I

tOlst ConUf'$$ ht Ses.sion COMMIT1'EE PRINT

REPORT AND RECOMMEN DATIONS

OF THE

ii' . .... -

NATIONAL COMMISSION ON DAIRY POLICY

SUBMITTED BY THE

SUBCOMMlTI'EE ON LIVESTOCK, DAIRY, AND POULTRY

OI' TH£

COMMI'ITEE ON AGRICULTURE U,S. HOUSE OF REPRESENTATIVES

APRI L 1989

Printed for the UK(! or the Commj!~ on Agriculture

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COMMITTEE ON AGRICULTURE:

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LETI'ER OF SUBMITI'AL

Hon. E (KIKA) DE LA GARZA,

HOUSE OF REPRESENTATIVES, COMMl'1'TEE ON AGRICULTURE, Washington, DC, March 22, 1989.

Chairman, Commitiee on Agricuilu,re, House of Representatives, Washington, DC.

DEAR MrL CHAIRMAN: I am herewith submitting to you the final report of the National Commission on Dairy Policy and request that it be published as an Agriculture Committee Print.

AB you are aware, the Commission was created in 1985 to make recommendations on the federal dairy pdce support program and the future of the U.S. milk production industry.

Subsequently , ~he Commission has completed its hearing process, published the hearing records, cleared preliminary findings aod has now developed its final report. It is important that the public have access to this report.

I thank you for your consideration and assistance with this matter.

Sincerely, CHARLES W. STENHOLM,

Chairman, Subcommittee on Livestock, Dairy, and Poultry.

Hill

FOREWORD

Hon. CHARLES W. STENHOLM,

HOUSE OF REPRESENTATIVES, CoMMITTEE ON AGRICULTURE,

Washington, DC, April 6, 1989.

Chairman, Subcommittee on Livestock, Dairy, wui Poultry, House of Representatives, Washington, DC.

DEAR CoNGR&SSMAN STENHOLM: Thank you for submitting the final report of the National Commission on Dairy Policy for publi­cation by the Committee on Agriculture. I am pleased to approve your request.

I am confident that this report will serve as a valuable resource for all those interesi€d in the dairy industry. While the report is not intended to represent the position of the Committee on the rec­ommendations found within, it does represent a vital assessment of the issues facing the dairy industry. The time and energy devoted to the report by the me.mbers of the Commission will help us to re­solve the problems that have evolved out of U.S. dairy policies. This report is an important contribution to our deliberative proc­"",.

Many thanks to you and the others for the hard work. Sincerely.

<vI

E (KIKA) DE LA GARZA, Chairman.

VI

COMMISSION AND STAFF

Commissioners -----------------------

Clyde E. Rutherford, Chainnan Otego, New York

Fred A. Douma, Vice ChJinnan OnlanO, California

Fred Butler, SecretaryfT reasurer Inwood, West Virginia

Gerald Aycock Fremor.l, Nonh Carolina

James P. Carner/o, Jr. Florence, Colorado

Irvin J. "Elkin Arne!)" Wisconsin

Kenneth Feller Everson, Washington

Robert L. Foster Middlebury, Vermont

James A. Holte Elk Mound, Wisconsin

Michael J. Homer Linton, North Dakota

H. Pearson Knolle, Jr. Sandia. Texas

John G. Laurie Cass City, Michigan

Raben B. McSparran Peach Bonom, Pennsylvania

George F. Mertens, 1L Sonoma, California

Clifford C. Schumacher Sleepy Eye, Minnesota

Richard N. Shade Rockton, Illinois

Wilfrid J. Turba Elkhan Lake. Wisconsin

Charles Williams Avon Park, Florida

Professional Sta.~'f'f,--~~~ __ ~~~~~~~~~~~_ David R. Dyer Executive Director

T. Jeffrey Lyon Assistant Director

Mary-Lucille Kaems

Steven D. Etka

Charlaine Thomas

Tamara Munford

CONTENTS

Letter of Submitt.31 ,. Foreword ................ " .................................................... . Commission and Staff ,...................................... . ............................... . Executive Summary ._,."._. _ ." n_.............. . ................. , Chapter I.-Gen,:ral ~icultural Policy.. n .................. .

Chapter 2.-Family Dalry FarlllS ............... . .............. , .. . Chapter 3.-Milk Price Support Policy........... . ................. . Chapter 4,-Federfll Milk Marketing Orders .................... . Chapter 5.-Regionallssues ................................................. " ............... . Chapter G.-Advertising and Promotion ............. _ ...... " ............. . Chapter 7.-Technology ................................... , .. Chapter B.-Food Safety and Product Identity Standards .. Chapter 9.-Trade and Aid Programs. History and Acknowledgments .. Letter of TransmiUaI.. . .................... _.

<VJJ)

?age

'" , " 1 15 27 39 53 59 73 79 87 93

108 110

Executive Summary This repon outlines a dairy policy for [he fUlure. It is a policy thaI 18

milk producers beJievc will serve Ihe dairy induslT)' weU into the 1990s. and beyond. The National Corrunission on Dairy Policy reached its conclusions after e:<amining national policy issues in nearly every facel of dairy policy.

The repon to Congress and the Secretary of Agriculture contains recom­mendations in policy areas ranging from technology to milk price supports. In the report, the material is organized inlo several sections, including: (I) general agriculmraJ policy; (2) family dairy farms; (3) milk price suppon policy; (4) federal milk marketing orders; (5) regional issues; (6) advertising and promotion; (7) technology; (8) food safety and product identity stand· ards: and, (9) trade and aid programs.

In many cases Ihe repon suggests needed c.hanges in current law or ad­minislJalive practices. Reviewing the present program was an explicil charge-10 the Conurussion. However, the Commission did not recommend change for the sake of change. Much of existing law, originating 40 years ago, Can still operale well, with proper administration.

Suggested changes include: amendments \0 laws: betler administration of existing programs; closer coordination of ongoing dfons; more coopera· tion within the dairy industry; and a greater effort 10 achieve goals.

The specific re.commendations must be read in conte:(1. Many monlhs of study and deliberation were expended to achieve a system of related proposals-some which mighl not be acceptable to milk producers WilhoUi olher accompanying changes recommended in t.he report.

The report is endorsed by alliS Commissioners. Considering that the Commissioners come fTom all pans of the United States, with various sized dairy operations, this complete endorsement is a remarkable accomplish· men!. 'The repon is thc rust unified proposal fOT progTam changes from the dairy industry in more Iilan a decade.

The repon is far reaching-it is not intended 10 be another shon-term. quick ftx to gel the industry through another year. Instead, the Commission's repon outlines major steps toward a revamped, long-term federal dairy program. The repon is intended to be a blueprint for dairy policy in the future.

As a result. it is unlikely that the recommendations wBi be enacted inlO law this year. Widespread industry understanding of the proposals is needed first.

(1)

2

In establishing a context fOr the agricultural and dairy program recom­mendations. two questions needed to be answered. "They were: (I) What economic environment will promote the effective functioning of a market­oriented agriculture; and, (2) Whal agricultural policy is consistent with sound dairy policy?

The repan states that U.S. policy should foster an economic environment [n which milk producers---including Ihose small-and-mediurn-sized opera­tions that make up the majority of mHk producers-have the opponunity !O

receive a satisfactory return for their labor and investment- Those producers who are efftcient, innovative, and indusoious will prosper under the Commission's plan.

Goals of federal dairy programs., especially those attempting \0 control production, should not be thwarted by efforts to keep producers in business when economic reality dictates otherwise.

The federal government should no! auempt 10 defmc: the tenn "family fann" for the purpose of targeting orresrricting farm progmm eligibility. Tar­geting benefits to a panicular size or structure of fann is inefficient and undermines the basic purpose of the federal milk price support program.

Agricultural and dairy policy should create an economic environment that makes profitability possible-but not guaranteed-for the nalion's milk producers.

Milk price support policy The National Commission on Dairy Policy believes federal dairy policy

should be market-oriented. Market fo~es, together with adjustments in the government suppOrt price, should balance supply and demand for milk and dairy products. While the Commission reconunends the use of "standby" production controls, their use on a pennanent basis is not in the best interest oflhe industry.

Continue supporting prices with purchases Supporting milk prices through government purchase; of dairy products

const.itutes a work.able basis for any dairy program.

The federal support price should establish a minimum price which guarantees an adequate supply of milk. The Food SeCurity Act of 1985 es­tablished a means of modifying government price suPPOrt levels. The Commission studied alternatives and believes a better method can be developed.

Consistem with the intent of the Agricultural Act of 1949. Commodity Credit Corporation purchases of dairy products must serve primarily \0 balance the domestic market annually. All other uses of surplus products,

3

including maintaining a reserve for domestic and imemational food assist­ance programs, should be secondary.

The Corrunission asks Ihe Secretary of Agriculture \0 make available \0 the public quuterly evaluations of Ihe acquisition and disposal of Com­modity Credit Corporation purchases of dairy products.

Milk price supports should be set by a formula The COmmlssion concluded that market forces, logemer with adjust­

mentS in the government suppon price, should balance supply and demand for milk and dairy products. To determine the suppan price, an effective for­mula needs 10 be establjshed in Jaw. The fonnula muse (1) aeCOu!]l for changes in technology in an explicit calculation; (2) lake into account economicconsideralions in ofhcragricui\ural se gmenlS; (3) beableto operale several years without major adjuslments: and (4) have some latimde to ac­count for shifJs in supply or demand to prevem either a build-up of costly surpluses or decreases in production that result in shortages,

The Secre1ary of Agriculture should have discretionary authority to ad­JUSt the price indicated by the formula by 5 percem either upward or downward. However, in no case should the total price change-fonnula ad­justment plus any change dictated by the Secretary-be more than SO cents per hundredweight in anyone year.

The COrnr:rUssion agreed (omaintaill the "action level" of 5 biUion pounds of net Commodity Credit Corporation purchases. However, in the furure, a specified perCentage of commercial use should be adopted as the "action level." Since 5 biUion pounds is 3 or 4 percent of commercial use today, then purchase volume snould represent 3 or 4 percent of commercial use 10 years from now.

Production controls may be needed The use of a production control program on a permanent basis is not in

the best interest of the dairy industry. Price adjustments should generally balance the market. However, if major price reductions were to be'lceded 10 balance supply and demand. then a production control program should be implemented in lieu of a major price reduction 10 reduce unneeded supplies of cheese, buller and nonfat dry milk..

The Commission believes lhe Secretary of Agricullure should have dis· cretionary.authority to impose controls when Commodity Credi t Corporation purchases exceed the legislated "action level. ,. if projected CCC stocks are to be 2.5 biUion pounds above the "action level," the Secretary of Agricul­ture should be required to implement a production control program.

Temporary implementation of production contrOls to reduce the federal deficit is not consistent with the Commission's market-oriented philosophy.

4

However, me Commission acknowledges that such a step rna) be necessary 10 meet deficit reductiOfl targets.

Choices for the Secretary of Agriculture The Commission determined that the most effective prodo.lCDOn control

programs are either a dairy lenumarion program similar to that canied OUI in 1986-87, or a rwQ·tier pricing program paying producm a pna: for milk used commercially and a lesser price for marketings in excess of /hac amount.

Factors such as: (l) the cost of Ihe program; (2) the progmm's effect on other agricultural segments.; (3) the economic conditions in agriculture; and, (4) fiscal goals: are alllaken into account when a production control program is considered. The Commission detennined thallhe Secretary of Agriculture should have options, since each program has desirable characteristics. to ad­dress these factors. Depending on cin;umslances, one program may be preferable.

The COrnmlssion provided the choice of programs to make it more dif­ficult for producers to anticipate a specific type of prod'uction control program and thereby circumvent the program's intent. Al!owing the alter­native ofa dairy tenninalion program, forexamp)e, would make it less ILkely for producers to "race for base" in anticipation of the two-tier program.

Any COStS associated with a production control program, to the extent toat Ihey exceed nonna! dairy program COStS, should be bome by milk producers. However, producers can bear those COStS in ways other than through assessments on milk production. A reduction in the milk suppon price may generate a reduction in government ouLlays sufficient to fund a production conrrol program. Assessments are neither warramec! nor

necessary.

Federal milk marketing order program needs improvement The Commission believes significant improvements in the administra­

tion of the federal milk marketing order system are needed. Long delays in the hearing process have contributed to frustration among dairy producers­f(llstration that led direcLly to provis..ions in the Food Security Act of 1985 which increased Class I milk differentials.

Marketing orders should be combinw where economic efficiencies will result. However, timely amendment of market orders wough the ad­ministrative process is preferable t.o changes made through legislation. The Commission asks USDA and the dairy industry to work logether to speed up decision-making and make mark~(ing orders more effective.

5

Regionalism--don't protect some producers The CuHlIII.1ssion rejecLS a "regionaliu,d" pllce suppon program.

Federal programs cannot and should nOI attempt !O change basic geographical features favoring milk production in one area over another. These features, which include favorabJeclirnate, abundant feed, and a diverse agricultural base, will lead to increased production in certain areas over lime.

