ButterChairman Lugar, members of the committee, I am Jim Tillison, Executive Vice President and CEO of the Alliance of Western Milk Producers. The Alliance was formed in 1991 to represent the interests of California dairy cooperatives and the milk producers who own these cooperatives. I am testifying on their behalf and appreciate being given this opportunity to talk with you about dairy policy.
I will cover three areas of interest to the Alliance today - the dairy support program, international trade and provide a brief description of California milk pricing and how it interfaces with the federal milk pricing system.
The Dairy Support Program
Few government programs have been as effective as the dairy price support program. Started in 1949, the dairy price support program removes excess milk from the marketplace in the form of butter, nonfat powder and cheddar cheese. When demand is up, these products are released back into the marketplace. In this way, the program assures consumers that milk and dairy products will be available by assuring dairy farmers of a market of last resort.
In 1996, milk producers reluctantly agreed to the phasing out the dairy price support program. At that time, it was believed that the General Agreement on Trade and Tariffs (GATT) would present additional opportunities for dairy exports. Unfortunately, that has not been the case.
Top dairy cooperative economists from around the country met in January 1999 to evaluate the impact on producer income should the dairy support program end. It was estimated that the average producer milk price would drop $1.50 to $1.75 per hundred pounds of milk. This would result from domestic nonfat powder prices falling an average of 25 cents per pound. The total cost to dairy farmers nationwide was estimated at approximately $2.7 billion.
Because of this, the Alliance decided to seek an extension of the dairy support program through the full term of the 1996 Farm Bill. As you know, dairy was the only commodity which would have lost its program before the end of the farm bill. We were successful in gaining an extension through this year and are hopeful Congress will keep the program in place through the full term of the farm bill at least at the current $9.90 level.
The Alliance believes that a program that allows management of supply relative to demand, like the dairy price support program, is far superior to programs that offer producers income supplements. First, a support type program is market oriented. It provides a market for milk products at times of supply exceeding market demand and makes dairy commodities available when market demand challenges the supplies available.
Second, supplemental income programs are very costly. In the past two years, the Congress has approved $325 million in emergency income relief to milk producers. In 1999, $200 million was distributed based on 1998 milk production with a maximum check of $5,000. USDA estimates the cost of extending the support program at $300 million total for 2001 and 2002. However, the return on that $300 million will be over $2 billion to all dairy farmers proportionately. This is a far superior return on investment with benefits to both producers and consumers.
The Alliance has already begun working with other dairy producer organizations to explore possible alternatives to the support program that will provide the same benefit to all parties involved at such a reasonable cost. We hope one can be found as effective and market oriented as the dairy support program.
International Trade
Frankly, the Alliance's member cooperatives have significant concerns about the near term prospects for increased exports of dairy products. They believe that the U.S. dairy industry came out on the very short end of the stick in the GATT negotiations. While the United States' ability to subsidize exports has been dramatically reduced, the European Union is able to continue to subsidize hundreds, even thousands of times the quantity of dairy products that the U.S. is allowed to subsidize. An excellent example is the "Other" dairy product category - products like ice cream - where the EU will be able to subsidize a billion pounds of product while the U.S. is limited to 70,000 pounds.
Free trade appears to us to be a one way street running towards the United States. Increases in dairy product sales from the U.S. to other countries seem limited to the one time sales that are made using the Dairy Export Incentive Program (DEIP).
The following data tables, excerpted from a 1999 study done by the Food and Agriculture Policy Research Institute (FAPRI), give us a glimpse of the world trade picture. The tables below show that under the current trade agreement, the United States will never be a significant player in the world marketplace even though it is one of the largest milk producing countries in the world.
Note: All data is in thousands of metric tons, 2,204.63 pounds per metric ton.
