Testimony of

Commissioner Nathan L. Rudgers

New York State Department of Agriculture & Markets

U.S. Senate Agriculture, Nutrition and Forestry Committee

American Dairy Policy:

Why do we have a dairy program? What is the status of the dairy industry in America?

Tuesday, February 8, 9:00 a.m.

Hart Senate Office Building, Room 216

Good morning. I would like to thank Senator Lugar and the other esteemed members of the committee for inviting me to testify on behalf of New York's dairy farmers. Governor Pataki and the New York State Department of Agriculture & Markets were both very involved in the effort to have our State included in the Northeast Dairy Compact last year and we witnessed firsthand the difficulties that this complex issue presented to members of Congress. I commend you, Senator, and the other members of the committee for having the insight to schedule these very important hearings to learn more about how we can help our dairy farmers to receive a fair and livable price for their product, preferably without having to revisit the political battles fought on Capitol Hill last year. I would like to talk to you today about the state of the dairy industry in New York. I would also like to articulate why I think we continue to need a national dairy policy and how these two issues are related.

Congress is to be praised for having the vision and fortitude to direct USDA to change the rules by which price discovery is accomplished in the dairy industry and effectively consolidating a still vital and relevant federal milk marketing order system. Simply put, milk remains a perishable product which is difficult to value and to orderly market. The federal milk market order system accomplishes those tasks. Effective price discovery mechanisms and the orderly marketing of milk are two essential components of a healthy dairy industry in New York.

Milk and dairy products are New York's leading agricultural commodities and are processed by leaders in the cheese and soft dairy products industry. Production in 1998 totaled 11.7 billion pounds with an approximate value of $1.8 billion, 56% of our total farm gate sales of just over $3 billion. New York State ranks 3rd nationally in milk production. The approximately 8,000 dairy operations and 140 dairy processing plants in my state are interwoven through their respective communities. These statistics show how important the dairy industry is to our State.

Besides being the 3^rd largest producer in the U.S., New York is part of a regional block of producers that provide much of the populous East Coast with its dairy products. New York does not stand alone in the historical importance of our dairy industry. Combined with our neighboring states, we form a regional dairy economy that is highly significant. Preliminary 1999 USDA data indicate that the northeast region produces nearly 20% of the nation's milk supply, which is comparable to the other major dairy regions of the country. Our resources are plentiful, especially water, good soils, and cool climate, our farmers are progressive, and our industry is well positioned for the future. We have an advantage in our proximity to major markets. The richest market in the world is in a 750-mile circle centered in New York State. Within this region you will find one-half of the United States and Canada's population, personal income, and wholesale and retail trade.

The state of dairy farming in New York State is one of a dynamic industry, one that is poised to use these advantages competitively in the new millenium. Our dairy farmers tell me that the regional future looks very promising; however, they need some short-term help while they position themselves in the new volatile dairy environment. Policy tools exist that Congress can provide to help our family farms transition and react to changing conditions in what is a very competitive marketplace. One of those tools is the Dairy Compact and it should be expanded to reflect the regional nature of our market. The low prices our farmers are currently receiving is the most pressing issue facing us right now, as prices are at their lowest levels in more than 20 years. On Friday, the dairy industry's benchmark price, the Class III Price, formerly known as the Basic Formula Price, was announced at $10.05 per hundredweight. While some forecasters predict that the price will increase slightly later in the year, I do not believe that some of our dairy farmers can last that long at these price levels.

On January 1, 2000, the long awaited federal order reform was finally implemented. The three formerly separate federal marketing areas in the Northeast were merged into one unified regional marketing order. After careful and extensive review, USDA determined that the northeast region from New England to Washington is one market. It would be appropriate for Congress to follow in a similar manner by permitting the Northeast Compact to be extended to cover that region.

Last year, Congress appropriated $125 million to be used to help dairy farmers. Of that, New York dairy farmers are projected to receive $11.4 million. While the assistance is certainly appreciated, if New York had been permitted to join the Northeast Compact, our dairy farmers would have received an estimated $132.6 million in Compact premiums this year, more than the entire Assistance Program itself. It does not make sense that the federal government continues to have to provide emergency stopgap assistance when a regional policy that provides a self-supporting safety net would be more effective, and would not require annual cash infusions from Congress. Joining the Northeast Compact would establish a transitional safety net for our family farms and ensure a steady and affordable supply of fresh, locally-produced milk for New York's consumers.

Frankly, it would have been preferable if USDA used the $125 million appropriated last fall in a more effective and efficient manner by linking impacts under the dairy price support program to federal milk market orders. Rather than cash payments to farmers, USDA could have used the Commodity Credit Corporation (CCC) authority to reallocate the butter-powder purchase price tilt to support nonfat dry milk at a higher level. Alternatively, USDA could have used the funds for advanced purchases of cheese for school and domestic feeding programs at market price levels, slightly higher than the current cheese purchase price. Either action would have tightened wholesale commodity markets and supported farm prices through the interaction of the federal milk market order pricing formulas. This "smart government" action would have been a more effective tool than direct payments for significantly supporting farm level milk prices. These tools are still available to USDA and Congress should encourage them to use them. Our farmers would rather have a fair price for their product than a government handout.

I applaud Congress for directing USDA to hold hearings on the Class III pricing formulas under federal milk market orders. This is an important and time-sensitive issue. As it is currently written in law, Congress directed USDA to publish a final decision on December 1, 2000 - not before or after. I would encourage you to permit USDA to issue the decision sooner rather than later.

These are some of the tools that I believe Congress could provide to New York State dairy farmers to help them remain competitive. Governor Pataki has done a tremendous job through substantial cuts in taxes and regulations which has addressed cost of production issues at the State level. A national dairy policy, one that recognizes the ability of the states to best use the market to position their farmers to remain competitive and viable, could be an effective complement to our efforts in New York State. I hope that we can count on your assistance in trying to keep our dairy industry healthy and competitive.

In closing, I should mention that I was raised on a dairy farm. I have two brothers still operating farms in Western New York. Dairy farming is something I am close to and is part of me. It is also an intrinsic part of the rural landscape, culture, and heritage of New York State. It is because of this importance that Governor Pataki and I have worked so hard and so closely with our congressional delegation to see New York join the Northeast Compact. If New York is not permitted to join the Compact, then our continued efforts to transition farmers to be more market-oriented and able to succeed in the new dairy economy will be much more difficult. I hope that these discussions today can lead us to the goal of helping our farmers succeed, and we can have healthy, prospering dairy operations throughout New York and the United States. Thank you again, Senator Lugar and the rest of the committee, for inviting me here to testify today and I look forward to working with you as we address the issues that face our dairy industry.