[Senate Hearing 107-216]
[From the U.S. Government Publishing Office]
. S. Hrg. 107-216
CONSIDERATION OF THE COMPLEXITIES INVOLVED IN MILD DISTRIBUTION AND
PRICING FROM THE FARM TO THE CONSUMER
=======================================================================
HEARING
before a
SUBCOMMITTEE OF THE
COMMITTEE ON APPROPRIATIONS
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
SPECIAL HEARING
MAY 14, 2001--PHILADELPHIA, PA
__________
Printed for the use of the Committee on Appropriations
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COMMITTEE ON APPROPRIATIONS
TED STEVENS, Alaska, Chairman
THAD COCHRAN, Mississippi ROBERT C. BYRD, West Virginia
ARLEN SPECTER, Pennsylvania DANIEL K. INOUYE, Hawaii
PETE V. DOMENICI, New Mexico ERNEST F. HOLLINGS, South Carolina
CHRISTOPHER S. BOND, Missouri PATRICK J. LEAHY, Vermont
MITCH McCONNELL, Kentucky TOM HARKIN, Iowa
CONRAD BURNS, Montana BARBARA A. MIKULSKI, Maryland
RICHARD C. SHELBY, Alabama HARRY REID, Nevada
JUDD GREGG, New Hampshire HERB KOHL, Wisconsin
ROBERT F. BENNETT, Utah PATTY MURRAY, Washington
BEN NIGHTHORSE CAMPBELL, Colorado BYRON L. DORGAN, North Dakota
LARRY CRAIG, Idaho DIANNE FEINSTEIN, California
KAY BAILEY HUTCHISON, Texas RICHARD J. DURBIN, Illinois
MIKE DeWINE, Ohio TIM JOHNSON, South Dakota
MARY L. LANDRIEU, Louisiana
Steven J. Cortese, Staff Director
Lisa Sutherland, Deputy Staff Director
Terry Sauvain, Minority Staff Director
Subcommittee on Agriculture, Rural Development, and Related Agencies
THAD COCHRAN, Mississippi, Chairman
ARLEN SPECTER, Pennsylvania HERB KOHL, Wisconsin
CHRISTOPHER S. BOND, Missouri TOM HARKIN, Iowa
MITCH McCONNELL, Kentucky BYRON L. DORGAN, North Dakota
CONRAD BURNS, Montana DIANNE FEINSTEIN, California
LARRY CRAIG, Idaho RICHARD J. DURBIN, Illinois
TIM JOHNSON, South Dakota
Professional Staff
Rebecca Davies
Martha Poindexter
Les Spivey
Rachelle Schroeder
Galen Fountain (Minority)
Jessica Arden (Minority)
Administrative Support
Angela Lee (Minority)
C O N T E N T S
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Page
Statement of Dr. Neilson Conklin, Director of Market and Trade
Economics, Economic Research Service, U.S. Department of
Agriculture.................................................... 1
Opening statement of Senator Arlen Specter....................... 1
Statement of Dr. Conklin......................................... 2
Prepared statement........................................... 4
Conditions and prospects for the U.S. dairy industry............. 4
Price support program............................................ 6
Dairy export incentive program................................... 7
Imported milk proteins........................................... 7
Dairy compacts................................................... 7
Retail prices.................................................... 8
Statement of Robert Robinson, Managing Director, Natural
Resources and Environment, General Accounting Office........... 8
Prepared statement........................................... 10
Analysis of farm-to-retail prices................................ 11
Relationship between farm and retail milk prices................. 11
Contacts and acknowledgement..................................... 13
Statement of Arden Tewksbury, Northeastern Pennsylvania farmer... 13
Statement of Luke Brubaker, Lancaster County farmer, member,
Pennsylvania Marketing Board................................... 15
Prepared statement........................................... 17
Agricultural activities.......................................... 17
Local government activities...................................... 17
Community activities............................................. 18
State government activities...................................... 18
Position of Brubaker farms....................................... 18
Statement of David McCorkle, President, Pennsylvania Food
Merchants Association.......................................... 21
Prepared statement........................................... 22
General comments & introduction.................................. 22
The supermarket business model................................... 22
The Pennsylvania Milk Marketing Board............................ 22
How the supermarket dollar is spent.............................. 32
Statement of Earl Fink, Executive Vice President, Pennsylvania
Association of Milk Dealers...............................32
(iii)
CONSIDERATION OF THE COMPLEXITIES INVOLVED IN MILD DISTRIBUTION AND
PRICING FROM THE FARM TO THE CONSUMER
----------
MONDAY, MAY 14, 2001
U.S. Senate,
Subcommittee on Agriculture, Rural
Development, and Related Agencies,
Committee on Appropriations,
Philadelphia, PA.
The subcommittee met at 8:50 a.m., in the James Byrne
Federal Building, Ceremonial Courtroom, 6th and Market Streets,
Philadelphia, Pennsylvania, Hon. Arlen Specter presiding.
Present: Senator Specter.
STATEMENT OF DR. NEILSON CONKLIN, DIRECTOR OF MARKET
AND TRADE ECONOMICS, ECONOMIC RESEARCH
SERVICE, U.S. DEPARTMENT OF AGRICULTURE
opening statement of senator arlen specter
Senator Specter. Good morning, ladies and gentlemen. The
hearing of the Agriculture Subcommittee of the Senate
Appropriations Committee will now proceed.
Today we are going to examine the issue of pricing of milk.
There have been wide fluctuations in the price paid to farmers,
with the hundredweight price dropping from more than $16 a
hundred weight to less than $10 a hundredweight. At the same
time, the price of milk to the consumers has gone up, something
that I can attest to personally. At a time when the farmers
were getting much less, I was paying $2.29 for a half gallon,
instead of $1.95. These questions have led the subcommittee to
seek this hearing. And we're going to be focusing on these
pricing arrangements. Senator Thad Cochran, chairman, has
requested that the hearing record will remain open to timely
manner--in a timely manner so that additional statements or
questions can be submitted by other subcommittee members.
The issue at hand came into sharp focus in January of 1999
when the price per hundredweight was $16.27, and a month later
it was slightly above $10. At the approximate same time, from
March 1999 to April 1999, the farm price fell 48 cents a
gallon, and the retail price fell only 29 cents a gallon. We
will have experts here from the United States Department of
Agriculture, which has noted that the transmission studies show
that farm prices--when farm prices go up, the transmission
factor is much more rapid, reflecting those changes in the
retail price than when the price goes down. In the studies of
the General Accounting Office have shown that the change at the
farm levels is not necessarily change at the retail level. The
price spread has been increasing, because when farm prices are
trending down, the retail prices are constant or actually
increase.
This is obviously a major problem for the Commonwealth of
Pennsylvania where agriculture is the largest industry and
dairy is the single largest component of agriculture.
Pennsylvania is the fourth-largest dairy producer in the
nation. There are approximately 9,900 dairy farms which produce
$1.73 billion worth of milk a year. Over the past decade,
Pennsylvania's lost an average of three to five hundred farms
per year. And this is a national problem as well, which
warrants concern by the United States Senate, by the Congress,
and especially concern by a senator representing the
Commonwealth of Pennsylvania.
As I think most of you know at this point, President Bush
is going to be visiting in Philadelphia today, which has
required us to advance the hearing and also to condense the
hearing. I must leave here shortly after 10:00 to be with the
president, so we're going to call all the witnesses in a single
panel. If you'd all come forward--Dr. Neil Conklin, Mr. Robert
Robinson, Mr. Arden Tewksbury, Mr. Luke Brubaker, Mr. David
McCorkle, and Mr. Earl Fink--and our time alloted for each
witness is going to be at five minutes, which is in accordance
with the committee practice. The green light will go at the
beginning, and the red light will go on at the end.
Our first witness is Dr. Neil Conklin, who serves as
director of the market and trade economics division of the
Department of Agriculture, Economic Research Service. Dr.
Conklin holds a Masters Degree in agricultural economics from
the University of Wyoming and a Bachelor of Arts in history
from Castleton State College in Vermont. Dr. Conklin, thank you
for joining us. Thank you for the information you have given us
in advance of this hearing. The floor is yours.
statement of dr. conklin
Dr. Conklin. Good morning, Senator Specter. Thank you. The
Department of Agriculture appreciates your invitation to
discuss retail dairy prices. I will make a brief statement
focusing specifically on the issue of retail prices, but I have
provided a more complete picture of the current dairy situation
for the record.
Farm-level milk prices declined through 1999 and much of
2000, as you noted. The blend price, on average for the United
States, fell from almost $17 a hundredweight in January of 1999
to a low of $11.48 in February 2000. Thanks to strong butter
and cheese demand, farm milk prices are now rising. The average
blend price in March was $13.64 per hundredweight compared to a
price of $11.63 at the same time last year. Blend prices for
Pennsylvania have shown a similar trend.
Retail dairy prices do not follow farm-level prices on a
one-for-one basis. This is a point on which even economists
agree. There is no reason to expect retail prices to follow
farm prices exactly since marketing costs, including energy,
packaging, and labor, also affect retail prices and margins.
Retail prices for fluid milk as measured by the Bureau of Labor
Statistics, were at the same level this March, as they were in
January of 1999. Over the last 2 years, retail prices have
fluctuated upward and downward, but they have not declined or
risen in step with farm prices. As a result, the farm-to-retail
spread has widened.
The Economic Research Service measures the farm-to-retail
spread nationally using a market basket of dairy products.
Between January 1999 and March 2001, this spread rose by almost
nine percent, a bit faster than the overall rate of inflation
over this period. Research conducted at USDA and elsewhere has
examined, in some detail, the behavior of farm-to-retail price
spreads.
Let me briefly summarize the findings of studies--these
studies at USDA and elsewhere. First, retail price changes for
fluid milk lag behind farm price changes. Second, retail price
changes are asymmetric. That is, retail prices respond more
rapidly to an increase in farm prices than they do to a decline
in farm prices. For example, a 1994 USDA study indicated that a
$1 per hundredweight increase in farm prices would lead to a
$1.04 increase in retail prices within two quarters. A
comparable decline in farm prices would lead to a retail price
adjustment of only 59 cents during the same two quarter period.
Senator Specter. The first thing here was what again----
Dr. Conklin. A dollar and four cents, Senator. Why this
asymmetry in retail price behavior? Economists have cited
several factors: one, operation of the Federal price support
system. Retailers might expect that price declines would be
temporary if prices fell to a point where the Federal support
system kicked in. This was hypothesized as an important factor
several years ago when Federal support prices were higher than
they are today--other factors include: consumer insensitivity
to changes in the milk price at retail, retailer resistance to
price changes, changes in marketing costs, and finally market
power.
These factors are undoubtedly all important, but their
importance varies over time and across markets. While price
spreads do rise and fall as farm and retail prices change,
their long-term trend has been upward. This is consistent with
the observation that price adjustments between farm and retail
level are asymmetrical. Over the two decades from 1980 to 1999,
the spread for fluid milk in the United States has doubled,
rising from about 49 cents per half gallon to $1.03 per half
gallon.
Senator Specter. Dr. Conklin, your time has expired. I'm
sorry.
Dr. Conklin. That concludes my remarks.
prepared statement
Senator Specter. Your full statement will be made a part of
the record. If you care to summarize the balance, you're
welcome to take another minute.
Dr. Conklin. That did conclude my remarks, Senator. I was
right at the end.
Senator Specter. Okay, thank you very much, Dr. Conklin.
[The statement follows:]
Prepared Statement of Dr. Neilson Conklin
Mr. Chairman and Members of the Committee, the Department of
Agriculture appreciates your invitation to discuss the impact of dairy
policy and programs on producers, processors, and consumers. I will
start with a brief overview of the economic situation in dairy markets.
This description provides the context in which dairy policy will
operate in the future. I will then review the performance of the major
Federal programs operating today: the milk price support program,
emergency market loss assistance programs, and the Dairy Export
Incentive Program (DEIP). Three issues of current interest: dairy
compacts, concentrated milk proteins, and retail prices are then
discussed.
conditions and prospects for the u.s. dairy industry
The Federal Agriculture Improvement and Reform Act of 1996 was
passed during a year when farm milk prices were much higher than in the
early 1990's. Since then, milk prices have been quite volatile but also
rather strong most of the time. Demand, fueled by strong economic
expansion, has grown rapidly, particularly during 1998-2000. When milk
production grew particularly fast (like 1997 or 2000), prices fell to
levels similar to the early 1990's, as production growth out-stripped
demand increases. However, when milk output slowed or slipped, prices
quickly shot to very high levels (like 1998,1999, and probably 2001).
In 1996 and 1997, milk-feed price ratios did not favor normal
increases in concentrate feeding and milk per cow. However, the
incentive to boost milk per cow since then has been strong, sometimes
very strong, and milk per cow has generally grown rapidly. When milk
per cow has faltered (like recently), weakness was generally caused by
forage or weather problems. Modern dairy feeding has become
increasingly dependent on top quality forage, and such supplies were
very tight in 1997, 1998, and recently.
