Pa. Senators dig into milk law and 'stranded' premiums
By Sherry Bunting, Farmshine, July 2, 2010
HARRISBURG, Pa.—‘Stranded’ milk premiums were the focus of Tuesday morning’s hearing called by Pa. Senate Agriculture and Rural Affairs Committee Chairman Mike Brubaker. The June 29 hearing included four panels representing sectors of the dairy industry from farm to retail and a fifth panel representing the Department of Agriculture and Milk Marketing Board.
"We have a state-mandated over-order premium that is intended to go to the dairy farmers," said Sen. Brubaker. "It is important for us to understnand how and how much of this premium is stranded when considering legislative solutions."
Minority Chairman Mike O’Pake said he looked forward to "forming a consensus," and he stressed the need to focus on long term relief to all corners of the Commonwealth. He said the testimonies in December, along with the efforts of the Governor’s office, Department of Agriculture and the PMMB, have helped identify areas within the state’s jurisdiction.
Out of that has come the first step, which changes the way of calculating the over-order premium on in-state milk for plants that buy and sell milk both in- and out-of-state. PMMB’s June 2 decision on that aspect will become effective October 1.
What became evident through Tuesday’s testimonies and the Senators’ questions is that the language of the law is at the root of the problem because it requires payment of the over-order premium by consumers on every gallon of milk, but does not require the payment on every gallon of fluid milk sales back to producers.
Sen. Brubaker read portions of the law to witnesses during testimony, asking for their perspectives to bring information to the table and begin building consensus for potential statutory changes.
At issue is how to account for the 25 cents (premium) paid by consumers on every gallon of milk, and the breaks in the chain back through the system from retail to farm.
Pa. Secretary of Agriculture Russ Redding said it comes down to the question: "Where does the milk lose its qualification under the three-part rule? (produced, processed and sold in Pennsylvania)"
Chief Counsel Brook Duer provided a road map. "It’s easy to get lost in the weeds and to get confused," said Duer, illustrating the ways in which milk that may qualify for the premium, under the intent of the law, is not receiving the premium at the farm level because of a "break in the chain."
On the producer panel, Lebanon County dairy producer Daniel Brandt testified that revenue flow from retail back to the farm was also a major issue at the national level during the USDA/Department of Justice hearing in Wisconsin last week. "U.S. Senators were asking the same question of ‘where is all the money going?’"
Brandt, a vice-chair of the Dairy Policy Action Coalition (DPAC) also showed a graph illustrating Pennsylvania’s mailbox milk price compared with neighboring Ohio and with the U.S. average.
"From 2008 through 2010—when the Pennsylvania over-order premium has been at its highest—our mailbox price has been 20 to 50 cents below Ohio’s and within five to 30 cents of the U.S. average," he said. "How is it that a state with a mandated ‘farmer premium’ paid by consumers... winds up with a mailbox price that looks like this?"
"Does Ohio have a state-mandated premium?" Senator Brubaker later asked Earl Fink—testifying for the Pennsylvania Association of Milk Dealers, along with Counsel Chip English. The answer was "no." But Ohio does have a voluntary cooperative premium.
The Department of Agriculture (PDA) and others who testified Tuesday pegged the ‘stranded’ premium total at $16 million for 2009, but at the high point of $3.18 / cwt for June, the stranded revenue could go higher. Witnesses testifed that about 25% of what is paid by consumers is ‘stranded’ in the middle.
Sen. Brubaker quoted from the Milk Marketing Law, where it talks about the PMMB setting the milk price based on a reasonable rate of return to producers, processors, and retailers. He drilled down on the point that the "reasonable rate of return" is defined for the dealer-handlers and for the retailers but not for the producers.
He asked David DeSantis, PMMB accounting and enforcement officer, to define reasonable rate of return. DeSantis said there is a wide range, but that any business would be happy to get 2.5 to 3.5%. That is the percentage defined in the law for the dealers and retailers.
Sen. Brubaker explored the "reasonable rate of return" with each panel. He also delved into the definition of "producer" in the statute. He went back and forth with Attorney Marvin Beshore, who testified for the Greater Northeast Milk Marketing Area (the cooperatives) on this definition as it appears in different areas of the statute.
He asked if the cooperatives pay all of the premium to the farmer members. Beshore explained that cooperatives collect the premiums and pay them out... minus expenses.
"The farmer owners determine the formulas for how much of the different premiums to pay out," he said. "Cooperatives can only pay out what they take in."
In addition to Brandt, Bellville area dairy producer Keith Spicher testified on behalf of the Professional Dairy Managers of Pennsylvania and Westmoreland County dairy producer Rick Ebert testified for the Pa. Farm Bureau.
Testifying from the retail sector was Robert Schupper, dairy category manager for Ahold, which includes Giant Foods of Carlisle.
Schupper noted the trend toward consumers wanting local milk and that the Giant store wants to provide 100% Pennsylvania milk.
"We’re at about 99% because with the blending of milk from the cooperatives, they can’t tell us 100% is from Pennsylvania farms." He said, adding that they also sell local brands.
Two legislative solutions are being considered. One would declare the sale of the milk occurs at the farm pick-up for the purpose of the premium pricing. The other would authorize retail licensing, reporting and auditing of all retail sales of milk.
Duer also put forward some options for evaluating how the over-order premium is distrubuted.
Look for more from this hearing in next week’s Farmshine.