Statement of

Dennis Meyer, Producer

Bernard, Iowa

and

Member, Board of Directors

Family Dairies USA

Before the

U.S. Senate Committee on

Agriculture, Nutrition, and Forestry

Public Hearing

February 9, 2000

Good day and thank you, Chairman Lugar and members of the Committee, for this opportunity to share our members' concerns on dairy policy. I am Dennis Meyer, a board member of Family Dairies USA. I am a dairy farmer from Dubuque County, Iowa, in America's traditional "Dairy Heartland." My wife Darlene and I milk 92 cows and farm 384 acres of land.

Family Dairies USA is a grassroots organization representing over 6,000 small and medium-sized dairy farm families in nine Midwest states. The annual survey of cooperatives published in the October 10, 1999 issue of Hoard's Dairyman magazine ranks Family Dairies USA as one of the nation's largest dairy co-ops in terms of membership. We are working closely with other groups to reform harmful federal dairy policies that discriminate against our members.

The original goal of this cooperative has been a single, national milk marketing order that treats all producers equitably. During the recent federal order reform process, we sought basic reforms that bring needed equity and simplicity and move us toward our original goal. These reforms included much flatter Class I differentials, broad order consolidation that raises Midwest Class I utilization much closer to the national average, a competitive Grade A-B pricing system recognizing the full competitive value of farm milk, and the inclusion of California in the federal order system. Though Secretary Glickman's reform package made only a modest step toward our overall reform goals, we nevertheless believed it was an important step toward a better system. Therefore, we are deeply disappointed that Congress interfered in the reform process by blocking even these modest reforms in Secretary Glickman's final rule. Now that Congress has derailed these modest reforms, we urge Senate and House leaders to work with us to bring needed equity and simplicity through other means.

We are strongly opposed to regional dairy compacts. Compacts are contrary to our goal of a uniform national dairy policy that treats all dairy producers equitably regardless of where they live or where their milk is marketed. These unfair milk-pricing cartels erect new trade barriers to the movement of raw milk among regions of the country. Like the Eau Claire-based Class I differentials, compacts legalize the principle that it's okay to maintain pricing rules that discriminate against many producers in some regions.

We shouldn't have to discuss compacts. The Northeast Interstate Dairy Compact was not part of the 1996 Farm Bill debate until it was inserted at the last minute in conference. Since July 1997, the Northeast Compact has fixed the regional price of fluid milk in the New England States. Since the compact was to be a transitional step between outdated federal milk regulation and federal milk order reform mandated by the 1996 Farm Bill, Congress scheduled it to sunset in April 1999.

Unfortunately, the opponents of dairy reform inserted provisions in the fiscal year 1999 omnibus appropriations bill that delayed the sunset of the Northeast Compact until October 1, 1999 as part of a broader effort to delay and obstruct the reform process. Allowing the extension of the Northeast Compact amounted to major backsliding from the 1996 Farm Bill which was intended to move the dairy industry toward greater market orientation in milk pricing. And again at the end of last year, through the fiscal year 2000 omnibus appropriations bill, we saw the Northeast Compact renewed for two more years, through yet another backroom political deal.

The extension of the Northeast Compact has emboldened other states to pursue these regional dairy compacts, in search of a quick, easy answer to the complicated problems of dairy policy. Many states have enacted or are considering legislation allowing them to join the Northeast Compact or form a Southern Dairy Compact. If Congress were to authorize expansion of the Northeast Compact or a Southern Compact, what was to be a temporary crutch in the New England States could engulf over half the states and seriously endanger the Federal Order System.

Milk price volatility and farm level prices are the core issues in the debate on dairy compacts. From late 1998 through 1999 raw milk prices went from record highs to record lows. With milk price supports scheduled to be phased out at the end of this year, price volatility is a major concern for our industry. Small to negative profit margins combined with extreme volatility is financially disastrous for dairy farmers. Farmers, processors and consumers will all benefit from a greater degree of price stability in dairy markets. Dairy compacts, however, are not the solution to the price stability problem. Surplus milk production in the Northeast Compact region depresses manufacturing milk prices for producers in our region, further adding to our price volatility.