Changes in milk cow numbers represent a tug-of-war between the
dairy farmers who are expanding their farms or building new ones
(mostly large farms with highly specialized division of
responsibilities) and dairy farmers who are quitting dairying because
they cannot generate an acceptable family income. Once either group
builds up momentum, swings in milk cow numbers may persist long after
prices have reversed their original course. For example, the sizable
decreases in cow numbers in the mid-1990's were caused by the
relatively low returns of the early 1990's. These declines did not slow
much until 1999, despite the strong returns of 1996 and 1998.
Similarly, the strong returns of 1996, 1998, and most of 1999 unleashed
such a surge of herd expansions that the low prices of 2000 did not
even result in typical decreases in cow numbers until early this year.
In 2001, milk cow numbers are expected to decline about 1 percent.
Dairy farm exits in late 2000 and early 2001 increased as a result of
the low returns of 2000. Meanwhile, expansion by stronger farms has
slowed, partially because of lower returns and partially as an
inevitable pause after the rapid growth of 1999-2000. Milk per cow in
early 2001 fell well below a year earlier, the result of forage quality
problems, stressful winter weather, and less use of bovine
somatotropin. Milk per cow is expected to recover in coming months but
may increase only fractionally for the year. Milk production is
projected to slip slightly for the year, with increases from a year
earlier not coming until late 2001. A large increase is expected in
2002, as brisk recovery in milk per cow easily outweighs a decline in
cow numbers.
Demand growth during the 1998-2000 period was extraordinary. The
booming economy resulted in consumers boosting their spending in
restaurants and treating themselves at home. Commercial use of cheese,
butter, and fluid cream grew rapidly in the face of relatively high
consumer prices during most of the period. Overall sales of milkfat
rose at an annual rate of almost 3 percent. Not all dairy products had
as strong demand, however. Use of fluid milk and most perishable
manufactured products were stagnant, while use of skim solids in
processed foods fell. Sales of many nonfat or lowfat foods, that had
used larger amounts of skim solids in the mid-1990's, fell sharply, and
imported concentrated milk proteins may have been substituted in some
uses. Even so, commercial use of skim solids rose faster than did
population during this period.
Demand for dairy products continues to increase in 2001, although
growth may not be as strong as it was. The economy has developed a
number of weaknesses, and consumer confidence has slipped. But,
economic growth is expected to continue, and consumers are likely to
want more dairy products. Demand in 2002 is a bit more uncertain but a
sharp slowdown is not expected.
With 1998 production increasing only slightly, strong demand shot
average 1998 farm milk prices up about $2 per cwt to a record $15.50.
Although production grew sharply in 1999, milk prices did not really
catch up with demand and decreased only about $1 per cwt. Milk prices
ultimately collapsed in late 1999 and 2000--but only after increases in
milk output over a 2-year span reached 6-7 percent. Because of the
large increases in wholesale butter and cheese prices since the start
of the year, milk prices in 2001 are now projected to rise almost $3
per cwt, back above the 1999 level. If milk production grows as
expected in 2002, milk prices probably will decline, maybe $1 or a bit
more.
Prices of nonfat dry milk have been the glaring exception to the
general pattern of volatile but mostly strong prices. Powder prices
have stayed close to the support purchase price since late 1998. While
government removals of butter and cheese have been minimal, the surplus
of nonfat dry milk was large. Removals of nonfat dry milk during the
current marketing year are projected at about 500 million pounds, down
from the almost 700 million a year earlier but still quite large. The
surplus of skim solids this year will be 3-4 percent of production,
compared with almost no removals of milkfat. Commodity Credit
Corporation's (CCC) uncommitted inventories of nonfat dry milk in early
May had reached 552 million pounds and were still growing.
Retail dairy prices rose relatively rapidly during 1998-99,
reflecting soaring wholesale and farm prices during 1998 and only
slight moderation in 1999. Retail prices increased almost 4 percent in
1998, followed by a boost of almost 6 percent in 1999. The farm-to-
retail spread fell about 2 percent in 1998, as retail price increases
lagged farm prices. However, the spread then jumped about 12 percent
with the softer farm prices of 1999. The spread rose about 5 percent in
2000, as retail prices were about steady in the strong economy, while
farm prices were low. In early 2001, retail dairy prices were about 2
percent higher than a year earlier even though the farm-to-retail
spread was lower. Further price rises during the rest of the year. For
the year, retail prices are projected lift average 2001 dairy prices 3-
4 percent, even though the farm-to-retail spread is expected to
continue somewhat below a year earlier.
Although concentrate feed prices and forage costs have varied
significantly and many other costs have risen steadily, milk prices
have been responsible for most of the swings in net returns to dairy
farming in recent years. Returns in 1996 were well above those of the
early 1990's. Lower 1997 milk prices reduced returns considerably, but
they stayed above the early 1990's. The higher milk prices and lower
feed costs in 1998 and 1999 boosted dairy returns sharply. However, the
low milk prices of 2000 reversed the pattern sharply, probably dropping
returns to levels below those of the early 1990's. In 2001, concentrate
feed prices are projected to be about the same as 2000's modest levels.
Although forage costs will be higher, stronger expected milk prices
will increase net returns considerably, probably back to near those of
1999. Net returns in 2002 probably will not match those of this year
but are expected to be moderately favorable.
Dairy farmers have been cautious about debt since the 1980's. Debt
loads have remained fairly low relative to debt capacity, possibly a
response to the volatility of prices and returns in recent years. The
1999-2000 expansions by stronger producers were funded to a significant
degree by the 1998-99 returns. These moneys probably were also used to
reduce earlier debt. Dairy farm debt may have risen some in 2000
because of all the new or expanded operations, but the increase
probably was not large.
Since 1996, both the number of operations with milk cows as
estimated by the National Agricultural Statistics Service, USDA and the
number of farms selling dairy products as estimated by the American
Farm Bureau Federation have fallen about 6 percent per year, similar to
or slightly slower than the declines of the early 1990's. This
continuing long-term decline represents a mix of individual farms
combining into multi-operator farms, purchase of dairy farms by
neighbors, and the exit of facilities from dairying.
During the next 10 years, milk production is expected to grow
slowly, about 1 percent or a little more per year. Although it is no
longer as easy to boost milk per cow by simply feeding more grain,
advances in management, nutrition knowledge, and genetic potential of
the cows imply that strong increases in milk per cow are likely to
continue, probably at trend rates similar to the past. Growth in milk
per cow may not be as steady as the past, however. Milk cows are more
geographically concentrated than in the past. Although these
concentrations are widely scattered, local weather conditions may have
more effect on the national average than in the past. In addition,
modern feeding may have made milk per cow more sensitive to variations
in forage quality than it was during most of the post-World War II
period.
Milk cow numbers are expected to decline slowly, representing the
net effects of diverging patterns by different groups of dairy farmers.
The split between the large, industrially organized farms and the
generally smaller traditional farms probably is the widest seen in the
dairy industry since larger, more heavily capitalized and specialized
dairy farms replaced small dairy enterprises on general farms in the
1950's and early 1960's. Most traditional operations will stay viable
for the foreseeable future, but they will be challenged to reduce costs
enough to generate an adequate family income.
Growth in the western dairy industry probably will be more
constrained than in the past by urban pressures, environmental
restrictions, fewer places to develop totally new dairy industries, and
(most importantly) availability of top-quality alfalfa hay. These
factors will not keep the West from producing more milk, but expansion
may be somewhat slower. However, development of ``new style'' dairy
farms east of the Rockies may accelerate. Dairying is moving back to
parts of the Great Plains, and new large farms have proven quite
competitive in northern dairy areas.
Demand for dairy products is expected to continue to increase
slowly. A growing population will demand more dairy products,
particularly with Hispanics contributing a significant share of the
population growth. Cheese demand shows no sign of slowing and will
continue to be the main source of strength in total dairy product
demand. Demand for butter and other milkfat products undoubtedly will
not maintain its extraordinary strength of recent years, but is
expected to stay fairly good. Milkfat and skim solids can provide
significantly improved quality to a wide variety of processed foods
with only a very modest impact on ingredient costs. On the other hand,
demand for fluid milk seems likely to stay stagnant unless its slipping
status in the beverage market can somehow be reversed.
Growth in commercial use of dairy products is projected to keep
pace with the increases in milk production only if farm milk prices
rise somewhat more slowly than the general inflation rate. However,
this price erosion is not expected to be large, nothing like the
decreases that occurred in the 1980's and early 1990's. It seems likely
that prices probably will continue to be more variable than in the
past, in part because growth in output is unlikely to be synchronized
with growth in demand and in part because a much larger and a growing
share of dairy products is traded under contract or some other standing
arrangement. Spot markets are not likely to regain the liquidity that
they enjoyed as recently as the 1970's.
price support program
The price support purchase program has been largely unchanged since
1949, offering to buy as much butter, cheese, and nonfat dry milk as
anyone wishes to sell to CCC at announced prices. These prices are set
so as to allow plants of average efficiency to pay at least the support
price for manufacturing grade milk during the year. Since butter and
nonfat dry milk are joint products of milk, any pair of support
purchase prices for the two products that will return the combined
value needed to support milk prices. In the past, relative prices of
butter and nonfat dry milk prices generally were adjusted in an attempt
to equalize the relative size of the milkfat and skim solids surpluses.
The 1996 Act specified that the support price for milk would remain
at $9.90 per cwt, but only through 1999. At the end of 1999, the
purchase program would be eliminated, and a recourse loan program would
begin at prices equivalent to the former support price. At that time,
it was projected that market prices would only occasionally be close to
the support price and that purchases would not be large. In general,
those projections have proven accurate.
Since enactment of the 1996 Act, subsequent legislation modified it
significantly. The support purchase program was extended and the loan
program delayed, first until the end of 2000 and then until the end of
2001. In addition, there have been three Market Loss Assistance
Programs. These programs differed slightly, but basically made cash
payments to producers based on their historic milk production. Payments
totaled $200 million in 1998, $125 million in 1999, and an estimated
$675 million in 2001. In 1998 and 1999, payment was limited to the
first 2.6 million pounds of milk produced on a farm, while the latest
program limit was set at 3.9 million pounds.
The very large surplus of nonfat dry milk in recent years, while
butter markets have been very tight with market prices reaching as much
as four times the support purchase price, would seem to argue for a
decrease in the support purchase price for nonfat dry milk and a
corresponding increase in the support purchase price for butter.
Relative support prices remain little changed since the early 1990's,
when a series of shifts were implemented to correct what had been a
large butter surplus. A lower price of nonfat dry milk would stimulate
use of skim solids in all products, reduce the incentive to import such
products as concentrated milk proteins, and possibly stimulate
commercial exports of nonfat dry milk. It would also help address the
continuing imbalance between the price of milk for cheese (Class III)
and the price of milk for butter-nonfat dry milk (Class IV) in Federal
order markets. Class III and Class IV pricing remains under review
within the Department, looking at such matters as make allowances,
determining product prices, and pricing of components among other
questions.
The National Milk Producers Federation, among other organizations
representing dairy farmers, has proposed extending the support purchase
program, at least through the remainder of the 1996 Act. The impacts of
such an extension would vary considerably, depending on market
conditions, adjustments to relative purchase prices of nonfat dry milk
and butter, and the level of support price specified.
dairy export incentive program
Since July 1, 2000, we have had to comply with the full World Trade
Organization (WTO) commitments to limit subsidized exports. This holds
our exports under the Dairy Export Incentive Program (DEIP), plus any
Government export sales, to 68,201 metric tons of nonfat dry milk,
3,030 metric tons of cheese, 21,097 metric tons of butter or its
equivalent in milkfat, and no dry whole milk. During the negotiations,
we told other WTO members that we intended to apply these limits to the
quantities covered by contracts accepted during the year. By not being
very rigid about the timing of actual shipments, we increased the
flexibility of exporters in meeting the needs of importing countries as
well as simplifying enforcement. In recent years, we have almost fully
contracted for the allowed exports of all products except butter, where
very tight domestic markets have made domestic manufacturers
uninterested in committing to DEIP sales.
Before July 2000, we allowed certain amounts of unused commitments
from earlier years to be ``rolled over'' into new allocations, similar
to actions taken by the European Union. However, we did not roll over
quantities of products that were contracted but not actually shipped
for whatever reason. This would have been a change in the understood
commitment to other WTO members, and it was not clear that these
quantities would have been shipped if additional allocations had been
available.
With the continuing large surplus of domestic skim solids, part of
the dairy industry have asked if new allocations representing these
unfilled contracts could be made. In addition to the earlier
objections, we interpret the agreement to say that roll-over was
allowed only during the completed transition period.
imported milk proteins
A wide variety of concentrated milk products are imported into the
United States, ranging from casein and caseinates to total milk protein
to milk protein concentrate (MPC). Casein and total milk protein are
precipitated from skim milk, while MPC's are produced, in a variety of
protein contents, by membrane filtration of skim milk. In recent years,
total imports of these products have grown somewhat as declines in
casein imports have been outweighed by rapid increases in MPC imports.
MPC's evidently have substituted for casein in some uses, as well as
benefited from a growing market for sport and nutritional drinks.
However, they probably have also substituted for domestic skim milk
solids in some uses. In addition, there is concern that they are being
used to produce standard varieties of cheese, a technical violation of
Food and Drug Administration standards of identity.