Regionalizlng dairy policy in an attempt to protect milk producers in any one area would coumer these basic market forces. As a resuJI, the Commis­sion believes price support policy should not be modified regionaHy to prOlecl producers in onc area of the country.

Also in the area of regionalism, the Commission considered the ap­propriatencS$ of California's separate manufacturing allowance for milk made into bUller, cheese, and nonfat dry milk. It concluded the California allowance has interfered with the orderly working of the federal price sup­port system by: (1) lowering the price received by California milk producers; (2) encouragmg construction of additional CalifoJllia manufacturing plant capacity; and, (3) increasing federal purchases of dairy products from California plants.

The Commission believes USDA's specificationofa manufacturing mar­gin for milk should apply 10 all areas of the United Stales. Federal actions ~hould prohibit California, or any other state, from establishillg a separate al­lowance [0 promme the useof grade A milk to make buner, cheese, or nonfat dry milk.

The consumer must be informed In the area of advertiSing and promotion, the Commission endorses the

current programs, financed through mandatory assessments on milk produc­lion. But if believes these programs must be monitored \0 determine their benefits to producers. Promotion should be cost effective, with changes in consumption serving as a guideline for spending on advertising in the future.

The Commission notes that the Dairy Production and Stabilization Act of 1983, which created Ihe National Dairy Promotion and Research Board, refers to a "coordinated" promotion program. Consolidating functions of the Dairy Promotion Board and the United Daily Industry Association would reduce administrative expenses, improve communication, and possibly save on program costs.

Technology---<hallenges and opportunities The revolution in technology expectctl to hit the dairy industry in the next

10 years-in areas !ncluding genetics. animal nutrition, disease control, and

6

computers-will increase efficiency, lead to increases in milk production, and CQuid boost U.S. dairy product surpluses.

The dairy indusO)' needs to plan for both the challenges and opponunhies these changes will present. Likewise, the federal government should recog­nize and plan for technological advancementS in detennining future dairy policy.

The Commission does flO\ believe new technologies should be prohibited from use based on their effect on either milk prices or indusO)' struc!Ure. However, before technologies are marketed, federal authorities should deler­mine their effects on: (1) wholesomeness of producl; (2) consumer perception of products made with the technologies: and (3) the health of animals to which they are applied.

New technologies shown to be safe should move quickly to the farmer and dairy processor. They should be explained through media-oriented educational programs, with an adequately funded Agricultural EXlension Service playing a major role.

Product identity and labeling The Commission also considered issues of dairy produCI labeting and

standards of idcmity. It concluded thai current standards of idenlilY for 3griculluml prodUCTS should be prescrved. Additional effons to preserve Ihe identity of standardized dairy products should be funded in part by Ihe dairy indusD)'. Also, the Food and Drug Administration should place a higher priority on enforcement of standards of identity by providing more resour­ces for monitoring lhe misbranding of foods, particularly new foods developed to simulme standardized products.

Uniformity in labeling likewise is essential 10 the effiCient marketing and distribUJion of dairy products. The Commission concluded federal law should re1uire apphc31ion of the tenn "imitation" 10 any food product thaI simulates a standardized food in order 10 promote honesty and fair dealing in the Interest of consumers.

International trade-<hallenges and opportunities The Uniled States has opened talks with member counuies of the General

Agreement on Tariffs and Trade on an agricultural trade refQOTl proposal aimed at eliminating all expon subsidies, tariffs, quotas, and domestic subsidies.

The Commission supports fair O"ade in international markets. h believes a free international trading environment is unachievable right IlOW.

However, it would welcome an economic analysis of the proposeil Iero-sub­sidy rrading environment indicating whal benefits-if any-U.S. dairy farmers would receive after one, five, or 10 years. Before the United States

7

agrees to any modification [0 GAIT as an outcome of the current negotia­tions, the advantages of any such agreement for the dairy industry must be shown.

TheColl\lTU!osiOil strongly suppons U.S. imponquotas on dairy products authorized under Section 22 of the 1933 Agricultural Adju~lmen( Act. h believes these provisions should not be negotiable in the CUl'Tenl Uruguay Round of talks under GAIT.

As a practical mauer. without some means to limit dairy impons, the United Slates, with ilS high per capita income, wQuld quickly become the dumping ground fot $l.Ibsid.ited world dairy surpluses. Milk price suppons would become ineffective and costs would significantly increase as impons displaced domestic production-production thai would be purchased by the Commodity Credit Corporation under the price support program.

The Commission believes that casein imports interfere with the milk price suppon program and increase the outlays made under that program. Casein should be. reclassified in the tariff schedule as a dairy product and thereby made subject 10 Section 22 quotas.

Look to the future TIle report outlines a dairy policy for the future-a policy that 18 m.iIJI;

producers believe wiU serve the industry well into the future.

In many cases, the ~POf1 suggestS needed changes--ei ther administra­tive or legislative. But the Commission did not advocate change simply for the sake of change. 11 IlaS 001 put fofW:u-d ill-advised recommendations simply to make headlines.

The report outlines the tools needed \0 make the dairy indus[f'y more profitable in the furure . The Commissioners believe this repoM is the indusuy's best opportunity to tell Congress and the Secrecary of Agriculture what dairy producers want as policy. The repo" can and should influence their future .

The Commission looks forward 10 Ole expedjtious but thorough review of lIS recommendations and, ultimately, !heir implementation as the basis for the fedel':l1 dairy program of the 19905.

9

Specific Recommendations Famil.Y Dairy Farms

The Commission is recommending dairy policy that wiU create an economic environment in which the "family farm," by any definulon, will survive.. Distinctions based on size or other crileria were found to be un· workable Jnd inappropriate for federal price support policy proposals or implemenlation.

• The federal government should not allemp! to derme the term "family fann" for the purpose of targeting or resnicting fann program eligibilitY­Targeting benefits \0 a paJ1icular size or SOUClure of farm is inefficient and llndermines the basic purpose of the federal milk price support program,

Milk Price Support Policy

Market forces, tOgether with adjustments in the government suppon price, should balance supply and demand for milk and dairy products. The use ofproduclion controls on a permanent basis is not in the best interest of the industry.

• A furward·\ooking fOfmu la should Ue C5Labli5hed in law to dt:temuJlt tht: price support level for milk. The support price should provide enough miJk to satisfy commercial demand and a market reserve. The fonnula should: (I) account for advances in technology that result in increased productivity; (2) account for economic conditions in b(l1h agricultural and nonagricultural segments; (3) be able to operate for a long period without revision; 3Jld. (4) account for shifts in the supply and demand for milk.

• The fonnula should include appropriate measures of milk production COStS, consumer purchasing power, and the economic relationships be­tween milk production and alternative agricultural enterprises.

• The formula should be revised and updated by law whenever the support price generated by it results in an unacceptable volume of Commodity Credit Corporation purchases in twO consecutive years.

• The Secretary of Agriculture should have discretionary authority to ad­just the milksuppon price indicated by the formula. However, in no case should theSccret.ary's adjustment exceed 5 percent of (he price indicated by the formula in anyone year, nor should the total adjustment in lhesup· pon price (formu la adjustment plus Secrelary's discretionary adjustmem) be more than 50 cents per hundredweight annually.

10

The COmmlssion recommends a system for siandby production controls using the following guidelines:

• Provisions of the Food Security Act of 1985 thai established the 5 billion pound purchase leve! to signal adjuslments 10 the milk support price program shovld be maintained. However, such level should be based on an equivalent percenUlge of commercial use in the fll1ure. If CCC pur­chases are projected to be in c)tcess of the amounl which signalS price adjustJTlents, the Secrewy of Agriculture should have speciflcdiscrelion · ary authority to carry out a production control program.

• When CCC purchases of dairy pnxlUCIS are projecled 10 e.(ceed by 2.5 billion pounds the amoUn! at which a change 10 the price soppon program is indicated, the Secretary of Agriculture, after making the maximum aJ· .Iowable adjustment in Ihc suppan price. should be required loimplemenl one of two production control programs:

A dairy lerminalion program operalil1g under the generaJ guidelines aUlhoriled in the Food Security Act of 1985, or

A "!Wo·ner" pricing program paying producers a price for a set per· ceOlage of milk marketings and a lesser price formatketings in excess of mat amount . To fund additional CCC purchases of dairy products. Ihe Secretary of Agriculture shall establish '8 charge for marketings above the rull 'price at a level that is at least 50 percent of the suPPOfl price.

• U a dairy lerrnioalKm program is implemented, the Secreury of Agricul-ture should:

Accept bids in ea<:h State at levels assuring that a uniform percentage of production capacity is reduced in each state.

Minimize ad"erse effecls on the beef cattle industry.

Prohibit participants from re-investing in the milk production industry in ways that citcumvent the program's intent,.

• II a tWO~lier pricing program is implemented:

An individuaJ's mvketing hislOry, at the producer's option should be either the moSt rteem 12 month production period, Of. the prior 11 month production period.

Marketing bases should be traJ\Sferable to anyone during the program and are unneeded when lhe program is not in effect.

Adverse effects on Ihe beef cattle industry should be rninirnized,

• Production controls should t.erminale when CCC purchases of dairy products are projet:led to be Jess !han the legally established amount at which a change to the price support program is indicated.

II

• CostS associated with a production control program, 10 Ihe extent Ihal "such costs eltceed nOffilal dairy program COSlS, :.oould be borne by milk producers. However, producers can bear those COSis in ways other than paymeol of assessments. A reduction in Ihe milk suppon price may genenue a reduction in government outlays sufrtciem to fund a produc­tion conlrOl program. Assessments are neither w3.rratucd or necessary.

• With Ihe expira:ion of the Food Security Act of J985. adjuslmems to the milk support price should be made on OcIOber : .

Feaeral Milk Marketing Orders The COmrnlssion believes signirlcatll improvements in Ihe administra­

lion of Ihe federal milk marketing order system are nteded .

• The Secretary of Agriculture should take all necessary 3clions to rWuce Ihe time between a legitimate hearing request and announcement of a decision [Q gr3JI1 or deny a hearing. Funher, Ihe Secretary, as quickly as possible in ugh. of legal requirements and consistent with good manage­ment practices, should render a recommended decision within 90 days after the close of a. hearing.

• Exceptions 10 the 9O·day rule should be granl«l only by an administra· tive law judge for hearings that involve extensive or connicting testimony, multiple or new issues, or innovative practices.

• Th e Seaetary of Agriculture should grant a hearing when requested by: ([) a majority of the rmlk producers supplying the federal milk market­ing order; or, (2) the dairy cooperatives and pIoprietary hillldJen in a federal order, provided lhatlht:y marktt mOte than 50 percent of milk in the order.

• MiUkctwide service payments should be granted in an order where the request is subslaJltiated.

• The continued existence of a fedcra.l order should not be jeopardized by the vote on a single amendment to the order. The Secretary of Agricul­ture should modify current administrative procedure to allow voles on individual amendments to a federal order.

• Federal orders should be allowed to consolidate Inrough the normal hear­ing process when economic efficiencies can be achieved. However, legislation should not create a single national milk marketing order.

• By the end of 1988, thc Secretary of Agriculture should establish an ade­quate standard testing procedure: to allow the implementation of multi-component pricing throughout the federal milk marketing order system.

12

• A system of testing packaged fluid milk products for compliance with federally approved standards should occur under the federal milk market­ing order system.

Regional Issues

Federal milk price suppon polley should not be ffiocified 10 protect producers in any area of the counlJ)'.

• Daisy policy should assure thaI supplies of fluid milk come from a diverse geographic area 10 guarantee an adequate supply.

• USDA's specifIcation of a manufacturing margin for milk made into cheese, buner, Qr nonfal dry milk should apply \0 all areas of the Unned Stales. Federal law should prohibit California or any other state from using a greater allowance 10 establish a gnde A price for milk used for manufacturing butter, nonfat dry milk, and cheese.

Advertising and Promotion

Advertising and promotion boost consumption of dairy produclS, help­ing both the fanner and [he (a»payer. However, advcnising and promotion programs should be monilored 10 determine their benefits. to producers. Promotion shou ld be cOSt effective, with changes in consumption serving as a guideline for spending on advenising by the early 1990s.

• The functions of the National Dairy Promotion and Research BOaJ"d and the United Dairy Industry Association should be consolidated in 1988to avoid costly duplication of effon. It is expected ,hall},is consolidation would nO! affect the National Dairy Council's SlatuS asa separate, non· profit nutrition education and research organization.

• Mandatory participation by all milk producers in the national promotion program, with a promotion check-off, should continul':.

• No increase in the promotion assessment should be approved unless strong (".vidence verifies the COST effectiveness of the proposed change. This effectiveness should be demonscrated through a study to detenmne the benefits and the co~t of the change.

• USDA should assist in detennining cost effectiveness by providing nationwide infonnation on changes in supply or demand for dairy rroouc!.~ Thi~ rlata ~hoilln 11lke into :lccount consumption patterns, income levels, demographic patterns, and price responsiveness.

• Federal competitive granlS should be aUlhorized specifically for research leading to the development of new dairy products that would increase the dairy industrY's efficiency, productivity, and ability \0 compete internationally.

