statement of Senator Roberts can be found on
    page 46 in the appendix.]
        Senator Gillibrand. I invite the panelists to come up.
        I would like to welcome each of you and thank you for your
    expertise. I want to take a personal privilege of introducing
    Mr. Ooms, who is from my State. Eric Ooms is a partner with his
    father and brothers of a 425-cow dairy farm in Columbia County,
    New York. The Ooms family has been milking cows in Columbia
    County since 1950. They also grow 1,700 acres of crops for
    their cows as well as selling forage to neighboring farmers.
        In addition to his work on his farm, Eric serves as the
    Vice President of the New York Farm Bureau. He has been part of
    this organization for over 14 years. He serves on the New York
    Commissioner of Agriculture Patrick Hooker's Milk Marketing
    Advisory Committee. He is on Agri-Mark's Legislative and
    Education Committee and the National Milk Producers
    Federation's Immigration Committee.
        I also want to congratulate Eric and his lovely wife,
    Catherine Joy, on the newest addition to their family, 4-week-
    old Grace.

      STATEMENT OF ERIC OOMS, DAIRY FARMER, OLD CHATHAM, NEW YORK

        Mr. Ooms. Thank you. Good afternoon. My name is Eric Ooms.
    I am the Vice President of the New York Farm Bureau, which
    represents nearly 30,000 farm families in the Nation's third
    largest dairy State. My father, two brothers, and I milk 425
    cows in Chatham, New York. My family's lineage in the dairy
    industry traces back to at least 1525 in the Netherlands and is
    part of who we are, and we are very proud of this. Many
    generations of my family have had the awesome opportunity to
    follow our Dad to the barn and learn the lessons that he has
    taught us. Part of my goal in life is that my son and daughter
    have the same opportunities that I have enjoyed so much.
        In addition to being a great place to raise a family, a
    dairy farm is a business. If the business is not successful,
    this is all academic, and the theory of raising kids on a farm
    becomes some relic of a Norman Rockwell painting of days gone
    by. Northeast Farm Credit estimates that dairy farm income will
    be down over $700 million in New York State alone in 2009.
    This, coupled with recent increased costs of production, is
    presenting us with a dilemma that my father assures me he has
    never seen in 60 years in the dairy industry. I am actually
    surprised that there have not been more farms exiting the
    industry. I believe that the reason for this is the fact that
    the cows, land, and just about everything else is undervalued,
    so a farmer's only choice is to proceed forward and hope for
    the best.
        Rather than spending time outlining the obvious economic
    challenges we are facing, I will outline some of the things
    that can help remedy the situation.
        First and foremost, we need to keep in mind that we are in
    an all-encompassing economic downturn that has not only left
    the U.S. economy staggering, but has also brought the global
    economy to its knees. If global and domestic economic
    conditions were stronger, dairy product demand would be
    greater, and we would not be facing such a historic dairy
    crisis.
        Essentially, the price of milk is set by the price of
    cheese on the Chicago Mercantile Exchange. With so little milk
    trading on the Merc, we feel very strongly that another method
    of price discovery must be devised. Unfortunately, I do not
    have a great remedy for the fiscal inequity presented by this
    price discovery method at this time, but the issue needs to be
    studied. We strongly support decoupling the price of Class I or
    beverage class milk from the CME, as fluid milk consumption is
    fairly inelastic and should not be tied to consumption of
    cheese.
        We fully support Secretary Tom Vilsack's development of a
    Dairy Industry Advisory Committee and hope that it will come up
    with some positive ways to revamp the Federal order. Any plans
    that recommend eliminating or lowering the Class I
    differentials should be viewed very skeptically, if not out
    rightly opposed. With growing emphasis on the importance of
    regional food systems and local foods, it seems obvious to me
    that to steer Federal policy away from Class I differentials is
    counterproductive.
        We strongly support and appreciate the Milk Income Loss
    Contract Program and appreciate any and all efforts to increase
    the rate of payment and the production cap to accommodate
    multi-family farms. In addition, we greatly appreciate the
    addition of $350 million to the appropriations bill, and we
    encourage that those payments be expedited.
        Looking forward, we need to be certain that imported milk
    products are on a level playing field with domestic products.
    Imported products should be paying the same 15-cent-per-
    hundredweight promotion fee that every U.S. dairy farmer is
    paying. This is something that should not be delayed. We urge
    Secretary Tom Vilsack to implement the rule that would allow
    the assessment of 7-1/2-cents-per-hundredweight on imported
    dairy products and ask that individual Members of Congress
    demand this action be taken as it was mandated in the 2008 farm
    bill. In addition, we support Senate 1542 which would assure
    that imported milk protein concentrates are paying tariffs that
    are consistent with our World Trade Organization commitments.
    There may be more that can and should be done, but let us stand
    and walk before we try to run.
        Conversely, part of the favorable farm milk price we
    received in 2007 and 2008 was due to robust export
    opportunities for our products. We commend the Secretary for
    doing the Dairy Export Incentive Program earlier this year, and
    we encourage that it continue to be utilized. We need to
    continue to aggressively pursue export opportunities for our
    products as we, for better or worse, are in a global economy.
        We support the U.S. Department of Justice investigating
    business concentrations in the dairy industry as we need to be
    certain that dairy farmers are able to compete in an equitable
    environment. However, it is important to note that we need to
    continue to maintain the Capper-Volstead law as it empowers
    farmers to work together and improve economic situations we
    face.
        We also support California's standards for drinking milk as
    this type of fortified milk will better serve our nutrient-
    deficient populations, particularly in under served urban and
    rural areas. Nutrient-fortified milk which meets the higher
    solids standard to children in schools and families in their
    home communities is a practical and cost-effective way to
    improve public health. In my immediate area, Stewart's shops
    have an award-winning milk that is fortified similar to
    California milk, so it can and should be done nationally.
        Currently, the American Farm Bureau Federation has policy
    that opposes a Government-run, mandatory supply management
    program. This is probably consistent with industry feelings on
    the issue for quite some time. However, there is a great deal
    of dialogue in the dairy industry about the issue right now,
    and the next few months will dictate if there is enough impetus
    to change our longstanding opposition to supply management.
        We have been very supportive of Cooperatives Working
    Together, and I am happy to report that my family supports that
    as well with our dollars.
        Thank you again for having this hearing and inviting me to
    speak today. We are in an uncertain time, and there is a great
    deal of trepidation throughout our industry. I remain
    optimistic, though, that we have an industry that is worth
    fighting for, and I look forward to partnering with you on all
    these endeavors.
        [The prepared statement of Mr. Ooms can be found on page 91
    in the appendix.]
        Senator Gillibrand. Thank you, Mr. Ooms.
        Mr. Paul Toft, President, Associated Milk Producers, Inc.,
    Midwest Dairy Coalition from Rice Lake, Wisconsin. Mr. Toft.

     STATEMENT OF PAUL TOFT, PRESIDENT, ASSOCIATED MILK PRODUCERS
          INC., MIDWEST DAIRY COALITION, RICE LAKE, WISCONSIN

        Mr. Toft. Chairwoman Gillibrand, Chairman Casey, Ranking
    Members Johanns and Roberts, Senator Klobuchar, and other
    members of the Subcommittees, I appreciate the Committee's
    invitation to present my views on solutions to the current
    dairy crisis. I am Paul Toft, a dairy producer from Rice Lake,
    Wisconsin. My family operates what many would call a classic
    Wisconsin dairy farm. With two generations working side by
    side, we milk 70 cows and grow the forage and grain to feed our
    herd.
        Our milk is marketed through Associated Milk Producers
    Inc., a Midwest milk marketing co-op. As Chairman of the AMPI
    Board of Directors, I participate in the dairy policy groups to
    which AMPI belongs: the National Milk Producers Federation and
    the Midwest Dairy Coalition. The perspective I provide today is
    one of an upper Midwest dairy farmer, dairy cooperative member,
    and one who is active in the formation of dairy policy.
        Prices paid to dairy farmers are about half what they were
    a year ago. The economic stress in dairy-dependent regions like
    the upper Midwest, as in all dairy regions, is severe.
    Consistent anecdotal evidence suggests dairy farmers are losing
    $100 a cow each month. When this happens, we rapidly lose
    equity or our livelihoods. It is with this background that the
    following short-and long-term solutions are reviewed.
        Let us first examine the short-term solutions. The
    temporary hike in the Dairy Product Price Support Program is a
    good example of a short-term fix. Raising the cheese support to
    $1.31 from August through October served as an invisible floor.
    The market moved past $1.31--without the Commodity Credit
    Corporation buying a pound of cheese.
        Though the bump in the support price will expire this week,
    it resulted in dairy farmers receiving about $2 more per
    hundredweight of milk marketed. In times like these, I must
    underscore the importance of these dollars to my dairy farm.
        The next short-term fix is the $350 million Congress added
    to the agricultural spending bill. On behalf of all upper
    Midwest dairy farmers, thank you. I urge the USDA to quickly
    spend these dollars, given the severity of this dairy crisis.
        Now let us consider more long-term solutions to dairy
    reform. These must include current programs that work and due
    diligence on proposed policies. What works? The Milk Income
    Loss Contract and the previously discussed Dairy Product Price
    Support Program. Without a doubt, the economic safety net
    provided by these programs must be maintained.
        When the 2008 farm bill passed more than 1 year ago amidst
    $20 milk, many did not think these programs were relevant. I am
    glad they are in place today.
        The MILC has provided significant financial assistance to
    dairy farmers nationwide during times of low prices. The direct
    assistance provided by this program has community-wide benefits
    as the dollars multiply throughout the dairy-dependent local
    economies.
        As originally envisioned, the MILC Program was intended to
    be a partner with the Dairy Product Price Support Program. The
    two programs working together, in theory, would provide the
    stability to allow viable dairy producers to weather the storm
    of low-price cycles. But the theory remains untested, because
    the Product Price Support Program is not fully functioning.
        AMPI and the Midwest Dairy Coalition urge the U.S.
    Secretary of Agriculture to implement a long-term increase in
    the Commodity Credit Corporation purchase price for butter,
    powder, and cheese. The 3-month increase has proven how cost-
    effective this can be. Support for the existing programs that
    work, however, does not negate the need to reform the dairy
    industry policies. Clearly, I do not want to operate my family
    farm under the current conditions.
        Due diligence is needed on new policies aimed at solving
    the dairy crisis. Let us make the 2012 farm bill our goal as we
    review policies introduced by groups such as the National Milk
    Producers Federation and the Holstein Association USA. These
    policies all have merit, but must be analyzed with the
    following in mind:
        We must seek ways to reduce volatility in dairy farmer
    income.
        Proposals must not discriminate against manufacturing milk,
    by providing artificial enhancement of Class I (fluid) milk
    prices.
        Proposals must seek to eliminate or reduce the regional
    discrimination of the current Federal milk marketing order
    system.
        Proposals must be sensitive to the fact small-and medium-
    sized dairy farms make up the overwhelming majority of this
    Nation's 55,000 licensed dairy farms. Our rural communities
    cannot afford to lose one of them.
        With these objectives in mind, AMPI is supporting the
    concept of dairy price stabilization. The program developed by
    the Holstein Association aims to stabilize prices by managing
    production. The program recommends a market access fee for
    expanding milk production, not a quota system. This pricing
    approach has long been part of AMPI's core policy resolutions
    which support managed, incremental expansion in our industry.
    Such a plan, however, will only be effective if paired with
    import controls.
        We must establish tariff rate quotas on imported products
    such as milk protein concentrate, casein, and products
    containing butterfat.
        In closing, I strongly urge these committees and the U.S.
    Secretary of Agriculture to help the industry analyze and
    develop options for the long-term viability of dairy farming in
    this country. While doing so, build upon the effective
    policies--the MILC and the Dairy Product Price Support
    Program--and consider ways to stabilize domestic markets.
        Thank you for this opportunity to testify.
        [The prepared statement of Mr. Toft can be found on page
    121 in the appendix.]
        Senator Gillibrand. Thank you, Mr. Toft.
        Mr. Ray Souza, President of Western Union Dairymen, Mel-
    Delin Dairy in Turlock, California.

