STATEMENT OF GREGG L. ENGLES
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
SUIZA FOODS CORPORATION
BEFORE THE
UNITED STATES SENATE
COMMITTEE ON AGRICULTURE, NUTRITION AND FORESTRY
February 8, 2000
Mr. Chairman and Members of the Committee:
Thank you for the opportunity to testify today about dairy policy from the perspective of the fluid dairy processor.
First, let me make clear, as the nation's number one fluid milk processor, we are absolutely committed to the economic viability of our nation's dairy farmers. Dairy farmers are our partners, and they must have a fair and steady stream of income. Without them and the safe and reliable raw milk they produce, we simply cannot operate. Dairy Farmers of America (DFA), the country's largest dairy farmer cooperative, now owns 34% of Suiza's fluid dairy operations. Therefore, our interests are even more aligned than ever before and we share a common goal + to advance and strengthen the dairy industry.
With that said, let me begin by describing what I believe to be the biggest challenges facing the dairy industry. First, and most importantly, we are experiencing significant declines in the consumption of fluid milk. Over the last 25-plus years, per capita consumption of fluid milk in the United States has steadily declined (See Exhibit A). Why is fluid milk consumption declining? Certainly one explanation is the increased competition from the food and beverage industries. To their credit, these industries have done a far better job of product innovation and marketing than the dairy industry. Today's consumers have many choices from many very appealing competitive beverage and other products. These products range from soft drinks, juices, soy beverages, fortified sports and other beverages to innovative food products, including calcium-enriched orange juice, breakfast bars, waffles and breads. As a result of this wide array of choices, consumers are opting, at an alarmingly increasing rate, for beverages and nutritional sources other than milk. This trend of declining consumption is a serious threat to the viability of farmers and processors alike. It must be reversed. It is only the dairy processing industry that can reverse this trend by bringing the same levels of marketing and innovation to the dairy industry that the food and beverage companies have brought to their industries. That requires scale players and the investment of tremendous resources that only large companies can bring to bear.
Suiza Foods and other fluid dairy processors are working very hard to bring product innovation and marketing to life to reverse the trend of declining fluid milk consumption. But, as an industry, we are constrained by the archaic and inequitable milk pricing system Congress has allowed to continue.
As you all know, our existing federal milk pricing system was developed in the early 30's in response to market conditions existing during the Depression era. Low milk prices, due to the loss of purchasing power by consumers and the collapse of the economy, required emergency legislation that created the first federal milk marketing orders. Although our milk pricing system has been modified from time to time, its purpose has always been to (i) establish orderly marketing conditions, (ii) to ensure sufficient supply of raw milk and (iii) improve the economic conditions of dairy farmers.
The system sets minimum prices processors must pay for raw milk. Those prices differ depending on whether the processor uses the raw milk to manufacture fluid milk (Class I), sour cream or cottage cheese (Class II) or cheese or butter (Class III), with milk used for fluid bottling bearing the highest price. The logic used to justify setting the Class I price above the Class III price was that the price had to be sufficiently high to bring forth adequate supplies of raw milk for bottling. Thus, if you are in a fluid milk deficit market, the Class I differential should be higher than in other markets that regularly produce surplus grade A milk. The higher price would either encourage more local production or help pay the cost of transporting milk into that deficit market.
This historical rationale no longer withstands scrutiny in light of the realities of today's marketplace. Fluid milk production and processing are no longer local in nature. Technological improvements have resulted in milk with a longer shelf life. Improvements in our refrigeration and distribution systems and our national highway systems have brought milk freely into all areas of our country. New technologies such as ultra filtration and reverse osmosis are rapidly blurring regional production differences even further. Milk now regularly travels from coast to coast. In addition, our nation's supply of milk has been steadily increasing. Over the past 17 years, the amount of raw milk produced per cow in the U.S. has increased nearly 50% while the number of milk cows has steadily declined. (See Exhibit B.) With a stable and increasing supply of milk and improved production and distribution capabilities, we no longer need artificial pricing mechanisms to establish orderly market conditions or ensure a sufficient supply of raw milk. Clearly we are now operating in an environment where the market forces of supply and demand can and should be allowed to set the price of milk to be paid to the farmer.
Notwithstanding these significant changes in our economy and in the dairy industry since the Depression, Congress has been unwilling to move the industry to an unregulated status. Yet Congress seems content to allow our current system to continue to charge processors of fluid milk higher prices than those charged to other dairy processors. These higher prices essentially tax fluid milk processors and our fluid milk consumers. These higher Class I prices raise the cost to fluid milk processors, which are passed on to retailers and ultimately to fluid milk consumers as a hidden tax on fluid milk consumption. As we know from experience in many areas, consumers will avoid paying even hidden taxes reflected in artificially high prices by choosing substitute goods. The higher price charged to fluid milk processors increases costs to consumers and drives down consumption. The decline in consumption will, in turn, reduce dairy farmer income unless, of course, Congress is willing to authorize additional subsidies at taxpayers' expense.
