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  April 20, 2010

U.S. House Ag Committee hearing

Witnesses highlight price discovery, long-term stability

By Sherry Bunting, Farmshine April 23, 2010

HARRISBURG, Pa.—Price discovery and long-term stability rose to the top of Tuesday’s dialog between two panels of witnesses and members of the U.S. House Agriculture Committee, who traveled from Washington, DC to the Farm Show Complex in Harrisburg for the nation’s first “full committee” field hearing on Farm Bill dairy policy.

Testifying were four dairy producers and the owner of a family-owned milk bottler, along with Pa. Ag Secretary Russell Redding, Penn State ag economics professor Jim Dunn, and Center for Dairy Excellence executive director John Frey.

The hearing was attended by nearly 130 people, of which three-fourths were rank-and-file dairy producers from Pennsylvania, New York, and as far away as Tennessee.

Chairman Collin Peterson, from Minnesota, said additional Farm Bill hearings could be scheduled as early as May, and that working groups would likely get started in June after National Milk Producers Federation has a final board-approved plan to present to Congress.

In response to a question from Rep. Leonard Boswell of Iowa, witnesses agreed price discovery was the number one thing needed to improve dairy farm profitability. Also getting high marks was the concept of “margin” insurance, which was explained in detail by Sec. Redding. Witnesses were also united in their belief that the government price support program has outlived its usefulness.

In short, there was a palpable desire by both the witnesses and the members of Congress to seek long lasting alternatives that lead to stability. Furthermore, it was oft said that the effects of the low prices threaten the survival of the nation’s dairy farmers, and that the band-aid approaches solve nothing and rarely reach far enough to do enough good at the farm level anyway.

Concern about access to credit for crop loans this season was also top-of-mind as new federal lending regulations tie the hands of lenders who want to work with their longtime customers. For many, the problem is that last year’s devastating losses are pushing many dairy farms into the 90-day bracket, which now means they must be listed as “troubled assets” because of new banking rules issued by the federal government after the home mortgage crash resulted in large financial institutions receiving huge amounts of taxpayer bailout money.

Sec. Redding said dairy has historically been a good investment for lenders. “But last year, they lost three years of equity. We need that bridge to the better year to buy some time while these policy pieces are put together.”

Rep. Glenn Thompson of Pennsylvania followed up on this point, asking Sec. Redding for more specifics, and concluding that, “It sounds to me like we need to allow these lenders to keep that discretion in working with their dairy customers.”

Supply management was discussed only briefly. Frey mentioned the Northeast Dairy Leadership Team’s involvement in evaluating a Dairy Growth Management Initiative, which would use a variety of tools to deal with “marginal” milk production. Cornell and Cal Poly are currently studying this proposal with results expected in May or June.

The members of the House Ag Committee also asked the first panel of witnesses about supply management.

“I’m not a fan of it,” said Professor Dunn. “If it’s successful, it is then capitalized into the worth of the cows and other assets. While it can increase the farmer’s wealth in terms of his assets, it does not mean more income or cash flow for the dairy farm. We can look at the peanut program for more evidence of this.”

Asked what, if anything, surprised him in the testimony presented Tuesday, Chairman Peterson said he had expected to come to Pennsylvania and hear more of a regional focus. He was pleasantly surprised to see how far ahead of the curve the state’s dairy producers are in looking for national solutions.

“This was very positive,” he said. “The time for regional fighting has passed.”

On the price discovery issue, Peterson confirmed that Congress is working with USDA to improve the current price reporting system to be more transparent and user-friendly for dairy farmers. “Mandatory price reporting needs to be reauthorized in September,” said Peterson, who met with USDA AMS last Friday to go over the provisions for dairy reporting in the current Farm Bill, which have not yet been implemented.

“We expect to see a rollout in June or July,” he added. “It’s a big step in getting to the issues that are out there.”

Rep. Boswell agreed that, “Price discovery for agriculture—across the board—is something we have got to have and is very much needed.”

Peterson said he has been studying dairy as long as he has been a member of Congress, and he has seen how the situation is made worse by trade agreements that tie the hands of Congress and prevent them from doing what is best for dairy farmers.

“As regional and complex as the U.S. dairy industry is, I think we can all agree that the safety net for dairy farmers is not working,” he said. “And we need to consider new ideas that could provide better security for our nation’s dairy producers.”

Ranking Member Randy Neugebauer of Texas added that, “The dairy industry has faced an enormous challenge over the last 18 months. It has become clear to me… that existing federal dairy policy does not adequately empower producers to manage the increasing volatility that threatens their survival.”

“We must have a strong and prosperous dairy industry in Pennsylvania,” noted House Ag Committee Vice-Chair Tim Holden, representing the Commonwealth’s 17th district. “85% of their income is spent in the local communities and each dollar earned is recycled 2.5 times through the local economy. Our dairy industry represents $4.2 billion and 40,000 jobs in Pennsylvania.”