      STATEMENT OF RAY SOUZA, PRESIDENT, WESTERN UNITED DAIRYMEN,
                  MEL-DELIN DAIRY, TURLOCK, CALIFORNIA

        Mr. Souza. Good afternoon, Chairs Gillibrand and Casey and
    members of the Subcommittee. My name is Ray Souza. I am from
    Turlock, California. My family and I have operated a dairy
    since 1973. My wife and I also ship to California Dairies,
    Incorporated, which is a California Cooperative, and have
    shipped to that company now for a number of years.
        I want to thank you for giving me this opportunity to
    present a California perspective. What I am going to do, I am
    going to go through three things. I would like to talk about
    the current conditions, programs that are available for a
    short-term resolution, and then maybe some thought for the
    future. But before I do, I would like to also put a human face
    on the conditions in California. I would like to use two
    families.
        The Linhares family was recently honored by our community
    as having the longest continuous dairy operation in the area.
    For 102 years, they have had a dairy farm. For 102 years, they
    have operated as a family farm, as most California farms do.
    They went through the hoof-and-mouth disease outbreak and
    survived that, went through the Great Depression and survived
    that, but they have not been able to survive this current
    condition. They have lost so much equity that the family came
    together and decided to enroll their herd and retire their herd
    through the CWT so that they could retain some equity and some
    money for future generations. So that farm is no longer in
    operation, and I was talking to Joe the other day, and he told
    me they had never missed a day's shipment of milk in 100 years
    until now, the first time.
        The other family is two young dairymen that got into the
    business a little over a year ago. They worked. They came from
    immigrant parents, worked on the farm, saved their money and
    had enough money to put a sizable down payment on a herd of
    cows. They paid for half of their cows. They went into the
    dairy business with half of their cows paid for, which is
    something that a lot of farmers who have been in the business
    cannot do today. A year ago, 50 percent of their herd was paid
    for. One year later, because of the drop in equity, cows
    dropping as much as $1,000 a cow, heifers dropping $750 in
    calves, which is $400--if you total that up, we have lost $2.6
    billion in equity in that State, the dairy farmers in that
    State. As a result of that, they have become insolvent in less
    than a year, hard-working families, and they will probably be
    exiting the dairy industry as well.
        Like them, and the rest of us, we have suffered from high
    feed costs while we have had declining prices on our milk. Our
    cost of production in California alone has gone up 26 percent
    in 3 years. I have provided a chart for you in my written
    testimony to give you kind of an idea where these price
    fluctuations go.
        In 2006, we lost $3.30 a hundredweight, and we talked about
    that for the longest period of time, for a year or two. We had
    never seen losses like that until now.
        In 2009, we are looking at losses on dairy farms as much as
    $8 a hundredweight--unprecedented in my life, and as you can
    see, that has been some time.
        But these problems are not unique just to California. It is
    beginning to happen across the country. We have had this
    dramatic increase in feed prices. We have these record levels
    in costs. And just about the time we see some recovery, we see
    feed costs begin to rise again.
        Production costs posted a slight decrease from 2008 to the
    first quarter of 2009 and again in the second quarter of 2009
    due to slight decreases in feed costs. However, cost-of-
    production figures are not expected to decline by any
    significant amount as we move forward.
        And just this last few weeks alone, we have seen our canola
    prices, on which we are so dependent in California, move up 36
    percent. Corn prices, of course, have risen, but most of all,
    hay is a particular issue in California. Hay and canola are
    protein feeds. We feed two types of feed: protein feeds and
    energy feeds. Our protein feeds have escalated. As you probably
    know--I am sure you know, we have a drought in California, the
    west side of the valley, which is a primary hay-growing area.
    That area, we have suffered tremendous losses of alfalfa
    production in that area. And to add to that, Nevada has become
    a big hay-supplying area for our State, and the rains that we
    had earlier this year basically ruined the best cutting of hay.
    The first cutting of hay has basically been ruined in Nevada.
    So hay is going to be quite an issue for us.
        I see we are running out of time, so I will try to get
    through the rest of my testimony as quickly as possible.
        The outlook for the remainder of 2009 and into 2010, we see
    some movement in price, but we do not see much movement in
    margins. As these prices move up, we were so far below the
    actual cost, our margins, we still see those as being pretty
    sad margins. We do not see much in recovery there
        The dairy safety nets. The support program, which has been
    the program that we have looked to for years and years as our
    basic support program, our safety net program, really has
    become inadequate and ineffective. As costs have gone up as
    dramatically as they have and the support price frozen where it
    is, it does not make--it is almost irrelevant any longer.
    Normally, we would have a support program below the cost of
    production, and in these downturns, we would have a number of
    producers that would exit the area, the more inefficient
    farmers, for whatever reason, a number of farmers that could
    weather the storm, and a number of farmers that could still
    produce a little bit. This loss has been so dramatic, no one is
    going to survive at these prices. I do not care how big, how
    small, where you are located, no one will survive. And what we
    have done, we have got ourselves into a situation now we have
    an inefficient industry. We have borrowed so much money against
    such little equity, we are no longer--we do have a global
    market, and I do not see how we can compete in that global
    market with these kind of prices. We need to do something
    immediately to stop the bleeding.
        The DEIP program, we want to thank the Secretary for help
    with the DEIP program. That has been a very effective program.
    We have moved some product out, and it has certainly helped us
    with our exports, and I think we need to remain--we would
    encourage the Secretary to fully use the DEIP program, as they
    can continue to do so.
        Back to the support program, I also want to thank the
    Secretary for raising the price to a level that it at least
    reasonable. The current price that we have, as we know, the way
    that program works, as the product price moves up by 10
    percent, that product is reintroduced into the market.
    Theoretically, I could see where we could buy cheese at the
    current price, not the price that the Secretary has said. That
    could have the effect of actually lowering the price of cheese
    long run. As the price moves up slightly, that product is moved
    back into the open market, again, reducing the market price. I
    would encourage--and let me once again say, encourage with
    everything that I have--that he continue to use the new price
    to extend the current price at least through July. That would
    be tremendously helpful, I think, to all of us in the West--in
    the country, I should say.
        Dairy export enhancement I have talked about. Steps to take
    to address the issue, we have looked at a number of things. We
    have looked at the Holstein plan. We have not endorsed the
    plan. We feel it has--we endorse the concept of the plan, and
    we have made 11 recommendations on how to improve the plan.
    That is not an endorsement of the plan but a simple recognition
    that there is interest and it should be fully developed, and we
    want to look at those opportunities.
        I have the rest of my testimony written----
        Senator Gillibrand. You can submit the rest for the record.
        Mr. Souza. I will submit the written, but one thing,
    though, I want to tell you that we do support the CWT program,
    and we encourage all non-participants to get involved. No
    matter how you cut it, there are 300,000 cows that have been
    retired, and that does have an impact.
        Thank you.
        [The prepared statement of Mr. Souza can be found on page
    108 in the appendix.]
        Senator Gillibrand. Okay. Thank you very much.
        Mr. Doug Nuttelman, dairy farmer, Nuttelman Dairy from
    Stromsburg. Mr. Nuttelman, go ahead.