Nonfat Dry Milk Powder
Butter
Cheese
These tables show what a small share of the world market for dairy products the U.S. has. The export cheese market is estimated to be 1.6 billion pounds. Net imports of cheese into the U.S. account for 16 percent of the world market. The U.S. net exports of butter are zero. Only in nonfat dry milk powder and whey products is the U.S. a net exporter. Thanks to the DEIP program, the U.S. has about 12 percent of the world nonfat market.
I have the privilege of serving on USDA's Animal Agriculture Trade Advisory Committee. Most of what we hear at the meetings is how our various trading partners are not living up to their trade commitments. That is why I have recommended to the Alliance Board of Directors that we work for a continuation of a support type program until world markets are truly free, but more importantly truly fair. That means the complete elimination of government sanctioned activities like export subsidies and state trading enterprises.
We would like to see significant limitations put on all dairy product imports from countries that employ these and other trade distorting activities. It is interesting that when you look at the data USDA generates for dairy products sales in the U.S. most years, the milk marketings from our dairy farmers and total sales of dairy products on a milk equivalent basis match up pretty well. When imports of dairy products are added in, either inventory numbers or Commodity Credit Corporation purchases increase. If we had fair access to world markets, that situation would be less likely to exist.
Milk Pricing Systems
The implementation of federal order reform brings milk pricing in California and in the federal order system much closer together. While differences still exist, the basic concept is the same.
Like California, federal orders now use product-based pricing. The market value of cheese, butter, whey and nonfat powder are used to calculate a minimum value for the producer milk used to make those products. As a result, prices will track much more closely then previously. For example, for the seventeen months from September 1998 through December 1999, the average difference in the cheese milk price between California and the federal order reform system would have been just 3 cents per hundredweight of milk. The so-called California advantage is no more.
And, California is adjusting its system to the federal system. On January 31, 2000, a hearing was held in Sacramento to consider proposals to adjust how California prices fluid milk relative to the federal system. The Alliance is hopeful that our proposal will be adopted by the California Department of Food and Agriculture and implemented on April 1.
Of course, being from California, I can't close without telling you how to improve the new milk pricing system. When we look at the system adopted in federal order reform, we have a few misgivings.
One is the use of NASS numbers for all commodity values. The Alliance believes that the Chicago Mercantile Exchange provides a better measure of what all cheese is selling for since virtually all other types of cheese are priced off the CME cheddar block price. All butter is priced off the CME butter market as well. NASS reporting is strictly voluntary and sales are unaudited. Consolidation of dairy product processing has concentrated the production of cheddar cheese and butter in fewer and fewer manufacturers. Some people may argue that the CME is a thin market because a small percentage of all the cheddar cheese is sold there. I contend that many more parties have an opportunity to buy and sell cheese at the CME than those who just produce it. As a result, thin is a relative term. If NASS is to continue to be used, especially for cheese and butter, then USDA should have the authority to audit reporting plants and reporting by all plants should be mandatory.
The other issue is manufacturing allowance determination. USDA should have the authority to require the reporting of manufacturing costs and to audit plants to verify that these costs are accurate. In this way, producers and processors can be assured that the numbers used to set the make allowances are real numbers. The Alliances wishes USDA had decided to use regional make allowances and/or product values to calculate milk prices as we and others suggested. To do otherwise creates winners and losers.
Summary
Few government policies have served an industry and consumers as well as the dairy price support program. It ensures milk producers that they will have a market of last resort for a highly perishable product. This, in turn, assures consumers that they will have an abundant supply of fresh milk and dairy products at reasonable prices. It should be continued through the term of the 1996 Farm Bill and perhaps beyond.
The Alliance urges this committee to take an active role in the upcoming round of trade negotiations. You are urged to ensure that agriculture's interests are not subjugated to the trade interests of other industries or other purposes. The ability to produce food is a form of security that no country can or should risk. That is why this committee as well as the House Committee on Agriculture must assure the constituents they represent that trade will be fair, not just free.
Thank you for this opportunity. I will be happy to answer any questions you may have.
Respectfully submitted,
Alliance of Western Milk Producers
Jim Tillison
CEO