[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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