      STATEMENT OF DOUG NUTTELMAN, DAIRY FARMER, NUTTELMAN DAIRY,
                          STROMSBURG, NEBRASKA

        Mr. Nuttelman. Distinguished Senators, thank you, first of
    all, for such a warm welcome, and thank you for the opportunity
    to testify on the critical state of the American dairy
    industry. As has been mentioned, my name is Doug Nuttelman, and
    I am a dairy farmer from Stromsburg, Nebraska. My three sons
    and I own and operate Nuttelman Dairy. We milk 185 cows and
    farm a total of about 2,000 acres, which includes corn,
    soybeans and alfalfa. Although our family has not been milking
    for many years, we were rewarded this summer for being 108
    years in our family farm at our local county fair.
        I am on the Board of Directors of Dairy Farmers of America
    and also on the Board of Directors of the National Milk
    Producers.
        First, I would like to express my appreciation to the
    Senators of this Committee and others for their relentless
    efforts to help dairy producers in these difficult times.
    Thanks to your tremendous efforts and that of USDA and the
    dairy producer community contributing to NFPF's Cooperatives
    Working Together Program, industry experts believe the dairy
    industry may soon begin to recover from its disastrous years.
        As you know, U.S. dairy producers have been hit hard,
    experiencing unprecedented financial stress caused by
    historically high production costs. I would like to share just
    a little bit about how it has affected my farm this past year.
        In 2008, we were milking 145 head, and I brought my
    youngest son home to be on the farm, and we built a new dairy
    barn that would house 75 cows. Our goal was to have enough
    housing for 185 to 200 cows. And the results of 2009 versus
    2008--in 2008, we were milking about 145 cows. This summer we
    were milking 190 cows. My income from my milk is $4,000 a month
    less than it was last year.
        My feed costs--we raise all our own heifers, we raise all
    our own steers, and even though we do produce a lot of our
    forages and our silages, we are running about $12,000 a month
    higher than last year.
        When I add my son on the payroll, when I add health
    insurance that I furnish my workers with, when I add my utility
    expense, when I add my vet bill and my $45 a month extra
    payment that I had to make for my building, I was at a net cash
    flow loss of $25,000 a month. And even with MILC at $5,000, you
    know, my farm was going backwards to the tune of about $20,000
    a month on 200 cows. So you can just escalate how much some of
    the larger producers were losing in the loss of equity in the
    year.
        Even though I produce my own feed, my fertilizer costs this
    year were $1,000 a ton compared to $350 to $400 last year. My
    seed was $250 to $300 a bag, and my chemical costs were twice
    what they were last year.
        The sudden loss in late 2008 of export markets translated
    into a loss of over 25 percent of the U.S. dairy exports or
    about $6.5 billion of dairy producer equity. During January
    through August this year, the U.S. average all-milk price was
    $5.10 per hundred, below the U.S. cost of production. And if I
    would add $5 a hundred to my milk production over these
    periods, that translates into $20,100--in other words, a break-
    even for my dairy farm.
        And while milk prices are expected to recover, they are
    still not projected to reach break-even levels until early next
    year, which will only stop the bleeding. It will take much
    longer for some dairy farmers to recover equity that they have
    lost this past year.
        The traditional safety net for dairy farmers, the Price
    Support and Federal Milk Marketing Order Programs, are not
    designed to operate in the environment that we have had in
    2009. However, to address the underlying problems that caused
    this crisis, we need to focus on solutions to avoid a
    reoccurrence of the present milk-pricing dilemma in the future.
        A new approach to dairy programs must foster a climate of
    growth for the industry while protecting dairy farmers by
    taking the following steps:
        One, we need to revamp the current programs and revise them
    to establish a better safety net--specifically, a Dairy
    Producer Income Protection Program operating similar to that of
    other insurance programs. As a farmer, I participate in my Crop
    Insurance Program. I would like to see some type of program
    that would allow me to participate in a margin-type program on
    my dairy. The purpose is to help dairy farmers survive
    financially difficult times by paying them on an insurance
    indemnity when a loss occurs.
        We need to reform the Federal milk orders. The final
    outcome of that process must take into consideration various
    concerns by different regions of the country as well as
    different roles that the cooperatives play in balancing milk
    supplies and demand in the United States. The present make
    allowance system creates a winners and losers scenario.
        We need to evaluate a number of options to build upon the
    success of the industry initiative CWT, Cooperatives Working
    Together program, and make it even more effective. Currently,
    there are about 66 to 67 percent of the producers in the United
    States participating in this program. DFA has begun a program
    which we have looked at as far as dairy growth management which
    works to the goal of trying to get 100 percent participation in
    CWT, which may take a mandatory move by the Government.
        If you look at our check-off system, if only 66 to 67
    percent of our producers participate in our dairy check-off
    promotion, it would not be a successful program. But with the
    help of 100-percent participation, it is.
        As we all work to reform and reshape dairy policy in the
    future, we need to be cautious as it would be far worse to
    create crisis if we put policies in place that would hurt our
    ability to fulfill the opportunities that we may encounter in
    the domestic market, as well as international markets.
    Producers, like me, agree that the more than 70-year-old
    programs, especially safety net programs, need revamping. It
    needs to be made more relevant for the future to avoid the
    conditions we are now experiencing.
        Thank you again for the opportunity I have had to testify
    before you.
        [The prepared statement of Mr. Nuttelman can be found on
    page 81 in the appendix.]
        Senator Gillibrand. Thank you, Mr. Nuttelman. Thank you,
    each of you panelists, for these excellent testimonies and for
    your insights and expertise.
        I would like to talk a little bit about financing, because
    one of the issues that I have heard from a lot of my dairy
    farmers is they have no access to capital right now and that,
    in fact, they are not able to get the kinds of loans they
    typically would be able to get or the interest rates are too
    high. I would like you to give some information on that issue,
    if you have experienced any challenges with regard to getting
    access to capital in these tough economic times.
        Mr. Nuttelman. I guess I would like to speak on behalf of
    my farm. I have had to increase my working line this year,
    which even though I have been growing my farm, I have been able
    to maintain over the last 5 years, but this is the first year
    in 5 that I have had to increase my working capital line at the
    bank. And it took me testifying before, you know, my loan
    officers as far as where I was and what was happening in the
    dairy industry to be able to get that.
        I was fortunate enough to get it, but borrowing money on
    agriculture now with high inputs is getting tougher and tougher
    every day, not only for me as a dairy farmer but as for a
    farmer goes.
        Rents have escalated. Production costs have escalated.
    Equipment costs just continue to grow. And so I was fortunate
    enough to get the money I needed to finish this year, but it is
    getting tougher.
        Mr. Ooms. I think it has been a real challenge for anyone
    to get enough capital to keep going. For our farm personally,
    with our location where we are, we have enough equity that we
    have not had any problem yet. But there are plenty of people
    who are not--we live in the same county, Senator, and our land
    equity really kind of helps float the rest of us through times
    like these, even though our farms-- we are optimistic about the
    future; we are concerned as well. And I think the industry as a
    whole is having a challenge, as I think our whole society is.
        Senator Gillibrand. Do you have an additional----
        Mr. Toft. Yes. On our farm we have so far weathered the
    storm. We have talked to our loan officer, and we have redone
    some of our loans. Come next spring, when it comes time to put
    crops in, it is going to be an interesting time.
        But I was at our local feed mill, and I bought some feed,
    and when I wrote the check out, I told the gal behind the
    counter, I said, ``I am going to have to quit writing these
    checks out pretty soon.'' And she said, ``Well, at least you
    are not calling in and telling us to use a different credit
    card.'' So there are people out there that are putting feed
    costs on credit cards, and different credit cards, and that is
    going to be an awful disaster when those come due.
        So it is getting tight out there. It is starting to hurt
    really bad.
        Mr. Souza. I would say the same thing. I think that the
    farmers in California are doing the same. They are just burning
    up their equity, which is putting us in a pretty difficult
    position as far as being competitive.
        I am talking now to banks, and I am hearing information
    that banks will soon be cutting off credit. I do not know of
    any--maybe one or two farms they have actually gone out and
    picked up the cows, but it appears that they have finally come
    to the point where dairy is no longer the preferred crop in
    California so the credit is becoming more difficult. But what
    the financial institutions are looking at, though, they want to
    see policy that will put the industry back on its feet. They
    are very concerned about the long-term health of the industry,
    more so than they are the short-term health.
        Senator Gillibrand. Right. In terms of the subject of this
    hearing, we are really talking about what are the potential
    solutions, both short term and long term. And your testimony
    was all quite similar. You basically said that the safety nets
    need improving; they are not working as well as they need to
    be; you would like to see a new pricing mechanism, but do not
    necessarily know how to do that or what the best mechanism
    would be. So I think that is the kind of information we are
    going to have to develop over the next several months and years
    until we get to the next farm bill.
        But one issue that you all brought up was the CWT program,
    and you all spoke pretty favorably about it, so I would like to
    know what are your impressions of a mandatory Government-run
    supply management program. What would the strength or weakness
    of that be? And what is it about the CWT program now that you
    actually like that you would want to preserve?
        Mr. Ooms. I think the strength of the CWT right now is that
    it is producer controlled, so it is able to be responsive to
    the industry, and I think it has moved pretty fast this year.
    And I think a drawback of it being mandatory and having Federal
    involvement is you lose that ability to respond.
        Having said that, I know a number of people that are very
    favorable towards doing that, but I think there are drawbacks
    once you involve the Government in a program.
        But, overall, it has been successful and it could do more.
        Senator Gillibrand. Mr. Souza.
        Mr. Souza. Well, our organization has favored CWT, although
    there has been a lot of debate on how it could be run. But
    being a privately run organization, it really does help us deal
    with some of the WTO rules. That is why we are doing it through
    the cooperatives. Through Capper-Volstead it gives us that
    opportunity.
        As far as a Government-run program, there are a lot of
    things about the Government-run program that we have to concern
    ourselves with. We have looked at supply management programs in
    the past that have been run by the Government that have been,
    to one degree or another, successful or not successful. But we
    are dealing with a whole new set of--we are in a global
    economy. We have WTO rules. And I think from our industry's
    perspective, we recognize that there is some value there, but
    we really need to be careful how we move forward in this thing.
        The WTO rules, unfortunately, today--although we have tried
    to tighten them up as much as we can, there is a lot of wiggle
    room with our international competitors. So we continue to look
    at that, and we believe that needs to be fully vetted before we
    can fully buy into that type of a program.
        Senator Gillibrand. Thank you. I actually need to move on
    to Senator Klobuchar because I want to stick to the 5-minute
    rule. But we can revisit this issue when I have time again
    next.
        Senator Klobuchar.
        Senator Klobuchar. Thank you very much. I appreciate it.
        One of the things that I was wondering about--maybe you can
    start, Mr. Toft--is just the effect that this has beyond dairy
    farmers, you know, on processors and the rest of the dairy
    industry. We have a lot of co-ops and different dairy
    processors in Minnesota. Could you talk about the effect you
    have seen beyond dairy farmers?
        Mr. Toft. When a dairy farmer has a dollar in his pocket,
    he spends it. And when you do not have that money in your
    pocket, you do not go to town, and it involves everybody on
    Main Street.
        In our county, we have been told that a dollar coming in on
    a milk check will turn seven times before it leaves our county.
    So that is a lot of money. And that keeps a lot of different
    businesses--whether it is a furniture store, a grocery store,
    or whatever, it keeps all these other businesses going.
        In the same way, this price volatility makes it hard for
    our co-op to--when we sell product to a customer and the price
    goes up and down, they would rather have a stable price rather
    than the--I mean, the farmers like a high price, but our
    customers would rather have a low price. So we would rather
    have it somewhere in the middle so that we both can keep on.
        If that customer of ours reformulates from a dairy product
    to something else, they do not come back right away. And that
    is going to be a problem now if the prices go up. We are losing
    dairy farmers so that the milk supply is dropping. But there
    are too many customers that have already reformulated, and they
    are not coming back to dairy right away.
        So it involves the co-op, it involves the dairy farmer, it
    involves Main Streets.
        Senator Klobuchar. Anyone else want to add to that, the
    effect?
        Mr. Souza. Well, I come from a high unemployment area. We
    are in the middle of the San Joaquin Valley in California. We
    have towns with as much as 25 and even 30 percent unemployment.
    And when you take $3 billion of farm gate value right out of
    the San Joaquin Valley, it is going to have an impact. But the
    biggest impact really has been on the poor--of course, which we
    are all becoming poor quickly. But those folks that do not have
    jobs, have lost their jobs in agriculture today, really have
    nowhere to go.
        One of the good things that we did with our Cheese Buy
    Program and trying to get that Cheese Buy and the dairy
    products moved through the appropriations bill into those
    families was to help some of those families survive this very,
    very difficult time. It has had a very dramatic impact. And if
    you drive through the valley in some of those poor rural towns,
    you can see it for yourself. It is quite sad.
        Senator Klobuchar. How about the export market? You know,
    we tried to figure out if there is anything out there to help
    in that way. And, of course, we have had issues with some of
    the concentrated milk and other things coming in from foreign
    countries. But what is the status of that? We fully funded the
    Dairy Export Incentive Program, but what do you think we can do
    better to promote exports?
        Mr. Nuttelman. I think the continuation of the DEIP program
    is going to help us out quite a bit. You know, just the idea
    that if markets around the world do improve, we become more
    competitive, too, and we can become a player in those markets.
    But I think the continuation of the DEIP program will continue
    to help us with our surpluses and get us into those countries
    we need to be in.
        Senator Klobuchar. I just had a hearing yesterday in
    Minnesota on exports--it was not specific to agriculture--
    because I head up that Subcommittee in Commerce, and I was just
    struck by the growing markets out there internationally, like
    95 percent of our customers are outside of the U.S. And I know
    this is not the panacea, but the more that we can try to help
    you with those exports, I think the better off we will be as
    some of these developing countries actually become consumers.
        Mr. Nuttelman. If you look back at what happened in 2008,
    other countries were not able to supply the markets and we
    were. And we grew a dairy industry that could be a player in
    the industry as far as other markets. And then all of a sudden
    when they were gone, you know, that was what created a lot of
    our dilemma. But now I think, you know, through DEIP and other
    programs, we will be able to get back in there and be a
    supplier.
        Senator Klobuchar. Mr. Ooms.
        Mr. Ooms. I think one thing that is really playing a big
    role in this, as I said in my testimony, is that in 2007 and
    2008 our prices were high. We were exporting up to 11 percent
    of our product, and historically we have done 4 or 5 percent.
    Part of the reason for that happening is the economics of
    everything, but the other thing is we cannot underestimate the
    impact of the melamine scandal in China, because the Chinese
    historically have not been dairy product consumers. So when
    they have that melamine issue, they do not switch to another
    milk. They just started drinking this product, and then they
    have their kids dying. They are not going to go back to it too
    quick.
        So I think that is another key factor because it is a huge
    market, and the dollar being a little weaker will help us
    export more.
        Senator Klobuchar. That is what we hope, and you mean to
    open up the Chinese market more or to----
        Mr. Ooms. If they drink milk, we will find a way to get it
    there.
        Senator Klobuchar. Mr. Souza.