13

Technology

The dairy industry should plan for bolo Ihe challenges and opponunities Lhese changes presem. Li.kewise, the federal government should recognize, plan for, and accommodate technological advancements in detennining fu­lure dairy policy.

• New technologies should be explained through media-oriented educa­tional programs. The Agricultural Ex.tension Service, with adequate funding from Congress, should playa major role in this effon. The education of dairy fanners conceming technological advances, especial­ly in production techniques, should have" high priority. The consumer represents a separale but imponafll audience for such educational programs.

Food Safety and Product Identity Standards Malntalning and marketing of safe, high quality, nutritious, and identifi­

able milk and dairy products is of prime irnponance to the dairy industry.

• The Food and Drug Administration should specify allowable levels for residues that are detectable by scientific valid testing procedures based upon a significant relationship to public health. Major emphasis is needed to develop practical and sensitive on-farm procedures capable of screening agriculiure products to measure allowable levels.

• Currently fDA has neither the resources nor a high priority program for enforcement of economic standards which prevent fraud and deception in the marketplace. Greater emphasis is needed in two specific areas: (I) enforcemenl of existing standards of identity to prOJect the consumer from fraud and deception; and, (2) enforcement of misbranding provisions of the Food, Drug and Cosmetic Act, panicularly with regard (0 non-standardized foods which purpon to resemble foods for which Standards of identity orconunon or usual names have been established. If properly carned out by FDA, such effons should prevent fraud and deception in the marketplace and should, ihc:n:fore, be funded in pan by the taxpayer. Present standards of idenut)· for traditional agriculrure products should be maintained. Effons that serve to preserve the iden­tity of standardized dairy products should Ix: funded in pan by the dairy industry. The Food and Drug Administration should place a higher priority on enforcement of standards of identity by providing greater resources for monitoring the misbranding of all foods, panicularly new foods developed to simulate standardized products.

• Individual Slate laws and regulations, such as California's Proposition 65, that supersede federal food safery standards for toxic chemicals and carcinogens should be prohibited. In siruations where no federal stand­ards exist, they should Ix. established.

14

• Uniformity in product standards and labeling remain essential to the promotion of efficienl production. mark.eting, and distributiOn of food moving in iniersialecommc.rce. Federal law should requirethe term "im­itation" to be applied to any food product thai simu lates 3 sllllldatdized food in order 10 prolllQlC honesty and fair dealing in the interest of con· sumers. Congrt'ss should define the term "imhation" 10 clarify existing FDA regulations wh ich base imitation soJeJ'I on the criteria of nutritional inferiori ty, contrary 10 Ihe intent of Section 4()3 of the Food, Drug and CosmeticAc1.

• FDA should wi l.hdraw its heahhdaim 13beling proposal of AUguSI4, 1987.

Trade and Aid Programs The-Commission urges the dairy indusU)' 10 expk>re and develop addi­

tional market opponun iries overseas, making panicular use of long-term mArketing and consumer education plans. Effons 10 b(x)sl exportS for market development should concenrrate on low·income nations where markets do not now exist, The Commission recommends IIlat improvements be made to the trade negotiation process currenlly being used.

• Import quotas on dairy products aumori1-Cd under Section 22 of the 1933 AgriculturoJ Adjustment Act should be mainlailled and cruOrt:ed as long as "free inleTTlational trade" does nOl exisL They should oot be e1imi.naled or increased during negotiations of the Geomd Agreemenl on Tariffs and Trade.

• Because the current volume of casein impoRS interferes with the milk price suppon program. Ihc volume of t:ascin impons should be reduced and casein should be reclassified 8S a dairy product and subjected to Sec­tion 22 irope" quotas.

• There should be public and privale funding of srudies 10 ascenain wtUch countries represent a potential mllJket for US. dairy products and which countries are potentially self-sufficient in production of milk and dairy products.

• USDA should maintain dairy product diwibotion programs that en­courage the increased use of dairy products.

• USDA shou ld require an annual minimum quantity of domestic dairy prodocis to be used in Food for Peace prognuns.

• USDA should encourage the development of international markets for dairy produclS and dairy callie by aSSisting induslry-iniliale(\ ac tivities through use of the Dairy Expon Incentive Program, or by greater use of

·the Expon Enhancement Program. Dairy products must be made avail­able fot such effortS for an extended period ofUme. Wheredairy produc1s can be used in ove~eas donation programs Ihat could lead to new markels, such use should be greatly expanded.

Chapter 1

• Recommendations:

General Agricultural Policy

In any discussion of federal dairy policy. it is necessary to consider olher issues closely related to agriculture. How wiU effons 10 reduce the federal deficit affect the milk price suppon program? What elements of general agricultural policy will make for a more eHecciveda.i.ry progr:un? How migh! foreign policy decisions influence agriculrurc?

it is especially important that the various fedcral agriculture programs be consistent, long-teon and well coordinated. What might happen if grain prices suddenly increase, as they did in the mid-J970s? In an era of low feed prices and milk surpluses, it is impooanl 10 remember thai the ability to produce milk, once lost, will 00( be reeSlablished quickly. Grain and dairy policies are inevitably lioked; a high level of grain subsidies necessarily wlU affect animal agriculture. 'IbQse designing policies in one 'area must con· stantly be aware of developmenlS in the other.

After 18 months of regionaJ hearings and meetings, the Nalional Com­mission on Dairy Policy detennined that ils discussion of dairy policies should begin with observations about some of the related policies that will inOuence the future of the dairy indusa-y.

General policy considerations

The Commission suppons continuation of federal programs thaI stabi­lize the agricultural economy by establishing price Suppons for milk and other farm cOITUl}()(jities.

Because federal aDicuhurai programs al times add 10 the uocenainties producers face from nallne and the market, the Comm.isslon prefers minimal government inlJUsion in agr1<:uIIUIt, BUI reducing governmenl involvelXlent w111 be difficult 10 accomplish in the immediate futUIt. \\'here government is involved in ilgriculture, programs should be orderly and ongoing, raaher than hastily implemented in reaction to a crisis.

Federal agriculmral policy must make profitability possibie-bul nol guaranteed-for milk producers. The milk price suppan program should lfea( a1l p,oducers eql.lally. Sensible policy should result in an ample supply

US)

16

of milk at prices that are affordable 10 consumers. yet offer producers a reasonable rerum on their investment.

FederaJ agricu]!Ural policy should be: (1) flexible enough to accom· modate unforeseen problems; (2) formulated through a process that is open and weB understood by producers and the public; (3) capable of working for several years: (4) market oriented-that is., resulting in commercial use of the vast majority of what is produced; and (5) consistent on both the federal and state level.

The Secretary of Agriculture should have discretionary authority (0 change or adjust agriCUltural policy within strict parameters. At the same time, the Administrative Procedures ACt shouk! be respected in fOrming agriculture policies and programs.

The Commission urges that revisions 10 the federal milk price suppOrt policy, recommended in this report, replace dairy pricing aUlhorities in the 1985 Food Security Act and the Agricultural Act of 1949.

Don't me price supporlS to accomplish social goals The rrend loward fewer, larger farms began decades ago and wi\! con­

tinue under any farm policy or program. Social goals, such as maintaining a maximum number of farms, are accomplished better through transfer pay· mentS or lax code changes than through changes in price suppons_

When crerlling or amend,ng laws. federal policy·makers should distin· guish belween actions that will enhance business opportunities and those actions taken to address social problems. Domestic social programs should addre~ the problem of declining farm numbers In rural America. Govern· ment should furniSh education and technical assistance, along with a credit system that provides fanners <ldequate credit al reasonable rates.

Tax policies should be consistent The federal lax code should be consistent and nOI contain provisions that

promote production while production controls are in place. Current federal tax laws concerning investmeOi credit, depreciation, and tax loss fanning should be retained.

The tax code should favor maintaining existing fanns over new farmses­tablished as tax shelters. The tax code should be amended to reduce the tax burden on families involved in the transfer of farm capi\al between generations.

The La>; laws should be administered 10 assure thai farmers and their cooperatives receive the exemptions imended by Congress. As pan of this. the distinction between cooperatives and proprietary businesses should be re-emphasized to the Internal Revenue Service. The Commission also favors

17

maintaining the Capper-Volstead Act, which prov1des limited anlitrust eli­emplion 10 associations of agricultural producel'$.

Deficit reduction could restrict mjJk prod uti ion "The Commission recognizes the importanCe of reducing the federal

deficit and ack.l1owledges ma.l changes in agricuhuraJ policy may be a neces­sary pan of deficit retluction efforts. Specifically, restrictions on the overproduction of milk could be necessary to mett deficit reduction wgelS.

19

• Background

General Agricultural Policy

During lIS deliberations., the Commission has concluded that supporting the price of milk through purchases of surplus dairy products has, in genera] and from mos.! perspectives, worked well over time and constitutes a wor1c­able ~sis for aroy dairy program. This purchase program underpins the current price r.uppo" program, and has been a crucial component of law goveming the. dairy program since passage of the Agricultura1 Actor 1949.

Policy considerations To effecti\'ely use the purchase program, severa) elenlCnls of sound a.nd

workable agricultural policy must also be presen!. TIlese elements include:

Fltxibility: Agricultural policy should effectively accommodate un­foreseen adversity; proprn features thai express policy could rapidly be changed to mitigate undesirable consequences.

ACC(}UnUlbility: Policy should be fonnulated by a prcx:ess·thal is operI

10 the public: both process and outcome mllSt be weU understood by all par­licipams. W'ho makes a policy decision, the reasoning behind [he decision. a.nd the likely consequences of the decision should be well known.

Durability: Policy in ils essential form should be able 10 work over a multi·year period. Long [enn policy allows the dairy industry to formulale multi· year plans.

MOllce/orientation: Milk producersshouJd be able 10 achieve an income from commt:n::ial sales.

Consistency: Policy must be consistent on the federal and stale levels. S lates should not act independently to avoid the consequences of federal policy programs. Likev.rise, rederal farm programs should not operate at ctOSs· purposes.

Incomr sufficiency: Efficient milk producers should be able to operate in an economic environment that provides an opponunity to cam income from labor and investment sufficient [0 continue the enterprise. Without in­come sufficieTlcy, there will be a hannful reduction in capacity to produce mill" Policy should nOt create an economic environment in which profitability is impossible, nor should it guarantee a profit to all producers.

20

Reasonable consumer prices: Policy should recognize that retail dairy products prices must be competitive with prices of other food items. Dairy pricing policy thai raises farm prices unreasonably over a long period of lime can stille consumer consumption of dairy products.

1n total, these elements must generate a policy which is easily understood, and encourages efficient production.

Flexible agricultural policy Agricultural policy must be flexible in order 10 respond 10 changes in

economic conditions and 10 account for specific geographical conditions, UncertainlY can never be eliminated by policy; nor, in a free emerprise economy, should that uncertainlY be entirely removed.

Agricullure is a high-risk business. Milk producers continually face un­cenainlies from weather, animal disease, and unpredictable shifts in consumer demand. On the DIller hand, many devdopmenlS in the agricul­tural indusrry have resulted in greater certainty today for milk producers than prevailed in years past. Such developmems include technological advances. inIemalionai rrade agreements, and international agricultural development that broadens the market for dairy products.

Government policies should nOt add 10 the uncertainties producers face from nature and the market. Unfortunately, frequent shifts in agricultural policy have generateD uncenaimy, primarily because the focus of policy has been shon-term, myopic responses to overproduction. Changes in dairy program provisions have become almost routine in recent years-major revisions in dairy law were enacted in 1981, 1982, 1983 ar;d 1985, l.n addi· tion, several olller less extensive legislative revisions were enacted.

In 1981 and again in 1985, Congress amended the Agricultural Act of 1949 \0 allow for changes in the suppon price on the baSIS of supply-demand considerations. These policy changes increase the uncertainty milk pro­ducers face, Uncenainty generated by these changes is QOt economically beneficial for the dairy industry or lhe national economy. Wi!.hout stability in the economic "rules of !.he game," dairy producers are unable tojudge the long·term income potentia. of alternative production or invesnnent plans. I.n addition, with extreme imaability. new dairy enterprises cannot find adequate flnancing and farm families are unable to plan for needed expenditures.

The Commission urges lhm revisions in price suppon policy. recom­mended in !.his repon, replacedair)' pricing aUlhorilies in the Food Security Act of 1985 and the Agriculture ACI of 1949.

Importance of accountability Agricultural policy, as articulated by Congress or the ?resident. should

empower the Secretary of Agriculture with sufficient discretionary authority

21

\0 quickly resolve suddenly occurri ng problems which may result from changes in lhc physical environment-such as drought. ovuproduction-or in tile economic environment-such as a sudden escahuion in mterest rates, or an increase in feed COSLS. Whenev('f such problems can be addressed by way of Administrative policy changes, the Secmary. as a member of the President's Cabinet, should be empowered with the allthority 10 effectively deal with any problem expediently. In addition the U.S. Department of Agricuhure should be the lead agency for addressing agricuhuraJ problems and the Secretary should be solely accountable for policy act ionsdirocted at solving such prob}ems.