Concentrated milk proteins have never been covered by import
restrictions. In part, this was because casein and caseinates, unlike
milk powders, were declared not to be primary agricultural products
under the General Agreement on Tariffs and Trade and were therefore
subject to more stringent restrictions on limiting import access and a
ban on export subsidies. The status of milk protein concentrates is
unclear since they share some of the characteristics of both casein and
milk powders.
The tariff-rate quotas (TRQ's) that resulted from the Uruguay Round
Agreements were clear WTO market access commitments of the kind we
expect other countries to adhere to closely. Any change in the
application of those TRQ's might involve intricate negotiations with
other countries. Together with the U.S. dairy industry, we are
considering remedies, consistent with our international trading
obligations, to see what can be done about increased MPC imports.
dairy compacts
The Northeast Interstate Dairy Compact (the Compact) was authorized
by the 1996 Act to include the six New England states: Connecticut,
Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont. Under
certain conditions, up to 6 additional States could be added with
Congressional approval. Authority for the Compact was to terminate with
the implementation of Federal Milk Marketing Order reform. Legislation
passed by Congress in 1999 extended the duration of the Compact to
September 30, 2001, but did not add states to the existing Compact.
Also introduced in 1999 was legislation to allow establishment of a
southern compact but no action was taken. May 2001 sees legislation to
extend and expand the Compact and also to establish a compact of 14
States in the South. The States to be included in the southern compact
area are Alabama, Arkansas, Georgia, Kansas, Kentucky, Louisiana,
Mississippi, Missouri, North Carolina, Oklahoma, South Carolina,
Tennessee, Virginia, and West Virginia.
Economic effects of the existing Compact and other possible compact
areas have been estimated and reported in several studies. The Office
of Management and Budget (OMB), the University of Missouri, the
University of Vermont, the University of Massachusetts, the
Pennsylvania State University, and most recently, the University of
Connecticut have conducted studies since 1998. The general conclusions
of these studies are similar:
--Milk producers in the compact areas, and those outside that supply
milk into the areas, receive a higher farm milk price and
respond by increasing production.
--Higher retail prices in the compact areas reduce consumption of
fluid milk so that more milk is available for manufacture into
products such as butter and cheese.
--Farm milk prices outside compact areas are reduced.
retail prices
Since 1996, retail prices for all dairy products (as measured by
the Bureau of Labor Statistics) increased an average of 3.1 percent,
with fluid milk prices rising 2.8 percent and other dairy product
prices rising 5.3 percent. In comparison, the annual average increase
for all food at retail was 2.5 percent. General inflation, measured by
the Consumer Price Index, has increased 2.4 percent per year over the
period.
Year-to-year increases in retail prices varied considerably, from a
high of 6.0 percent in 1999 to a low of 0.6 percent in 2000. Similarly,
rises in fluid milk prices ranged from 6.2 percent to 0.2 percent.
Prices of other dairy products rose at a faster pace, ranging from 9.2
percent in 1998 to 2.1 percent in 2000. In contrast, retail price
increases for all foods have been relatively steady at 2.1-2.6 percent.
Retailers, and processors to a lesser extent, tend to resist price
changes, partly because of the direct costs and partly from fear of
adverse consumer reaction. Retail prices lag farm prices, whether
prices are rising or falling. These lags help to explain the erratic
changes in farm-to-retail spreads in recent years. Over the long run,
the spread has risen just slightly less than the general inflation
rate.
Mr. Chairman, that completes my review of the current market
situation for milk and the immediate issues facing the principal
Federal dairy programs. I note that the programs reviewed here are
supplemented by many other Federal programs that affect milk producers
and the dairy market, including risk management programs, food
assistance programs, trade programs other than DEIP, promotion programs
and research and extension programs. I would be pleased to respond to
questions.
Senator Specter. We turn now to Mr. Robert Robinson,
managing director of the National Resources for the Environment
at the U.S. General Accounting Office, graduated Phi Beta Kappa
from the University of Maryland in 1973. Thank you for joining
us, Mr. Robinson. The floor is yours.
STATEMENT OF ROBERT ROBINSON, MANAGING DIRECTOR,
NATURAL RESOURCES AND ENVIRONMENT, GENERAL
ACCOUNTING OFFICE
Mr. Robinson. Thank you, Mr. Chairman. In my remarks today,
I'd just like to make just a few key points. At the outset, it
is important to understand the price consumers and the price
farmers receive for milk in this country is the result of an
extraordinarily complex interaction of government program
rules, price classes, a multitude of private-sector entities,
and variations in milk markets; and hard data to discern
exactly what is happening in this complex mix, including what
costs are being incurred and what profits are being made, is
very limited. In this context, during the course of our work,
we cobbled together the best information available from many
different sources to lay out as clear a picture as we could on
milk prices across the country, including Philadelphia.
Although our report was nearly 200 pages long and contains
a vast amount of detail, a few basic observations jumped out.
First, nationwide and in the Philadelphia market, farmers
receive about 42 percent of the price consumers pay for milk at
the store. At the time of our analysis--again, two-percent milk
cost about $2.50 at the store, and, therefore, the farmer's
share of that was about a dollar. Second, we found, in most of
the milk markets we examined, the difference or spread between
what the farmer received for milk and the retail increased over
the 26-month period governed by our analysis. In some markets,
such as New Orleans and Denver, the price spread increased
dramatically, by about 47 cents. In other markets, such as
Philadelphia, the increase in the price spread was less
pronounced, but still increased by about 13 cents. The increase
in the price spread resulted largely from farm prices trending
down over the period while retail prices either stayed constant
or trended higher. Third, at any given point in time----
Senator Specter. Would you repeat that last statement, Mr.
Robinson?
Mr. Robinson. The increase in the price spread resulted
largely from farm prices trending down over the period while
retail prices either stayed constant or trended higher.
Third, at any given point in time, we found that changes in
farm prices were not always mirrored by similar price changes
at the retail level. By that, I mean reductions in prices
received by farmers, for example, generally did not translate
into lower prices paid by consumers. As milk moved farther from
the farm, the relationship between changes in what the farmer
received and changes at other levels in the marketing chain
weakened. Other factors began to more prominently influence the
price.
This marketing chain for milk is composed of four basic
parts: the farmer, the dairy cooperative, the wholesaler, and
the retailer. As the milk leaves the farm, each entity performs
certain functions for which they, of course, receive a payment.
Collectively, these links in the chain beyond the farmer
received about one and a half times what the farmer received
for a typical gallon of milk.
In our study period, again, while the farmer received about
a dollar of the $2.50 final price, the other entities
collectively received about a dollar and a half. The breakdown
of this dollar-fifty was as follows: cooperatives such as Land
O' Lakes, on average received about 25 cents; wholesalers such
as Suiza Foods received about 75 cents; and finally, retailers
such as Acme and Pathmark on average added about 50 cents to
the price, bringing the price of that original dollar gallon of
raw milk provided by the farmer to $2.50.
Prepared Statement
To recap, Mr. Chairman, our work showed two basic things:
the price spread between farm and retail prices increased
during our 2 year study period, and reductions in prices
received by farmers did not always translate into lower prices
to consumers. While changes in the farm price have some
influence on the retail price of milk, in comparison to other
factors this influence has proved to be limited. Thank you.
[The statement follows:]
Prepared Statement of Robert A. Robinson
Mr. Chairman and Members of the Subcommittee: Thank you for the
opportunity to discuss our work on fluid milk prices. Our statement
today is based primarily on our October 8, 1998, report entitled Dairy
Industry: Information on Prices for Fluid Milk and the Factors That
Influence Them (GAO/RCED-99-4).\1\ As you know, the process by which
milk prices are set is a very complex one. This is because milk prices
are influenced by a variety of Federal and State programs that regulate
the production and sale of milk and because several entities are
involved in the process of moving milk from the farm to the consumer.
Each of these entities--dairy farmers, cooperatives, wholesale milk
processors, and retailers--perform distinct functions relating to the
processing and marketing of milk, and each receives a portion of the
price of milk. At your request, our comments today will focus on the
relationship between farm-level and retail-level milk prices and the
factors that influence the price of milk as it moves from the farm to
the consumer.
---------------------------------------------------------------------------
\1\ We are currently updating the information included in the
October 1998 report, at the request of Senators Feingold and Leahy, and
expect to issue our updated report in June 2001.
---------------------------------------------------------------------------
In summary, for the period January 1996 through February 1998, we
found the following:
--On average, farmers received about 42 percent of the retail price
of a gallon of 2-percent milk (the most frequently purchased
milk), and retailers received about 17 percent; the spread
between farm and retail prices increased in most of the markets
we reviewed.
--Changes in fluid milk prices at the farm level generally did not
mirror similar price changes at the retail level in most
markets. This is because as milk passes through various
processing, packaging, and distribution stages after it leaves
the farm, a variety of other factors begin to influence its
price. For example, at the wholesale level, the costs of
pasteurization, packaging, and transportation, have a major
influence on milk prices, and at the retail level the pricing
strategies used by other retailers may have a significant
influence on the prices that consumers pay for milk at the
grocery store. Consequently, as milk moves farther from the
farm, farm prices may have less of an impact on prices than
these other factors.
background
U.S. dairy farmers produce about 20 billion gallons of raw milk
every year. The top four milk-producing States in the United States are
California, Wisconsin, New York, and Pennsylvania. About 7 billion
gallons of the nation's milk is used to produce fluid milk products
such as the four kinds of milk--whole, 2-percent, 1-percent, and skim
milk--as well as buttermilk and flavored milk, yielding about $22
billion in retail sales annually. Sales of 2-percent milk sold in
gallon containers account for the largest volume of retail fluid milk
sales in the United States.
Fluid milk reaches the consumer by a variety of pathways. Dairy
farmers who produce the raw milk used in fluid products can (1) market
it through dairy cooperatives, (2) sell it directly to wholesale milk
processors, or (3) process it into fluid milk for direct sale to
consumers. Most milk produced by dairy farmers in the United States is
marketed through dairy cooperatives. Dairy cooperatives, in turn, can
either sell, or arrange the sale of, raw milk purchased from farmers to
wholesale milk processors, or they can process it into fluid milk and
distribute the fluid milk to retail outlets themselves. Wholesale milk
processors process and package the raw milk into fluid milk, which they
then distribute to retail outlets. Wholesale milk processors include
independent bottling plants or retail food chains that own bottling
plants. Retail outlets purchase fluid milk from processor for direct
sale to consumers.
Most milk produced in the United States is regulated under either
Federal or State programs. These programs ensure that farm prices do
not fall below a minimum level and provide a safety net for individual
farmers who lack market power compared with other entities, such as
wholesale milk processors and retailers. The primary Federal programs
include the milk marketing order and dairy price support programs.
Currently, about 70 percent of the milk produced in the United States
is regulated under the Federal milk marketing order program. The
Federal program sets minimum prices that can be paid to farmers for
unprocessed, fluid-grade milk in specified marketing order areas.
These prices vary by the class of product for which the milk is
used, and, for some classes, the minimum price also varies by
location.\2\ Some areas, such as California, which are not under the
Federal milk marketing order program, are covered by State programs. In
these areas, dairy farmers are paid the minimum milk prices that are
established by the state government. These minimum prices may be higher
than Federal minimum prices.\3\
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\2\ The four usage classes are Class I for fluid milk; Class II for
soft manufactured dairy products such as yogurt and ice cream; Class
III for hard cheese; and Class IV for butter and powdered milk.
\3\ In addition to Federal and State regulatory programs that set
minimum milk prices, in 1996, the Congress approved the creation of the
Northeast Interstate Dairy Compact for six New England States. The
Compact supplements Federal and State programs by setting the minimum
price to be paid to farmers for fluid milk marketed in the six-state
area. The Compact is scheduled to terminate, unless reauthorized, by
September 30, 2001.
---------------------------------------------------------------------------
Dairy farmers selling milk within a Federal milk marketing order
receive an average price, or blend price, that is based on the weighted
average of the four usage classes for all the raw milk sold in that
marketing order. The average price of milk they receive depends, in
part, on the extent to which the total milk supply in a specific area
is being used for fluid or manufacturing purposes. Buyers of milk
regulated by Federal and State programs are permitted to pay farmers
prices in excess of the established minimums--known as over order
premiums. Any such excess payments are determined by market forces.
analysis of farm-to-retail prices
In our 1998 report, we analyzed milk prices for the period January
1996 through February 1998, for 31 selected markets across the country,
including the Philadelphia, Pennsylvania, market. We found that on
average, farmers received 42 percent of the retail price for a gallon
of 2-percent milk, cooperatives received 10 percent, wholesale milk
processors received 31 percent, and retailers received 17 percent.\4\
However, the portion received by those in various stages of the milk
marketing chain varied substantially among the markets. For example,
the portion of the average retail price that farmers received ranged
from about 31 to 54 percent, and the portion that retailers received
varied between about 4 and 31 percent.\5\ For the Philadelphia market,
we found that farmers, on average, received 42 percent of the retail
price of a gallon of 2-percent milk and retailers received 20 percent.
---------------------------------------------------------------------------
\4\ For the 1998 report, our detailed analysis focused on data for
2-percent milk; consequently our results may not reflect pricing
patterns and trends for whole, 1-percent, and skim milk.
\5\ Except for one market where retailers received a negative
return because milk was being used as a loss leader.