        Mr. Souza. Yes, I would like to take a shot at that, too.
    Being from California, we have, you know, particular interest
    in the Chinese market. That is probably our market of the
    future. But we needed to pursue a more aggressive public-
    private partnership in reaching into those markets. It is very
    expensive, product development, marketing, and strictly for the
    co-ops themselves, it is extremely expensive and very difficult
    to do.
        But I think one of the things that we could look at is a
    public-private partnership and how do we aggressively crack
    those markets and get our American products to those markets.
        Senator Klobuchar. Right. I was just struck at this hearing
    that 30 percent of small businesses--again, outside of
    agriculture but there are a lot of lessons to be learned--say
    that they would like to export more, but they just do not know
    where those markets are, and trying to focus on that I think
    could be a big part of the solution. As we know, dairy products
    would be really good for people in these developing countries.
        Mr. Nuttelman. If I could make one more comment. If you
    look at the Price Support Program, you know, a lot of the
    products that have been manufactured over there were
    manufactured to meet Government standards, our Government
    standards, so that if the market fell out, we could sell them
    to the Government. You know, if we are going to be looking at
    playing in exports, we need maybe help of some type of
    developing the products that these other countries wants and
    get away from just producing products that would have a
    Government support program attached to it. So I think it is
    important that we help develop products that other countries
    want.
        Senator Klobuchar. Thank you very much.
        Senator Gillibrand. Senator Johanns.
        Senator Johanns. Well, let me just start out and tell each
    of you how impressed I have been by your testimony. But, of
    course, you would know this industry because you live it every
    day.
        In preparation for the hearing, I was reviewing some of the
    overall numbers that are available through the USDA and the
    Congressional Research Service report, and there just is not
    any doubt about it. There was a perfect storm here.
        About the time, Doug, that I went back to Nebraska to start
    the campaign for the Senate, we saw historic prices for milk.
    Had I told you that you would see $21 milk, I think you
    probably would have wanted to debate that with me, but that is
    what you saw.
        It appears to me that the signal that sent to the producer
    was to do what farmers and dairy folks are really good at, and
    that is, to produce. After all, the price was very, very good.
        Consequently, it looks to me like what occurred is that
    instead of culling those animals out of the herds, some cows
    got kept, the herd expanded, while at the same time
    productivity has been going like this in dairy, just like it
    has in the rest of agriculture. Then all of a sudden you
    started to experience very expensive input costs. Corn prices
    in Nebraska flirted with $7. As you know if you were buying
    that corn, that was going to be a painful situation, while at
    the same time demand dropped. And it just could not be a worse
    set of circumstances for the industry. It just could not be a
    worse set of circumstances.
        What I am trying to figure out and I think all of us here
    today are trying to figure out is the right approach that
    recognizes that you are really good at what you do and we
    should encourage that. We should encourage you producing,
    because with better genetics, et cetera, we are going to see
    great productivity. But the piece of that I think we have a
    role in is, number one, what is the right safety net. You do
    not want agriculture to collapse in bad times. And then,
    secondly, how do we increase that demand for the product that
    you raise?
        Now, let me throw something out to you on that demand
    equation. About 2 years ago, a little more than 2 years ago,
    trade promotion authority lapsed. Our President does not have
    trade promotion authority, and that is the legislation that
    allows for the up-or-down vote on a given trade agreement.
        I submit, having worked in trade as a member of the
    Cabinet, there will be no bilateral trade agreements by this
    administration. There will not be any--not because they do not
    talk like they want them, but you cannot get them without trade
    promotion authority. What country would negotiate with you if
    535 people then have the ability to amend the trade agreement?
        So tell me what your opinion is on trying to expand trade.
    We have got three bilateral agreements pending. We have got the
    issue of trade promotion authority, which I would gladly work
    to help the President get.
        Doug, get us started here. What is your sense of what I
    have said here about trade?
        Mr. Nuttelman. Well I think when it comes to outside
    markets and trade, we need to be able to be a fair player. You
    know, whatever we have, if the trade agreements are, it needs
    to be fair for both of us. And I know there is always a lot of
    talk about free trade with other countries and stuff like that.
    I am not that well versed when it comes to what the President
    can do or cannot do, and that is why I rely upon you, Mike, on
    knowing some of that stuff.
        But I believe that we can be a fair player in all these
    markets, and if these markets were open to us and we produced
    the products that these countries want, I think we could have a
    thriving dairy industry in this country.
        Senator Johanns. Mr. Souza, what is your thought on that?
        Mr. Souza. Well, first of all, I am impressed with your
    statement because I think you have pegged the industry exactly
    correct. I feel that trade is the future of our industry. We
    have a natural inclination to grow, and for us to grow, we have
    to get into the trade business. But, once again, we have to
    work--we have to be competitive. That goes back to the
    statement I made earlier that we need to have a public-private
    partnership in expanding those markets, and to do that we have
    to have good research. We have to be very aggressive in product
    development--product that is developed specifically for a
    country to meet their demands, not our demands. And, secondly,
    we have to have trade laws that will make those markets
    accessible to us.
        I am with you. I think we need to strengthen our trade
    laws. I think we need to get very aggressive back in that
    arena, and hopefully those options will be made available to
    us.
        Senator Johanns. Mr. Toft or Mr. Ooms.
        Mr. Toft. I probably have a little bit different
    perspective of what exports should be. We have talked a lot
    about free trade, and free trade is not what we need. What we
    need is fair trade. We need to be able to export on a fair
    basis rather than just free.
        But the problem comes in, if we are going to be an exporter
    of dairy products, unless they are something spec, some
    specific product that somebody else does not--we can export
    whey and whey products simply because most of the other
    countries in the world that export do not have much export in
    whey products. So we can export a lot of our whey products.
        But in order to be an exporter of non-fat dry milk, which
    is the biggest one that goes, we would have to be able to
    produce it at world prices or less. And the last 6 to 8 months
    has shown that we cannot survive at $9 milk. We have got to
    have something higher.
        So unless there is some way to raise the prices and we can
    still export, you know, non-fat is not going to be something
    that we can do at a profit. But there are products out there
    that we do, but like I say, the rest of the world does not make
    whey products to any extent and we do. So we have got a lot of
    that. But cheese and others, you know, our prices are too high
    for that most of the time.
        Now, with the falling dollar, that is going to make our
    prices a lot more competitive with foreign markets.
        Senator Johanns. Yes. Let me wrap up there.
        Senator Gillibrand. Yes, I think so. Thank you very much.
        Chairman Casey.
        Senator Casey. Thank you, Senator Gillibrand, and I am
    grateful for all of your testimony. I know, Mr. Nuttelman, I
    missed your testimony. I had to step out. But I will--we do
    have your testimony.
        I think it gives an opportunity for you and others as well
    to focus on one or two questions. The first question would be:
    Each of you in your own way--and it is set forth in your
    testimony, Mr. Toft, on page 2, Mr. Souza, for example, on page
    10, you talk about short term and long term. And I am glad you
    did that because it is critically important. In Washington,
    when there is a problem, sometimes saying we have a bill on
    that or there is a bill does not respond immediately enough to
    a lot of problems, but especially I think in this situation.
        If you were able to--and I know some of this will be
    redundant, but in this town it is important to be redundant,
    and then again and again and again, because of how busy people
    get and how sometimes we lose our focus.
        If you had to pinpoint--just dealing with the short term
    first--two or three immediate actions that the Congress, the
    executive branch of the Federal Government, any agency could
    take at the Federal level, what would be those two or three
    things if you had the proverbial magic wand? Because we are
    trying to think about in those time periods both short term and
    long term. And in our second panel, Russell Redding is here,
    and he has broad experience in Pennsylvania, and I am going to
    be giving him a half-hour build-up when his panel appears. But
    he can tell you how immediate the crisis is for Pennsylvania
    farmers, and I know it is true across the country.
        So if you had even two, what are the two things you would
    hope that the Federal Government could do in the near term, the
    next 6 months or so, if not the next year? Why don't we just go
    right to left?
        Mr. Nuttelman. I think one of the things you could do--and
    you have already done that with your $350 million--is getting
    some money into dairy farmers but be an active player in some
    of our markets and help us in controlling maybe some of our
    inventories. The purchase of cheese and even that for, you
    know--I am not going to say export, but for feeding programs
    and stuff like that, or anything that could help stimulate our
    price. I think our price is going to be, you know, gaining but
    I think that would help speed up the programs.
        When I look at what our co-op does right now, we do not
    have enough milk in some areas to supply markets. And you might
    think, well, that is not very good the way the markets are. But
    our milk supply at present right now does not supply all the
    milk without moving a lot of milk around. But the inventories
    that we still have on hand is what is holding some of our price
    back. So helping in some type of lowering of inventories would.
        Senator Casey. Helping moving the inventory.
        Mr. Nuttelman. Helping moving the inventories I think would
    stimulate the price and get it back into dairy farmers'
    pockets.
        Myself, you know, I would rather get my money from my
    market. You know, if there is something I could tell you guys,
    I believe in having the programs as safety nets and everything
    else. But I would like to be--I would love to be a farmer that
    gets all my money from the markets. And let me market my stuff
    the way I want to or whatever it is, and let me be a steward in
    marketing my product and not rely upon you guys to keep me in
    business.
        So we need to find a way to strengthen the price sooner
    than later.
        Senator Casey. Thank you.
        Mr. Souza.
        Mr. Souza. Well, Chair Casey, I would agree that the most
    immediate thing with the greatest impact and probably it would
    give you the most bang for your buck would be the Cheese Buy,
    and I say cheese not dairy products, but in particular cheese.
    There was an analysis done by the National Milk Producers
    Federation that showed that the Cheese Buy Program would return
    more money per each dollar invested than a direct payment
    program or actually even an increase in the support price.
        And it also takes care of two problems. We have a business
    crisis in the dairy industry, but we have a social crisis. And
    I cannot think of an idea that would handle the dairy industry
    crisis, the social crisis, and is fiscally sound, money spent
    on that Cheese Program would effectively reduce the payments
    put into other safety net type of programs. And I think you can
    show a savings with that.
        So number one in my book is the Cheese Buy, but the one
    problem that I have was we actually gave a figure of 100
    million pounds, and there was a specific reason. We have 100
    million pounds of overhang, of too much cheese. Anything below
    that, what concerns me is we may spend the money but not get
    the benefit.
        So I would recommend that we look hard to find the rest of
    the money to get the 100 million pounds bought, move that off
    the market right off of the CME, not through CCC, which
    requires additional packaging requirements and inspection
    requirements, take it right off of the CCC, the same way you
    buy it at home, get it to those families, even the $60 million
    we have now, it has to be moved immediately, and then
    immediately move into another phase to buy the rest of the
    cheese.
        We have a fairly good balance of supply and demand. Some
    regions you have a little bit more than you need. Other
    regions, there is a short supply. In California, we are short.
    They say as California goes, so goes the Nation. We are down
    6.4 percent from where we were a year ago.
        We feel the market signals. I hope that the rest of the
    country will understand and will do the same as California does
    and get our production in line. But Cheese Buy is my answer to
    your question.
        Senator Casey. Mr. Toft? I know I am out of time, but I
    will let the responses----
        Mr. Toft. I have to agree with these two gentlemen that
    buying that cheese as soon as possible, not waiting a month,
    but with our economy the way it is, there is an awful lot of
    hungry people out there that could put that cheese to good use.
    And I think if we did that right away, that would help us more
    than anything. And the other 290 million would go a long ways
    as soon as that can be put into the pockets of dairymen, that
    would really help the individual dairymen.
        I was going to mention, too--Senator Klobuchar is gone, but
    the other thing you could do is, you know, in Wisconsin we send
    aging quarterbacks, expensive quarterbacks across the State
    line.
        Senator Casey. Well, she will watch this testimony tonight,
    so be careful.
        [Laughter.]
        Mr. Toft. Okay.
        Senator Casey. Just kidding.
        Mr. Ooms. I would just say I cannot disagree with anything
    that they said, but we oftentimes get caught up in big things,
    and there are little things that we let elude us. And two
    things that just really bother me is the 15 cents that every
    dairy farmer in America pays for promotion and the imported
    products do not have to pay it. The farm bill mandated that
    they pay 7-1/2 cents, which sounds like a good Washington deal
    that, you know, the IDFA wanted that. It should still be 15
    cents, and why USDA is not expediting that process is beyond
    me.
        The second thing is that Senate bill 1542, which would
    basically--milk protein concentrates are essentially a new
    product that were left out of the last WTO round. They could be
    tariffed under the WTO rules, just so we are making sure that
    everybody is playing on a fair playing field.
        Again, they are not big things. They hit the big things, so
    I would take the opportunity to give you two things that we
    just need to pay attention to this stuff, because we are
    letting too much of the little things go by.
        Senator Casey. Thanks so much.
        Senator Gillibrand. I want to thank you all for
    participating in this hearing. This is obviously the first
    hearing on a very complex topic that is going to take a lot of
    time to develop a record and develop testimony and develop the
    ideas. I am very appreciative, in particular, of offering your
    short-term solutions and at least being able to lay out some of
    the long-term ideas that we need to begin to debate.
        But thank you for being here. We know how much stress your
    farms are under. We all represent dairy States, and we are very
    worried and concerned for you.
        We are going to do everything we can do to follow up on the
    three things that were your top priorities: getting the 15
    cents for promotion out of our foreign competitors, making sure
    we focus on 1542 as a way to have more money in, and then
    trying to get that cheese bought. So thank you so much for
    being here. I am very grateful.
        I invite the second panel to come up.
        Senator Casey. Welcome to the second panel, and we are
    grateful that people are still in the audience to listen to the
    testimony. We are also grateful that our witnesses are here.
    And I think you know, our witnesses know the drill by now. We
    are going to try to keep your testimony to 5 minutes if you
    can. We probably have been adding a minute here or there, but I
    am not supposed to say that.
        What we will do is Senator Gillibrand will introduce Mr.
    Gallagher, and then I will introduce the next three witnesses,
    and then we will go from there.
        Senator Gillibrand.
        Senator Gillibrand. Thank you all for being here. Thank
    you, Mr. Chairman.
        Ed Gallagher serves as the Vice President of Economics and
    Risk Management at Dairylea Cooperative Inc., Dairy Marketing
    Services, and Dairy Farmers of America Farmer Services Unit. As
    a member of Dairylea's senior management team, Ed is involved
    in milk marketing, regulatory and government affairs issues,
    and providing assistance developing various business ventures.
    He overseas the operation of Dairylea's and DFA's milk price
    risk management programs.
        Prior to joining Dairylea, Ed was employed for 12 years at
    the Office of the Federal Milk Market Administrator for the New
    York-New Jersey Marketing Area. He spent his last 5 years there
    as Chief of Market Analysis Research and Information. He was
    raised on a dairy farm in Sangerfield, New York. The family
    farm is currently being operated by his brother and sister-in-
    law. Ed lives with his wife and two children in Cosnovia, New
    York.