The Corn.1lission recognizes that the Secretary may be consaained from aering heelyon some issues. When legislation provides lhe Secrtwy with discretionary authonty to address agricuhural issues, the leglslatioo should also establish specific guidelines, especially for s1gnilicanl and sensitive is­sues, ~ucl\ as Ole Secretary's ability 10 Change the support price of milk. ' Setting or modifying the milk support price by means of an ecollOf"l"tic for­mula inherentl y would provide guidelines for such actions.

When the Secretary e .. eroses discretionary authority and makes adjust­ments \0 agricultural policy, specific geographical or climatic conditions may need to be taken into accoum. However, in consideri ng any such adjust­ments, !he Secreta.ry must give primary emphasis to the economic, social, and production chmclerislics that affect the entire indusuy. Adjustments in program provisions made 10 reflect panicular conditions in a specific area should 1'001 adversely affw other areas in the future.

Fun impiementaliOl"l of all policy provisions required by law is necessary to assure Ihal each provision will achievt: its intended objenive.

Durable policy

A profitable future for the agricultural industry is one mat permits milk producers 10 formulate a reasonable inveslmem strategy and allows (Or sen-5ible plnnning in agencies thai usc surplus prodUCts.

Farmers and policy makers recognize IDal loog·tenn, ralher than soon­term. agricultural policies are more effe<:tive fO( !,he indusuy? In addition, substantial market development efforts wert initialed under nuthoritiescreated or expanded by the 1985 Act Markel developmeOi is a long-tenn investment and, I:omroensurntely, long-term commitment 10 these efforts is required. From .available dat.ll, such commitment appears to be lac"l.ing loday.

EStablisrung an agricultural enterpri se , such as a dairy farm , requires a significant investment of capir.aJ, time and narura] resources. To the extent that signir)(:ant COSI may be incurred adapting to new policy---<:hanges in program provlsions. examining program options, or re-budgeting for a lower cost-price: rdationship, (0( tl:ampie-miUc producers wiU have a more:

- -,-,2. Su {ootnotU on page 26.

22

dirficuh task maimaining the ability to make a profit if policy objectives change frequently.

To increase awareness of the potential c ITeclsor policy changes on milk producers. education services should be provided by their local ASCS of· fiees and cooperative eXlensioo agents 00 policy and prognrn rules. ThtSC offices need 10 become more knowledgeable about c tirTenllaws, regulations, and USDA policies if farmers are 10 rely on Such services.

Marker-oriented dairy policy By far, moS{ production of milk and milk products is sold 10 and used by

commercial entities. During 1983. when ~surplus" production was .11 ils peak, 88 pe1teO! of production was commercially used. Funhc.nnore,daiIy products acquired by me government under price suppon operations are used for wonhwhile domestic and overseas nlJoilionaJ supplementation programs .

Still, mort can be done 10 use product in commercial markets. Milk producers spend more than $.25 rnilliol'l each year 10 promote consumption of prodUCts and fund millions of dollars of research [0 improve the appeal of milk products to consumers .

The current dai/"), program, as established in !.he Food Security ACl of 1985, has accomplished some of its goals. Specifically, the surplus of milk has been recloced from a level in e,.;ccss of 10 billlon pounds 10 some 5 bil­lion pounds. Concurrently, Ihe COSI of lhe milk price suppon program has been CUI by rwo-thirds. Funher growth in production mUSI occur to meel growth in population and io consumer demand for milk products, bOl un­restrained expansion of production when new markets or new uses do not exist would be fi scally irresponsible and wasteful.

Fann programs 3tlimes have been COSIly. Current rarm prognm fund­ing appears 10 be at ~reasonable" level. Despite concern o,·er !.he federal budget. there is no widespread public outcry against the level of agricultural spending, bUI sti ll more can be done to a~sure minimum public expense for fann programs.

Proper accouming for federal oUllays fo r agricultural prog;ams is impor­tant. The current dairy program deliberately generales a "surplu s·' thaI flows 10 a quasi-commerciai use in a host of federal programs.

When anaJyting the COStS of domestic fanll programs, a comparison should be made with spending for olhcr domeslic programs and wilh lhe cost of the agriculture programs in OUlercountries. The United Sl,.3.tcs has chosen 10 deal wilh the problems of surplus \";llher thao confront Ihe problems of scarcity: this choice entails a certain public COSt.

23

Consistency Federal and Slale agricultural policy must be consiStenL Stales should

no! act indepe.ndenlly 10 avoid the consequences of federal policy programs" Likewi!it. federal fann programs should not operate at cross-purposes_

Publtcly funded, low-interest farm loans made aVallabk under either federal or Siale programs are inconsistent with federal policics aimed at reducing production. Also inconsistem are proposed cash paymems from Siaies to maintain milk production in those states and Fanners Home Ad· ministration plans 10 forgive as much as $7 billion in nonperforming federal loans. The Farmers Home Administration's plans are under consideration only two yeaN after ,flat agenc), sought unsuccessfully \0 forocloseon 80,000 delinquent farm borrowers. Subsidizing those farmers wilhdclinqocnlloans will disadvantage fanners who operate on a busint.ssliXe basis and will Ihwan operation of an efrective, efficient milk price suppon program.

Prices and returns Current national policy objoctives for agrkultW'e include ~assuring a

level of farm income adequate [0 maintain productive Gap'aciry sufficient 10

meet anticipated future needs." To achieve thai objective. realistic product prices must be established.

AI the same time, prices paid by conStlmers should reneet the price received by the producer for mHk. BUI, while substantial decreases in milk prices received by fanners have occUITed in recent years. these decreases ap­pear nOi \0 have been passed through 10 consumers. During the period 1981 through \986, the milk suppon price was reduced by more than 10 percent, the farm price for all milk decl.!ned 5.6 percent, but retail prices for milk and dairy products increased by 7.6 percent.

Policy so:ategies designed 10 reduce the amount of surplus milk and min· imize government outlays resl ()fl the preiliclion of increased consumCT consumption through lower prices.. 1n!.he conleJl\ of agricultural policy debate in the 19805. acritical assumplion was thai reduced farm prices would be passed through as lower consumer prices. Yel, milk producers should have reali tee! IDOredirecl benefllS from the vel)' signiIicant increases in con· sumption Ihal could have tC$ulted from these price decreases.

Consumer rood prices Overall, consumer food prices have increased annually by abou\3.2 per·

cent during the last fi ve years-while prices received by farmers have decreased by an average of 2 percent per year. Between 1985 and 1986. con· sumer spending for food increased by an estimated $16 billiOn. Of the $16 billion, fanners received about $1 billion; the rest went [0 !.he food industry for handling, processing, and retailing foodstuffs after they leflthe farm.

2'

Farm programs subsidiu consumer expenditures through lower food prices and, by and Jarge, remove almOSt all uncertainlY concerning the con­rinuous availability of farm products including mille Consumers appear relatively uninformed about the costs and benefits of farm programs.

Price supports and social goals The price support program serves 10 assw-e an adequare supply of milk

10 meet curren! needs, and 10 assure a level of farm income needed to sus­lain the producuve capaciry to meet fu ture needs. This objective is best accomplished wilh a dairy industry composed of diverse opel"lluons and enterprises.

The milk price support program serves both a business objective and a national policy objective, and should not be used to attain a social objective. The suppon program strives to balance the market for milk and dairy products and achieve equilibrium between supply and demand; this balancing fune­lion is its business objective.

The milk price support program's national policy objective is to assure consumers thai milk will be available 10 meet current and future demand.

Although social goals are imponanl. the price support program is the wrong vehicle for attaining Ihem. Further, attempting 10 use the milk price suppan program 10 achieve social goals may serve 10 und ennine the basic purpose of the program.

Ta~ policies The Tax Reform ACI of 19&6 contains significant changes to the tax code

affecting Ihc dairy indUStry. These include elimination of the investment lax CTedit , elimina tion of capital gains tax treatment, and restrictions on the deduction of certain preproduction expenses. The last item, in effect, reo qLlires farmers 10 capitalize the expenses of raising replacement animals and depredate (hem over eight yean;. The change applies to any anima! having a pre ·productive period of two years or more. The Commission 0PPOSC$ lhiS change and endorses cUlTent legislat ive effons ajmed al i13 repeal.

The Commission recommends retaining lhe amendments made 10 Ihe federa l tax. code concemulg investment credit, deprecialion. and lax. loss farming. Tax. code provisions which we re established to encourage invest· ment in land, agricultural machinery and cquipmem have been detrimental 10 the agricuhural industry in the past. Such incemives lead to ex.ct!.Sive caphaJ expenses and unneeded capital formation , particularly in the dairy in­dustry. In addition, the inves[JOCnt tax credit has contributed to ex.cess dairy production and has encouraged partiCipation in the dairy industry by in­dividuals who would not otherwise be involved in agriculrure.

25

The Conunission believes thai tax code provisions should also be con-5islem. TM provisions. should flot promote production by allowing investment loSSes \0 be written off nonfarm income while simultaneously restricting production through production comrol programs.

The lax code should fa.,.or established agricultural enterprises over new agricultural invesonents. Provisions that assist ft tax sheller" farm emerprises lead 10 excessive capital fonualion, and ultimately, surplus producdon.

The Corrunission is concerned about the transfer of e.'(isting farm capital between genera_tions of the same family. The laX code should be amended to reduce [he !aX burden on those involved in family transfers.

Policies affecting cooperatives Legislative effons have been mounted in recent years 10 weaken Ihe

Capper-Volstead Act, which provides limited antitrustexempllon locoopera­tives, The Commission opposes these efforts. Current language in the Capper-Volstead Act should be retained !O better assisl the daily operations of dairy cooperatives.

The purpose of cooperatives is \0 be the common marketing agency for their fanner-members. The Capper-Volstead Act, ahhough it does not specifically enable cooperatives to organite, does provide limited antitrust ellemption \0 cooperatives under two condilioM: (I) the cooperative mu~t be operated fOT the mutual benefit of its members insofar as they are producers of agricullUraJ products; and (2) the cooperative must not deal in the products of nonmembers in an amount gn=.ater in value than such products thaI it handles for its members.

Occasionally the lmemal Revenue Service has oied \0 limit the ability of cooperatives to deduct legitimate operating COStS and allocations!O mem­bers or to Hmit their ability 10 properly pool relllms. Such attempts appear to be primarily a result of misconceptions on the pan of me [RS concerning the function of a cooperative.

To assisl Ihe IRS, the dislinction between cooperatives and proprietary businesses should be re-emphasitcd in provisions of the tax code. The tax laws should be administered [0 assure that fanners and their cooperatives receive the exempllons intended by Congresl>.

Reducing ihe federal deficit The Commission recognizes the imponaoce of reducing the federal

deficit and acknowledges that changes in agricc\!ural policy may be needed to achieve this. Specifically, restrictions on excess milk production could be necessary to meet deflcil reduction targetS. Also, budget reduction cffom may cause more rapid pTOgTam changes than would otherwise be pruden!.

96-555 u - 89 - 2

26

These actions could hun the dairy economy, creale disorderly markeiing of excess dairy animals, and harm other indusoies as well.

Tight fiscal policy may nol always be consistent with solid, long-term agricultural policy. However, milk producers would benefit. along with aU Americans, from a reduction in the federal deficit.

The federal dairy price suppon program outlined in the Food Security Act of 1985 contains serious program cOSt reductions. These reductions were 10 serve as a deficit reduction program fOT the dairy indusuy. These cost rwuC!:ions are nOI credited to the dairy industry under the obscure "score-­keeping" used 10 evaluate Congressional actions \0 reduce the federal budget deficit.

The Commission believes mal all programs should incorporate deficit reduction programs ime their individual budgets. The result of such aClionS would be a very significant reduction in the federal budget deficit.

Endnotes

I. Adminislnltive improvemer.ts could include sudl s.reps as establishing a commodity specifie advisory commiuee (LOensurc t.nat the public is made aware of and understands the process of change) and imprO¥ing time schedules for review and decisioll making in the U.S. Department of Agriculture. Acommodily specifIC advisory commillee mIght be SlT\J.C­

lured similar toiht: National Commission on Dairy Pol.iey. Improvements in meeting deadliooscould be achiev~d in severnl areas" fore:<.amplc,a re<lUCUQIl in ill<': amount of lime m':cessary to obtain Departmental action on such items as changes in marl:.et order provisions would be desirable.

2. Congress endolsed the concept of Iong·term planning in enacting many provisions of th~ Food Secwity Act of J985-includlng a ten year conservation program and a longer­than tradiuonaI billlifc· ... n,·e years in$lJ!lld of four years,

Chapter 2

• Recommendations:

Family Dairy Farms The National Commission on Dairy Policy spent many hours trying to

defme the term "family farm." Distinctions based on size or other criteria were found to be unworkable and inappropriate for federal price support policy proposals or implementation.

Foremost in the Cornrnission's considerations has been constructing a fair policy thal, if established, would create a prosperous rural America. Prosperity can result from effective pricing policies, continued protection from foreign imPOrts, and standby production control authority to help con­trol surplus produclion. The Commission is recommending dairy policy thai will create an economic environment in which the "family fann," by any definition, will survive.

