TESTIMONY PRESENTED TO THE

SENATE AGRICULTURE COMMITTEE

Tuesday, February 8, 2000

U.S. DAIRY POLICY

IN THE 21^ST CENTURY

GORDON HOOVER

Dairy Producer - Gap, Pennsylvania

Member, Land O'Lakes Board of Directors

Member, NMPF Board of Directors

THE NATIONAL MILK PRODUCERS FEDERATION

Good morning, Mr. Chairman, and the other members of the Senate Agriculture Committee.

I'm Gordon Hoover, a dairy producer from the town of Gap, Pennsylvania. My family and I milk 120 cows. My home county of Lancaster, Pennsylvania produces more milk than any other county in the Eastern Time zone.

I'm also a board member of the 2^nd largest dairy cooperative in the country, Land O'Lakes. And I also serve on the Board of the National Milk Producers Federation, on whose behalf I am appearing today. As you know, NMPF is the national voice of 50,000 dairy producers on Capitol Hill and with government agencies. We develop and carry out policies that advance the well-being of U.S. dairy producers and the cooperatives they collectively own. The members of NMPF's 28 cooperatives produce the majority of the U.S. milk supply. We also manufacture 45% of the butter, 55% of nonfat dry milk, and 30% of the cheese, marketed in the U.S.

I'm here today to help this committee understand NMPF's perspective on dairy policy, and the future of the U.S. dairy industry from the producer's perspective. I'm glad the Agriculture Committee is taking this opportunity to focus on dairy, which is the second-largest sector of U.S. agriculture, measured by cash receipts, behind beef cattle.

I'd like to address five issues of importance to the dairy industry: the recent reform of the Federal Order program; the future of the dairy price support program; the future of the DEIP program; the need to maintain current cheesemaking standards; and the importance of industry unity.

First, let me briefly address the recently-implemented reforms in the Federal Milk Marketing Order program. I think that's a good place to start, since that's part of the reason these hearings are being held.

I'd like to begin by reminding the committee what the 1996 FAIR Act directed the USDA to do, in order to reform the Federal Order system. There were four primary requirements specified in the dairy title of the Farm Bill:

· Consolidate the number of Federal Orders from 31 into roughly one dozen;

· Use the informal rulemaking process to propose and implement changes;

· That the new Class I differential structure not be based on the existing differential structure, and;

· That the changes be implemented by the Spring of 1999.

How did the USDA do on those four counts? Let's review.

First, there are now, as of Jan. 1^st, 2000, 11 consolidated Federal Orders - a two-thirds reduction from the old system.

Second, the USDA did follow the informal rulemaking process as it developed the new Federal Order program. One area during that process that caused some problems was in the determination of the proper manufacturing allowance for Class III and Class IV products. Congress has now directed the Department to use a formal rulemaking process to reconsider the appropriate make allowance for cheese and butter/powder products. In this matter, the informal rulemaking process failed to arrive at a fully-informed conclusion about the make allowance, and we believe the formal hearings the USDA is about to conduct will rectify that problem.

Now, let me address the third point, Class I differentials.

Back in 1998, USDA staff developed two possible approaches for the reform of fluid milk prices under the new Federal Order system: Options 1A and 1B. Both represented a change in prices compared to the existing system. Both had their pluses and minuses. Both generated some controversy. Ultimately, Congress passed legislation last year requiring the use of Option 1A in the new Federal Order system.

Finally, how did they do on the timeframe for reform? The Congress delayed implementation of the new system by six months, and a lawsuit further delayed it by a couple more months. But the reforms were finally implemented at the beginning of the year.

Therefore, Mr. Chairman, we believe that the USDA's final rule has complied with the congressional directive in the Farm Bill. Moreover, we believe that the USDA has established a solid framework for the future of the Federal Order system: one that preserves elements of the existing system that historically have well served consumers, processors and producers; and one that makes significant changes to reflect the realities of the marketplace of the future.

There are many other significant changes in the new system. A brief list:

· Replacing the outmoded Basic Formula Price with a new pricing arrangement using multiple component pricing to better reflect the underlying value of raw milk;

· The reliance on both Class III prices and Class IV prices as the Class I price mover, and the use of four product classifications in all 11 Order areas, not just some;

· The accelerated schedule of advanced pricing announcements whereby the system more quickly reflects changes in supply, demand and price, and;

· The aforementioned consolidation of Order regions to 11, which better reflects the increased movement of milk across the country.