    STATEMENT OF ED GALLAGHER, VICE PRESIDENT OF ECONOMICS AND RISK
        MANAGEMENT, DAIRYLEA COOPERATIVE INC. SYRACUSE, NEW YORK

        Mr. Gallagher. Thank you, and thank you for the invitation
    to speak to you today, and thank you for everything that you
    have done to date supporting America's dairy farmers, and thank
    you for having this hearing.
        I do not want to make light of the economic crisis that is
    facing our dairy farmers, but I do want to get into some
    specific things. In my lifetime, this is the single worst
    crisis facing the dairy industry. This cost price squeeze is
    having impacts that are going beyond anything that we have ever
    seen before. It is made far worse by the cost of production
    increase that has occurred because of Federal policy to support
    the production of ethanol. My research would suggest that it
    has probably added almost $2 a hundredweight on average across
    the country right now to the cost of producing milk.
        When I look at farm returns, it is very similar to some of
    the returns that Mr. Souza spoke about earlier that losses on
    farms are deeper than they ever have been, and they are
    probably $5 per hundredweight or more. In the Northeast, they
    are probably averaging about $75 a cow a month, and as you go
    west where they buy more of their feed, they get worse.
        You know, the ultimate issue that we are dealing with is a
    collapse in demand, not a collapse in domestic demand but a
    collapse in export demand, that specifically can be attributed
    to the financial crisis. I often talk at dairy farmer
    gatherings about governmental policy, and I frequently start by
    saying the single most important policy that we should be
    trying to develop is policy that results in a strong, growing
    national economy.
        All of us here have a sense of what goes on in the dairy
    industry, but beyond that, about the issues that caused the
    financial collapse, we are neophytes. We need your support and
    your efforts to continue pursuing solutions to that so that
    crisis never occurs again.
        Prices are improving. I am optimistic about price
    increases, although I am not sure we are going to get beyond or
    up to in some cases break-even. Certainly there has been a lot
    of discussion about the $60 million. We need that spent right
    away, and we need it spent to buy cheese, not just any type of
    cheese but cheddar cheese. That will have the biggest bang for
    the buck, and I think markets are tight enough that we can move
    cheese prices fairly significantly with a new buyer in the
    marketplace.
        As the economies around the world pick up, there is
    definitely going to be inflationary issues running across
    commodities. One of the things we have to make sure is that
    undue speculation in the commodity markets is not contributing
    to higher prices. That has harmed dairy farmer income in the
    past. It has harmed prices that all of us have had to pay.
    There are issues that can--we need your support in making sure
    that some of that speculative activity is reined in and
    supports dairy farmer income.
        Regardless of some of the policies that we come out of
    after this is over, longer term with some of the things that we
    can do, milk price volatility is not going to go away, in my
    opinion. We need to help dairy farmers get educated on the
    opportunities that are out there to help them manage their milk
    price risk. I have got farms in my programs that are getting up
    to $8 a hundredweight over the market price right now because
    of actions they took last year through forward contracts in the
    DFA and Dairylea programs.
        I think there needs to be incentives to encourage them to
    use the programs. I think for many farms there are some really
    good opportunities to create their own price floor far above
    anything the Federal Government will be able to afford to give
    them, but some farmers balked last year in doing that because
    they did not want to pay the cost of it. And I believe some
    incentives will help them.
        We need to look at supply management options. The CWT
    program has been successful. We have taken what would normally
    be a 1-to 3-percent increase in production and zeroed it out,
    and it is starting to decline now. Certainly if we can get more
    people participating in the investment in CWT, that would be
    helpful.
        Federal orders definitely need to be looked at and
    reformed. At the end of the day, we have got to make sure that
    we do not go create an unintended consequence of discouraging
    manufacturers from buying milk, and we have to make sure there
    is a linkage so that farmers and milk processors can continue
    to hedge.
        We need to get Secretary Vilsack's Dairy Advisory Committee
    going. We need that so that we can get a pulse from the farming
    community and from the dairy industry about what is going on.
    We need to look at a whole bunch of things.
        In addition to everything that has already been stated,
    maybe we need to look and review how data is collected and the
    impact that that may have, dairy data is collected and the
    impact that that may have on the pricing system and are there
    ways to do a better job collecting the data to make sure that
    it is relevant.
        In closing, I want to thank you for the opportunity to be
    here. I look forward to working with this Committee and my
    partners here on this Committee and the entire dairy industry
    in working through these issues over the next months to improve
    the dairy industry and have a stronger, more profitable
    industry for dairy farmers.
        Thank you.
        [The prepared statement of Mr. Gallagher can be found on
    page 47 in the appendix.]
        Senator Casey. Mr. Gallagher, thank you very much for your
    testimony, and we appreciate you being here.
        Secretary Redding, the Acting Secretary of Agriculture for
    the Commonwealth of Pennsylvania, I was kidding before when I
    said I was going to give him a half-hour introduction. I will
    not do that. But I have known Russell Redding for many years.
    He served in State government, actually prior to my own
    service, and we were there in Harrisburg together doing
    different jobs. He has been part of the Department of
    Agriculture's leadership team since 1995. He grew up on a
    family farm in Gettysburg, Pennsylvania, in Adams County. And
    since 2003, he has overseen the day-to-day management of the
    Department of Agriculture in Pennsylvania. I know his
    predecessor and former boss, Secretary Wolfe, is in the back of
    the room. I am happy to see Secretary Denny Wolfe from the
    Commonwealth of Pennsylvania.
        He also served here in Washington as a member of the staff
    of actually one of my predecessors, Senator Harris Wofford, as
    agricultural policy adviser and executive assistant to Senator
    Wofford in the 1990s.
        He has served our Commonwealth in so many different
    capacities. He is a proud graduate of Penn State, and, Russ, we
    are glad you are here. I should say, ``Mr. Secretary, we are
    glad you are here.'' And we appreciate the perspective you
    bring to this for our Commonwealth and our country. Thank you.

    STATEMENT OF RUSSELL C. REDDING, ACTING SECRETARY, PENNSYLVANIA
          DEPARTMENT OF AGRICULTURE, HARRISBURG, PENNSYLVANIA

        Mr. Redding. Thank you, Mr. Chairman, for the kind
    introduction. Madam Chairman, thank you, and to the Senators,
    thank you for being here and inviting the Commonwealth of
    Pennsylvania to be part of this testimony. This is certainly an
    important moment for us to talk about the dairy issue, and we
    heard from the first panel and we will hear from this group as
    well. But on behalf of Governor Rendell, thank you for the
    invitation to be here.
        We look forward to working with you as a Committee and your
    colleagues to deal with this issue. On behalf of the
    Pennsylvania producers, about 8,000 of them presently, I want
    to say thank you to the Committee for the $350 million
    supplemental support for the dairy industry. Certainly that is
    a critical step. It is the first step. We know how difficult
    that was and how difficult it is to come by with extra money,
    so certainly an important statement from Congress and from the
    Committee.
        It is certainly helpful in dealing with the near-term pain
    that the producers are experiencing, and you heard from them
    earlier. But also it maybe more importantly gives us some
    breathing room to really deal with this crisis and to talk
    through what is going on. I think that has been the real
    benefit of the $350 million, so thank you for that.
        I have said often in the past several months that you never
    want to waste a crisis, and we certainly have one here in the
    dairy industry today. Now, it is both a crisis in confidence
    and it is a crisis in income. We must use the rare moment to
    reform our pricing system, better understand the dairy market
    dynamics, and most importantly, change the approach to managing
    risk at the farm level.
        Now, several items of recommendation on reform. We must
    improve the system of price discovery. The U.S. dairy industry
    would benefit from a reliable and transparent method of price
    discovery for dairy commodities. It is questionable whether
    that exists today. The CME market for cheese and butter is
    thinly traded and is the market of last resort for both sellers
    and buyers at times. Yet it is these transactions and only
    these that send the signal to the USDA/NASS for prices of dairy
    products which the Federal Milk Marketing Order System depends
    on for prices of dairy commodities. There is a lot we could say
    on that. I just put that on the table as one of those items we
    need to come back to.
        Secondly, we would also suggest improving the integrity of
    the marketplace by creating alternatives to the CME or consider
    using a collection of price discovery tools that would more
    accurately reflect what is going on in the market and the
    market conditions.
        Thirdly, and maybe the most important recommendation I
    would make here today is that both Congress and the USDA work
    together to provide dairy producers with additional workable,
    affordable, and meaningful risk management tools. Mr. Gallagher
    mentioned this. I think this is one of those teachable moments
    that you rarely get in agricultural policy in particular. We
    spent a lot of time trying to build a system and a product and
    a private product that Congress gave the authority to do back
    in 2000 which Mr. Bruce Babcock called LGM Dairy. It is that
    first step to really encouraging dairy producers to use a risk
    management tool to hedge some of the risk that they are all
    experiencing. Whether it is the most effective product in doing
    that, there are certainly some things we should do, like
    providing some incentive. Ed mentioned this. That is the number
    one reason that folks buy crop insurance. There is some
    incentive there. There is no incentive at this point for the
    LGM Dairy. We think that is an important first step.
        We believe that there are some things we could do from an
    incremental payment standpoint, is that right now all the money
    is due up front. That is a very heavy lift when you are working
    with negative margins. So having some opportunity to spread
    those payments out.
        And, most importantly, I think, education, and clearly this
    is a changed day. You are asking producers to take a very
    different approach to managing their risk. We are going to have
    to help them get there. We have shown we can do that on the
    crop side over the last number of years, and thanks to Congress
    for having the foresight to consider that. We have worked hard
    on that. So the LGM Dairy or other risk management options I
    would say is important. And I think it becomes critical to
    moving forward because that is the tool that bankers and
    lenders will look to. How have you managed or will you manage
    your risk is important.
        Just a couple of final points. The standards of identity
    for imported product, we keep hearing over and over those
    issues. I think, again, this is a moment for us to talk about
    what is coming into the country, who is bringing it in, what
    form is it in, how is it being used. That is an issue. This is
    the confidence side when I say crisis of confidence. Producers
    really do not understand the pricing mechanism and is
    compounded by--you have imported product where we are really
    not sure of its intended use. Is it coming in with tariff rate
    quota? Is it coming in under the same standards of identity?
    That is an issue that simply must be dealt with, and I put that
    on the table as one of the near-term items.
        A final point, and this is not a dairy issue, but more in
    terms of going forward, is the most immediate thing we can
    focus on are the credit markets. Even if the milk market starts
    to turn up, which it is a little bit, and we have some outward
    hope, we have an issue in the near term of folks being able to
    finance their operations. We heard this in the first panel.
    That is the piece we really need to focus on. What can the USDA
    and Congress do to provide that bridge from this year to the
    better year? And we need to look at finance. We cannot probably
    price product the way everybody wants it priced at the moment
    or make all the changes. But we certainly can change the credit
    availability and how the USDA and the Federal Government
    manages this portfolio of credit for American agriculture.
        Finally, we are fortunate in a State, in Pennsylvania, to
    have a Milk Marketing Board under Governor Rendell's
    leadership. Just as we have asked this Committee and Congress
    and the USDA to work hard at finding some solutions, the
    Governor has also asked the Milk Marketing Board, which is a
    separate independent entity in the State, to look at their own
    authority. What can we do as a State to address the issue? It
    certainly has been over the years a partnership between State
    and Federal Government. We are one of six States in the Nation
    that have a pricing mechanism. How do you use that? Is it being
    used effectively? Is there some other way to use that tool to
    help the producers in the State of Pennsylvania?
        So I end there saying that we have a lot of good work to
    do. There has been a lot of good work done, and I think with
    this moment in time, we know producers now understand where
    their margins are or what their margins are. We know that. And
    that is an important statement, because only once you know that
    can you make an informed decision about how to manage your
    risk. So we have that moment now with the crisis that has been
    provided to us. We did not want it, but we have got it. What do
    we make of it? And then how do we apply these new risk
    management tools to really help our producers in Pennsylvania
    and this Nation.
        Again, thank you to the Committee.
        [The prepared statement of Mr. Redding can be found on page
    96 in the appendix.]
        Senator Casey. Mr. Secretary, thank you very much.
        Our next witness is Paul W. Kruse, and Paul is currently
    the Chief Executive Officer and President of Blue Bell
    Creameries. He is a graduate of Texas A&M and Baylor Law School
    and also currently serves as Chairman of the International
    Dairy Foods Association and had been chair of the Dairy
    Products Institute of Texas.
        We are grateful that you are here, and thank you for your
    testimony, sir.

