TESTIMONY OF

EDWARD T. COUGHLIN
ACTING CHIEF EXECUTIVE OFFICER
NATIONAL MILK PRODUCERS FEDERATION

before the

COMMITTEE ON AGRICULTURE, NUTRITION, and FORESTRY
UNITED STATES SENATE

regarding

AGRICULTURAL COMMODITY PRICE VOLATILITY

July 29, 1997

Mr. Chairman and Committee members, I am Edward Coughlin, Acting Chief Executive Officer for the National Milk Producers Federation. I appreciate the opportunity to testify before the Committee on Agriculture, Nutrition, and Forestry on agricultural commodity price volatility. The National Milk Producers Federation (NMPF) is the trade association that represents dairy farmers and the cooperative milk marketing associations they own and operate throughout the United States.

Prices that U.S. dairy producers receive for milk are established every month. USDA calculates and announces what is now known as the "basic formula price" (BFP) and prior to May 1995, was known as the "Minnesota-Wisconsin" (M-W) price. The BFP, with some variation, is the price the processing plants throughout most of the United States pay to producers for milk used to produce manufactured dairy products. The $10.70 per hundredweight BFP in May 1997 and the $10.74 in June 1997 are the lowest prices since June 1991.

The gradual reduction in the Federal dairy price support level that began in 1983 has been accompanied by increasing volatility in the monthly milk prices that dairy producers receive. Throughout the 1980's, the Commodity Credit Corporation (CCC) purchased dairy products and had inventories that were available for sell-back to the trade whenever current production was below market demand. The sell-back price for government stocks was usually ten percent above the government purchase price. Consequently, the government sell-back price became the ceiling on the market price.

Looking back ten years ago, the benchmark monthly M-W milk price varied by $0.93 in 1986 from a low of $10.98 per hundredweight in April and May to a high of $11.91 in November while averaging $11.30 for the year. The price support level in 1986 was $11.60; federal dairy price support expenditures were over $1 billion that year; and, government stocks on October 1, 1986 were 194 million pounds of butter, 559 million pounds of cheese and 697 million pounds of nonfat dry milk.

Ten years later in 1996, the BFP varied by $4.03 from a high of $15.37 in September to a low of $11.34 in December while averaging $13.39 for the year. The price support level in 1996 was $10.35; there were no federal dairy price support purchases in 1996; and, the CCC did not have any dairy product inventories in 1996.

In summary, dairy producers have gone from very stable prices at or near the price support level to market driven prices where small supply or demand changes trigger highly volatile price responses very quickly. With the dairy price support program slated to end after 1999, U.S. dairy producers will likely continue to experience highly volatile milk prices.

In his July 9, 1997 letter to Chairman Lugar and Senator Harkin, Agriculture Secretary Glickman correctly states: "Over the past year, volatility in feed and milk markets has caused the income of dairy farmers to be extremely variable." The letter acknowledges the "stress these dramatic fluctuations have had on dairy producers and processors." The Secretary concludes: "However,under existing statutory authorities, there is little more that USDA can do to affect this situation appreciably." We do not agree.

Section 191 of the 1996 FAIR Act authorizes the Secretary of Agriculture to implement an Option Pilot Program (OPP) to assist producers who are struggling to adapt to market forces. Clearly, dairy producers are struggling to cope with changing market forces.

We are dismayed that USDA has not used the authority to establish an OPP for dairy. Instead, USDA plans to convene a forum later this summer on risk management education and will continue to "examine" the use of futures, options and insurance. More is needed to help dairy producers learn to adapt to price fluctuations.

Dairy producers need practical experience in trading options to help them learn to adapt; exactly what the OPP is designed to provide. On a national level, the information developed from an OPP can be used to develop targeted and worthwhile educational programs on risk management. An OPP can also be used to evaluate whether futures markets can provide dairy producers with the insurance they desperately need.

The Secretary's letter concludes that an OPP would "go beyond the scope of USDA's current authorities and require action by the Congress." However, the FAIR Act states that the CCC will fund the OPP. The law does not require that an offset be found, but states that to the greatest extent practicable, the program should be conducted in a budget neutral manner. If USDA decides to find an offset, the FAIR Act gives broad latitude to the Department to identify such an offset. This broad authority is documented in the report language accompanying the FY 1997 Supplemental Appropriations Act (P.L. 105-16), which states that if offset funding is needed, the Secretary is strongly urged "to use available balances in other CCC-funded programs."

In letters from members of Congress (including one from Committee member Senator Santorum) and at congressional hearings (such as those before the Senate Agriculture Appropriations Subcommittee), the Secretary has been urged to move forward with an OPP for dairy. Further, in response to congressional inquiries, USDA officials have stated that a proposal the Department received last fall for a dairy OPP has merit.

We strongly urge that an OPP for dairy be established as soon as possible. Thank you for this opportunity to place the National Milk Producers Federation's views on the record.