Policy should serve the whole industry The dairy industry is composed of diverse operations and enterprises.

Federal price suppon policy should treat all commercial dairy operations equitably. If policy serves the entire industry, "family farms" will profit, regardless of defini tion.

No policy distinction based on volume of milk production is suitable be­cause the definition of a '·small" dairy varies greatly from one region to another. For example, what a Florida dairy producer might consider a ·'small·' farm likely would be considered very substantial in Wiscons.in.

Goals of federal dairy programs, especially those attempting to control production, should not be thwaned by efforts to keep producers in business when economic reality dictates otherwise.

The Conunission makes this specific recommendation concerning family dairy farms:

• The federal government should not attempt to define the tenn "family [arm" for the purpose of targeting or restricting fann program eligibility. Targeting bendits to a panicular size or structure of fann is inefficient and undermines the basic purpose of the federal milk price support program.

(27).

29

• Background

Family Dairy Farms When me Commission was established by Congress in 1985. one of ils

dUlies was to study and identify the effects of <::enain likely changes in the d3iry industry on [he family farm structure of the dairy indusay.' During the course of ils hearings held from March 10 August 1987 in various locations around the United Siales, the Commission was presemed with various con­cepts as 10 what constilUtes a "family farm."

Ahhough agricultural policy makers lend 10 discuss. !he currenl situation of America's ~family farm:' there is no one definition for the term "(amily faJll\.~

In fact. for the purposes of progranl implementation or policy proposals. the term ~fami:y farm" is indefinable. There is lin1e point in attempting 10 defU'le the lent! "family farm" unless the definition is 10 be used \0 exclude non·family f3l'ms from dairy progr-arn participation. Furthermore, any such exclusionary policy is inappropriate and unworkable.

The Comro.iss.ion heard testimony from witnesses who define the term "family f:!rro ~ based on various criteri a of size, labor, management style. or way of life. The hearing record shows a wide range of defl,nitions of the tenn "family farm.~ Some witnesses srressed the importance of regional differ· ences in defUlition.

Commooly, size as measured by the scale of operaoon (Le., number of acres owned or operated, number of cows milked, or like measures), is thought to be the ~ingle moSt imponant differentiating characteristic of "family fanns." BUI, ill fac\. size camKM be \lsed 10 define the term "family farm."

The concern Because agriculture is one of the Nalion 's primary industries, there is

widespread interest in eCOnomic and social changes affecting the quantity, productive capability, and size of Amenca's fanning enterprises. In Ibis con­telll, the TOOlS of the concern can be demonsrr31ed with 5laOstics.

Some of \.he concern about the "family farm sO'Ucture" siems from a decline in Ihe total number of farms . During lhe laS! thiny years, the total numbers of farms (defined by USDA as "3 p!ace. .. thal sells Of could sell $1,000 of agricultural products annually~) has de:creaKCI from 4.6 million in

---r:- See footnote on p. 37.

management decisions, and depending primarily on fanning for a living ...

And the American Family Farm Foundation Slates (hat:

any frum, regardless of size, where a family provides aJt of the management and majority of labor is, by our definition, considered a family fann.

The agricultural organiuniol"l comi ng closest to the Commission's deter­mi nation on the issue is the Americ3.n Farm Bureau Federation which. ha$ Oelennined thaI it is inappropriate 10 3uempllodenne the tenn -fam.ily farm." The Farm Bureau Slales:

Our Organization docs nOt attempt to define or reslrici usage of the term family farm. We recognize Ihal fanning units of any size or enterprise SU1J<;1Uf"(. may fit into cenain preconceived ideas of wh at constitutes a famiLy farm ... For the most part, the tenn ''family farm· ing" is used to appeal to an idealized view of agricuhure and Ihe structures within the indusO')' thaI are deemed most desirable. As aD

organization which repre$ents farmers of all sizes and business sn-uc­lures. we find 11 impossible to delineate between the types of famil y farms in order !O promote a desu-oo strucrure of agricul!ure in the United States. In Ywn , we find thaI such definitions are inaccurate and lacking in a reaJiunion ofthe complexhy of agricuhun~ in today'!. economy.

Ahhough some agricuhufal organizations have createc! definitions of the term "family faJlTl," many have recognittd the impossibility of doing so fOf purposes of public policy and have chosen either (0 ignore the lenn or 10 dcchuc it indefmable. In this lighl, the Com.mission determined that no dermition is possible thaI facilitates economic and policy analysis or enhances program management.

Commission's views The Commission, along with various farmer organizations, discussed

derU"litions of !.he lenn "family fatlr( based on different criteria of !.ize, labor and management Style, and regional con!.iderations. These criteria are use· ful instruments of social polJcy, but are inappropriate and ambiguous when applied 10 business or national policy objectives.

Siu Though populardef"initio:'ls of the term "family fann" frequenUy include

some reference \0 "smallness, " the Coramissioll has detennined that such a mea.suremen! based on size is both inappropriate and unworkable.

A large number of family owned and managed farms are indeed smaU re lative to the national average. However, many family owned and managed

33

farms are o( a site that far exceeds the nalional average. We can also find cliampics of large fanns that are owned and ffi3JI/lged by muhiple family units. In many cases, these farms are larger in size lhan farms owned by publicly held corporations which art managed by hired labor.

acari}" siu: cannot be Ih~ common deoonUOiuor whtch dislinguisnes II "family farm" from a "non-tamily"' fann. AtlheCommission's Hudson, Wis­consin hearing, milk produCtt MarieSkic was asked whether a farm operated by a three member family in Florida would becons)dered a "family farm" if several thousand cows wefe being milked. She replied :

Yes. I would say good 10 them. I[they waIllIhc: headaches ofa busi ­ness like thaI. thai 's free enterprise ... let 'em have iL

AI a later Commission hearing in Arlington, Texas. milk producer Ken-neth KJemem supponed the spUit of Ms. Skit's conuncn\ when he sillled:

... I've sill children, four sons and IwO daughters. The four sons arc out of school. The oldest son is 25 and the youngest son is IS. They're all on the dairy with me. We have 1,200 acres. We milk about ISO cows. Tha.t's a f;unily farm. because a family runs it . I don 'I thin}.:: we can defU'lc a farruly fll.tm in acres and size. II 's to the capaeiry of the individuals who run il .

At lhc Commission's Syracuse hearing, John Widger, President of O·AT-KA Milk ProdUCIS Cooperative, Inc.,came close 10 the Commlssion's view when he lestifi«i:

.. .1 MOW you (theCommissionersJ recognile that siu; Llonedoes not includeorr:xclude a fann hom being family·operated in every sense of Ihe word. As wilh any Other business, 3.1l agricuhural enterprise refleCIS the business philosophy and managerial ability of its owner ...

lAlwr IJnd mnrwgfmrnl style

The Corrunission heard suggestions Ihat tbe lenn "family fann" can be defl/led according 10 labor or management style. For example, L.M. Maclin, 811he Arlington. Texas hearing, Staled:

My idea of a family farm is where people bave nO set salaries ... They take what they get, what Ihey nel out. They have no set hOlm. They work unril the job is done. And 10 me, that's a ramily operation.

BUI the question arises whelher 3.n eQually hard,working and dedical«i manager who is paid a percenl3,ge of profits plus room and board by an ab­sentee landlord could aJso be considcred a ramily farmtj. He may be supporting 3 family 01\ his percent3ge of profilS. It is unclear whelhcr this resident manager would be included under Mr. Maclin's defUlition. II so, then it is also unclear whether the owner would be considered a non· family

36

Corporate/arms Can a farm which is owned by a corporation be considered a "family

farm"? Just as the Commiss..ion determined that it is unworkable (0 usc: criteria such as siz.e or management style to define the term "fanuly farm," is it also inappropriate to use business structure as a criterion

The Commlssion acknowledges that some agriculluraJ and consumer groups have alleged thaI corporate farms are seriously ihrealening the "family farm srruclUre." The allegations 300m "COrpOflite fanning" include:

(I) the corpor.:tte structure has grown in proportion \0 the non" corpora Ie struClUre;

(2) the corporate farm represents a "non farmer" interest ideology; and (3) the market power of corporate fanns threaten the slabili.ty and

affordability of food products.

According to statistics provided by the Economic Resarch Service of USDA, none of these allegalions appear 10 have substance. (See Table) In 1982, Economic ReseaJch Service recorded almost 60,000 farms as "cor­porate farms" which represented 2.7 percent of all U.S. farms. Of these. only about 7,000, representing 0.3 percent of all U.S. fanns, were recorded as "OIher than family held" corporate farms. These statistics show that close to 90 percent of all corporate farms are family-held corporations. In fact, there are many examples of farm corporations (notably "S" corporations) whose stockholders are all members or the same famlly.

Table: Statislicallmportance of Corporate Farms

Year: 1982 1978 t974 1982 1978 1974

Corporale Farms % of A~ Farms Number 01 Corpol"ale Farms

Fam~y held 2.4 1.8 1.3 52,652 45'<\18 21.758

Other than family held 03 02 0.4 7.140 5.852 6.684

All Corporale farms 2.7 2.0 1.7 59.792 51.270 28.442

SoW"u: Ufljs~d Sl(ll/!j. Dqnlllf7ll?rII of )"g,ic~lJur£. Ecofl()nUc Re.<£(JJ"ch SUllic~_

In response to the second allegation about corporate farms, there is a behef that property managed by a tenant is less well cared for than thai managed by a resident owne!. There is no evidence!Q prove thai stewardShip of the land is bellcr under a owner manager than it is with a tenant manager. I n fact, it is in any owner's beSt interest to insisllhat a renter be a good steward of the land as the tenant is employed for this purpose and is accountable for seeing that it is done weU.

37

Lastly. corporate fanns ~ not able \0 exerciseexcessi ..... e power in pric­ing prnclices because even the larges\ corporate farms are unable to control a large enough pe«:ent of pfOducl)on 10 innuence prices of commodities. Ease of cnlI)' for competing farmers aocl ease of SubsuMing competing productS in the diel peevenl the development of unfair pricing advantages. even in limited markets for specialty commodities.

A definition of the tenn "family farrn N thai excludes corporate farms would ultimately be inadequatClodescribe modem fanning, and , as has been lhe case wben oonsidering oilier 3SpeC1S of a definition of a "family farm." including or excluding corporate farms will not affect basjc fann program goals or effective operation.

Conclusion The National CoTl'llnission on Dairy Policy. afler listening 10 testimony

from len hearings around lhe Nation. and aflel close consideration of tile "family farm structure" of lhedajry indusl1Y,delermined that the term "rami· \y farm"" is inappropriate to define for porposes of policy implementation or policy proposals. Various definitions were discussed based on criteria of size, laborand management style, or regiooal considelliuions. All were found to be unworkable and ambiguous. FWlhennore,theCommissiondetennined thaI it is inappropriate to construct a policy which ane mpts to e)(clude cer­tain ownership structures from any definition of lhe lenn "family farm. ~

Because small· and medium·sized operallons make up the majority of U.S. dairy producers, the U.s. dairy industry is a classic e.)(ampie of a free market industry.

The Commission intends 10 recommend poticy Ihal wilt creale a protitable environment for the ~mainstream" of Ihe dairy industry. The mainStream of the dairy industry is composed of divefSC operations and enlerprises. Policy which serves the entiIe industry will profit '"fami ly farms~

by any defmi[ion one may care to use.

Endnotes

1. "The Fooa Security ACtOr 1985 (Public Law 99·198 Sec: . t43 (aJ) SUlIeS lhac .. . !he Commiuion WU considet among other things .. . how well such program (milk pOe!! SUpport program) wiU respond 10 Lhe chaJlenges to the family farm Suut~ of tile milk PfodUCUon industry Crtaled by de\'(lI()~lIng le.e hnologi~, and wltCtM! Of 1\01 a beneHcspOIlSC to lhOse ~baJlenf.U coutd be xh;eved thJougl\ modirlCaOOo1"OI revisions of Cum:nl pol,,),.

Chapter 3

• Recommendations:

Milk Price Support Policy

The NalionaJ Commission on Dairy POlicy believes federal dairy polley should be market oriented. Market fo~s, IOgclhet with adjustments in Ihe governme", suppon price. should balance supply and demand for milk a.nd dairy products. While the Commission r~ds use of some form of "sla.fIdby" production controls, use (Kl a. pennanenl basis is nOI in the beSt Ln· terest of Ihe industry.

Continue supporting prices wilh purchases Supporting mjlk prices (hrough government pun:hases of dairy products

conSlilules a workable basis for any dairy program.

The federal suppon prict: should establish a minimum price which guaranh~:es an adequate supply of milk. The Food Security Act of 1985 es­tablished a means of modifying government price support levels. The CommiSSlon slUdied ahemalives and believes a bener method can be developed.

Consistent with Ihe intent of the Agricultural Act of 1949, Commodity Credit Corporation purchases of dairy products must serve primarily 10 balance the domestic market annually. All Olher uses of surplus prO(h.lC1S. in­cluding maintaining a reserve fO( d~stic and intemational rood 3ssislanc:e progruns, should be secondary.