        STATEMENT OF PAUL W. KRUSE, CHIEF EXECUTIVE OFFICER AND
         PRESIDENT, BLUE BELL CREAMERIES, L.P., BRENHAM, TEXAS

        Mr. Kruse. Thank you, Mr. Chairman and Madam Chairwoman and
    members of the Subcommittees. I appreciate the opportunity to
    be here today. As you said, I am the CEO and President of Blue
    Bell Creameries. We are an ice cream manufacturer located in
    Texas, and we basically distribute product through 18 South and
    Southeast States in the United States. We have been around in
    business for 102 years, so we have been at it a long time.
        I am also, as the Chairman said, the Chairman of the
    International Dairy Foods Association. That is 220 member
    companies that actually handle about 85 percent of all milk,
    cultured products, cheese, and ice cream that is manufactured
    and marketed in the United States. As a group, we are deeply
    concerned with the situation that dairy producers face today,
    and we are definitely available to help find solutions so that
    all producers, both large ones and small ones, can get the
    necessary tools to manage their businesses profitably. The
    partnership that we have with milk producers is critical to
    protect.
        There are three points I would like to make.
        First, most of our dairy policies were designed over 70
    years ago, and the industry has changed very profoundly since
    then.
        Second, price swings are normal for farm commodities, but
    dairy farmers lack the tools that would allow them to smooth
    those swings, and I think Mr. Gallagher and the Secretary here
    both elucidated that very well, talking about risk management
    and just how important it can be.
        And, third, the milk supply needs to continue to grow to
    meet demand, and Federal dairy policies should be reformed to
    let us reach that potential.
        Just a few facts about milk and the dairy industry. About
    45 percent of domestic milk goes into cheese production; 30
    percent into fluid, or the bottled, the beverage milk; and
    about 10 percent goes into frozen products like ice cream. Milk
    production really in the United States has soared in the last
    30 years. Fluid sales have been very stagnant during that time.
    Cheese sales have taken up most of the milk growth over those
    years. And the frozen products have been relatively stagnant
    also over those years.
        As you know, probably three-quarters of our milk supply
    comes from the ten top dairy States. It is very concentrated.
    And when most of our Federal dairy programs were designed,
    there were 4.6 million dairy farmers, and today by our count
    there are about 67,000. So there has been a real decrease.
        Long ago, most of the milk came off small dairy farms, and
    today I think 59 percent of the milk comes from only 5 percent
    of the dairy farms, and those are classed as 500 cows and up.
        We used to be a net importer, and as you heard, I think,
    from the producers testifying today, last year about 10 percent
    of all the production of milk in the United States was actually
    exported last year.
        There is no question that the low prices have been kind of
    historic this year and have created a lot of concern. I think
    by our calculations, the Federal Government has put about $1
    billion in help into that market this year. But even with this,
    I think people will agree that our old system is not serving us
    very well, and changes are really looked forward to, I think,
    by our industry.
        One of the ways, I think, is to stop treating dairy as
    different than any other commodity. We need to, as the previous
    two witnesses just testified, give them the ability to manage
    unavoidable swings in the market, encourage the use of market-
    based risk management tools that allow them and processors to
    manage the variability in market prices. As I understand it, I
    think every other agricultural sector can and does use those
    tools as a regular part of business, and it is just not real
    frequent in the dairy industry.
        Expanded insurance programs like the Livestock Gross Margin
    Insurance Program, and also the forward contracting program, I
    think, that was reauthorized in the 2008 farm bill are steps in
    the right direction.
        We think more can be done, and as the previous witnesses
    talked about, education for farmers to understand what tools
    are out there and what they can do. Providing the right
    insurance products is also important.
        But our outdated dairy programs discourage the use of these
    tools and, what is worse, they really stand in the way of our
    industry's ability to expand demand for dairy both domestically
    and internationally.
        Companies around the world have developed new dairy
    ingredients, but we have not done a good job in the United
    States of that. Why? Well, our support programs encourage the
    production of non-fat dry milk which food processors really do
    not want to use, and that is a drawback.
        We need to simplify the system by reducing the number of
    classes of milk and by eliminating the complex formulas that we
    use to establish prices. Prices are ticking up, and hopefully
    we will see them go in the right direction. Projections for
    next year I think are much different than they are for this
    year, but the question is: How do we get there?
        Some have proposed, I think, a supply management where the
    Government would be involved in managing the supply of milk,
    and those proposals I think are a little mind-boggling. We
    would rather not see those. We do not think that is the
    direction that the dairy industry needs to take in the United
    States.
        In sum, the U.S. dairy industry needs to make some
    fundamental decisions about the future. Are we going to choose
    to modernize and grow like other Ag sectors? Or do we have the
    Government limit the milk supply in an attempt to try and
    guarantee stable and higher foreign milk prices? If we do that,
    the industry is going to stop growing and decline as domestic
    and world markets are captured by our competitors. With the
    right policies in place, we can thrive as a U.S. dairy-
    producing region and be able to build demand for dairy products
    both here and abroad.
        I appreciate the opportunity to be here today.
        [The prepared statement of Mr. Kruse can be found on page
    69 in the appendix.]
        Senator Casey. Thank you very much.
        And our final witness for this panel is Lucas S.--and I
    want to make sure I am pronouncing it right. Is it Sjostrom?
        Mr. Sjostrom. Sjostrom.
        Senator Casey. Say it again?
        Mr. Sjostrom. Sjostrom.
        Senator Casey. Sjostrom. Thank you, sir, and I appreciate
    the fact that Lucas has as his responsibility Government
    relations and communications for the Holstein Association USA,
    Incorporated. He grew up being fully involved in his family's
    100-cow Holstein farm in southern Minnesota, and--I am sorry?
        Senator Gillibrand. Isn't he from Vermont?
        Senator Casey. It says southern Minnesota. Is that correct?
        Mr. Sjostrom. Originally, yes. Originally.
        Senator Casey. Okay. We want to make sure we have the right
    State there. And we appreciate the fact that he can bring a
    perspective to this panel that we may not have heard before.
    Thank you very much.

    STATEMENT OF LUCAS S. SJOSTROM, GOVERNMENT RELATIONS SPECIALIST
     AND COMMUNICATIONS ASSISTANT, HOLSTEIN ASSOCIATION USA, INC.,
                          BRATTLEBORO, VERMONT