In the recent Omnibus Budget Reconciliation Bill, Congress did approve federal order reform, but Congress also increased the Secretary of Agriculture's recommended Class I pricing to a higher Class I differential. I simply cannot understand what public policy is served by perpetuating and even increasing the cost differentials to fluid milk processors. The burden of sustaining dairy farm income already falls disproportionately on fluid milk processors and consumers. These recently enacted higher Class I differentials raise the hidden tax on fluid milk, and increase an already disproportionate burden on fluid milk consumers. Furthermore, in the Omnibus Budget Reconciliation Bill, Congress also allowed a forward pricing program to smooth volatility for all milk + all milk that is except milk used for Class I fluid processing. Again, processors of fluid milk have been penalized. Then, to further exacerbate these inequities, Congress authorized the extension of the Northeast Dairy Compact to September, 2001, continuing the higher pricing in New England (for Class I milk only) above the federal order price.
I believe that interstate dairy compacts are one of the more misguided, counter productive legislative initiatives this country has seen. Interstate dairy compacts set a minimum price that fluid milk processors must pay producers of raw milk. Dairy compacts were established with a single purpose: to raise the price of raw milk used for the manufacture of fluid milk (Class I milk) above the prevailing federal price - - not the price of milk used to make other products like cheese, just the price of milk used for bottling.
As of January 2000, raw milk processed for bottling in the New England Compact states costs $16.94 per hundred weight, while that used to make cheese costs $10.05. That's a 69% premium for an identical ingredient. This premium borne by fluid milk processors raises the price of fluid milk to the consumer. Therefore, is it any wonder consumers view cheese as a better nutritional value for their dollar, driving growth in cheese sales, while fluid milk sales have declined? If we continue to try to enhance dairy farm income by taxing fluid milk sales alone, we will ultimately drive the category down to the point where we have insufficient volume to support farm incomes.
Not surprisingly, at the same time fluid milk consumption is declining, New England dairy farmers, who are receiving more money for their milk, have increased production. Milk production in New England has grown far faster as a whole than in the U.S. since the Northeast Dairy Compact began. (See Exhibit C.) This increased production, together with decreased consumer demand, has resulted in excess production. Some of this excess production has been absorbed (at lower costs) in neighboring states, driving down prices at which dairy farmers in those states can sell their products and some has been purchased by the government as surplus production.
Understandably, dairy farmers in other states would also like to receive higher premiums for their products. What rational dairy farmer or other businessperson would oppose a program to subsidize his business? However, if that is the course we choose, and we authorize compacts for other states, dairy farmers in those states will also increase production. The cost of milk to the consumer will increase and consumption will decline. This imbalance of supply and demand is a deadly downward spiral that ultimately must result in you, Congress, getting back in the business we have struggled as a nation to put behind us, namely, buying the excess production. To extricate yourselves from such a cash subsidy, which in the early 1980s exceeded $2 billion per annum, you might then take taxpayer money and pay dairy farmers to slaughter the cows which, in turn, would devastate beef prices and have cattle ranchers knocking on your door in anger seeking relief for themselves. Surely we have learned from the mistakes of the past and will not let history repeat itself.
Unfortunately, while this distortion in market forces is occurring, the purported benefit of the Northeast Dairy Compact + protection of the small dairy farmer + has not been realized. During the first year of the Compact, dairy farms in New England declined at a 25% faster rate than during the previous two-year period. Dairy farmers in New England, and elsewhere in the country, have been exiting the business on average at a rate of 5% per year. That decline is due, according to the American Farm Bureau Federation, not to milk prices, but to the increasing age of farmers, the unwillingness of children to take over the business and the attractiveness to the farmers of market prices for their land. Our economy has created many opportunities and alternatives for our farmers and their families. There are many among us who believe that this represents progress and an intended result of a prosperous capitalistic economy, rather than a case for continued government intervention.
What the Northeast Dairy Compact clearly has done is benefit a handful of large New England dairy farms who receive the lion's share of payments from the Compact. But, this marginal benefit has come at the expense of consumers (including low-income families and food stamp recipients) who have paid $85 million more for milk than they would have paid without the Compact, and at the expense of the dairy industry as a whole.
In summary, the dairy industry is complex and so are the issues surrounding it. But the solution does not have to be complex. First, Congress should not authorize any additional interstate dairy compacts and should put an end to the existing Northeast Dairy Compact. We must put the national interest of strengthening and advancing the dairy industry above the regional interests of a select few. Second, we must move toward a system of pricing of milk that is transparent and simple and that allows processors to compete in a free market where prices are based on supply and demand. Such a system should no longer require fluid milk processors (and fluid milk consumers) to disproportionately bear the burden of supporting dairy farmers through an ineffective and archaic pricing system that no longer reflects the realities of the market.
My vision for the future of this industry is clear. I see a vibrant and growing industry. I see technological innovation reducing costs to the customers. I see product innovation and marketing creating new products, attracting more consumers and increasing their consumption of fluid dairy products. And finally, I see our 18,000 hard working and dedicated employees at Suiza Foods having a reason to feel secure about their futures and excited about their industry and the opportunities it creates for them and their families.
We can make this vision a reality + but we need your help. Like every other successful industry in our country, we need market forces to drive supply and demand and set prices. And we need Congress to take a stand and seek market-oriented solutions which address the needs of all constituents in the industry + our dairy farmers, our dairy processors and our consumers.
Thank you.