[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
__________
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Committee on Agriculture, Nutrition, and Forestry
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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
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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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