        Mr. Sjostrom. Well, thank you, Chairs Gillibrand and Casey
    and Ranking Members Johanns, for inviting me here to testify
    before you today. I am the Government Relations Specialist and
    Communications Assistant for Holstein Association USA, a
    nonprofit dairy organization that is headquartered in
    Brattleboro, Vermont, with over 30,000 members nationwide. I am
    here to talk to you today about a program we have proposed,
    called the Dairy Price Stabilization Program, which will
    stabilize the peaks and valleys of milk prices which make it so
    difficult for those in the dairy industry to manage.
        As you all know, for almost an entire year virtually all of
    America's dairy farmers have risen every morning to find that
    they will be selling milk for less than the amount it costs to
    produce it. Obviously there are many factors that add into what
    the milk price will be and what the cost to produce milk is.
        In a typical commodity market, there is room for some
    volatility. You can have ups and downs and hedge against future
    losses. As stated earlier, milk is not a typical commodity; it
    is perishable. While we can forward contract milk, there is no
    way to hang onto that milk for a few months until the prices go
    up again, like farmers can in other commodity markets, such as
    corn, soybeans, rice, cotton, and others.
        In the dairy market, an oversupply of milk leads to lower
    prices. As dairy farmers are paid per hundredweight for their
    milk, the only incentive they have to generate more income when
    milk prices are down is to produce more milk. This is precisely
    why we have seen the roller-coaster ride of milk prices over
    the years. Bottom line, in order to improve the plight of the
    American dairy farmer, there needs to be some incentive, either
    a penalty or a premium, to keep supply and demand closer
    together. The Holstein Association's Dairy Price Stabilization
    Program accomplishes this.
        The Dairy Price Stabilization Program is not a quota
    system. Unlike supply management systems in other countries,
    you can still produce as much milk as you want, and there are
    no large barriers to growth. Ultimately the program rewards
    producers for making good decisions for the betterment of their
    industry. Instead of financial incentives directing farmers to
    produce more milk, the direction received at each farm will
    help the farmer decide, based on his goals, what that farmer
    wants to do.
        The basic objectives of the Holstein Association's Dairy
    Price Stabilization Program are:
        To prevent severely depressed producer milk prices that
    result in low and negative returns over feed costs to dairy
    producers.
        To reduce the volatility of milk prices to dairy producers
    and thereby reduce the price risk to dairy producers, dairy
    processors, and consumers of milk and dairy products.
        To complement, and not replace, other existing dairy
    programs such as the Federal Dairy Product Price Support
    Program and the Milk Income Loss Contract Program. In fact, our
    program may reduce the Federal Government cost of both of These
    two programs.
        Here is a quick overview of the program, and further
    details have been submitted to the Committee in writing.
        The Dairy Price Stabilization Program removes the incentive
    to produce milk beyond the levels our market demands. It
    rewards producers who stay in line with market needs.
        The U.S. Secretary of Agriculture would administer the
    program with an Advisory Board. The Board will forecast the 12-
    month domestic and export market demands for fluid milk and
    manufactured dairy products. With consideration of the current
    level of milk production, a determination will be made to the
    needed change in milk production to fulfill the market needs
    for each quarter of the next 12 months and return a profitable
    price to dairymen. This is referred to as ``allowable milk
    marketings.''
        Dairy farmers who maintain their milk marketings by quarter
    within the allowable milk marketings will not have to pay
    market access fees. Dairy farmers who expand their operation
    and exceed their allowable milk marketings will be accessed a
    market access fee per hundredweight on their additional milk
    marketings. The fee would be determined by the U.S. Secretary
    of Agriculture and the board on a quarterly basis. The fees
    collected from those producers paying the market access fee
    would be distributed as a bonus to the dairy producers who
    stayed within their allowable milk marketings.
        Producers will receive their base by filing their history
    of milk production and monthly marketings to their area USDA
    Farm Service Agency office. The FSA office will notify the
    producer's milk plant or dairy cooperative to deduct the market
    access fee if the producer exceeded their allowable milk
    marketings.
        The cost of the program to taxpayers is nothing. We would
    expect an assessment of less than 2 cents per hundredweight to
    producers on all milk marketings to cover the administrative
    costs of the program.
        Dairy farmers are very thankful to our representatives
        in Washington, DC, for putting dairy and agriculture as
    priorities. We would especially like to thank our Senator,
    Senator Sanders, and all the other Senators who aided in adding
    some short-term help for dairy farmers to the agricultural
    appropriations bill the President signed just days ago.
        With the Dairy Price Stabilization Program, we have a long-
    term solution that can have an impact almost immediately, with
    no cost to taxpayers. The DPSP was developed for dairy
    producers, by dairy producers. The key to this program is that
    dairy farmers now have an incentive to produce milk for the
    market instead of producing all the milk they can and finding
    out what they are paid for it after it is sold. The program
    will be beneficial to dairy farmers, milk cooperatives,
    processors and consumers.
        In closing, I would like to emphasize three points:
        The Dairy Price Stabilization Program could be put into
    place without affecting any current dairy programs.
        Implementing the DPSP does not require opening the farm
    gill.
        The Dairy Price Stabilization Program is the only new,
    detailed program available that can have a positive effect on
    mailbox milk prices now and in the future.
        On behalf of the Holstein Association USA's 30,000 members
    across the country, thank you for the attention you are giving
    to the volatile position America's dairy farmers are in.
        [The prepared statement of Mr. Sjostrom can be found on
    page 101 in the appendix.]
        Senator Casey. Thank you very much, and I appreciate you
    mentioning your Senator, Senator Bernie Sanders, who worked
    very hard on that $350 million.
        Let me go to questions. I will start, and we will try to
    keep our questions within the 5-minute limit.
        I am going to ask two basic questions. I ran out of time on
    the first panel to ask the second part of this, so I will start
    with that.
        With regard to risk management tools, I would ask each of
    you to assess where we are. I know that we have had in place
    the so-called LGM Dairy risk management tool. If you could
    assess that and any other risk management strategies in place
    right now or programs in place right now, and how we can either
    add to the list of tools or programs, but any improvements--or
    outline improvements, if any, for the LGM Dairy risk management
    program. Maybe we will just go left to right. Mr. Gallagher.
        Mr. Gallagher. Thank you. One of the challenges we have
    with risk management that in its infancy the only thing you
    could do was lock in a milk price. And so at the end of the
    day, you were either so many dollars above the market or so
    many dollars below the market, and when you were below the
    market, you thought it was the worse thing in the world.
        The programs have matured. We have got programs now where
    you can have price floors, where you can have things that we
    call an upside rider, which is basically you have a floor, and
    it is like a deductible on an insurance policy. You choose how
    much you are willing to give up on the upside, but you can get
    the rest. And I do not think there is enough knowledge of how
    those programs can help dairy farmers protect themselves
    against dramatic price declines.
        When I go out and I talk to dairy farmers about these
    things, I talk to them about it as if it is insurance and they
    are ensuring all these assets and accepting those as cost of
    production, and yet they are not insuring the single biggest
    thing that can wreck the operation, and that is their milk
    price. And so we have got some really good programs, and I
    think some of the programs that are going on in Pennsylvania
    and in New York to help educate dairy farmers through the
    Centers of Dairy Excellence in the two States to educate dairy
    farmers on the benefits of these I think are extraordinary, and
    we have got to figure out how to lever that up and get more
    participation on a Federal level as well as, again, creating
    incentives.
        One of the biggest challenges Russell mentioned with LGM
    is, one, it is kind of complicated and it is new, and it is
    talking about managing a margin, milk over feed. And a lot of
    farms--although they think that way, a lot of farms do not, so
    it is a little bit of a challenging concept. And so there is an
    extra added amount of education that needs to go on, as well as
    it is all front-loaded and farmers cannot afford to pay that.
        Actually, our insurance agency sells LGM Dairy insurance,
    and we have been trying to work with the crop insurance people
    to allow us to have monthly milk deductions for the insurance
    so that there is no up-front cost, we just take it out of the
    milk check, like we do with our forward contracting programs.
    And I think that would be an improvement that would get more
    use out of the program. Thank you.
        Senator Casey. Thank you.
        Secretary Redding.
        Mr. Redding. Yes, Senator, thank you. I appreciate the
    question on LGM. As I mentioned in the testimony, we have
    worked on that. It is a private product, which I think is sort
    of interesting. When Congress made some changes back in 2000
    under the ARPA legislation, it basically allowed the private
    sector to come in the door with a product to propose to RMA and
    the Federal Crop Insurance Board, and we did that with an AGR-
    like product, and Bruce Babcock did it here with the support of
    initially the States in the Northeast. So you have a private
    product, which I think is important to note that that is not
    one that is offered by--it is approved by but it is not--it is
    approved by the USDA and RMA, but it is a private product. So
    you need to manage that system.
        I would say this: It is only in the second year. It is
    available in 36 States. It is a pilot project. And probably the
    lesson here--Ed had mentioned this--when you really need to
    support it financially, you need to continually talk about it.
    You mentioned, Senator, in your opening comments about
    repetition. That is absolutely the key to understanding risk
    management. You need to hear this over and over and over
    several times to really grasp the principles. And then once you
    understand the principles, it is to translate that into a
    policy that is going to protect your paycheck. And the nice
    thing is farmers can do that in this program on a monthly
    basis, and they can do it to the level of insurance and
    deductible that they want. So it has a lot of nice pieces to
    it, but it is expensive at the moment. Education is key. And I
    think the near-term need is for folks like Dairylea, who really
    invested in risk management education and tools, to help guide
    that because they can sort of be that translator that we are
    needing right now. So I think it has a lot of potential.
        The point I would make, I guess, we have tried with LGM,
    and we think it has a lot of potential. We do not know what all
    the options are, and in this moment, when you really have this
    dairy world upside down, you know, there may be a better
    product out there. There may be a better idea out there that
    the private sector can bring forth. And it would be nice, in
    this moment when we are really looking for what the next
    generation of risk management tools are, to set a course for
    the near term, the next couple of months or so, to really have
    four or five different pilot projects and products in the
    marketplace. Let us experiment, right? We have lost billions of
    dollars in dairy equity. We need to have a really good response
    to that, and giving the tools to producers in different parts
    of the country in different ways to experiment a little bit I
    think would be to our advantage.
        Thank you.
        Senator Casey. Thank you. I am out of time, but I will try
    to come back.
        Senator Johanns.
        Senator Johanns. Thank you, Mr. Chairman.
        Mr. Kruse, let me start with a question or two to you. If
    you do not mind my asking, how many people are employed by your
    company?
        Mr. Kruse. We have 3,100.
        Senator Johanns. 3,100. And how would you feel about a
    Federal law that basically would give to me as Secretary of
    Agriculture--and I occupied that post for a while, as you
    know--the power to look across this country and dictate what
    the milk supply is going to be? Would that be troublesome to
    you as a processor of the milk supply?
        Mr. Kruse. Very much so, sir.
        Senator Johanns. Yes. Now, I am not suggesting your company
    would do this, but some other company that employed people
    could look to Mexico, Canada, whatever, and say, well, they do
    not have such a law. Do you think there would be a temptation
    to move those jobs someplace else because of that kind of law?
        Mr. Kruse. I would think so, yes, sir. If I may say, you
    know, the up and down volatility, we hate it as an industry. I
    hate it as a company. It is very destructive. It chases away
    consumers. It makes many people go substitute products. You
    have heard that today, and it is very, very true. I still make
    ice cream straight out of milk, and I fully intend to. But,
    boy, if we can either through forward contracting, my biggest
    cost, milk and cream, I cannot. In essence, it has not been
    very easy. I forward contract everything else.
        Senator Johanns. Yes. That was going to be where I wanted
    to go with my next question. I think there are some really good
    ideas here, and I think this is fixable. Interestingly enough,
    in the last farm bill, the Dairy Title actually went through
    without a lot of opposition. Of course, prices were very good.
        When you talk about risk management, I think you have
    really hit the nail on the head. I really believe that farming
    these days is as much about risk management as it is about
    milking cows. And so what I have kind of pieced together
    through your testimony--and, Secretary, I would like you to
    respond to this--is the notion that with better risk management
    tools, better educational opportunities for producers on how to
    use those, and maybe even something like a revenue-based crop
    insurance program that would be subsidized--I will openly
    acknowledge there will be a piece of this that would be
    subsidized, like crop insurance is today--that you could put
    together a risk management forward contracting sort of approach
    for the dairy industry that would take some of these peaks and
    valleys that we see out, because these good producers that were
    here before you are doing exactly what the marketplace is
    saying to do. They are saying produce more, the price is good.
    And, by golly, they did it. And they are really, really good at
    it. But then there is a cliff effect to that.
        What is your reaction to what I am saying about forward
    contracting, maybe a revenue-based almost crop insurance type
    program, only it would be revenue-based based upon milk prices?
    Is that something we should be thinking about as a
    Subcommittee?
        Mr. Redding. Senator, absolutely. I think it is the next
    generation of dairy policy. You know, you are going to have to
    move at some point from the MILC and the Dairy Price Support
    Program and deal with a lot of market dynamics that we all
    speak about. But the question is: How do you want the American
    producer, you know, to manage that risk?
        We have found out you cannot self-insure, right? That is
    what we are experiencing right now. Folks thought they had
    enough equity, they had enough savings, and some are doing it.
    But long term I think we need to borrow the page from the other
    commodities where the Federal Government has made a significant
    investment in development of meaningful, workable, and
    affordable products to help mitigate that risk.
        We have not done that on dairy. I think that is where we
    need to be focused. We need to insure and assure that there are
    really good products available for a dairy industry that
    reaches from coast to coast, and being Secretary, you
    understand the challenges of finding a product that works from
    coast to coast. So that was my point earlier, that there may be
    things in different markets and different areas that would be
    worth exploring, but the principles are the same. You are going
    to try to transfer some of that risk, hedge as much of that
    risk somewhere else away from your farm and out of the farm so
    you do not experience these cruel cycles that we are
    experiencing right now. But it takes support, financial support
    to do it. You would not sell many crop insurance policies
    unless you underwrote that by 40 or 60 percent, right? You
    would not have a lot of folks--and I will speak for
    Pennsylvania--in the crop insurance system if it was not for
    Congress identifying the State as an underserved State and
    really every year being there to help educate. And then you