In addition to Chairman Peterson (D-MN) and Vice-Chair Tim Holden (D-PA), other members of Congress who were present from the House Ag Committee were: Livestock, Dairy and Poultry Subcommittee Chairman David Scott (D-GA), Ranking Member Randy Neugebauer (R-TX), Leonard Boswell (D-IA), Kathy Dahlkemper (D-PA), and Glenn Thompson (R-PA).

Testifying on behalf of dairy producers were: Daniel Brandt of Brandt-View Farms, Annville, Pa. and vice-chair of the Dairy Policy Action Coalition (DPAC); Rod Hissong of Mercer-Vu Farms, Mercersburg, Pa. and past president of the Professional Dairy Managers of Pennsylvania (PDMP); Kent Heffner of Jersey Acres Farm, Pine Grove, Pa.; Laura Mosemann of Misty Mountain Dairy, Warfordsburg, Pa., on behalf of National Milk Producers Federation. Testifying from the perspective of dairy processors was Todd Rutter, president of the family-owned Rutter’s Dairy based in York, Pa.

“Dairy farmers have lost confidence in the markets, their price, and their ability to manage,” Sec. Redding testified. “We cannot afford to hit ‘pause’ and wait for the Farm Bill.”

Redding said the first big step toward improving price discovery doesn’t take any additional authority by Congress. “This is one of the most important items we need action for now.”

It comes down to “what triggers the price of milk,” he said. “Right now, it’s the thin trading on the Chicago Mercantile Exchange (CME), but that (market trigger) needs to be more robust.”

In his testimony, Brandt also highlighted price discovery, which DPAC worked on earlier this month in Washington, citing the need to fund section 1510 of the current Farm Bill in the upcoming ag appropriations bill.

“There’s one issue all dairy producers agree on: The need for improved price discovery and market transparency,” he said. “Today’s milk pricing system is a bit like the ‘wizard behind the curtain,’ pulling this lever and that lever to keep the people of ‘Oz’ from seeing what’s really on the other side: What is the true value of our product in the marketplace? And how is the value of so many dairy products passed back through the system to the farm? Dairy farmers are absolutely united on this major point: Pull away the curtain and introduce price discovery that is simple and transparent so we can be fully informed participants in the market for our product.”

The Committee members wondered if additional price reporting would put an undue burden on processors, to which Todd Rutter said: “In Pennsylvania, we already report every conceivable piece of information to the Pa. Milk Marketing Board, so I don’t see where it would affect us.”

Congressman Neugebaur asked Redding what kind of response he is getting from U.S. Ag Secretary Tom Vilsack in their discussions on price discovery. “The conversations have been fruitful and productive,” Redding replied. “I think there’s a full desire to work on this, but they are limited by the cost.”

Redding also said part of the discussion is to look at the different price points that need to be collected. “Right now we know the price of milk, but not the value of that full range of products,” said Redding. “And we wonder to what extent can the Consumer Price Index be applied in an econometric pricing formula? That’s the discussion: What is the ‘bucket’ of indicators?”

Frey and Brandt both noted that daily reporting of sales and inventory is also important to the discussion of transparency.

“Producers can’t make decisions on incomplete data,” said Frey.

“Price discovery should include more products, reported more frequently and without the lag times that are signs of an old system long past due for an update,” said Brandt.

“There is no downside to this,” said Redding. “A crisis has a way of bringing things into focus. We need to talk about every day transparency in different areas of the market. That includes answering the questions about imported products, where are they coming from and what is coming into the marketplace.”

Hissong talked about PDMP’s position paper, which also highlighted the lack of transparency in current pricing formulas that are indirectly based on the CME. “Increasing the accuracy of the price reporting just makes sense,” he said. “We are left to the mercy of a broken system.”

Hissong talked about eliminating the price support program and using those funds to stimulate long-term market development to make products the world wants. For example, “We make salted butter, but the world wants unsalted butter,” he said.

He also noted that producers would benefit from reducing the legal limit on somatic cell count (SCC) to the European Union standards of 400,000. This would improve milk quality and affect the supply of milk available to the market.

Heffner noted that, “I’m a marketer (having a roadside stand and winery in addition to the dairy farm). I hear people complain about milk protein concentrates (MPC) coming into this country, but I think we should produce them here. Let’s get into this market and compete,” he said.

“We don’t have the process in place for that,” added Brandt. “The current system has make allowances and support price purchases. So the processors are okay with those margins, so why take a risk to make something different when they are already making a nice profit?”

In his testimony, Brandt referenced an idea of using funds currently directed to the support program for recourse loans or other incentives for new product development and manufacture.