The Commission asks the Secrewy of Agriculture 10 make availablo to ,he public quanerly evaluations of the acquisibon and disposal of Com· modity Credit Corporation purchases of dairy products.

"Slandby" production controls may be nec:essary Production controls should be used only wneo pricc changes alone wiU

nOI b~ance supply with demand within a reasonable rime period without grt:al1y disrupting the market for dairy products.

Some form of standby produclion contrOl . aUlhorilY should be: permanently available for Ihesc occasions.. TImely use of permanent standby aulhorily should avoid the need form3jor reductions in milk production. such as those resulting from .Ihe proc!uctton control programs enac1cd in 1983 and

(39)

\

40

1985 .. Also, byminimiz.ing \heamoun\ of reduction needed \0 balance supply and demand, the COS! of Ihe program will be much less.

A reduction in IDe suppon price should accompany controls \0 discourage increased production by nonpanicipams or by milk producers who have ad­juSted plans 10 i.ncrease production a$ tllC program ends, Also, establishment of new dairy enterprises shoo ld not be encouraged while controls are in effect

Production conrrols could help reduce the federal deficit Congress might enact a production control program with tbis goal in mind. Temporary implementation of controls, if done for this purpose, may nO! be consistent with a markel-orienled policy.

The Commission recommends Ihm Ihe milk price support program opame according to the/allowing procedure:

II Aforward·]ookjng formula should be established in Jaw 10 determine Ihe price suppOrt level for milk. The suppan price should provide enough milk to satisfy commercial demand and a market reserve. The formula should: (l) account for advances in technology thaI result in increased productiviry; (2) account for economic conditions in both agricultural and nonagricultur&l segmentS; (3) be able \0 operate for a long period withoul revisiOfI; and, (4) account for shifts in the supply and demand for milk.

• The formula should include appropriate measures of milk production costS, consumer purChasing power, and the economic relationships be· tween milk production and alternative agricultural enlerprises.

a The fonnula should be revised and updated by law whenever we suppon price generated by it R:sults in an unacceptable volume of Commcxlity Oedit Corporalion purchases in two consecutive years.

• The Secretary of Agriculture should have discretionary authority 10 ad­just the milk suppan price indicated by the formula, However, in no case should the Seuetary's adjustment exceed 5 percent orlhe price indicated by the formula in anyone year, nor should the 10lal adjustment in Ihesup­pon price (fonnula adjustment plus the Secretary's discretionary adjustment) be more than 50 centS per hundredweight annually.

The Commission recommends a system/or standby production controls usfng lhefollowing guidelines:

• Provisions of the Food Security Act of J985 thaI established the 5 biUion pound purchase level !o signal adjustments 10 the milk support price program should be maintained. However, such level should be based on

41

an equivalent percentage ofcommerciaI use in the [ulure. If Commodity Oem! Corporation purchases are projecled 10 be in excess of the amount which signals price adjustments, Ihc Secretary of Agriculture should have specific discretionary authority 10 carry OUI a production control program.

• When Commodity CreWt Corporation purchases of dairy products are projecloo to exceed by 2.5 billion pounds the amount al which a change 10 the price support program is indicated. Ihe Secretary of Agricultw-e, afler making t.'le maximum allowable adjustment in the suppOrt price, should be required to implement one of two production control programs:

A dairy lenninalion program operating under Ihe general guidelines authorized in the Food SecurilY Act of 1985, or

A "two-tier" pricing program paying producers a price for a sel per­cenlage of mitk marketings and a lesser price formarkerings in excess of that amount. To fund additional Commodity Credit Corporation purchases of dairy products, the Secretary of Agriculrure shall estab­lish a charge for marketings above the full· price at a level that is al least 50 percem of !he support price.

• If a dairy termination program is implemented, the Secretary of Agricul-ture should:

Accept bids in each state at levels assuring~hat a uniform percentage of production capacity is reduced in each stale.

Mlnimiz.e adverse effects on the beef cattle industry.

Prohibit panicipanlS from re·investing in !he milk production in­dustry in ways thai cl1'cumventthe program's inlent.

• If a two· tier pricing program is implemented:

An individual's marketing history, at the producer's option should be either Lhe most recent 12 month production period, or, the prior 12 month production period.

Marketing bases should be lJansferable to anyone during the program and are unneeded when the program is 001 in effect.

Adverse effects on the beef cattle industry should be minimized.

• Production controls should terminate when Commodity Credit Corpora. tion purchases of dairy produclS are projected !O be less than the legally established amount al which a change to the price support program is indicated.

• COStS associated with a production control program. to the extent that such CO~ts exceed normal dairy program costs, should be borne by milk producers. However, producers can bear those COStS in ways other than

42

paymem of assessmentS. A reduction in the milk suppon price may generate a reduction in government outlays sufficient \0 fund a produc­tion concrol program. Assessments arc: neither warranted or necessary.

• \-Vith lhe c).pir.llion of !he Food Security ACl of 1985, adjustments 10 tk milk suppon price should be made on OcIObe, 1.

43

• Background

Milk Price Support Policy The Food Se<:Urily Act of 1985 provides for annual adjustments of the

support price of milk for calendar years 1988-90 based solely on the volume of purchases of dairy productS by the federal government The political con­troversy surrounding the adjustment mechanism in 1987 would suggest the adjustment mechanism will generclte controversy each year and a beller method of establishing and modifying the milk support price should be developed,

Determining the price support level The National Commission on Dairy Policy supports the use of an ap­

propriately specified formula [0 set and adjust the suppon price of milk. However, the Commission has found substantial shoncomings in those for­mulas that have been available for review.

A carefully constructed formula, based on ascertainable production costs and other relevant factors, could identify the appropriate suppon price. The formula, and the suppon prices that it delermlnes, mnst be well understood and accepted by persons affected by the dairy program. Prices must not be unduly increased above that which can be derived from market sales. A credible formula will sel the milk suppon price at a level that results in no more than a politically acceptable volume ofproducl purchases by the Com· modity Credit Corporation.

In this regard, the Commission is not satisfied with the outcome thatcould result from use of parity pricing, the dairy pricing index developed by the National Milk Producers Federation, or the moving average of past prices because the indicated price appears to be too high given market conditions.

Parity pricing

"Parity" is a commonly misunderstood term. Parity pricing is a distinct concept from parity of income. Parity of income is a goal while parity pric· ing is only one of several ways that government policy can promote attainment of that goal.

"Parity" is legally dermed in the Agricultural Adjustment Act of 1933. Generally. the concepT of parity has evolved into a broad social goal, that of

" providing fann residents a "fair" share of income and economic"growth . to e specific policy tool, used to sellevels of suppon prices through nonrecourse loans, or-in the case of dairy-ConunodilY Credit Corporation purchase prices. While the definition has been modified over time. the 1933 Act es­tablishw as Congressional policy to:

reestablish prices to farmers at a level that wi!! give agricu ltural com­modities a purchasing power with respect 10 articles thaI farmers buy, equivalent to the purchasing power of commodities in [a specified] base period.

acariy, the goal of parity pricing is 10 maintain or enhance farmer economic well-being in relationship 10 the nonfarm population. This goal can be attained by other means. If the goal is not achieved over any sig. nificant period of time, the Nation's ability 10 supply enough milk for domestic needs will be endangered.

While the milk price suppo" program is intend«1 10 ~ used as a business· oriented means to efficiently price milk produc ts. the lonc· term results of a short· term pricing decision could be seriously deuimental to the capacity of the dairy indusD)' to supply adequate amountS oC milk. In shOn, there exisls some "breaking price" below which the viability of conti nued operation for a majority of milk producers is threatened. Loss of the milk producing capacity those producers represem can jeopardize the ability of the indusoy to selVitt domeslic markets. as was the case in the mid· 1970s. In this sense, a1\ pricing decisions have income and indusoy-viability aspects.

Throughout most of the history of the milk price suppon program, parity pricing has been used 10 adjust the suppon price of mille Congress aUlhorized the Secrelary of Agriculture 10 $uppon the price of milk aI be· tween 75 and 9() percent of the parity price of m.i1k. But. for a num ber of reasons. the general parity pricing standard has become outmoded . unreli· able. and nOI relevant tocurrem pricing and supply· demand conditions In the dairy industry. The parity pricing standard is no Ionget a viable means to achieve the goa! of income parity for mjik producers who seU product in a dynamic market economy.

Parity pricing has not been used 10 set the milk Support price si nce 1980. As pointed out in a recem USDA repon, use ofa parity pricing system tends to freeze price relationships among agricul tural commodities, as well as price relationships among agricultural and nonagricultural products. The supply and demand relationship is not considered and parity prices are unrelaled 10

market prices for agricultural commodities.

If the dairy indusD)' adopts as policy goals (a) market orientation, and, (b) prices thai discourage a search for Subslilutes or imitations, then parit{ pricing will not achieve those goals because the anificially increased prices

--1-. See footnote on p. 51.

45

will diScourage consumptIOn and stimulate use of nondairy products or imports.

The National Milk Producers Fetkra/ion dairy pricing index

In recognition of the increasing shortcomings oflhe general parity stand· ard for pocing milk. Lhe Nalionaj Milk Producers Federation undenook deve!opmento[ a method for adjusting the milk support price to replace parity pricing. Objectives cited for the new pricing melhod are that it would: (I) reflect economic conditions in the dairy industry including changes in the cost of producing milk and the long-term supply and demand condllions for milk; (2) reflect economic conditions in other segments of agriCUlture; and, (3) be subject 10 fonher adjustmem for factors not fully reflec!ed in the specific formula.

Thedairy specific parhy index developed by Ihe Na!ional Milk Producers Federation has several appealing features, but, in recent years, Ine formula appears 10 generate a support price that exceeds equilibrium prices. In par­ticular, the index-determined price requires ma)(imum use of a supply! demand adjuster, indicating the index is no longer properly specified, or per­haps the productivity adjustmem does not adequately reflect advances in dairy technology in recent years.

The Commission is keenly interested in both: (I) the application of a specifIC adjustrIlenl for technological change; and, (2) thc concept of allow­ing cenain latitude in me final determination of a suppon price based on current or projected supply that would occur at a given suppon price. At the same time, use of the laller adjustment should be only minimally necessary if a formula properly accounts for factors mat affect the production of milk; the use of the fonner adjustment should accuratc.ly reflect increases in the ability of milk producers 10 generate rnoreoutpul ITom the same or less inpUl.

Using historical averages

Many milk producers have supponed a policy that would establish and adjust the milk price suppon based on some average of historical prices. During 1985, for example, the American Farm Bureau Federation supponed a price suppor1 program where the mUk price support level would bcadjusted based on past market prices and the expected level of federal purchases. Al­ternatively, the suggestion has been that suppon prices could be determined on the basis of a three year average of market prices, with prices drawn from three of the preceding five years, excluding the year that the average: price was highest and the year (hat the average price was lowest.

This proposal has the vinue of being arithmetically simple, easily under­stood, and not subject 10 oven manipulation. However, il would notquickJy or adequately addreS:$large cbaJlges in productivity, nor would it compensate

46

for periods when market prices are driven by--orre!y exclusivdy on-pre­viously establishe<:l suppon prices.

The role of an economic formula An effective dairy pricing fonnula, established in law, muSt not set the

suppon price at a levcl that: (\) routinely interferes with the effective market prices for dairy products; or, (2) results in a politically unaccepmble volume of dairy product purchases by the Commodity Credit Corporation.

The fonnula must: (I) account for advances in technology thai result in increased produc.tiviIY; (2) account for economic conditions in both agricu 1-tural and nonagricultural segments of the economy; (3) be able to operate for a long period of time without revision; and, (4) account for shifts in the supply and demand for milk products.

Specifically, the fowula should include appropriate measures of milk: production COStS, consumer purchasing power and the economic relation­ships between milk production and alternative agricultural enterprises.

While the fonnula should not overly enhance the suppon price for milk, the suppon price should be set at a level to assme a supply of milk: that will satisfy commercial demand plus a market reserve. The CoT1ll'Il.lssion is con­cerned that, if the fomlUla price is at a level that causes a large number of producers to exit the industty, the dairy indus-tty may nOI have the produc­tive capacity 10 increase production at times when milk supplies are needed 10 provide an adequate supply.

lf the formula results in Commodity Credit Corporation purchases of dairy product'> at unacceptable levels over a long period of time, the fonnula should be revised. However, the Secretary of Agriculture should not be able to administratively revise the formula to avoid the use of a production con· trol program. Congress should retain authOrity to revise the formula. This syslem of "checks and balances" is needed to assme that the ,Secretary of Agriculture does not revise the formula because of philosophical differences in how the dairy program should operate.

The stabilizing effeci of a sound milk price suppon policy cannOt be over­looked. [f milk price suppon policy is unable to effectively avoid wide seasonal swings in product prices both producers and consumers will be ad­versely affected and the overall efficiency of the dairy indu$1Jy lhrealened. Also, an effective milk price suppon policy will allow milk producers an op­porrunity fO make wise management decIsions wd plan for the future,

Production control programs

The capacity for Ihe dairy industry 10 increase milk production has never been greater. Input COStS are relatively low. Production per cow has steadily increased. The number of replacement animals is al a level grealer than

47

necessary for !lonnal culling? Hence, much attention is being given on how to conuol an anticlpated increase in !he supply of milk.

