STATEMENT OF

THE AMERICAN FARM BUREAU FEDERATION

TO THE

SENATE AGRICULTURE, NUTRITION AND FORESTRY COMMITTEE

REGARDING

THE DAIRY INDUSTRY AND MILK PRICING

Presented by

Clark W. Hinsdale, III

President

Vermont Farm Bureau, Inc.

February 9, 2000

Thank you , Mr. Chairman. My name is Clark Hinsdale, III, president of Vermont Farm Bureau. I am a producer from Vermont and have been very active on federal dairy issues. Farm Bureau's membership includes the majority of the nations dairy farmers. I am presenting these comments today on behalf of the American Farm Bureau Federation.

As you are aware, Farm Bureau was active both in the milk order reform process that has recently been implemented and also in the dairy debates that took place in Congress last year. I would like to thank the members of Congress for actions that you took last year relative to dairy. Extension of the dairy price support program for one year, the implementation of the Option 1A differentials for Class I milk in the new orders, extension of the Northeast Compact and providing additional Market Loss Payments to producers have all helped to provide some additional stability for dairy producer income across the nation.

One of the questions that you have asked is: "What is the status of the dairy industry in America?" As with all of agriculture, it is an industry in transition. Although prices paid to dairy farmers are extremely low now, the past two years have been good years for most producers as milk prices have been higher than in the past and, due to price problems in the grain sector, feed prices have been generally low. This combination of factors was likely a primary factor in the smaller than normal loss of dairy farms that occurred between 1998 and 1999. We found in the annual Farm Bureau survey of the number of dairy farms that we lost 4.2 percent of the dairy farms during the year. This compares with 8 percent the previous year.

I mentioned that the industry is in transition. A few numbers will help put this into perspective. When Farm Bureau began collecting data on dairy farm numbers in 1992, we had a total of 131,535 farms selling milk in the country. This past July we had dropped to 87,669. This means that we lost one-third of our dairy farms in that seven- year period. However; even within the dairy industry this herd loss wasn't uniform. In looking at Grade A farms we found that 29 percent had left the industry, while in the manufacturing grade farms there was a loss of 52 percent of the operations. Herds are also getting larger. Based on USDA cow numbers and Farm Bureau herd numbers we have moved from an average herd size of 73 cows in 1992 to 104 this past year. Based on analysis provided by the milk market administrator's office in Tulsa, we see another indication of the consolidation that is taking place in the countryside. Their data shows that 257 counties now produce about 75 percent of the milk in the country and that the top 81 counties produce 50 percent of the milk. While these changes have significant impacts on the families who are or were operating the dairy farms, there is little noticeable impact on consumers as total milk production has increased by about 10 billion pounds during this same time period.

The changes on the producer side of the industry are significant, but we still have not seen the vertical integration in dairy that is taking place in other segments of the dairy industry or in other sectors of animal agriculture. During the past two or three years there has been significant consolidation in both the processing and the retail sectors, meaning there are fewer buyers for our products. In response, cooperatives have also expanded and in some cases now have members from coast to coast.

While the large majority of dairy producers are members of cooperatives, they are still independent operators. If we compare the dairy industry with other sectors of animal agriculture, two differences are apparent. One is the presence and widespread use of cooperatives by producers and the other is the federal milk marketing order system. Both help to equalize market power between buyers and sellers of milk. For this reason we favor maintaining the federal order system, and maintaining its integrity. We supported reform of the federal milk marketing orders and were actively involved in the process. As I noted previously, we appreciated the action by Congress to require the use of Option 1A differentials for Class I milk and also that USDA held hearings to review the price movers for Class III and IV milk. These actions, coupled with the changes included in the final rule by USDA, provide a very workable system for the future.

Last year we supported the extension of the dairy price support program through the end of the current year. We recognized at that time that a longer extension would be desirable, but we chose to move forward to address the immediate need at that time. We now encourage you to provide a further extension to make the program consistent with other commodity programs. While prices have generally been above the support level, the dairy price support program does serve as an important safety net for producers and is likely to be needed for the next few years. December's basic formula price (BFP) of $9.63 per hundred pounds of milk was the lowest BFP ever, and the lowest Class III price mover since August 1978. This is actually 17 cents below the current support price, which is based on product prices of $0.65 cents per pound for butter, $1.01 per pound for powder and $1.10 for cheddar cheese. If we were to eliminate the price support program, then the world price becomes the only floor for our prices. To provide you with a frame of reference, for the impact this could have, world prices currently stand at approximately $0.57 per pound for butter, $0.68 per pound for powder and $0.79 for cheese. If farm gate prices to U.S. producers were to reflect these prices, it would devastate the industry and the rural economy. Again we strongly encourage you to extend the dairy price support program to make it consistent with other commodity programs.

There are two other actions that we encourage you to take to strengthen the safety net for dairy producers, one is full funding of the Dairy Export Incentive Program (DEIP) and the other is to support regional dairy compacts. The DEIP is an important tool for the dairy industry to combat the export subsidies of the European Union. The amount of product that we are able to move under the program has been reduced, to reflect our commitments to the GATT agreement, but it is still an effective tool. It helps our industry open international markets and provides more stability to domestic prices by moving more of our milk powder into export channels.

The Northeast Dairy Compact has proven to be an effective tool for producers in that area of the country to gain more income from the market. It is estimated that the compact has returned over $40 million to producers from the market in that region. Delegates to this year's annual meeting of the American Farm Bureau Federation reaffirmed past policy, stating: "We support state and regional initiatives or compacts which are consistent with our overall goals of federal market order reform and a market-oriented national dairy program." They also added new language in another section of our dairy policy, stating: "We support modifications in the Federal Milk Marketing Order that will enhance the price of milk received by producers, including but not limited to:

(1) Option 1-A price differentials for Class I milk,

(2) Adjusting USDA formula for make allowances on Class III milk; and

(3) Regional dairy compacts."

Twenty-five states have passed legislation authorizing regional compacts. We support legislation that would extend the current Northeast Dairy Compact to include Maryland, New Jersey, New York, Delaware and Pennsylvania. Farm Bureau supports the authorization of a Southeast Dairy Compact which would include all of the Southern states plus Missouri, Oklahoma, Kansas and Texas. We encourage you to continue to allow producers and the industry to work together through efforts such as the Northeast and Southeast Dairy Compacts to stabilize producer income.

We appreciate the opportunity to provide these comments to you about the current status of the dairy industry, the importance of the dairy program and the milk order system. We look forward to working with you in the coming year as we seek to address challenges facing the industry.