---------------------------------------------------------------------------
Furthermore, we found that retail prices for a gallon of 2-percent
milk remained constant or increased in 27 markets and decreased in 4
markets during the review period. In contrast, farm prices decreased in
27 markets and remained constant in 4 markets. As a result of these
price changes, the spread between farm and retail prices had increased
in 27 of the 31 markets over the 26-month period we reviewed. In the
Philadelphia market, we found that between January 1996 and February
1998 the farm-level price had decreased by about 13 cents while retail
prices had remained constant. As a result, the difference between farm
and retail prices had increased by about 13 cents per gallon.
In addition, retail prices for the four kinds of milk--whole, 2-
percent, 1-percent, and skim--varied significantly in the 31 markets we
reviewed. For example, in some markets, 1-percent milk was the lowest-
priced milk sold at the retail level; in other markets, skim milk was
the lowest-priced milk; and in still other markets, the lowest-priced
milk sold in retail stores shifted among 2-percent, 1-percent, and skim
milk. For the period we reviewed, in the Philadelphia market, skim milk
was the lowest-priced milk sold, averaging about $2.31 per gallon and
whole milk was the highest-priced, averaging about $2.58 per gallon.
relationship between farm and retail milk prices
In 1998, we reported that for the period January 1996 through
February 1998, changes in prices at any given stage in the milk
marketing chain were most often reflected in changes in prices at the
next stage. For example, in most of the markets we analyzed, there was
a strong correlation between changes in farm prices and changes in
cooperative prices--the next stage in the milk distribution process.
Similarly, changes in wholesale prices generally correlated with
changes in retail prices. In contrast, changes in prices received by
farmers less frequently correlated with changes in retail prices. This
is because as milk moves from the dairy farm to the consumer it passes
through various processing, packaging, and distribution stages, and
many factors other than the farm-level price begin to influence fluid
milk prices at each subsequent stage. In particular, we found that
supply and demand forces influence milk prices at all stages of the
milk marketing process; however, the following factors influence milk
prices at each particular stage:
--Federal and State dairy programs have a major influence on farm-
level prices for raw milk used in fluid products. These
programs provide farmers with the assurance that milk prices
will not fall below the government-set minimums and therefore
may play a significant role in the production decisions of
dairy farmers.
--The price that cooperatives charge wholesale milk processors for
fluid milk is influenced not only by the minimum price
established by Federal and State milk marketing order programs
but also by the services that the cooperatives provide to the
wholesale milk processors. Cooperatives generally sell raw milk
that will be used for fluid purposes to wholesale milk
processors at prices above the Federal or State minimums. This
higher price, in part, compensates cooperatives for the
services they provide to wholesalers. These services include
(1) transporting milk from different milk-producing areas, (2)
scheduling milk deliveries to coincide with demand, and (3)
standardizing the component content of milk deliveries. In
addition, cooperatives may be able to sell milk to wholesale
milk processors for a price higher than the government-set
minimum price because they have greater market power compared
with the wholesalers. One of the primary reasons dairy farmers
become members of cooperatives is to benefit from the
cooperative's greater bargaining power.
--Processing, packaging, and distributing costs have a significant
influence on the wholesale price of fluid milk, in addition to
the wholesaler's need to earn a normal return on investment.
Processing services provided by wholesale milk processors
include pasteurization, homogenization, and the standardization
of butterfat and nonfat solids in flavored milks, buttermilk,
whole, 2-percent, 1-percent, and skim milk. Wholesalers also
incur costs for packaging these products into a variety of
types and sizes of containers and arranging for their
distribution to retail outlets for sale to consumers. Costs of
distribution may be significantly higher in rural markets
compared with urban markets because smaller quantities of milk
have to be transported over longer distances. Some wholesalers
also provide different levels of in-store service in addition
to shipping the products to retailers--such as unloading the
milk at the store dock, restocking the dairy case, and removing
outdated and/or leaking containers. Differences in any or all
of these factors will be reflected in differences in wholesale-
level prices.
--Retail prices for fluid milk are influenced not only by certain
factors that generally apply to all retailers but also by
specific considerations at individual retail outlets. The
retail-level factors that generally influence price include the
wholesale cost of the product; retailers' operating costs, such
as labor, rent, and utilities; and their need to earn a normal
return on investment. In addition, the size, age, tastes, and
income levels of the population in the marketing area and the
prices of substitutes will influence how retailers set prices
for milk. For individual retail outlets, other considerations
may influence the manner in which retail prices for milk are
set. To meet their stores' goals, such as profit maximization
and increased market share, individual retailers may use a
number of strategies for pricing fluid milk. In developing
these pricing strategies, retailers consider a variety of
factors beyond their operating costs, such as the prices
charged by their competitors, the role that milk prices play in
attracting customers to their stores, the convenience offered
by their store compared with other stores, and their desire to
build an image of quality or low prices for their stores. Those
retail pricing strategies that are primarily based on a
retailer's operating costs are generally referred to as
vertical pricing strategies, whereas those strategies that are
based on responding to prices charged by competitors are
referred to as horizontal pricing strategies. Retailers
generally use a combination of horizontal and vertical pricing
strategies when setting prices for fluid milk.
In conclusion, Mr. Chairman, our work shows that while the farm
price of milk has some influence on the retail price, other factors may
ultimately have a greater influence on the retail price. Given that
farm prices account only for about 40 percent of the retail price,
there is adequate opportunity for other factors, such as wholesale
processing costs and retail pricing strategies, to significantly
influence the other 60 percent of the retail price.
That concludes our prepared statement. If you or other Members of
the Subcommittee have any questions we will be pleased to respond to
them.
contacts and acknowledgement
For future contacts regarding this testimony, please contact
Lawrence J. Dyckman or Anu Mittal on (202) 512-5138. Individuals making
key contributions to this testimony and/or the report on which it was
based include Jay Cherlow, James Dishmon, and Jay Scott.
Senator Specter. Would you repeat that last sentence again,
please?
Mr. Robinson. While changes in the farm price have some
influence on the retail price of milk, in comparison to other
factors, this influence has proved to be limited.
Senator Specter. Limited?
Mr. Robinson. Yes, sir.
Senator Specter. Our next witness is Mr. Arden Tewksbury,
who serves as president of Progressive Agriculture and operates
a dairy farm in northeastern Pennsylvania. Mr. Tewksbury is an
extraordinarily active advocate for farm interests. And it's
about time he came to Philadelphia to see me, because I've been
to his farm on many, many occasions in my travels around
Pennsylvania. And I regret the early hour but, in self-defense,
let me say that there are many mornings when I leave my house
at 6:00 or shortly before to get to Northeastern Pennsylvania.
We welcome you here, Arden, and look forward to your testimony.
STATEMENT OF ARDEN TEWKSBURY, NORTHEASTERN PENNSYLVANIA
FARMER
Mr. Tewksbury. The only difference, Senator, is when you
leave Philadelphia to come to Northeastern Pennsylvania, you
usually know where you're going to end up at when you get
there. When I came in to Philadelphia for the first time in 25
years, I ended up in Camden, New Jersey.
Senator Specter. Then I compliment you doubly, because
you're right here and on the spot and--you're early, as a
matter of fact.
Mr. Tewksbury. I left at 4 o'clock this morning to be here,
but that's beside the point.
Senator Specter. However, 4 o'clock is late for you, Arden.
Mr. Tewksbury. We appreciate the opportunity to appear
before you, Senator, and we don't have written testimony. We
are going to submit to you and your committee several
suggestions that we have on this overall problem. And I think
the comments we've heard so far from your two previous speakers
certainly speaks very clear as to a lot of the problems we
have, but not all of the problems, and I'm going to relate to
some of the other problems, if I may be permitted to do so.
And as you said, we've been in advocacy. We have talked to
120,000 consumers in the last 26 months. And outside of six of
them, they all agreed they would pay a higher price for milk if
they knew it was going to go to the dairy farmers. They don't
say what that price should be, except a higher price if it
would go to the dairy farmers. I think they have the feeling--
and it's not necessarily that true in Pennsylvania because of
the marketing board establishing prices here--but I think they
have the feeling--and we talked to a lot of consumers in
Brooklyn and Staten Island and New Jersey, and they have the
feeling that the farmers are not definitely getting their fair
share of the price of milk that they buy at the stores. And
something has to be done.
And the fact that now, in the northeast corridor here, that
production is down 5.2 percent, Senator, from a year ago,
indicates that there's a real problem surfacing in their dairy
industry. So we think the time has come for senators, like
Senator Specter and others, to reintroduce legislation, like
you did a couple of years ago, to bring in the dairy farmer's
cost of production into a new pricing formula that would allow
our dairy farmers to get a fair price, not only for milk used
as fluid, but also manufactured. And at the same time, it could
create a more level pricing to our consumers. They are just
torn apart as to why the price goes up and down and up and
down, and mainly down. And farmers, they say, are not getting
their share, then why didn't they leave the price up there so
we can get a fair share? Well, we don't have the mechanism to
do it. The only way we can do it is by having a new and
different type of national pricing formula. So that certainly
is our biggest concern.
As far as the retailing, you know, I have--I don't have a
problem with retailers. We need them just as bad as they need
us. But I have a problem when I walked into some of--into a
supermarket in Berry, Pennsylvania two days ago and found Land
O' Lakes butter selling for $3.35 a pound and other butters
selling for $2.45. I don't know which is right, but it really
confuses consumers when they see this.
In November of last year, the price that our cheese makers
paid the farmers for milk used for cheese all across the United
States, I think, was about $9.37 a hundredweight, the lowest
price since November 1977, 24 years ago. How in the devil do we
expect our dairy farmers to stay in business when they're
receiving prices like this? Yeah, they are rebounding now. Are
they going to stay there? Are they going to collapse again? We
think it is time, you know, to have this pricing formula that
would reflect a fair price on all classes of milk and not
allow, ever again, to have prices drop to where they were 24
years ago to our dairy farmers.
And I have consumers tell me--again, we talked to 120,000,
and, as you know, we've handed in 25,000 names to your staff of
consumers that support our position. And up in Meshauken where
I come from, I can go into Marty's store and buy a five-pound
block of cheese for $8, $8.50--good American cheese. Consumers
tell me some of the markets, they have to pay $14, $15 for a
five-pound block. And sure, it's their option whether they buy
it or don't buy it, but these things all bother me, as a dairy
farmer.
When I hear the gentleman tell me that the change in the
prices is very limited to what it costs at the dairy farmer
level, that tells us there is certainly a problem. I commend
the Pennsylvania Milk Marketing Board here in Pennsylvania for
what they've done since 1987 on trying to give some better
prices on fluid milk. But as everybody knows, that price only
stays with the milk that is bottled and stays here in
Pennsylvania. They do not have the authority to establish the
pricing for milk that leaves the State. For instance, my milk
goes into New Jersey. We've appeared here several times since
1987 in defense of higher premiums on milk, but it does not
directly affect my milk and many other thousands of dairy
farmers in Pennsylvania, and that's where the Northeast Dairy
Compact would come into play. If we can't do anything else, at
least we could give a better price to all of our dairy farmers
for fluid milk. That's not the total answer, but it would help.
There are some things, Senator, that can be done, and
there's no use of us pointing our fingers at our Pennsylvania
Milk Marketing Board or the Pennsylvania legislature. They've
done all they can. It's up to the national people to step in
and do something, as you tried a couple of years ago when you
and 16 other senators introduced legislation on pricing milk
differently. That's where we've got to go.
We're very concerned about milk protein concentrate coming
into the United States now that's displacing domestic milk and
our cheese fats. Is it even legally coming into the United
States? Has FDA even said it's legal to be in as cheese fats?
There's a lot of questions out there. Are these milk protein
concentrates coming in from countries that have the foot-and-
mouth disease? We think there should be no dairy products
coming into the United States from any country that has the
possibility of foot-and-mouth disease or the mad-cow disease.
Why do we want to take the possibility of having these products
blending into our problem in the United States?
I think with the fact that production is down 5.2 percent,
the fact that most of Pennsylvania now appears to be heading
for a possible good drought if we don't get some rain soon,
we're looking at some real serious problems here in the United
States and in Pennsylvania. And I think we have got to shore up
the price to our dairy farmers, not only to give them a fair
price, but also to guarantee a supply of milk for our
consumers.
Senator Specter. Thank you very much. We will come back in
the question-and-answer session.
Our next witness is Mr. Luke Brubaker, a member of the
Pennsylvania Milk Marketing Board and manages a 1,000 acre
dairy agribusiness partnership in Lancaster County. Mr.
Brubaker has served as an ambassador for dairy management,
nutrition, and marketing, and overall expertise for the
Citizens Network for Foreign Affairs. Thank you for joining us,
Mr. Brubaker. The floor is yours.
STATEMENT OF LUKE BRUBAKER, LANCASTER COUNTY FARMER,
MEMBER, PENNSYLVANIA MARKETING BOARD
Mr. Brubaker. Thank you, Senator. My speech here was about
10 minutes long. I'm going to have to do some real cutting
here, so--but could somebody pass these out here, maybe,
while----
Senator Specter. Yes, John our staff will be glad to do
that for you.
Mr. Brubaker. Anybody that wants a copy--I would like the
Senator----
Senator Specter. Your full statement will made a part of
the record.
