Good morning Chairman Lugar and Committee Members:

My name is John Wilson. I am Corporate Vice President of Marketing and Economic Analysis at Dairy Farmers of America (DFA). I am speaking on behalf of the 24,200 dairy farmers who own our cooperative.

DFA is a dairy cooperative that is owned strictly by dairy farm families. Our purpose is to market all the milk produced every day by our members at a fair return.

DFA’s owners operate dairy farms in 45 states and will produce about 21% of the US milk supply during 2000.

DFA is structured to assure dairy farmers control the organization. To ensure that the cooperative serves its local members and customer needs on a daily basis, DFA maintains a grassroots structure made up of seven area councils, based geographically on the number of member farms and milk production. Each area's marketing strategies and policy development is set up and controlled by an area council made up of dairy farmer members who are elected by the area's farmers. Each area council elects representatives to the corporate board which oversees the policy development and direction of DFA. To ensure even more grassroots participation, each area council has district leadership, delegate, and resolutions structures that allow for many voices to contribute to the direction of their cooperative.

On behalf of the members of DFA, I want to express my appreciation for the action Congress took to correct the Federal Order Final Rule. As you recall, USDA attempted to lower dairy farm income by lowering Class I differentials that processors are required to pay farmers. This action was reversed by Congress with the passage of the Consolidated Appropriations Act, 2000. Also, by requiring USDA to hold formal hearings for the purpose of reconsidering Class III and IV prices, Congress is helping dairy farmers to get a fair shake from USDA. Congress sent a clear message that it was not their intent to lower farm income when it called on USDA to reform Federal Orders.

DFA strongly supports Federal Orders for these reasons: 1) Federal Orders establish minimum farm prices; 2) they assure consumers of a steady supply of fresh milk; and 3) they provide for orderly marketing.

The basic purpose of the Federal Order system is to establish minimum farm prices at a level that assures consumers of a sufficient quantity of milk. In doing so, Federal Orders classify milk according to how it is used and establish minimum prices for each class.

This economic principle is based on the fact that consumers place different values on milk depending on how it is consumed. Fluid milk (Class I) commands the highest value. Dairy farmers deserve to get a portion of the added consumer value attributed to milk. The Federal Order system is the best tool to make sure that happens.

This system brings order to a market that is naturally out of sync because of two simple realities: 1) milk is highly perishable, and 2) cows produce milk on a much different schedule than consumers drink it.

Milk’s perishability requires it to be sold by the farmer every other day. Seasonally, the supply and demand for milk do not match up.

Production of milk (primarily because of the seasons of the year) increases in the spring and declines in the late summer and fall. Consumer demand for milk is just the opposite -- the need for milk is heaviest in the fall and lightest in the late spring and early summer. Within a given week, the demand for milk is not the same from day to day. Since many consumers do their grocery shopping on weekends, the demand for milk is heaviest toward the end of the week. Since within a week, the supply of milk is not likely to vary significantly, farmers must have an alternative use for their milk on the days the bottling plants don’t want to purchase it.

This means in order to have a sufficient supply for consumers every day of the year, we must have more supply than is needed on most days. This puts dairy farmers at a competitive disadvantage to investor-owned processing plants when negotiating for prices. This situation caused Federal Orders to become public policy in 1937. The need for the system has not changed today.

An unregulated milk market would be extremely disorderly with investor-owned processing plants taking advantage of dairy farmers during times of excess supplies. Federal Orders can not completely solve the problem, but they do play a major role in equalizing the imbalance of bargaining power between producers and purchasers of milk. For these reasons, DFA strongly supports Federal Orders.

The economic environment in which today’s dairy farmer must operate is a tough one. Price volatility is the name of the game. Within the last two years, the Class III price (formerly known as the Basic Formula Price) has been as high as $17.34 and as low as $9.63. Incidentally, the $9.63 was for December of 1999. The last time the Class III price was this low was July 1978, over 21 years ago! Obviously, dairy farmers are not very happy about current price levels.

The foundation for Federal Order prices and consequently farm prices is a composite of the value of cheese, butter and nonfat dry milk. Cheese and nonfat dry milk are currently trading at or very near the support price. The butter price is somewhat stronger, but it has a limited effect on total milk prices. Without our dairy price support program, it is likely that cheese and nonfat dry milk would fall to significantly lower levels. Some would say we should let our dairy prices fall to world price levels and thus become “competitive” with the world trade. Based on dairy commodity prices published by USDA, we estimate the world price for milk used to produce butter and nonfat dry milk to be $7.03 per cwt. The comparable price for milk used to produce cheese is $6.68 per cwt. I cannot imagine the impact on our commercial dairy industry if our prices were to go that low. The safety net provided by our dairy price support program is real. We strongly advocate it’s indefinite continuation.

DFA will be asking Secretary Glickman to modify the make allowance used in the price support calculation to equal the effective make allowance in Federal Order prices. Currently, if you calculate the new Federal Order Class III price using the commodity prices established under the price support program, the resulting milk price is $9.74, not $9.90 as Congress has mandated. Likewise, if you do the same calculation for Class IV, the result is $9.83 per cwt. It is only fair that Secretary Glickman make the appropriate adjustments to the price support make allowance to reflect the intent of Congress which is to floor the price farmers receive at $9.90 per cwt.

The Dairy Export Incentive Program is a very important tool for the dairy industry. Without this benefit, our dairy farmers cannot afford to export their product in the heavily subsidized world trade. Currently, the world cheese price is approximately $0.78 per pound (compared to approximately $1.10 domestically). The world butter price is approximately $0.61 per pound (compared to approximately $0.97 domestically). The world price for nonfat dry milk is approximately $0.68 per pound (compared to approximately $1.01 domestically). Obviously, if we expect our dairy farmers to be players in the world dairy trade, we must continue to maximize use of the Dairy Export Incentive Program.

Another issue of concern involving world trade deals with cheese standards of identity. We understand the National Cheese Institute may petition the United States Food and Drug Administration to allow the use of imported milk protein in the manufacture of domestic cheese. This is potentially devastating to this country’s dairy farmers. Foreign casein (milk protein) or milk protein concentrate has no quota or tariff when imported into the United States. Like other dairy commodities, the world casein price is well below our price due to foreign subsidies. As a matter of fact, the world price is so low, there is no casein produced in the United States. The quantity of imported foreign milk protein would directly displace milk produced by the U.S. dairy farmer. This would be a tremendous slap in the farmer’s face if the FDA approves the cheese processor’s request.

Governmental intervention is important to assure dairy farmers get a fair and equitable price for their product. However, the government can’t provide farmers with everything they need. Dairy farmers need market security. They want to control their own destinies. They are fearful they will be swallowed up like the poultry farmer who has become a piecemeal worker. They look at their neighbors who used to raise hogs and no longer have the ability to compete with the vertically integrated corporations which control the pork industry. They see the beef industry controlled by a handful of buyers.

These fears have caused dairy farmers to create Dairy Farmers of America. Our cooperative is the farmers’ answer to a quickly consolidating industry that threatens the livelihood of dairy producers and their future as independent business people. As we look around other segments of agriculture, we see significant vertical integration from the processor back toward the farmer. Dairy farmers use DFA to vertically integrate from the farm toward the consumer. The result is that through DFA, farmers have an ownership interest in many processing plants around the country. This gives them market security and perhaps a bigger share of the consumer’s dollar.

We believe the United States needs a secure domestic food supply and the best source for that food is from the independent business people we call farmers. We, at DFA, are doing what we can to perpetuate the farming tradition that has made this country the best place to live in the world.

On behalf of over 24,200 dairy farmer members of DFA, I thank you for your time.