These are important changes, and ones that we believe will make the system more market-oriented, and more workable, for dairy producers and manufacturers, as well as others involved in the milk marketing system.

It will take time to assess all of the impacts of these changes. We are hopeful that we can allow the new system to function without any further tinkering. There are many other issues that are critical to the survival of dairy farmers in all regions of the country.

The second issue I'd like to address this morning is the disastrously low prices we are experiencing right now, and what can be done about them. It's at times like these that I think that dairy farmers should petition to be listed under the Endangered Species Act.

I hope the Senate recognizes the importance of continuing some type of safety net for farmers when we experience extremely low prices. One approach utilized the past two years is the appropriation of tens of billions of dollars in ad hoc farm assistance, including a very modest $325 million for dairy producers in the past two years.

We appreciate Congress allocating money specifically to dairy producers in this fashion, but this form of assistance needs to be bolstered with a true safety net for dairy. In our opinion, the price support program is that safety net. Unfortunately, as part of the 1996 Farm Bill, Congress saw fit to eliminate the dairy price support program at the end of 1999, although a provision passed last year extended it an additional 12 months, through calendar 2000.

Unlike during the 1980s, when the price support was set at levels that encouraged excessive supply, the current support level of $9.90 per hundredweight is not an excessive incentive spurring unneeded production. Believe me, the promise of sub-$10 milk is not going to enhance anyone's cash flow. It simply represents a very modest investment by the government in preventing the complete collapse of domestic dairy prices. The recent collapse of hog prices, and the pain that has caused in rural America, is a prime example of the value of the dairy price support program.

The U.S. dairy industry has operated in a relatively market-oriented environment for close to a decade, with the dairy price support program providing a safety net at a price level that has not stimulated excess milk production. The price support program is the best tool available to U.S. dairy farmers to cope with cyclical changes in prices.

Annually, about 230 million pounds of nonfat milk solids have been absorbed by the dairy price support program. Absent this program, commercial exports would constitute the only outlet for marketing that 200 million-plus pounds of surplus nonfat dry milk. Nonfat dry milk prices would likely drop to artificially-depressed world price levels, which according to USDA, are $0.68 to $0.70 per pound. The current CCC purchase price for nonfat dry milk is $1.01 per pound. NMPF estimates that discontinuing the CCC standing offer to purchase nonfat dry milk under the dairy price support program would reduce dairy producer revenue by about $2.7 billion per year.

The best option for addressing the ups and downs of the agricultural business is to continue the price support program after January 1, 2001. Last week, Secretary Glickman, in unveiling the Clinton Administration's proposal for improving the farm safety net, expressed support for a two-year extension of the dairy price support program. We urge this committee to endorse that proposal and extend the program through the lifespan of the FAIR act.

Every dairy producer organization in this country supports this extension, and there are no regional disputes involved. We have unanimous agreement among producers on this point.

I'd also like to briefly address an additional threat to domestic prices: Imports that will circumvent and undermine the legitimate, hard-fought tariffs we worked to achieve in the current World Trade Organization agreement. Already we face a situation where heavily-subsidized milk caseinates produced by other countries can flood into this country and displace domestic milk products. But now, to make matters worse, there will soon be a petition by the National Cheese Institute to change U.S. cheese standards to allow the use of imported milk proteins as an ingredient in cheese.

Mr. Chairman, such a change would be extremely damaging to U.S. dairy farmers, because unlike the European Union and many of our international competitors, the U.S. has no significant quotas or tariffs to limit imports of milk protein concentrate. Milk protein concentrate produced by heavily-subsidized foreign dairies could be exported to the U.S. for less than it costs to produce a similar product here. And that foreign milk supply would directly displace billions of pounds of U.S.-produced milk that is now used to produce cheese.

I believe it's worth noting that the dairy cooperatives that belong to the National Cheese Institute oppose this petition to the FDA regarding a change in cheese standards. Unfortunately, the producer-owned cheesemaking organizations belonging to NCI were outnumbered in that vote, but I hope you will see this is a divisive issue that is not good for the domestic milk prices. I hope this committee will monitor this issue very closely, and give thoughtful consideration to the economic calamity that would be produced by such a change in cheese standards. We are disappointed that some of our own U.S. processors seem to lack a sense of compassion for, and loyalty to, U.S. dairy producers on this issue.