Mr. Brubaker (continuing). I would like the Senator to have
that. And anybody that wants a copy, well you can pass them
out, please.
Thank you, Senator for inviting me here this morning. I
appreciate your holding this hearing on farm to retail and
retail price--milk prices. I'm going to go fast here, and I'm
going to do some skipping because I--that green light bothers
me.
I'm Luke Brubaker from Mount Joy, Lancaster County, and a
member of the Pennsylvania Milk Marketing Board. I would like
to tell you a little bit about our operation, the dairy
industry in Pennsylvania, and how the milk marketing board
benefits, not only the producer, but the consumer, as well.
You can look down across my professional experience and
qualifications there when you have time. I will page on here
and get to some of the meat of what we're going to talk about
and look at the positions at Brubaker Farm. We think we have a
positive attitude toward the future of the dairy industry in
Pennsylvania and America, and we have developed a progressive
dairy enterprise that's centered on a family partnership and a
business philosophy that employs the latest technology to
enhance the economic viability of the dairy operation and the
dairy for the future.
I'm going to skip on. I started out in 1950 with about 18
cows. Today we're up to about 600 cows--started out with about
a 13,000 herd average and now about 24,000-plus. As a member of
the Pennsylvania Milk Marketing Board, I'm very sensitive to
the challenges confronting today's dairy producer without
losing sight of the need to be understanding of the consumer's
need for safe and nutritious and affordable dairy products.
Most recent indications of the monthly production of
Pennsylvania indicated that the Agriculture Statistics Service
and Milk Production Report released April 2000 shows that milk
production and cow numbers are declining over a year ago. The
primary report of the Pennsylvania production in the first
quarter of 2001 indicates milk production in the State is down
4.3 percent over last year's quarter, about 14,000 cows. The
report would seem to reflect that lower milk prices received by
Pennsylvania dairy producers over the past year, combined with
reported feed-quality concerns, have taken their toll on milk
production in the State.
Recent and projected milk prices increases combined with
the opportunity to harvest higher quality forages this spring
may bring back some production. However, with cow numbers in
dramatic decline, it seems likely that milk supply will not be
returning to last year's levels anytime soon.
Another factor is the health of the United States economy.
If it moderately strong, I believe the consumer will continue
to buy. Overall, the current market outlook is calling for
Pennsylvania milk prices to be about $2.32 over the 2000
levels. This is based on a 2001 annual forecast of uniform milk
prices for the Northeast Federal Order compared to $13.04 in
2000.
The recent increase in producer prices experienced in the
Federal order--marketing order's projection of higher milk
price levels for the second half of this year will give the
average Pennsylvania dairy producer a much-needed boost in
meeting its total cost of production. However, recent declines
in the Pennsylvania milk production will adversely affect
producer's ability to benefit from the higher levels that they
are expected to receive and justify the need for a continuation
of additional income incentives that the Pennsylvania Milk
Marketing Board can provide through the mandated over-order
premium. Even with the higher prices that the Pennsylvania
dairy farmers have experienced and are expected to experience
in 2001, producers will continue to be faced with unrelated
competitive challenges. I believe that after--that the positive
trend in milk prices, the Pennsylvania Milk Marketing Board
must do everything feasible to provide producers with the best
possible price that the market conditions warrant to help the
dairy industry stay viable in Pennsylvania. Continuation of the
board's over-order premium at a reasonable level will
contribute to the recent--contributes to the recent positive
trend in milk prices, will help ensure that Pennsylvania and
surrounding State producers will receive a price that best
ensures their future viability without disadvantaging their
market share.
Senator Specter. Mr. Brubaker, your time has expired. Your
full statement will be made a part of the record. You can take
another minute or so to summarize.
Mr. Brubaker. Okay, I would like to do that. If you will go
to the last two charts on the back of my statement, you will
see that this is--the source was the International Association
of Milk Control, Retail Price Survey August 2000. You'll take
notice the Pennsylvania farmer receives 52.2 percent of the
share of the dollar. He receives more share of the dollar in
Pennsylvania than you can see in these here States that are on
this list. And then if you turn over the page to the last--the
percentage of the retail fluid price received by the farmers in
Pennsylvania is 52.2 percent compared to the national average
of 39.4.
Prepared Statement
So I think we're pretty proud of that there, and we just
wanted to make sure that you had a copy of that. Thank you, Mr.
Senator, for giving me the opportunity to speak here this
morning.
[The statement follows:]
Prepared Statement of Luke F. Brubaker
Senator Specter, other invited guests, and members of the audience,
good morning. I would like to thank you, Senator, for holding this
hearing on farm to retail milk prices.
I am Luke F. Brubaker from Mt. Joy, Lancaster County, Pennsylvania,
and a member of the Pennsylvania Milk Marketing Board. I would like to
tell you a little bit about our operation, the dairy industry in
Pennsylvania and how the Milk Marketing Board benefits not only the
producer, but the consumer as well.
As you look at my professional experience and qualifications:
agricultural activities
--Overall experience of 30 years in the dairy industry.
--Owner and operator of a 600 cow dairy farm.
--Manager of a 1,000 acre Dairy Agri-Business Partnership.
--Member of the Pennsylvania Farm Bureau since 1970.
--Pennsylvania Chairman of the American Farm Bureau Federation,
Poultry and Meat Advisory Committee: 1992-1996.
--President of the Lancaster County Farm & Home Foundation: 1999-2001
--Member of the Mount Joy Farmers Co-Op since 1990.
--Past President of Donegal Local Milk Producers.
--Member of Interstate Milk Producers for 23 years.
--Participating farmer in the Chesapeake Bay Program.
--Chairman of Farm Service Agency: 1996-2001.
local government activities
--Chairman of the East Donegal Township Board of Supervisors: 1993-
1998.
--Vice-Chairman of the East Donegal Township Board of Supervisors:
1992.
--Member of the East Donegal Planning Commission: 1986-1992.
community activities
--Board of Trustees of Lancaster County Farmland Trust: 2001-2003.
--Chairman of Environmental Resources Coordinators for Lancaster,
Lebanon, York, Dauphin, and Berks Counties, in conjunction with
the Pennsylvania Farm Bureau and the Department of
Environmental Protection.
--Ambassador to Russian Republic for dairy management, nutrition,
marketing, and overall expertise--Citizen Network for Foreign
Affairs, Washington, D.C.: March 1997 and 1998.
--Member of an Economic Development team which visited Bolivia to
assist in the development of small business. Active member of
the Mount Joy Mennonite Church. Exchange visit to German dairy
farm: July 2000.
state government activities
--Nominated by Governor Ridge to the Pennsylvania Milk Marketing
Board for a six year term: 1998-2004.
awards
--Recipient of the Pennsylvania Dairy of Distinction Award.
--Winner of the 2001 Dairy Stakeholder Pacesetter Award of
Pennsylvania.
--Nominated for ``Innovative Dairy Farmer of the Year'' Award of the
United States by the Pennsylvania Secretary of Agriculture:
2000.
--Brubaker Farms awarded the National Environmental Stewardship Award
in recognition of production practices and concern for
community: 1999.
Now, I would like to summarize the primary reasons I am here to
speak and what we look at on our farm and the future of the dairy
industry.
position of brubaker farms
--Positive attitude about future of dairy industry in Pennsylvania
and America.
--Development of a progressive farm enterprise that is centered on a
family partnership and a business philosophy that employs the
latest technology to enhance the economic viability of the
dairy operation.
--Commitment to environmental stewardship, public education, and
production of high quality consumer dairy products.
--A recognition that we are producing an excellent product--not just
agricultural commodities.
A summary of production innovations, marketing innovations, and the
management innovations follow.
Brubaker Farms wants to represent the future of Pennsylvania
agriculture and the dairy industry. We have demonstrated our commitment
to operating a dairy facility 4 which was designed for cow comfort,
employee performance, and environmental stewardship. Beginning with
just 18 cows in 1950 and a 13,000 pound herd average, we expanded to
meet the challenges of a modern dairy business with 600 cows and a
24,000 plus pound herd average. We built our new facility to
accommodate future expansion and to capitalize on the benefits of
producing large quantities of quality fluid milk. We have aggressively
pursued good markets that recognize the value of our milk production,
volume, and quality management practices.
With the partnership, which includes my two sons, Mike and Tony,
and families, we have devised a business management plan, which
capitalizes on the talents of our family members. One of the strategic
goals of Brubaker Farms is to build the human capacity of the family to
adapt and manage in a very competitive business environment.
As a member of the Pennsylvania Milk Marketing Board, I am very
sensitive to the challenges confronting today's dairy producer without
losing sight of the need to be understanding of the consumer's need for
safe, nutritious, affordable dairy products.
Most recent indications of monthly milk production for Pennsylvania
indicated in the National Agricultural Statistics Service Milk
Production Report released April 17, 2000 shows that milk production
and cow numbers are declining over year-ago levels. The preliminary
report of Pennsylvania production in the first quarter of 2001
indicates milk production in the State is down 4.3 percent over last
year's first quarter with about 14,000 fewer cows. This report would
seem to reflect that lower milk prices received by Pennsylvania dairy
producers over the past year combined with reported feed quality
concerns have taken their toll on milk production in the State. Recent
and projected milk price increases combined with the opportunity to
harvest higher quality forages this spring may bring back some
production. However, with cow numbers in dramatic decline, it seems
likely that the milk supply will not be returning to last year's levels
anytime soon.
Another factor is the health of the United States economy. If it is
moderately strong, I believe the consumer will continue to buy.
Overall the current market outlook is calling for Pennsylvania milk
prices to be about $2.32 per cwt above 2000 levels. This is based on a
2001 annual average forecast of uniform milk prices for the Northeast
Federal Order (Boston) of about $15.36 in 2001 compared to $13.04 in
2000. To adjust this price forecast to Pennsylvania (Lancaster) reduce
the Boston price by $0.35 per cwt.
conclusion
The recent increases in producer prices experienced in local
Federal milk marketing orders and incentives that the Pennsylvania Milk
Marketing Board can provide through the mandated over-order premium.
Even with the higher prices that Pennsylvania's dairy producers
have experienced and are expected to experience in 2001, producers will
continue to be faced with unrelenting competitive challenges. I believe
that despite the positive trend in milk prices, the Milk Marketing
Board must do everything feasible to provide producers with the best
possible price that market conditions warrant to help keep the dairy
industry viable in Pennsylvania. Continuation of the Board's over-order
premium at reasonable levels which contributes to the recent positive
trend in milk prices will help ensure that Pennsylvania and surrounding
State producers will receive a price that best ensures their future
viability without disadvantaging their market share.
The Pennsylvania Milk Marketing Board is authorized by it's
Pennsylvania statute to regulate the entire dairy industry including,
wholesale and retail pricing.
In Pennsylvania, prices paid to dairy farmers and resale prices
move in lock step unison with one another. It is vital, therefore, to
ensure that resale minimum prices established by the agency, are
adhered to by both milk dealers and retailers. Our auditors perform
wholesale audits to verify that milk dealers are selling milk at or
above minimum prices established by the agency. Enforcement of the
minimum wholesale price provides a stable economic environment free
from destructive competition in the form of below cost sales. It
follows then that enforcement of 10 minimum retail prices by the agency
is equally important. Minimum retail prices for milk ensure that
retailers are not using milk in a price war that eventually may be
funded by the supplying dealer. The supplying dealer may then reduce
payments to their dairy farmers. With this direct correlation between
the prices paid by consumers and the price received by dairy farmers,
the agency guarantees, through the enforcement of minimum resale
prices, that our dairy farmers are receiving their fair share of the
money spent on milk by consumers.
Our auditors also collect and review financial data supplied by the
milk dealers. This information is combined with information that is
submitted monthly regarding the utilization of milk and is used to
establish the dealer's cost for processing, packaging, and delivering
milk. It is from 11 this audited historical cost information that the
agency establishes the minimum wholesale price.
For your information, on Wednesday, May 16, 2001 at 9:30 a.m. in
Room 202 of the Agriculture Building, 2301 North Cameron Street,
Harrisburg, the Pennsylvania Milk Marketing Board will be holding a
hearing to establish the level of the over-order premium for third and
fourth quarters of this year. We, as a Board, are proud of our ability
to respond quickly to the consumer, farmer, and market needs.
Senator, thank you for allowing me to speak today.
Senator Specter. Thank you very much, Mr. Brubaker. We now
turn to Mr. David McCorkle, president and CEO of the
Pennsylvania Food Merchants Association. He has served on the
board of trustees of the Food Marketing Institute and the
National Grocers Association and was chair of the Food
Industry's Association of Executives, a bachelor of science
from Bucknell, master of arts from John Carroll University.
Thank you for joining us, Mr. McCorkle. The floor is yours.
STATEMENT OF DAVID McCORKLE, PRESIDENT, PENNSYLVANIA
FOOD MERCHANTS ASSOCIATION
Mr. McCorkle. Senator, thank you very much. It's a pleasure
to be here today. As you mentioned, I represent the
Pennsylvania Food Merchants Association and the Convenience
Store Council, about 1,700 corporations in Pennsylvania that
own and operate 6,500 retail stores, all of them proud to sell
milk from the farmers at this table and from the dairies that
process that milk in Pennsylvania.