    have got a delivery mechanism that you have to think about in
    dairy that may be a little different than crop because you use
    the private sector--not saying they cannot, but you are
    introducing a fundamental change in risk management and a whole
    new industry to a delivery mechanism that has not historically
    used or been involved in livestock risk management or dairy
    risk management.
        So there are some things to learn, but most of what we have
    learned about risk management is transferable.
        Senator Johanns. I have run out of time. This is such an
    important discussion because you cannot sell Holsteins unless
    you can allow the industry to grow and protect itself. And that
    is just kind of the bottom line. I think if we work on this, I
    think we can position ourselves to move these programs forward
    in a forward-looking sort of way, and I will conclude with this
    last thought.
        I so appreciated Doug Nuttelman saying what I have been
    hearing since I was a little kid growing up on a farm. Farmers
    do not want to farm for the Government. They want to farm for
    the marketplace and for the price, and they want to manage
    their own operations. And I think if we can work with the dairy
    industry to get that done, we can come up with a good, a really
    good dairy program.
        Thank you.
        Senator Casey. Thank you, Senator Johanns.
        Senator Gillibrand.
        Senator Gillibrand. I would like to follow up on some of
    the import and export market issues that particularly were
    raised in the last panel. We have touched on a number of them
    ranging from increasing the tariff on milk protein concentrates
    to promotion assessments to the Dairy Export Incentive Program.
    What, in your opinion, is the net result of these kinds of
    programs? Do the benefits they provide the American dairy
    farmers outweigh the potential for trade retaliation? Anybody?
        Mr. Gallagher. I believe the benefits derived are greater
    than the risks and costs associated with it. The Dairy Export
    Incentive Program for this current fiscal year has the ability
    to take about 1.5 billion pounds of milk equivalent off the
    market. That is very meaningful and is going to help in the
    price recovery.
        You know, one of the things that was mentioned frequently
    is the milk protein concentrate issue. You read the testimony
    and you listen to the colleagues of mine that have been
    testifying today, and on supply management, we are all over the
    board. On the issue about milk protein concentrate, I think
    there is complete producer unanimity in this country on that
    one particular issue, and we would encourage you to work with
    your colleagues to move that along because that can make a
    difference. And to tweak it a little bit, one of the things--
    you know, we can put tariffs on that will put limits on how
    much of a product will come in on an annual basis. But still
    and all, if they can bring all the product in 1 or 2 months, I
    am not sure we are solving the problem. And so if there is some
    way we could tweak that so that there maybe is some monthly
    limit as well, I think that would be extraordinary.
        You know, there is tremendous opportunity in U.S. exporting
    products that we have to keep digging deeper and deeper and
    looking into ways to tweak our regulatory system to encourage
    that, and that may even be getting into things like do we
    adjust the Price Support Program a little bit to create
    incentives to create things like milk protein concentrates here
    in the U.S. as opposed to a discouragement, which the current
    program does.
        But I think at the end of the day these things that we do
    on the export market I think will add more value to the U.S.
    dairy farmer than the risk of whatever retaliation may occur.
        Thank you.
        Mr. Kruse. Madam Chairman, could I address that?
        Senator Gillibrand. Yes.
        Mr. Kruse. One of the things is people are demanding milk
    protein concentrate as an ingredient for sports drinks, for
    energy bars, and things of that sort. We do not make it here
    because Federal policy favors making nonfat dry milk. That is
    the safer thing to make, and it is really not in demand. And so
    if we see some imports coming in, it is because there is a
    desire to use those ingredients. We need to make them here, but
    part of the reason they are not made here is there is a
    disincentive.
        Senator Gillibrand. How does Federal policy favor only
    making the nonfat dry milk?
        Mr. Kruse. It relates to all the Federal support prices and
    things. There is a ready market for your nonfat dry milk, and
    you know where you are going to go with it. You might get into
    the MPCs and find out that you did not come out as well. So it
    is the safe way to do it.
        Senator Gillibrand. Okay.
        Mr. Sjostrom. I will take a shot at that. Obviously, the
    MPC thing is unanimous, as we have said, and then also as we
    have said, there have been a few different opinions on supply
    management. But no matter what happens to the imports and
    exports, if we do not change the incentives to produce more
    milk all the time, which is what is happening right now when
    the price is low and what also happens when the price is high,
    and that is something that our program can change. Without
    changing those incentives, risk management is still hard to
    manage because we have not changed what is inevitably wrong
    with why there is too much milk.
        Senator Gillibrand. Do any of you have comments about his
    proposal specifically, why you think it would work or why think
    it would not work?
        Mr. Gallagher. We call the Holstein program a base access
    program, and it is actually being implemented right now on a
    private basis in California by the dairy cooperatives in
    California and in Arizona by the single dairy cooperative in
    Arizona. So it is a workable program. The program that Dairylea
    and DFA are talking to our counterparts in the National Milk
    Producers Federation about the Dairy Growth Management
    Initiative would look to take the best of the best of the
    things that people are talking about, including the plan like--
    a base access program like the Holstein Association's. If a
    region of the country would like to implement it, they have
    room within this initiative to implement it.
        So there are some really good aspects of what the Holstein
    Association and the dairy farmers in California have been
    talking about.
        Mr. Kruse. You know, I think if it would tend to not bring
    on producers in areas that are growing, Nevada or Idaho or
    places like that, if all of a sudden there is a disincentive to
    enter the milk business and grow the milk in regions where
    processors have located and where it is natural for them to
    produce this milk, then I think I would have to study the
    program. I would rather not the Government dictate supply
    management. I think it is going down the wrong path.
        Senator Gillibrand. Thank you.
        Senator Casey. Thanks very much. I want to make sure that
    Vermont gets a little rebuttal time here. I say that for a
    couple reasons. Number one, I do want to be able to have that
    opportunity, but one of the members, a longstanding member, of
    the Agriculture Committee and former Chairman of the Committee,
    Pat Leahy, would have been here today. He is very sick. We were
    talking at our caucus lunch today that he is out today, and if
    he is able to get here for a vote, it is going to be very
    difficult for him. But I know he would want to be here. So he
    would want me, as I do, to give Vermont some time to rebut
    that. Do you want to do that, sir?
        Mr. Sjostrom. Sure, yes. As a resident of Vermont, I am
    proud to support the State, and anytime we get--being somebody
    that has--a State that is represented very well by Mr. Leahy,
    and it is too bad he is not here.
        In rebuttal, first of all, I thank all the farmers for the
    support on the last panel, and Mr. Gallagher's comments, they
    mean a lot.
        Moving forward, I think it shows that our plan at least
    needs to be considered we hope for the short-term, if that is
    not possible, at least for the long-term solution, and it does
    not mean that we want our plan to be the sole sailing ship.
    There are other things that can come along with it. There are
    other things that can be added or subtracted from it. But we
    think the concept of it that changes the inherent incentives
    that are the bad part of our industry right now or what makes
    our industry hard to manage, we think if those incentives can
    be added into a long-term solution, it is going to be better
    for all of us.
        Senator Casey. Thank you. I wanted to also ask a couple
    more follow-up questions about the short term versus the long
    term. I will ask the same question I did of the last panel.
        Each of you in your own way has provided testimony about
    your experience, your assessment of where we are now, and also
    where we should be going in the near term in addition to the
    long term. I think the long-term strategies are critically
    important. We have got to get them right. But most observers of
    this crisis--and there is no other better word, I do not think,
    to describe it--are mostly concerned about how do we help in
    the near term. And I just want to literally go down the table
    again as fast as you can, in 20 seconds or less, give us your
    one-two punch on what we should be doing in the short term.
        In addition to that, I was just going to ask Secretary
    Redding, we have been losing in Pennsylvania a couple hundred
    dairy farms every year for a while. I do not know if you have
    any current sense of that, say, in the last 2 to 3 years, what
    the annual loss has been. Do we have any accurate numbers on--I
    have seen as high as 200 dairy farms to 300, losing that number
    every year in Pennsylvania. Is that----
        Mr. Redding. That is about right. You are just about 8,000
    today, just slightly over 8,000. You were at 9,000 five years
    or so ago, so you end up with that 200, 250 a year that you are
    losing. Cow numbers have been stable. Production has been
    stable.
        Senator Casey. And I know, Mr. Kruse, you mentioned the
    national number. You said it was 4.5 million and went down to
    67,000?
        Mr. Kruse. Right. A lot of consolidation.
        Senator Casey. In what time period was that?
        Mr. Kruse. From when the Federal orders came in, about 70
    years ago.
        Senator Casey. Well, I will just wrap up with my 20-second
    response to my question on the one-two thing in the near term
    you think we should be doing.
        Mr. Gallagher. Cash is king. Farms need cash right now. The
    milk production correction I think has occurred. We need to get
    more cash back on dairy farms. And, certainly, if there was
    some way to give a grant to CWT so that it could do more,
    taking out cows, if necessary, I think it would work.
        Senator Casey. Thank you.
        Mr. Redding. Several points I think I made earlier. This
    whole social crisis, I think you can deal with two problems at
    one time--that of the food bank and those who are nutritionally
    at risk and are relying on the tradable system. Of course, the
    dairy issue, but a couple of things.
        One, continue to use the full authority of the USDA both on
    DEIP and the commodity purchase. Push the credit standards as
    hard as you can push them. I think folks are going to need to
    know that they have got at least the ability to refinance to
    get to the next year. Pilot projects on risk management. And I
    think most importantly for the confidence of the producer and
    the industry is we have got to challenge the current systems,
    both the domestic and international. A lot of questions about
    how a product is priced, not really understanding it well, and
    having less of an appreciation or understanding of what is
    coming in. I think focus on those points.
        Senator Casey. Thank you.
        Mr. Kruse. The problem occurred when markets more or less
    went away, the export markets, and we had to much milk. So
    every time we send a signal to say it is going to be okay, do
    not stop milking, we are going to get some money to you, it is
    a price signal. And so I think it is a little bit of a
    disservice. Obviously, we need to remove a certain amount of
    milk from the market, and it needs to leave and get back into
    balance.
        I have heard a lot of dairy farmers talk about the overhang
    of stocks, whether it is in private holdings or it is in the
    Government through the CCC purchases, that is going to stretch
    out the pain. And so those are just things that happen.
        But anytime you say, hey, it is going to be okay, you are
    telling them do not stop doing what you are doing; instead of
    pulling back, just keep going.
        Mr. Sjostrom. I would just like to say this is the dairy
    crisis of 2008, but if you look at all the modeling and if you
    look at when the next farm bill is going to need to be
    reconstructed, the next dairy crisis might happen to coincide
    at the same time as the next formation of that next farm bill.
    Without a long-term solution before then, you might see the
    same people in front of your, or maybe these four people behind
    me might all be gone by then, talking about the same sort of
    things. Obviously, they asked for cheese purchases, and there
    are a lot of other things that can be done in the short term.
    But we think long term you are going to need to change the
    incentives, and something like our plan can do that.
        Senator Casey. Thank you very much.
        Senator Gillibrand. Thank you, Mr. Chairman, for hosting
    this panel.
        I want to close with the same question but the long-term
    issue, and, Mr. Gallagher, you addressed this somewhat in your
    testimony, and so did Secretary Redding, about price discovery.
    And if you have any recommendations for long-term changes on
    how we price milk in this country, I would like to hear them.
        Mr. Gallagher. The challenge we are going to have is
    getting consensus, and there are a lot of good ideas out there.
    Mr. Redding talked about having a market basket of things to
    look at.
        You know, one of the things that, for good or for bad, most
    of the other commodities are priced off the futures market. It
    is some price off the Board of Trade. And there is a working
    group that I participate in of young bucks like myself that are
    steeped in dairy economics, and that is one of the things that
    we are next going to address to see is there some way that we
    can develop some sort of a futures-based pricing system that
    then has buyers and sellers that may be the gentlemen that
    testified in the first panel trying to hedge their milk that
    are impacting what their price of milk may be under the Federal
    order system. So that is something that we need to look at.
        Senator Gillibrand. So you would like us to use credit
    default swaps in the dairy industry?
        Mr. Gallagher. We----
        Senator Gillibrand. It was a joke.
        Mr. Gallagher. Yes.
        Mr. Redding. Just picking up on the testimony and Ed's
    comments, I think anything we can do in terms of transparency.
    I mean, I think folks need to know what the product is worth.
    We know what we are being paid, but what is the product worth?
    And I think this is one of those moments when you can talk
    about that. So you are going to need transparency to get to
    that point, and that ought to be mandatory reporting, what is
    coming in, in terms of trade, and what are we using and how are
    we using it, we ought to report that and use those numbers,
    that information to make an intelligent decision about what the
    price is worth.
        Two, get rid of the lags in the system, the lags in
    pricing. Today there are lags just in reporting and how those
    numbers ultimately play out for the producer, reduce the lags
    or eliminate them at least.
        And the final point would simply be looking at a two-class
    system. I think it is inherently complicated today to have four
    classes of product milk. You know, you get down to a fluid
    product. You can understand what fluid is; you understand what
    manufacturing is. Because in the pricing system, it should be
    something the producer did not understand as well. So a
    recommendation would be looking at a two-class system versus a
    four-class system.
        Mr. Kruse. You know, I would say that existing policies
    have not performed as we would have hoped they had and were not
    sufficient to do the job.
        On the two-class system, IDFA has gone on record as saying,
    yes, we would like a two-class system of, one, fluid or
    beverage milk and then the second class being manufactured
    milk.
        But long term, you know, look at everything we can do from
    a risk management standpoint to get dairy more like all the
    other Ag sectors that seem to manage themselves. There is
    volatility--I think in my written testimony, there is more
    volatility in the other ones as opposed to dairy, and so we
    just need to manage those risks out there.
        Mr. Sjostrom. As I have said before, thank you again for
    the opportunity, but the Holstein Association thinks one of the
    best long-term fixes is going to be implementation of a plan
    like the Dairy Price Stabilization Program that we have
    endorsed and tried to gain support for.
        Thank you.
        Senator Gillibrand. Thank you all for your time and your
    expertise.
        Senator Casey. Thank you as well. We can do it together?
    Hearing adjourned.
        Senator Gillibrand. No, you can do it. I got to do the
    first one. Go ahead.
        Senator Casey. This hearing is adjourned. Thank you very
    much.
        [Whereupon, at 4:54 p.m., the Subcommittees were
    adjourned.]

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                                A P P E N D I X

                                OCTOBER 27, 2009

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