Compacts are not slowing the decline of small dairy farms. Compacts pay a premium on milk production without regard to farm size, so large operations receive more benefit than small farms. Ironically, statistics from the New England Order indicate that the rate of decline in small dairy farm numbers has actually increased since the inception of the Northeast Dairy Compact, while the number of large farms has grown at an accelerated rate. The Northeast Compact has failed in its primary mission of preserving small dairy farms in the New England region.

Farmers outside the compact region would see their milk prices lowered to benefit dairy farmers within the compact area. About 34 percent of producers in the nation reside in the states where compacts either exist or are under active consideration. By artificially propping up the price of milk for 34 percent of the producers in the nation, compacts directly depress the price for the other 66 percent of the nation's producers.

The Northeast Interstate Dairy Compact has caused surplus milk production in the member states that has depressed manufacturing milk prices for producers outside the compact area. Artificially high prices both stimulate production of raw milk and suppress demand for bottled milk. The resulting surplus must be manufactured into products such as cheese and butter. This is a serious problem for the Midwest where up to 85% of our milk is made into manufactured dairy products whose prices have been reduced because of surpluses created by the Northeast Compact.

A 1999 University of Missouri study shows that a majority of producers in the nation would be harmed by the combined effects of regional compacts in the Northeast, Mid-Atlantic and Southeastern states. Producers in every region outside of the Northeast, Mid-Atlantic and Southeast stand to lose between 17 and 21 cents per hundredweight of milk, according to the study.

While the study shows that producers in the compact region benefit from compacts, those benefits also would come at the direct expense of fluid milk consumers in the compact region. According to the Consumer Federation of America, the Northeast Compact has already cost New England consumers about $88 million in higher milk prices. The International Dairy Foods Association estimates that the cost will rise to $2 billion annually for 60 percent of the nation's consumers if compacts are expanded as proposed.

Nutrition program costs also rise under dairy compacts. The Consumer Federation of America estimates that Food Stamp Program costs have increased by $9 million in the New England states since the Northeast Compact was started.

If allowed to continue, compacts will carve the country into milk trading blocs. This harmful balkanization of the milk industry will further distort milk prices and supplies. Open interstate commerce has been one of the major hallmarks of our national economy since the birth on our nation. Dairy compacts are an unjustifiable exception to this rule, pitting farmers in compact states against those who are not.

As Secretary Glickman noted in his February 10, 1999 testimony before the House Agriculture Appropriations Subcommittee, compacts fly in the face of a national dairy policy by erecting trade barriers between regions.

Congress should not approve agricultural policies that so clearly provide benefits to the producers of one region, at the direct expense of the consumers of that region and producers elsewhere. Instead, there should be an effort to create a more rational and uniform national dairy policy. The Secretary of Agriculture should have the flexibility and authority to maintain a sound and cohesive national milk pricing policy, without the regional fragmentation caused by compacts.

At a time when so many Members of Congress are raising concerns about trade barriers erected by other nations against American products, it would be ironic to allow similar trade barriers to be erected within our borders, hindering commerce between regions of the United States. But compacts do exactly that. By fixing milk prices at artificially high levels, the compact proponents understand that their markets become vulnerable to market forces at work elsewhere in the nation. So in order to prevent milk from other regions from entering those compact markets at lower prices, a tariff-like mechanism is established to assure that all milk entering the compact area is priced at the level fixed by the price-fixing commission in the region. This essentially insulates that region from competition or trade from other regions.

Congress would be making a mistake to further expand or extend the Northeast Compact or authorize any new dairy compacts. Compacts are inconsistent with the broader federal milk marketing order reform process laid out in the 1996 Farm Bill. To retreat to compacts against the background of Congress's work reflected in the 1996 Farm Bill would be a huge step backwards and a costly mistake.

If we allow regionally biased policies such as compacts and high Class I differentials to control dairy policy, we will never move beyond the divisions that have plagued our industry. Let's work together to find national solutions to our national concerns.

Thank you for this opportunity to present our views.