I would begin by saying that our 6,500 stores selling to
Pennsylvania consumers certainly support the dairy farmers,
large and small, where the challenge is defining ``dairy
farmer, and understanding just what that term means, because we
have many ranges here, but very many efficient operations. It's
really an extraordinary enterprise in the State of
Pennsylvania.
Our association, as I mentioned, supports the dairy
farmers. At this time, we oppose any Federal legislation that
would have unknown effects on what is understood to be a very
complex and difficult and challenging business. I will say
there are a couple of exhibits that I'd like to share with you,
Senator, if you don't mind.
Senator Specter. Fine. We will be glad to receive them.
Mr. McCorkle. They are a part of my testimony, and that--
they point to a couple of issues that I think bear importantly
in this discussion. First of all, the dairy department makes up
about nine percent of the average supermarket sales. That nine
percent-plus in sales is one of the most hotly competitive.
Speaking of beverage, milk is competing with other beverage
products; and beverage products are the fastest growing segment
of the supermarket and the manufacturing industry. Milk is
competing with an array of beverages, from bottled water to
fruit drinks of all types. It is a very, very competitive
department.
Consumers are buying more and more beverages in the
supermarket. Margins on those beverages are shrinking,
generally. And the margin overall, as you know, in the grocery
store, is 1 percent of sales. That is net profit for the
supermarket is a penny on the dollar, after all expenses are
paid and all costs of the product is paid. So the dairy part is
9 percent of total sales. The supermarket margin is a very
slim--it's a hotly competitive business. The supermarket owner
and operator gets a penny on a dollar profit after taxes and
expenses are paid. In that competitive marketplace the
challenges are immense.
And I shared with you one other piece of information, that
being a graph that tracks the comparison of farm prices paid
for dairy products as presented by the Pennsylvania Milk
Marketing Board to the minimum retail price charged by stores
in Pennsylvania. If you look at that graph, you will note that
the spread between those two costs has actually decreased from
January of 2000, I believe it is, to February of 2001, from
$1.25 to $1.10.
Prepared Statement
In Pennsylvania, we have the unique situation of having a
milk marketing board that considers cost of production of the
product to the consumer, cost of processing for the dairies,
and cost of operation for the retailer. And because of our
unique situation here, Senator, I think it is possibly a model
State for the Senate to study in regard to cost and expenses
and product prices paid by consumers. So I commend Mr. Brubaker
who was--this was noted earlier, is a member of the commission,
and to the staff of that commission for presenting a full
picture in Pennsylvania that might be a little harder to get
into focus as you look at the national picture for the
production and processing of the price of dairy products, which
is very, very complicated and confusing for a number of reasons
that were noted by earlier persons testifying today.
Thank you for the opportunity to be here. Our members are
happy to share with you any in-depth additional information
that you would like to have concerning this very complex
process.
[The statement follows:]
Prepared Statement of David L. McCorkle
general comments & introduction
I am David McCorkle, President of the PA Food Merchants Association
and the PA Convenience Store Council. Thank you Senator Specter,
members and staff of the Agriculture Appropriations Subcommittee for
allowing me to provide information on behalf of the members of the
association. The membership includes over 1,700 companies operating
6,500 retail locations in the Commonwealth of Pennsylvania and
surrounding States. The directors of the association have asked me to
make it clear that we will support any program that will ensure the
stability and safety of Pennsylvania's milk supply and enhance the
business viability of dairy farmers, milk processors and retailers in
the Commonwealth. The family farmer is important to the economic and
cultural future of the Pennsylvania. Moreover, the product produced by
dairy farmers is vitally important to the well being of every
Pennsylvanian.
As I understand it, we are here today to discuss farm to retail
milk prices and the translation of increases or decreases in the
payments made to farmers for class 1 product that is ultimately sold to
consumers in retail stores. I am pleased to initiate dialogue on that
and other topics that emerge from today's discussion and look forward
to providing the members of the committee with any information that you
desire concerning retail pricing policies followed by Pennsylvania-
based companies.
the supermarket business model
The Food Marketing Institute publishes an annual financial review
for the supermarket industry. Many of you know that supermarkets are
known as a penny business. That is, to earn a dollar, supermarkets rely
on a low mark-up to stimulate volume sales. Simply, the net profit
margin is the net income as a percentage of sales that remains after
paying all expenses, including product cost and the realization of any
gains or losses. Over the past decade, the average supermarket industry
profit has been 0.89 percent annually. Competition is extraordinary as
the percentage of disposable income spent on food at home for the year
1999/2000 (6.2 percent) is not much higher than the percentage of
disposable income spent on food away from home (4.2 percent). For the
fiscal year 1999/2000, the average net supermarket profit after taxes
was 1.18 percent.
the pennsylvania milk marketing board
The milk pricing system in the Commonwealth of Pennsylvania will be
interesting for subcommittee members and staff to review. Act 37 of
1934 and Act 43 of 1935 organized the Pennsylvania Milk Marketing Board
in a temporary basis. Regulations were made permanent under Act 105,
Public Law 417, in April 1937. In 1968, the Milk Control Commission
became the PA Milk Marketing Board. The Board supervises and regulates
the entire milk industry of the Commonwealth, including production,
manufacture, processing, storage, transportation, disposal,
distribution and the sale of milk and milk products for the protection
of the health and welfare of the inhabitants. The appointed three-
member board and staff review each of the above areas in six separate
regions of the Commonwealth and establish prices to be paid at each
level of the production and distribution system, including establishing
a minimum retail price.
The Bureau of Consumer Affairs consults with representatives of
consumer groups, disseminates information relative to activity of the
Board, and acts as a liaison to Federal, State and local agencies
involved in the dairy industry and milk marketing. The Bureau has
provided a consumer update, which is attached to my testimony, dated
January 2001. A chart from that testimony is provided on ``Milk Price
Comparisons Pennsylvania State, January 2000-February 2001,'' and it
contains a graph comparing the whole milk average minimum retail price
and producer price at the gallon level.
The numbers speak for themselves and generally indicate a direct
and immediate movement of retail prices with the fluctuation of
producer prices.
The above fact is not surprising in that milk is generally sold at
the minimum retail price in supermarkets due to the highly competitive
marketplace.
Pennsylvania's milk pricing structure is unique in the nation.
Pennsylvania's consumers can be assured of purchasing quality and
competitively-priced dairy products that fairly reimburse producers,
dairies and retailers for their efforts.
conclusion
I look forward to reviewing the specific problems identified by
this committee. Once we better understand the problems expressed by
dairy farmers in the nation, industry experts at Penn State University
and other research facilities will be able to work with industry
representatives, appointed and elected officials to resolve the
problems.
It is the belief of our association members that marketplace
solutions will work best. However, we are in the process of reviewing
legislation introduced in February by Senator Rick Santorum and Senator
Herb Kohl. A national safety net for dairy farmers may a viable
solution.
Industry experts have challenged recent economic studies on the
N.E. Dairy Compact. The President of the Food Marketing Institute, Tim
Hammonds, noted that ``the bill extending the N.E. Dairy Compact is
being introduced in Congress. Votes for that bill will disappear if the
proponents are forced to admit the uncomfortable truth that it is the
Dairy Compact that pushed up prices for consumers.''
The dairy industry is working diligently with retailers and
marketing experts to develop new dairy products that will increase
consumption of milk in America. Value-added products are the single
most important growth area for milk. I know that Earl Fink will provide
you with an update on new products being introduced in the marketplace
by the quality dairies operated by Pennsylvania-based companies.
Finally, product development and marketing translates into increased
investment by dairies and retailers.
In addition, groups like the PA Dairy Stakeholders are working with
dairy farmers to improve on-the-farm practices and efficiencies, which
will help farmers improve their bottom line and succeed in today's very
competitive marketplace.
I look forward to working with you so that together we can create a
better understanding of the milk production, processing and
distribution system.
attachment i
attachment ii
how the supermarket dollar is spent
Senator Specter. Thank you very much, Mr. McCorkle. We turn
now to Mr. Earl Fink, executive vice president of the
Pennsylvania Association of Milk Dealers representing 35
dairies which produce 85 percent of the milk sold in
Pennsylvania, a graduate of Penn State University with a degree
in accounting. Thank you coming in, Mr. Fink. We look forward
to your testimony.
STATEMENT OF EARL FINK, EXECUTIVE VICE PRESIDENT,
PENNSYLVANIA ASSOCIATION OF MILK DEALERS
Mr. Fink. Thank you very much, Senator Specter, for
affording us the opportunity to be here. Much of what I was
going to cover has already been covered by Mr. Brubaker and Mr.
McCorkle, so in the interest of time, I will make my brief
remarks even briefer.
I've brought with me sample copies of the International
Association of Milk Control Agencies Price Surveys. I have been
monitoring these surveys for the past 20 years, and basically
what they show is that in Pennsylvania, the minimum retail
price established by the Pennsylvania Milk Marketing Board
tends to be the prevailing price. So, in effect, our prices to
consumers move in lockstep with prices paid to farmers. And, in
other words, each month, the Federal Government announces what
the class-one or beverage milk price will be for the following
month. The PNMB posts its reports, and then our price moves up
and down in lockstep with that.
I have these reports available. We find that the minimum
price tends to be the prevailing price in every market in
Pennsylvania except the Philadelphia area, which tends to move
in step with southern New Jersey; and their prices tend to be
slightly above minimum. But in all fairness to stores in
Philadelphia, when you look at them compared with the national
prices in other markets, they're very much in line. Penn State
used this information to do a study some years ago, and their
bottom-line finding was that, on average, Pennsylvania farmers
received more for their milk than farmers around the country
and, on average, our consumers pay less. I think that is very
compelling evidence and is a credit to the work that the milk
marketing board.
Mr. Tewksbury indicated that the Milk Board has been
setting a premium--I think it was since 1988, Arden, not 1987--
and I would like to point out that our association, which
represents processors, has always supported that premium, not
always at the same levels as the farmers, but we have supported
their premiums since its inception in 1988. I would like to
point out that this Wednesday, the Milk Marketing Board will be
holding a hearing to consider the level of premium beyond July
1, and at that hearing we will be supporting a higher premium,
$1.65 where we've been for the last 6 months, the same as a few
other farm organizations. But a couple of the farm groups are
actually supporting a price lower than $1.65. So as processors,
we're supporting a higher level than some farm groups.
I think that's all I have. Thank you very much.
Senator Specter. Thank you very much, Mr. Fink. Mr.
Tewksbury, you talked about Federal legislation. What Federal
legislation would you like to see introduced?
Mr. Tewksbury. Senator Specter, last fall former
Congressman Ron Clink introduced a bill in Washington that we
helped put together. And my understanding is that Congressman
Tim Holden either has or will be introducing a similar bill.
And in addition to that, we have put together a bill somewhat
like Congressman Clink's bill which basically brings the
average cost of producing milk across the United States, as
determined by USDA, into a pricing mechanism. It also allows
dairy farmers to produce milk for the needs of the market
without being penalized. And I think, to me, it is the answer
to this pricing problem.
I realize not everybody is going to agree with that, but,
you know, a confusing thing is that a branch of the USDA has
been establishing prices on the cost of production for all
commodities or major commodities for many, many years through
the act of Congress, I guess, demanding that our market
administrator's report every month what that cost is by certain
sections of the country and the national average. This is being
surveyed all across the country, and farmers and dairy farmers
now themselves realize as what USDA says the average cost is by
the northeast, the southeast, the far west, and the national
average.
And we've heard today that--and I have been at hearings of
the marketing board over the past years when they do bring in
the cost factors of our processors and so on--and their
container costs and so on in establishing the price-per-gallon
of milk, but they pattern their prices after the Federal
orders. So as the Federal order pricing collapses, so does the
price in Pennsylvania on the beverage milk, except for the
premium established by the marketing board.
So while the board does--as best I can recollect, does
bring in the cost of other elements into a gallon in--into
Pennsylvania, and they bring in the farm price established by
the Federal orders, but that Federal order does not bring in
what the farmer's cost of operation is.
Senator Specter. So essentially, Mr. Tewksbury, you would
like to see legislation which took into account the cost of
production and a reasonable profit.
Mr. Tewksbury. Yeah, and these figures are established by
the Department of Agriculture, and we have tried to bring them
into an advocacy meeting sometime, and they don't want to be
any real part of it; but they said if there is a bill
introduced and there are hearings held on it, they will come
into the committee hearings in front of you people and discuss
their cost of production records and how they get there and how
they can defend them. I understand there's people in USDA at
other levels who don't even support the USDA's cost of
production figures, yet these figures are put all across the
United States as,'' Here's what it costs.'' I've got them right
here, the latest ones for the northeast and so on, and it is
substantially higher than what farmers are receiving. And if
you put total economic costs in there, it shoots way up.
Our policy is that we need a pricing formula that doesn't
go up and down all the time and cause all of this confusion to
consumers and causes a lot of problem for our stores to make
these changes. And that's why I've heard them say, you know,
about milk selling higher in other States--I watch it in
southern--here in New York--and what I've noticed is when--
when, in Pennsylvania, if the prices go up for our dairy
farmers, and the price of a gallon of milk does go up, okay, it
does go up as dictated by the board, but in New York State,
they also are raised, because they're cost is going up. But now
when the price comes down in Pennsylvania, what I find in
Horsehead and Elmira and Corning, New York, and those places,
they hang onto that price that was up here higher than what it
is here in Pennsylvania.