One final note about prices and international trade: I think the recent failure to launch new WTO negotiations in Seattle should give us all pause to think about the competitive position of U.S. agriculture. NMPF certainly supports all efforts to reduce international dairy subsidies, since they grossly distort the world market and depress prices. However, as long as the European Union and other exporting regions continue to rely on various subsidy programs to augment their exports, the U.S. cannot afford to unilaterally disarm itself. We have our own modest government system, the Dairy Export Incentive Program (DEIP), to help move products overseas.

DEIP allows the U.S. dairy industry to compete in a limited way with the much more extensive export subsidy practices of some of our export competitors. For example, the E.U. accounts for almost three-fourths of the dairy export subsidy volume permitted among WTO members, when measured on a milk equivalent basis. DEIP exports by the U.S. are limited to just three percent of this same total. And while Canada will be limited to roughly half the milk equivalent volume permitted under the DEIP, Canada's dairy industry is not much more than one-tenth the size of the U.S. industry, and we had to go to the WTO to force Canada to stay within its limits.

DEIP also acts as a market development tool for U.S. dairy products in a very distorted market. This is why we strongly believe Congress should extend the authority for the DEIP, which currently expires at the end of 2002, and push to ensure that USDA uses the program to the full extent we are allowed by our commitment to the WTO, as provided in the 1996 FAIR Act. Especially during a time when we're seeing both extremely low domestic prices and serious questions about the world market for agricultural trade, now is not the time to give up on the DEIP program.

Finally, Mr. Chairman, I'd like to end this testimony with a discussion of how we in the producer community are looking at future dairy policy issues.

First of all, a larger percentage of dairy producers than ever before, about 84%, now market their milk through farmer-owned cooperatives. We have seen what has happened in other agricultural sectors like pork and poultry, where independent producers have been shoved aside by huge, vertically-owned conglomerates. I believe the dairy sector is unique in having seen the value of dairy farmers working together to market their product. As I said earlier, it has not meant a windfall for our industry, because cooperatives or not, we all face pricing pressures. There are no magic bullets.

But I believe only by working together within our coops can we hope to balance the power in the marketplace of multinational corporate dairy processors and retailers. The marketing power of the giant conglomerates of the world needs a counter-balance in the form of strong and healthy dairy cooperatives, owned by farmers for the benefit of farmers.

We in the dairy producer sector know that last year's contentious debate over dairy policy has created some rifts that need to be mended.

That's why the National Milk Producers Federation has taken the lead in sponsoring a new initiative, the Dairy Producer Conclave, to refocus the energies of dairy producers and find areas of agreement within our community. As Abraham Lincoln noted long ago, A house divided against itself cannot stand. We need some home improvements in dairy.

So, NMPF is working with other national farm groups right now to arrange five regional grassroots sessions this spring to receive input on issues of importance to the industry, such as Animal Health, Environment, Economic Policy, Product Standards, Trade, and Food Safety. After the regional sessions, our steering committee of national dairy leaders will consider the input we've received, and attempt to build a consensus program of issues for the future.

NMPF is being joined in this effort at the national level by the American Farm Bureau, the National Council of Farmer Cooperatives, the National Farmers Organization, the National Farmers Union, and the National Grange. At the five regional sessions, individual producers and producer groups in those regions will be invited to participate in this consensus-building endeavor. All of these groups recognize the importance of moving beyond the debate we conducted last year. We hope that by finding areas of consensus on the issues I just mentioned, we can focus on the challenges that lie ahead.

We intend to complete this process by December 31^st, and will be back to this committee, and to your colleagues on the House Agriculture Committee, with our ideas and plans. Dairy producers must try to resolve our regional differences first, and then attempt to reach consensus with the processing segment of our industry.

We have already completed our initial planning committee meeting, and now have set the dates for the five regional grassroots meetings. NMPF is serious about unifying producers and working together with those in the processing segment who also are willing to work toward a consensus in the future.

Dairy policy should not only be about milk prices, but also include all of the areas that affect by bottom line as a producer.

With that, I'd like to thank you for the opportunity to testify today, and I'll be glad to answer your questions.