In a free market. supply and demand are balanced through price adjust­ments. While milk production is in a relalively competitive markel, competition for milk-whether for fluid or hard product utilization-limits the effectiveness of price adjustments for balancing supply and demand in a relatively short time period.

With factors indicating future increases in milk production, price adjust­meflts alone cannot balance supply and demand unless the price is reduced significantly. Some analysts believe that large price adjusonenLS disrupt the structure of the dairy industry. Still, price adjustment is a tool that should be used to help bring the supply of milk in line with consumption.

The federal dairy program, which purchases surplus dairy products to balance the market. has been cxrremely effective in ?roviding milk producers with an adequate rerum for their product. However, federal deficit and budget concerns make unlimited purchases of cheese, butter and nonfat dry milk by the Commodity Credit Corpol1ltion undesirable and unfeasible.

A reduction in the price suppOrt level when Commodity Credit Corpora­tion purchases of hard products are estimated to be Slightly above the eSlablished market balancing level is the mO$! desirable way to balance sup­ply and demand. If, however, estimated purchases are to exceed the legally established market balancing level and il is apparenllhat a signirlcant cut in the suppOrt price level would be necessary 10 balance supply and demand, then a production control program should be implemented in lieu of a major cut in the price support level. However, the Commission recognizes the need for a reduction in !he price suppOrt level when a production control program is implemented to discourage increases in production by nonparticipants or milk producers at Ihe end of the program.

Past production control programs

The dairy industry has successfully used production control programs to

reduce Conunodiry Credit Corporation pw-chases of cheese, butter and non­fat dry milk. The production control programs have provided short-teffil stability [0 the dairy industry and allowed a rransition period for individual milk producers.

The Dairy Diversion Program which was required by the Dairy Produc­tion Stabilization Act of 1983 allowed milk producers to reduce their milk marketings from 5 to 30pcrcenl and receiveSIO for every hundredweight of milk not marketed. The program was paniaJly funded by a 50 cent per hundredweight assessmeoton all milk marketings. Producers had 15 months (January 1, J984 to March 31, 1985) to achieve the contracted reductions.

--'-, See footnote on p. 51.

48

Nearly 38,000 milk producers, which represented 12 percent of all milk producers, participated in the program and agreed to reduce their milk market­ings by 9.3 billion pounds. On December I, 1983, one month prior to the implementation of the Dairy Diversion Program, the price SUppOI1 level was reduced from $13.10 per hundredweight to $12.60 per hundredweight.

The Dairy Tennination Program authorized under the Food Security Act

of 1985 paid milk producers to cease milk production for five years in return for slaughtering or exporting their entire herd of dairy cattle.

The program was funded in pan by assessing milk producers 40 cents per hundredweight for the fITst nine months of the program and 25 cents per hundredweight for the remaining nine months. Under the Dairy Tennination Program, USDA contracted with nearly 14,000 milk producers to remove 12.3 billion pounds of milk from production.

Both production control programs reduced milk production and brought supply in line with demand in the shol1-tenn, but, for a variety of reasons both were unable to keep production and Commodity Credit Corporation purchases at a manageable level.

Under the Dairy Diversion Program and the Dairy Termination Program some nonparticipants increased production. In the Dairy Diversion Program, many milk producers timed replacement freshenings to coincide with the end of the program. This activity was undertaken by both participants and nonpar­ticipants. Some analysts argue that even with the 50 cent per hundredweight

price SUppOI1 price reduction3

the price SUppOI1 level remained too high and encouraged milk production.

Developing a production control program Regional differences in size of milk production operations, milk utiliza­

tion, and divergent dairy policy philosophy among milk producers all make the development of any production control program difficult. However, several criteria must be incorporated in a production control program.

A production control program should be "standby" in nature, meaning it should operate only when: (I) Commodity Credit Corporation purchases are estimated to be more than the legislatively determined market resen'e which indicates when price adjustments are to be made; and, (2) when acceptable changes in price are not enough to balance the market. With the implemen­tation of a production control program there should be a reduction in the price SUPpOI1 level to discourage increases in production while it is in place. A production control program should be tenninated when estimated Com­modity Credit Corporation purchases of dairy products are expected to be at acceptable levels over the long tenn. A production control program should not be a one time attempt to balance supply and demand but rather be avail­able to the Secretary of Agriculture and the dairy industry to implement when

3. See footnote on P. 51.

49

Commodity Credit Corporation purcha$es are estimated to be greater than acceptable levels, The Commission recogniu:s the imponance. to milk producers and U.S. taxpayc~, of not allowing Commodity Credit Corpora­tion purchases of dairy prodUClS 10 reach levels requiring significant decreases in production.

The funding of a producllon control program can be achieved by reduc­ing the production capacity of the dairy indUStry, thus limiting Conunodir:y Credlt Corporation purchase exposure. Moreover, the federal government is properly responsible for purchasing the amount of dairy products necessary 10 annually balance the markel.

To monitor production levels or lodeterminepanicipant paymeOilevels. the establishment of a marketing history is absolutely necessary. The market­ing history should reflect a recent time period so that reduction levels can be more accurately determined.

Milk producers should be able to choose their marketing history based on cenain guidelines. A marketing history wh.ere producers have an option of choosing beIween the mOSt recent 12 month production period and the prior 12 momh production period could be used. By allowing producers an opLion, hardship adjustments to an individual producer's marketing history would be minimal.

Marketing base will acquire a value except for a dairy termination program, where a marketing history (1) is used to determ.ine the payment level to be received by a milk producer; and, (2) is terminated with the slaughter or expon of the herd. Preventing the capitalization of marketing base is impossible.

A policy which allows the free movement of marketing base could pUt a greater value on the marketing base. However. in Ihe case of a "standby" production conrrol program, producers would not have a claim to a market­ing base when the program is not in effect. The marketing base would have a minimal value in such cases.

The Commission reviewed the issue of the capitalization of marketing bases and determined that although capitalization may make it more costly 10 enter the milk production industry, new enrrants will know exactly the COSt of entering the industry.

When a production control program is being implemented, provisions for new dairy enterprises, whether Ihe operators are young, old or currently engaged in another agricultural enterprise, should not encourage entry intO the mill: production industry. Easy entry into the dairy industry will only burden eJlisting producers to reduce milk production.

For production conO"ol prognms which provide an incentive for redlJO ing production there must be mandafory registration to determine whelhe(" .

50

the producer has compliw with the program provisions. Participants should be accountable for their livestock marketings as was the case with the DaiIy Termination Program where participants were required to verify Ihc slaughter or expon of their herds before receiving- their payment. Incentives to producers should be unlimited so thaI all producers will be encouraged to participate.

For any production control program, the Commission recognizes Ihe im­portance of en forcing its provisions [0 preven t a buses of !.he program's i nlen!.

Conclusion The Commission reviewed several production cenuol programs either

described in bills introduced in the 100lh Congress or proposed by dairy organizations.

The Comrn.lssion determined that !.he most effective programs to control production levels are either a dairy termination program. similar to Ihc program authorized under the Food Security Act of 1985 or a TWo-Lier price program which would pay producers a price for a sel percentage of milk marketings and a lesser price for marketings in excess of thai amoUllt

There is substantially less $Uppon within the Commission for a dairy diversiOn program. an animal inventory maintenance program and a target price-deficiency payment program which would provide direct payments to producers and maintain the federal purchase program.

The Commission supports neither a target price-deficiency payment program that would provide direct payments to producers but eliminate the federal purchase program. nor a program thai would restrict milk marketings by all milk producers in exchange for a price that would be determined by the parity pricing fomwla in the Agriculrural Adjustment Act.

Why should the Secretary of Agriculture have an option of choosing be­tween a dairy tenninalion program and a two-tier price program? Factors such as Ihe cost oftne program, l1S effect on other agric'Ulrure ~egmems, lhe economic condilions in agriculture, and fiscal goals are all taken into aceoum when implementation of a production program is considered. The Commis­sion believes that the Secretary of Agriculture should have options because each program has desirable characteristics that win address these factors. Depending on circumstances. one program may be preferable.

For any production control program. there has to be a disincentive for nonparticipants to increase production so that the program will have a more lasting effect. A price support adjustment at the timeof implementation could effectively discourage nonparticipants from increasing production. Also. regulations and penahies need to Ix more stringent 10 deal with tbose par­ticipanls that circumvent the law.

51

The use of production controls on a permanent basis is nOi in \he best in~ terest of the dairy industry. The industry should generally rely on price adjustments to bal3.J1ce the market. However. if major price reductions were needed to balance supply and demand, then a production control program should be implemented to reduce unneeded supplies of cheese, butter and nonfat dry milk and provide stability to farm and retail prices for milk and daily producls.

Endnotes

I. In January 1988, tbeparilypnceofmilk wasS.23.90perhundrWweighL Thesvemge price received for all milk sold to plants duringJanuary 1988 was S 12.50 per hundredweight.

2. In 1987 production per Ci)w in the United StateS was 13.186 pounds compared to 11,889 poWldspercow in \980. In 1986and 1987 replacem:f11 ntImbers wcrtal43 bead and 41 head rt.speCli~e!y. Genetally,!he annual culling rolles of lactating cows is 33 pcrCUll

3. The. argument hasalso been made that Ihe Dairy Thnnination Program did no! StIr· rtciently dis<:ourage production by nonparticipanlS. USDA SLaListics indicated thal in California, for example, 325 milk producers will! \OOlI marketings of nearly 1.8 billion (Xlunds (10.7 perc.erol of 100al production) participal«l in !.he program: yel, milk prodllction levels in Dlifomia for October 1987 were 11 percent more than production levcls a year earlier. Similarly. in Wisconsin. 1.681 milk producers with 785 million pou.nds of produc­lion partieipa!ed in Ihe program. October 1987 milk production levels in Wisconsin were 5 percent above O;::tober 19861evels. The California Dairy Information Bulletin issued in December 191:11 ror October 1987 production points ootllmprOCluction in October 1987 in California was 7.6 percent above OctOber 19&6 levels and oot 11 percent as indical.ed by USDA.

Chapter 4

• Recommendations:

Federal Milk Marketing Orders

The National Comm.ission on Dairy Policy beLe .... es federal milk market­ing orders are an effective means of providing market SiJ'Ucture \0 the dairy industry. The industry-funded federal milk marketing order program provides the means [Q carry oU[ the purpose of the milk price support program. The milk price suppOrt program exists to assure an adequate sup­ply of pure and wholesome product.

Speed up the hearing process The federal order hearing process is the best way {O adjust milk market­

ing orders. However, long delays in the hearing process are a problem. USDA and the dairy industry should work logetiJer to speed up decision­making.

Meeting strict deadlines may be impractical for comp!ex hearings mal iovolveexlensiye or conflicting testimony, multiple or new issues, or innova­tive practices. However, tile Secretary of Agriculture should explore aU possible ways \0 speed the amending of regulalions.

Timely amendment of marketing orders through the administrative process is preferable 10 changes made through legislation. The 1985lcgis­lative changes to marketing order provisions indicate the fruStralion of milk. producers conceming attempts \.0 modify orders t1.fough the nonnal USDA suucture.

Market adm.iniscrator offices should provide milk producers with infor­malion on Ihe operation of the federal order system. Market administrators should ratify marketing order programs when requested by a majority of producers in the order.

Differentials should meet Class I requirements Milk marketing orders should assure. that Class I differe.mials meel Class

I milk requiremems without creating incentives for additional production for manufacturing purposes. In miling this determination, consideration should be given to the percentage of Class 1 use in a federal order, as well as transpor­wlion COStS, proper alignment, and historical Class 1 prices in an area.

(531

Standby pools should be used to promote more orderly milk markeli ng. Cuntl'lt authority for J 2-month base e)(cess plans should be relained to help balance production with demand throughout the year.

Tht Commission maktS lhest SPtcific recommendations concerning mitk markering orders:

• The Seetetaryof Agricuhure should take all necessary actions 10 reduce the time between a legitimate hearing f«Juest and announcement of a decisiOO to grant or deny a heariJ'lg. Funner, the Secretary, as qllickly as possible in light of legal requirements and eonsistent with good manage­ment practices. should render a recommended decision within 90 days after lhe close of a hearing.

• Exceptions 10 lhe 9O·day rule should be granted onl y by an adminisrra­live law judge for hearings that involve extensive or conOicting testimony. multiple or new issues, or innovative practiccs.

• The Secretary of Agriculture should grant a hearing when requested by: (I) a majority of the milk producers sl.lpplying the federal milk market­ing order; or, (2) the dairy coopeTatives and proprietary handlers in a fC(\eral order, provided thaltney markel more Ihan 50 percent of milk in the order.

• Marketwide service payments should be granted in an order where Ihe request is substantiated.