Senator Specter. Well, Mr. Tewksbury, they hang onto the
price which is higher, too, according to what Bob Conklin and
Mr. Robinson said.
Mr. Tewksbury. I've seen many times 30, 35, 40 cents a
gallon higher than what you can buy it up in the Athens area.
And I'm sure that's what goes on across the country. So I think
the way to get away from this, Senator, would be to have a
pricing formula that reflects what the cost is at the farm and
has stabilized the prices.
Senator Specter. Dr. Conklin, let me turn to you for a
response to what Mr. Tewksbury has had to say. When the first
changes were made in milk prices, going back into the 1930s,
there was a concern about the sanity of milk, the adequacy of
production--I see you nodding in the affirmative--and there
were minimum prices set in order to deal with the problem of an
adequate supply of milk. It was really done for the consumers,
and it took into account what the farmers were facing.
One of the first jobs I had as a younger lawyer--I'm still
a young lawyer--but when I was a younger lawyer working with
Barsdeck, Price, Meyers, and Rhodes was representing Sealtest
National Dairy Products, we had many hearings before the Milk
Control Commission, and that was still the dominant theme, to
provide an adequate price to the farmer to guarantee adequate
supply and sanitary conditions. So why not figure in the cost
of production to the milk producer as a cost of production plus
a reasonable profit?
Dr. Conklin. Senator Specter, let me begin by noting that--
as Mr. Robinson also mentioned, the structure of pricing milk
in this country has been built on over a half a century of very
complicated policy structures, both at the Federal level and at
the State level. We've heard here a little bit about the role
of the board here in Pennsylvania. There are some other States
that also have similar institutions, or ones that play a
slightly different role.
Developing policies that use the cost of production to help
set prices, requires caution, because there is no very good way
to measure cost at the farm level. Costs vary widely--we can
compute average costs, but there is a wide variance around the
average.
Senator Specter. Well, Dr. Conklin, I understand that
you're looking for competition. But where you have this very
complicated structure which you've testified about, is there
any way to simplify this so-called, quote, ``complicated
structure,'' or are we really heading to a situation where
there are not going to be anymore small farmers? Where you lose
300 to 500 farms a year, and you have some 9,900, that is a
pretty heavy attrition rate. Do we want to find a situation
where we're relying only on the giant corporations and milk
producers in far-distant places, or is there some value to
society and to the consumer in maintaining the family farm?
Dr. Conklin. The judgment, Senator--the judgment about the
value of maintaining the family farm is certainly not one that
I am in a position to make, but I think that is a statement
that many other people here have spoken to today, and that
that's a judgment that society has to make through the
political process and through the policy process.
Senator Specter. Well, you're the economist--a key
economist for the United States Department of Agriculture, and
if you find some other way to handle it, you have to consider
the impact of the elimination of the family farm or this sharp
reduction. A question which comes to my mind--and maybe we'll
turn to you, Mr. Brubaker--you cite the statistics that
Pennsylvania farmers receive a larger supply--a larger
percentage of profits than farmers from other States. What is
happening in the other States? Are they losing more family
farms? You cite here that the Oregon farmer gets only 35.7
percent of the retail price of milk, compared to 53.2 percent
in Pennsylvania. Is Oregon losing more of its family farms--
milk producers?
Mr. Brubaker. Senator, I can't answer that question. But
one thing I can answer is some places where they have had a
board similar to Pennsylvania, what I was told is that when
they lose the board, the price usually goes up to the consumer,
and the prices goes down to the farmer. And that is what I
consistently have heard from where States--and I think I'm
referring to--maybe someone can help me out what State that
was----
Senator Specter. Well, Mr. Brubaker, that generalization
isn't too helpful, even if it is so. But from the point of view
of the Senate Agriculture Subcommittee appropriations, we're
concerned about what is happening nationally. And this hearing
obviously focuses on Pennsylvania. But if the Pennsylvania
farmers are better off, say, than the Oregon farmers or the New
Jersey farmers, who get only 40.5 percent of the retail price
of milk, I would like to have a finding, Dr. Conklin, perhaps
the Department of Agriculture can give it to us, whether
there's other States--New Jersey and Oregon, illustratively,
are losing more of their farms than Pennsylvania. Can you
provide that to us?
Dr. Conklin. Senator, that is not a question that I can
answer right now. Certainly, I can go back and check the data
that we have to see if we can give you an answer to that
question.
Senator Specter. I understand you can't answer on the spur
of the moment, but I would like to see if you could go back and
answer the question.
I'm very much concerned with the testimony we have here
today--Mr. Robinson testifying about farm prices going down and
retail costs are constant or higher so that when the farmer
gets less money for his milk, the retail prices are constant or
higher. Now, how can we account for that? Dr. Conklin has
testified that there is retail resistance to lowering prices
and the market power--when prices go up, there is a faster
accommodation--you're nodding in the affirmative--on retail
prices rising, when prices go down to the farmer, they retain
constant or even go up among the retailers. What can be done
about that to provide greater fairness to the system?
[The information follows:]
Farmers' share of retail prices for Class I milk varies widely
across States. Because this share is based on retail prices within an
individual State, milk is shipped across State lines, there is no
reason to expect these shares to be consistent across States. Dairy
farm numbers have declined across the nation. At a first glance it
appears that the percentage decline in the number of commercial dairy
farms is higher in States where the farmers' share is lower. Of the six
States we examined at your request, Pennsylvania, New York and Maine
had the highest farm shares of retail fluid milk prices and the
smallest percent decline in the number of dairy farms between 1995 and
2000. However, it is worth noting that the three States with the
largest percentage decline in dairy farm numbers, Colorado, Oregon and
New Jersey, were all States with a relatively small number of farms at
the beginning of the period so that the absolute decline in farm
numbers in these States was quite small even if the percentage decline
was high. A complex set of factors drive dairy farm entry and exit
decisions. In addition to milk prices, these include operator
demographics, real estate prices and urbanization. Because these
factors vary widely across the United States it is not possible to
conclude from these numbers that there is a causal relationship between
farmers' share of retail milk prices and the changes in the number of
dairy farms.
CHANGE IN THE NUMBER OF COMMERCIAL DAIRY FARMS \1\
----------------------------------------------------------------------------------------------------------------
Share of Number of dairy
retain price farms Change in
received by -------------------- number of
farmers in dairy
Class I milk farms
\2\ (percent) \3\ 2000 \4\ 1999 since 1995
(percent)
----------------------------------------------------------------------------------------------------------------
Maine........................................................... 47.9 458 592 (22.6)
New Jersey...................................................... 40.5 158 242 (34.7)
New York........................................................ 51.1 7,238 8,913 (18.8)
Pennsylvania.................................................... 53.2 9,837 12,000 (18.0)
Colorado........................................................ 33.9 195 300 (35.0)
Oregon.......................................................... 35.7 364 522 (30.3)
----------------------------------------------------------------------------------------------------------------
\1\ Commercial farms are those actually selling milk as defined in a survey by the American Farm Bureau
Federation carried out annually since 1992.
\2\ Data from testimony given May 14, 2001 in Philadelphia, PA.
\3\ Data from July 1 survey of farms within each State actually selling milk published in ``Hoards's Dairyman'',
October 25, 2000.
\4\ Data from July 1 surveys of farms within each State actually selling milk published in ``The Western
Dairyman,'' February 1998.
Mr. Robinson. Well, our work--again, I want to say--
confirms, through empirical information that kind of price
behavior and price relationships.
Senator Specter. You say you do confirm that from the
empirical data?
Mr. Robinson. The empirical data shows that again--as I
mentioned earlier, that there's a pretty weak price
relationship between what happens on the farm nationally--that
is the prices farmers received and what the retail price is in
a given market. I might say, in confirming some of the
observations made here earlier, that among the nationwide
picture that we put together, the price relationship was
stronger in Philadelphia, Pennsylvania than it was in the vast
majority, if not all, the other markets in the country--so
there may be things going on in Philadelphia, Pennsylvania to
strengthen that relationship, which I can't say with certainty.
All I can say is that there is a stronger relationship in
Philadephia, Pennsylvania than most, if not all, the other
locations.
Senator Specter. You say a stronger relationship, but did
prices in the retail stores in Pennsylvania go down as fast
when farm prices were reduced as they went up when farm prices
were increased?
Mr. Robinson. No, the price relationship is still not
extremely strong. In technical terms, I think it is a
correlation coefficient of about point-six. A perfect
relationship would be one.
Senator Specter. So you're saying that although
Pennsylvania--the disparity is not as great in Pennsylvania,
there still is a significant disparity that when farm prices go
up, the prices reflect at the retail level, much faster than
when prices go down--the prices--the farmers prices at the
retail level go down.
Mr. Robinson. Certainly in the end result, there was not a
perfect flow. That is correct. The speed with which these
things happen is a little difficult to discern. All I can say
is that at the beginning of the period and the end of the
period, there was not a perfect match, and that during the
course of the period there may be lags.
Senator Specter. Just to be sure I understand you, your
conclusion is that when prices go up to the farmer, they go up
faster in the retail stores than when prices go down to the
farmer, that they are reduced in the retail stores.
Mr. Robinson. When prices go down to farmers, it does not
translate into prices going down for consumers. They, in fact,
have gone up for the most part.
Senator Specter. That is true in Pennsylvania, even though
there is less disparity?
Mr. Robinson. That is correct.
Senator Specter. Okay, Mr. Tewksbury?
Mr. Fink. Mr. Chairman, I beg to differ.
Senator Specter. We'll give you a chance in a minute, Mr.
Fink, but Mr. Tewksbury will get recognition first. In the
Senate, it's the first senator on to speak who gets
recognition.
Go ahead, ``Senator'' Tewksbury.
Mr. Tewksbury. I watch the retail prices very closely in
probably 25 stores, maybe more than that, in northeastern
Pennsylvania. Number one, when the dairy farmer prices go up on
beverage milk, and that's good terminology, beverage milk, the
prices have to go up because the marketing board establishes
higher minimum prices at that point. Okay?
Now, when the prices come down to our dairy farmers on
beverage milk, the stores that I survey all the time, they come
down the same day, the first of the month. I see it over and
over and over again. So I don't know about the whole State, but
at least one-third of the State that I observe, when the prices
come down to the dairy farmers, on the first of April, say, the
prices--the minimum price comes down, established by the
marketing board, and at most supermarkets, the minimum price
becomes the selling price and it comes right down the same
identical time.
Now, the problem that I have, as a dairy farmer, is, while
I'm listening to these statistics as to the better relationship
between what the dairy farmers in Pennsylvania receive and the
correlation to what the consumers pay, but I don't think those
figures take into consideration the dairy farmers in
Pennsylvania whose milk goes into New Jersey and New York where
that isn't necessarily true. So while some Pennsylvania dairy
farmers, the correlation between their price and the consumer
price is better, overall many of our dairy farmers in
Pennsylvania would not fall into that category, in my opinion,
and for the dairy farmers in New Jersey, I don't think they
have even 200 dairy farmers left in New Jersey to supply almost
8 or 9 million people. So the attrition rate in New Jersey for
many years has been extremely bad, and they can't lose many
more or they won't have any at all. But I think my observation
is that there is a relationship between the dairy farmers
prices going down and going up with the retail prices in most
cases.
Senator Specter. So you think the attrition of the New
Jersey dairy farmers is accountable to the fact that they
receive a smaller portion of the retail price of milk, getting
40\1/2\ percent, compared to Pennsylvania, 53.2 percent?
Mr. Tewksbury. I think that's part of it, and the fact that
they're not getting a realistic fair price overall, and the
terrible exposure of the real estate problems in New Jersey has
just eaten up our farms in New Jersey. And if we're not
careful, that same thing could happen in Pennsylvania and other
States, as well.
Senator Specter. Mr. Tewksbury, let me see if I understand
your testimony correctly. Do you disagree with Mr. Robinson,
and do you believe that when milk prices go down to the farmer,
that the farmer gets less money, that those are reflected in
retail prices going down?
Mr. Tewksbury. I find that true in northeastern and north-
central Pennsylvania. But about a half an hour ago, I also said
that I watch the prices in the southern tier of New York, that
when the prices in these stores in Pennsylvania go down, as
established by the marketing board, I find the stores in
Corning and Horsehead and Elmira keeping their prices up there,
which would indicate to the testimony of--that one of the
speakers gave that the relationship of what the farmers get is
less than the retail price.
Senator Specter. So what you find in the southern tier of
New York, you think there is a closer correlation between the
retail prices in northeastern and central Pennsylvania because
those retailers are more attuned to what their customers, who
are significantly farmers, know, that the farmers who go into
their stores know that the price is going down on the price
paid to the farmers, so they expect the prices to go down in
the stores that are in their area?
Mr. Tewksbury. I don't know how much it relates back to the
farmers to the prices going down and so on. I think it is the
relationship that's been established between the Pennsylvania
milk marketing board and our retail stores across Pennsylvania,
which I think is extremely good. And I agree that the overall
picture in Pennsylvania is probably better than many States. We
also do surveys in California, which I'm sure is in Mr.