Mosemann testified about the need for “a combination of solutions” as outlined by National Milk’s preliminary plan, particularly the specifics on income or margin insurance. “My husband and I support the revenue insurance because we see this as the best opportunity for our farm to stay in business and to have the dairy for the next generation,” she said.

Redding also advocated a new outlook on income insurance. “From the Susquehanna Valley of Pennsylvania to the San Joaquin Valley of California, producers need to have some control of their margin.”

He called Dairy LGM (Livestock Gross Margin) insurance a “promising tool,” but not very user-friendly in its current form. “It is not currently subsidized, like crop insurance is, and it needs to be more flexible,” he said. “We have found that successful crop insurance sits on a three-legged stool. First, it has to be a ‘real’ product that is workable and usable. Second, it must be affordable. And third, producers need education on how to use it.”

He said Dairy LGM has “great potential.”

Rep. Neugebaur agreed that risk management options need fine-tuning, but he wondered: “How do we look at policy on this and make sure we’re not part of the problem? How does the government be sure it is not encouraging over production.”

Dunn replied that, “The system we have now is not very supportive or market oriented. Risk management is something that is tied to market prices.”

Redding added that, “Right now, the industry is not sure how to balance all the different signals (including government support purchases). Risk management seems to be an appropriate role for the government versus buying storable products, which stay on inventory.”

He said producers need a way to protect their margin and their decisions. “This is far better than making policy that tries to fit small versus large and east versus west,” said Redding. “Offering a voluntary product for dairy producers to protect their own margin is an alternative to the band-aid approach. It sends a signal that this is where we want you to go to buy your protection versus coming to Congress for appropriations.”

Peterson tended to agree. “You are on the right line,” he said. “Insurance on all commodities is the long term approach. That’s what’s left in terms of the government helping to manage risk in agriculture.”

Unlike other commodities, dairy is “self-sufficient,” said Penn State ag economist Jim Dunn, explaining that the U.S. has 10% of the world’s exports and 10% of the imports. You don’t see that with other commodities where we produce more than we use and we export more than we import.”

He acknowledged that dairy presently has a positive trade balance so far this year, but competes in a world where heavy exporters have advantages. For example, New Zealand and Australia are positioned as the world’s low-cost producers and the European Union, as a heavy exporter, is heavily subsidized.

Dunn also said low milk prices are not, by themselves, the extent of the problem. “Thirteen-dollar milk in 2009 did not do as much for producers as $13 milk in 2006,” he said. “They paid considerably more to feed their cows and to plant and harvest their crops in 2009 compared with other years in which the milk price was low.”

Producer Kent Heffner of Pine Grove, Pa. said his calculations show alfalfa hay, feed concentrate and roasted soybeans rose 20% in 2009, and seed prices increased by 30%, and fertilizers and chemicals cost as much as 125% more than previous years. 

Heffner advocated for a federal order structure, formulas and price classes that compute a milk price reflecting current market conditions and takes into account the regional differences in the cost of producing milk.

“We must develop a price discovery method that utilizes more milk and expands mandatory reporting and auditing of prices and inventories, including penalties for inaccurate reporting,” he said.

Heffner also mentioned implementing higher standards—like in California—for solids-non-fat content of beverage milk. Doing this at a national level would not only increase the quality of milk to consumers, he said, it also would help the situation on the supply side.

Rep. Scott asked whether a single nationwide marketing order would help provide stability in pricing. Dunn, Redding and the dairy producers gave a firm: “No.”

Dunn said that idea is a “thorny issue” and would not really solve any of the current problems. Instead, it would create winners and losers. Moving to one national marketing order would hurt dairy farms in the Southeast and Northeast, where Class I utilization is higher.

“Regional marketing orders are not the source of the problems,” said Dunn. “The problem is farmers can’t turn the milk on and off, and we have a situation where just a small change in supply and demand can send prices all over the place.”

One idea he mentioned was to have the Class I “mover” based on a “moving average” of several months as a way to bring some stability to milk prices.

Rep. Scott asked about whether the federal marketing orders still serve a purpose. Brandt replied that they still benefit some regions, like the Southeast, by helping to keep a local supply of Class I fluid milk, but he added that going to a two class pricing system could minimize the manipulation of those orders, where qualifying loads are classified for the lowest use (Class IV) but end up getting sold to make Class II products, which are higher priced. “That does go on, and a two-class system—fluid and manufacturing—would help minimize the impact of that on the producer’s pay price,” he said.

Peterson said he appreciated how witnesses Tuesday are “very much looking forward.” He had been in Northwestern Pennsylvania the day before with Congresswoman Kathy Dahlkemper. “People are worried about losing their farms,” he said. “But I’m encouraged by the fact that the dairy industry is developing some unanimity.” He encouraged everyone to “keep thinking on this” and to keep the lines of communication open.


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