Robinson's surveys in my lands. The prices that the farmers
receive in California and what the consumers pay, I would like
to see if he has a breakdown of that, because that is alarming,
not only on beverage milk, but on manufactured products, as
well. If he has that, I think it would be very good for you
people on the committee to study that, because you're going to
get some amazing statistics.
Senator Specter. Mr. Fink, we'll come to you. And--wait
just a second. I haven't formulated my question yet. You wanted
to reply to Mr. Robinson. In your testimony, you said that the
farmers get more, and the consumers pay less, and you referred
to a stack of papers which you have in front of you as being a
study from Penn State. Can you----
Mr. Fink. No, no. This is not the Penn State study. This is
a study that is made every month, Senator, and it is published
by the International Association of Milk Control Agencies. It's
available on the Milk Marketing Board's Web site since January
of 2000. It goes back 20 years.
Senator Specter. Will you point to the source of that study
to back up your statement that Pennsylvania, the farmers are
getting more and the consumers are paying less----
Mr. Fink. That was a Penn State study done some years ago
by the committee, a copy of it.
Senator Specter. Well, that is what I was referring to.
Mr. Fink. Okay.
Senator Specter. You referred to a Penn State study, which
is what I had just said, and I thought you had gestured toward
that stack of papers.
Mr. Fink. No, I'm sorry I misled you, Senator. This is
simply the price surveys that are done monthly. And in
Pennsylvania----
Senator Specter. Well, if you would provide the Penn State
study to the subcommittee, I would appreciate it.
Mr. Fink. I will do that.
Senator Specter. Go ahead with your testimony in which you
think--which you represent contradicts what Mr. Robinson said.
Mr. Fink. I know Mr. Robinson has a massive job trying to
study retail milk prices throughout the country, but in
Pennsylvania we have hard data, back probably 20 years, where
employees of the milk marketing board actually go into
supermarkets, and record the prices. And then those prices are
published and compared with their minimum prices. And we found
over the last 20 years that in all areas of the State except
Philadelphia, in supermarkets, the price to the consumer moves
in lockstep with the price to the farmer.
Senator Specter. Well, would you show where in those
studies that conclusion appears?
Mr. Fink. You have to go through--and I'm stating my
conclusion. I would like the committee to make your own study
of these reports. And I'm sure you will arrive at the same
conclusion.
Senator Specter. We will make our own study. But when you
make that representation, if you are able to back it up, I
would like you to. If you can't at the spur of the moment, I
would like you to provide it to the subcommittee.
Mr. Fink. Okay. Well, if you want to take one report--I
will walk through one report, if you would like, Senator.
Senator Specter. Go ahead.
Mr. Fink. Okay. This is for February of this year, February
2001. Unfortunately, the pages aren't numbered, but the----
Senator Specter. Excuse me. If you have a report for
February 2001, let me take a look at it please. Do you have a
second copy?
Mr. Fink. I probably gave it to you. If I can take one
second--there's the minimum retail store prices for six milk
marketing areas for a gallon of whole, low-fat, and skim--and
then you move on back to the supermarket prices in
Pennsylvania, and you will see they have a high, a low, and an
average.
Senator Specter. Well, are you saying there's something you
want to compare? And you say there is something you want to
compare?
Mr. Fink. Yeah, compare the minimum prices with the various
areas with what the observed prices were at the supermarkets.
Senator Specter. Go ahead.
Mr. Fink. Okay. In area two, for whole milk, the low was
$2.63; the high was $2.89, the average was $2.63. I would say
the minimum was $2.62 for whole milk, correct?
Senator Specter. What is your point here, Mr. Fink?
Mr. Fink. That the prevailing minimum price established by
the Pennsylvania Milk Marketing Board, which are these numbers,
tend to be the prevailing prices to consumers in all areas of
the State except area one, which is the Philadelphia area.
Senator Specter. Well, how does that correlate with the
prices which are being paid to the producers at this time----
Mr. Fink. Because these minimum prices move up and down in
lockstep with the changes in the prices to the farmers. In
other words----
Senator Specter. Where does that appear?
Mr. Fink. That is on another page, and you have to use some
math to get that. Here are the prices paid to the farmers.
Excuse me, that's not it.
Senator Specter. Let me ask you to do this, Mr. Fink, in
the interest of time. Would you submit to the subcommittee the
analysis, and if you have to do some math, make the
computations. If you think that these statistics support a
conclusion that the prices which are paid to the producers and
dairy farmers match the prices paid by the consumers?
Mr. Fink. I'd be happy to do that.
Senator Specter. It would be very interesting to see what
the General Accounting Office and the Department of Agriculture
say.
Mr. Fink. If Arden and I agree, it must be correct.
Senator Specter. If you and Arden agree, it must be
correct? The subcommittee is not quite ready to delegate the
conclusory responsibilities to you, Mr. Fink.
Senator Specter. Mr. McCorkle, you wanted to make a comment
here?
Mr. McCorkle. Yes, Senator, thank you. I just wanted to say
that what I've heard today has been very interesting, but I
believe what I've heard from Mr. Brubaker, over to this side of
the table, which happens to be the left side of the table,
agree that farm prices are fairly reflected at retail prices
for whole milk products purchased by consumers in the State of
Pennsylvania, which fits with my testimony that says that in
Pennsylvania we have protected the safety of the milk supply
and the production of the supply and providing consumers with a
quality product at a low price compared to prices in the
region. And I think that is what Mr. Brubaker and Mr. Tewksbury
and Mr. Fink and I testified today. And the testimony, I
believe, including this one-page chart, I believe backs that up
in Pennsylvania.
The situation is more complicated as we look to the other
States. I think it was testified earlier, those differences
between farm costs and retail costs are explained to some
extent by energy costs, by packaging costs, by labor costs, by
marketing costs, and by broader factors in the economic----
Senator Specter. Well, Mr. McCorkle, you're saying that
there could be some reflection of this differential, as Mr.
Tewksbury says, if you go to New Jersey; that in New Jersey,
the prices which the consumers are paying go up faster than the
prices which are paid, say, to the Pennsylvania farmers, who
are apparently shipping milk into New Jersey. When the amounts
of money paid to the Pennsylvania farmers go down, that that is
not reflected as much in a reduction in cost to New Jersey
consumers?
Mr. McCorkle. Sir, I'm not sure. I think it's very
complicated. What you've stated is probably true, but the
reverse of that is probably also true, that there are benefits
that come from shipping to other Federal districts that
probably can't be explained very clearly or justified by an
economist.
Senator Specter. Well, what are the benefits? If the costs
are higher, what are the benefits?
Mr. McCorkle. The payment is higher. The costs stay the
same, but the payment may be higher. And I'm not an expert in
any of those areas, and don't pretend to be. What I can testify
to is to what's happening in the retail marketplace in
Pennsylvania and to the positive effect that the milk marketing
board has had on the structure of the dairy production and
distribution system in the State.
Senator Specter. Mr. McCorkle, what is your opinion of the
breakdown in the cost of the milk which was testified to about
$2.50? And you are representing the retailers. The farmers get
$1, and the costs are 25 cents, and the wholesalers get 75
cents, and the retailer gets 50 cents. Does that breakdown seem
about right to you?
Mr. McCorkle. I would have to compare that with the
breakdown for other products sold in the stores. The average
markup in the supermarket is somewhere in the low-20 percent
area. So again, I would have to take a close look at that. But
there are extraordinary costs to operating a retail store.
Senator Specter. Mr. Fink, 75 percent goes to the
wholesalers, almost as much as the farmer gets. Is that fair?
Mr. Fink. To the wholesalers?
Senator Specter. You're representing the wholesalers here
today.
Mr. Fink. I don't think 75 cents is almost as much as $1,
Senator.
Senator Specter. You get 75 cents out of $2.50, the farmer
gets $1, the coop gets 25 cents, the wholesaler gets 75 cents,
and the retailer gets 50 cents. Is it fair that the wholesaler
gets three quarters as much as the farmer, that produces the
milk?
Mr. Fink. I think it is fair, at least in Pennsylvania. Our
pricing is very fair. The pricing is based on the cost of the
milk and the value of the container and the cost of processing
the milk in the plant and delivering it to the store. We don't
do this for nothing. I think in Pennsylvania at least----
Senator Specter. Well, the farmers don't do all of what
they do for nothing either.
Mr. Fink. Mr. Brubaker's testimony shows in Pennsylvania,
the farmer gets 53 percent of the retail price, which is higher
than the national figures presented by Mr. Robinson.
Senator Specter. Mr. Tewksbury, do you think that's a fair
allocation?
Mr. Tewksbury. It's a fair allocation.
Senator Specter. Take the microphone, or Pennsylvania Cable
Network is not going to get your pearls of wisdom, and you have
to get the other one, too.
Mr. Tewksbury. I'm not going to dispute any of these
figures. I don't really know exactly what they are, but I still
say that it does hold true probably for the milk in the State
of Pennsylvania, but it does not hold true for the milk that
leaves the State, like most of the milk in northeastern
Pennsylvania. It goes into Brooklyn and Long Pond, New Jersey.
And I think if those prices were segregated out, you would find
it would not be 52 or 53 percent; it would be down in the 40-
percent bracket, and that's because of the premium structure in
Pennsylvania, which is good in Pennsylvania, but it doesn't
help the milk that leaves the State. So I think that 53 or 52
percent would be lower on your producers in Pennsylvania whose
milk leaves the State. And, of course, that does not reflect
anything on the milk that is used for manufacturing purposes.
Senator Specter. So the Senate has to consider whether the
national average and the national picture.
Mr. Tewksbury. Yes, sir.
Senator Specter. Ms. Mittal, you've sat through this entire
hearing without saying anything. Would you like to speak?
Ms. Mittal. No, thank you, Senator. I agree with most
everything that's been said so far.
Senator Specter. Well, the subcommittee--the Agriculture
Subcommittee of the appropriations is going to pursue this
matter further. I will be interested to get the analysis from--
that Mr. Fink is talking about, and I would like for you, Mr.
Robinson, and Dr. Conklin to take a look at the point which Mr.
Tewksbury is making here about the impact on the Pennsylvania
farmer on milk which is sold out of State, as he cites what has
happened in New Jersey, the southern tier of New York,
Brooklyn.
I remain very much concerned about the basic statistics of
the farm prices falling 48 cents a gallon in the period between
March and April of 1999 and the retail price going down only 29
cents a gallon--a big differential. I'm also concerned about
the wide fluctuations in what the farmer gets--$16.27 in
January of 1999, down to $10.27, a month later--as to how we
might approach this issue on milk pricing. It is obviously a
very complicated matter.
But from a national perspective, I'm concerned about what
is happening to the loss of farms in New Jersey, perhaps in
Oregon. We will see what those figures show. So I'm certainly
concerned about what is happening in Pennsylvania where, in my
travels among--through Pennsylvania, 67 counties, I hear
repeated complaints about the squeeze of the dairy farmer, the
squeeze of the dairy farmer. And my purchases are not
scientific, but I haven't found the price of milk going down,
ever, on the milk that I buy. And the repeat of the specific
time that prices were going down to the farmer, where I bought
milk, it went from $1.95 to $2.29. And when we talk about
economic power in the retailers and the ability to hold onto
more of the profits at a time when the prices go down to
reflect that change in a slower price contrasted with when the
prices go up to the farmer and up to the retailer, the prices
go up much faster.
Milk is very important to the consumers, especially to the
children of America, so we intend to pursue the matter further.
We will be looking for the follow-up from Mr. Fink and from Dr.
Conklin and Mr. Robinson. If anybody would like to say anything
further before we conclude the hearing--Mr. Brubaker?
Mr. Brubaker. Mr. Senator, thank you for this opportunity.
Again, just to try--and I don't have this down on paper, but it
would be for the record, just to simplify the situation a
little bit--would be that I can testify to the same thing that
was said here. In our area, when the milk price goes up to the
farmer, the store price goes up about 9 to 10 cents a gallon,
and that doesn't take into account the percent of fats. But I'm
saying on average about 9 to 10 cents per gallon. The price of
a gallon will go up if it goes up $1 to the farmer. If it goes
down a $1 to the farmer, that will follow itself right through,
as they stated. I can go into a Mini-Mart or the super chains--
and our store, and that will basically, on the day of the first
of the month, that milk will be back down following the
farmer's reduction in price. It is just like step-by-step. If
the price goes down to the farmer, the price comes down to the
store at about 9 to 10 cents a gallon as $1 relates to the
dollar to the farmer.
Senator Specter. Mr. Conklin, Mr. Robinson, would you be in
a position to extend this study to that precise point? I would
like to see just exactly how that works now.
Mr. Robinson. We'd be happy to look at any figures anybody
can provide. I can only tell you the price spread in
Philadelphia got larger. And the only way it gets larger is if
farm and retail prices are not tracking with one another.
Senator Specter. What I'm asking you--would you be in a
position to track the representation just made by Mr. Brubaker?
Mr. Robinson. We'd be happy to try. Yes, sir.
Conclusion of Hearing
Senator Specter. Okay, thank you all very much.
[Whereupon, at 10:05 a.m., Monday, May 14, the hearing was
concluded, and the subcommittee was recessed, to reconvene
subject to the call of the Chair.]
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