• The continued e)(istence of a federal order should nOt be jeopardized by the VOle on a single amendment to the order. The Secretary of Agricul­ture should modify current administrative procedure 10 allow votes on individual amendments 10:\ federal order.

• Federal orders should be allowed to consolidate through the normal hear­ing process when economic efficiencies can be achieved. However, legislation should 1'101 create a single national milk marketing order.

• By the end of 1988, the Secretary of Agriculture should establish an ade­quate standard testing procedure to allow the implementation of multi · component pricing throughoul Ihe federal milk marketing order system.

• A system of testing packaged nuid milk products for compliance with federal ly approved standards should occur under the federal milk market­ing order system.

55

• Background

Federal Milk Marketing Orders

Federal milk marketing orders provide rules for how fluid milk entering a specific geographical market wiJl be marketed. Federal milk marketing or­ders have three goals which include: (1) the orderly marketing of milk; (2) equitable dealings between milk producers and milk: handlers; and, (3) fair prices and dependable supplies of wholesome milk for consumers.

Milk marketing orders are intended to perform four specific functions:

(I) provide a means by which milk. is classified according (0 use; (2) establish a method for computing the minimum prices for each

class of milk; (3) establish a system for pooling returns from Ihe sale of milk among

all milk producers shipping (0 the market; (4) provide for effective administration of the order, including market

infonnation.

In addition 10 these r~uired provisions in a milk marketing order, other provisions are permitted.]

Marketing orders are created or modified by the Secretary of Agriculture under specified conditions, based on the fmdings from public hearings and comments. Provisions ofmaJkeling orders are based on guidelines from and limitations imposed by the enabling legislation.2 The provisions of each order are carried 00\ by the "market adminiscrator" who is an agent of [he Secretary of Agriculture.

Problems and criticism In recent years the federal milk marketing order prognun has come under

increasing criticism from milk producers. Critlcism intensified with the pas­sage of the Food Security Act of 1985 which Jegislaled higher Class J differentials for 35 of the 44 federal milk marketing orders.

During its hearing process, the Conuniss.ion heard testimony indicating that marketing orders irW.':rferf'-<l with the f~ flow of milk ~mong regi()n.~, and encouraged milk production in some areas of tbe count!)' at a lime when milk produccrs are being asked 10 reduce production. ~-1-,2. See footnotes on p. 57.

56

Olher marketing order issues idenl itied dun ng the hearing!. included mark~lwide servic(: pZlymtnLS. potentia l benefits of m<Ukc:ting order Con­solidation, the use of feconSliruled mi lk to supply fluid mMkefs. and multiple: componcm pncing .

. Incr~ses in me C lass I price differentia ls through legisialion came about becaur.e or milk producer disSOlisfaction with the adminS{TI!lion of the heaT­ing process.

Long delays by the Secretary of Agricultu re in granting hearing requests or making:l deciSion :lIthe conclusion of a hearing were cited 3S Ule primary reasons for producers !.Ceking changes in the price different ia Is through legiS­lation.

The history of federal milk marketing orde rs Over the paSl 40 yem. the ponion of the national milk supply covered

by mlTketing orders has e"panded substantially_ The progrnm e;.: panded from 29 individual orders in 19<1710 a high of 83 in 1962. Consol id3tion

and merger reduced the number 10 "" in 1985.

Producer deliveries under markeling orders grew from 15 billion pounds in 1947. less than 13 percent of IOlal U.S. produ(tion, 10 nearly 100 billion pounds in [985 or cwo·thirds of 10 lal Olllptli. In 1947, Ihe 9.8 bill ion pounds of Class I use in federal order markels represenled 26 percenl of Ihe total milk usC'd ror fluid pllrposes. By 1985, Class I mIlk In feder :l l order markets was 81 percent of n3tional fluid milk consumpHon.

This growlh in appliCJlion of fed e ral milk marketing orders is sUOllg evidence of Ihe acceptance 3nd con tinued reliance on Ihe orders 3S a markel o rganiting force .

Relationship to the milk price support program In itially, prit:e SIruClures in individual orders rellecte:d local market con ·

didol'ls and p(aclico;:s. Milk movement between markets was limited and somelimes impoSsible . As /lew technology improved l:TansponaliOn equip­ment, road system s, and refrigeration capacity, milk could be s.hipp.::d greale!r dis tanc!!!>. As a restllI , me local natun: of fluid milk matk ets changed and some system of coordina ling prices between mark.ets was necessary. Since 1961 the MinnesOfa-Wisconsin Price Series hJS been used todetennine m.in­imum prices underfedera l mi lk maikeling orders. The Minnesola -Wiscon~in

Pnce Series3 is the base price fOl" Olher c lassified prices4

under lite federal milk mar-ket ing order program. Thi s price , the rn:tnufactllring price or the

Class UI price. is tht. price 10 which appro priltc! price! differen lla ls arc! added (0 determine speCific class prico;:s.

3,':'. See footnutes 1)1'1 p. sa.

57

Milk producers under federa1 marketing orders are paid for produclion on (he basis of a "blend" price which is a weighted <l.verage between the Class 10 price and the Class I price in the federal order.

The price suppon program isamajordclenninanl in the level oflheClass l[] price. During period~specially seas.onal-when dairy produC! market prices decline to 3 level al which the Commodity Credit Corporation pur­chases buuer, nonfat milk aod chetse under the price support program, the suppon program provides a floor under the MillneSOLa-Wisconsin price. This minimum price assurance is reflected through the enUre federal order pric­ing str\lClUre.

Conclusion The Commission Suppons the continued use of the federal milk: markel­

ing order program as II marketing tOOl ; however, it is not S3listied wilh the adminsaation of the hearing process thaI allows milk producers to amend their federal milk marketing order. The program was established to be responsive to markets and producers and must be more receptive in the fu­Lute. The Commi~sion believes milk producers would have preferred 10 have made changes in Class 1 price differentials tl1rough the hearing process and 001 gone 10 Congress to get the Changes.

Inues such as marketwide service paymerns, the use of standby pools and base-excess plans. the level and adequacy of price differentials, market· ing order consolidation, the reconstitution of milk and multiple component priCing can be deah with through the hearing process. However, better cooperation and oommunication between USDA, the market administrators and milk producers. themselves is needed to make the hearing process effec­tive as a marketing and supply and demand baJaneing tool.

The CommiSSion recognizes thai hearings with extensive or conOicting testimony, multiple or new issues or innovative practices may cause delays in the decision making process. However. decisions under the hearing process should be made e.xpeditiously.

EndnQtes I. Such Pfovjsions include Lh ose toencourag~ shifts in milk production to meel seasonal

de/'l\al1d. for coUection of fund s to rU"I8nee milk promolio!) programs. and {or payments to coopera Li vt$ and o1.h~rs {or providing services INl benefit zH producers in the market (j .e .. man:etwide $C.I"Vic:e ~ytnenLS) . By eontrUl, some run.ctkms arc nOI provided for, or are spoeific.3Hy lIOI permiued. They include: (I) eonlJ'OWog milk produc!lon. (2) rulticlin& the mar\;eung of milk by producers. (3) guararu.eeing producers 3 market wiLh a particular buyer. (4) esl8.blisl'lillg unilMy Of qus6ty $lNIdardl. (S) gumnteeing a rued p~ leycl La pro:Lucers, (6) staing n:.lail prices rOt fluid mill:. atld. (7) ~!ting priee tciling~ to producers.

2. The FedetaJ Milk Matl:et Onk.r program i$ aulhoriu.d by the Agrieuhlll'llol Markel­iJ'lg Agreemcnl Act or 1931. as amended

96-555 0 - 69 - 3

58

3. Minnesota-Wisconsin Price Series is derived from the price ~d fOI ma.rlUfaClurillg grade milk by 250 handlers (i.e-.. cheese, bolter and nonfat dry milk plants). The-milk price Is esl.!'lbl ished by tk M-W because there are thousands of milk producers producing a similru piUdUCI-rnilk. Ill\d several hundred plants producing a similarprodocl--cheese. Handlet'$ ~ rlOI required to pay Grade B producers at the federal price suppon level; however, itaf· fOClS whal they pay.

4, Most market orders have three classes of milk. Class I milk is used as a fluid product Class a milk is made i.n1O prodUCIS weh as ic¢cream, frozen desserts. coltage CMese, yogurt and fluid cream. Class III milk is identified as milk used for hard cheese, butler, nonfat dry milk and evaporated milk. Thcreare marketing orders wilhonly lwoclassesofmil.l:.ln cases like Ihis the Class II milk is uS«! for hard cheese, buner. and nonfat dry mi\):.

Chapter 5

• Recommendations:

Regional Issues The National Commission on Dairy Policy recognizes that federal

programs cannot change basic geographical features favoring milk produc­tion in one area over another. Cenain fealures-a favorable climate, abundant feed, and a diverse agricultural base-wi!! lead to increased production in $(Ime areas over time. Likewise, the absence of these features will hampermilk production.

Don't use price supports to protect certain producers "Regionalizing" dairy policy in an auempt to protect milk producers in

anyone aIe3 would counter these basic market forces. It would lead to economic distonions thai would subsidize milX production for manufactur­ing uses in h.igh-coSl markelS. Therefore, the Commission believes price suppon policy should not be modified [0 protect producers in any area oflhe cOuntry.

Stale or federal programs adversely affecting the working oflhe federal dairy program should be eliminauxl. Also, state and federal creclit assistance programs mair,taining inefficient milk production capacity through subsidies should be revised.

Change California's separate make anowaDce The State of California has established for its State marketing order a

manufacturing allowance thaI determines Ihe State order grade A price for milk used for manufactured dairy prodUCIS. It IS approximately 60 cents per hundredweight higher than that used in the federal program. This has nega· lively affecled the price received by California producers and has encounlged consrruction of new excessive California milk manufacwring plan! capacity. California's separate make allowance also interferes with the federal price support program. Increased federal purchases of dairy productS from California pla.'1ls has been the result.

U.S. milk producers should be tr"eatw equally under federal laws that compel a government agency to purchase dairy products under the price sup­port program. Substituting the federal Minnesota-Wisconsin Price Series as the minimum California price for grade A milk used for manufacturing pur­poses will inc:ease prices for Califomia producers.

(59)

60

While this higher price could stimulate milk production i.., California , processing capacity will limit expansion . If addi oonaJ processing capacity can be constructed while California milk producer.:; are paid in accordance with federally determined minimum prices. erfrciencies are cleatly present 10 justify that comtruction.

The Commission mnkes Ihe/ollo ..... ing specific recommendalions concerning fl:g iona( isslus:

• FederaJ milk price suppon policy shOuld not be modified to protect producers in any area orthe cQunuy.

• Dauy policy should assure that suppliesof nuid mil.k come from a diverse geographical area to guaran tee an adequate supply.

• USDA's spec ification of a manufactlJring margin for milk made inlo cheese, butter, or nonfat dry milk should apply 10 all areas of the United Srales. Federal law should prohibit Califomia or atly oiher stale from using a greater allowance to eSl3bHsh a grade A price for milk for manufaclUring butter, nonfat dry milk. and cheese.

61

• Background

Regional Issues Recent discussion of ~regionalism" or "regiona1" milk price suppon

programs present one approach to long-term dairy policy. Befon: my judg· ment of the merits of this approach can be considered, II defmition of "regionalism" is necessary. In one instanr;;c, the!elTTl Mregionalism" describes a lack of unity in national political effort. In another instarlet, ~regionaJism" refers 10 changes in patterns of productioo across the Nation. In yel a third sense, "regionalism" reflects a concern over lhe patterns of sales 10 the Com­modity Credit Corporation.

When ~regionalism" is used to describe fragmentation of politicai views On needed changes to dairy legislation, the term usuaJly carries a- negati ve cannOlatian. Legislative initiatives from the da.iry industry have been more dimcull 10 achieve in reccllt years in pan because of substantial disagree· menl-among illlponanl political entities concerning the "appropriate" COW'SG of aelian. These political disagreements oflen could be characterized as " regionaJ~ in naNte, with political forces alignerl on each !>ide of such dis­a~ements. "Regionalism" in this sensc is widely regarded as a situation to be avoided or problem to be solved.

Ln this decade., legislative initiatives have focused on reducing a national excess of milk productS. Regional division on how to accomplish that reduc­tion is based on the point of VK:W that cenain areas of the counD)' mattet a high percenlage of milk in fluid rorm and, therefore, milk produced in those fluid markets does nOl contribute to the oationnl surplus of tho$C prodlJCu. This point of view concludes that solutions to the "surplus problem" ought to exdude adjusa-oents to millr. production and processIng in high Class I utitization areas. This argument indicates a seeond and different meaning of the lemt "regionalism," namely, a bias for or against a shifl in the natiOl"lal pattern of milk production.

When used to describe. shifts in the national pattern of milk production, "regionalism" is usually viewed by proponentS as a setof legislative revisions needed 10 hall stnx:ru:ral chaJIge within the dairy industry. Over time. II great deal of concentration and consolidation of prOOoctive capacity, as well as processing capacity, has taken place. Average herd size io all geographical locations has increased for a varieJy of reasons, inCluding technOlogical ad­vances and economies of scale. These same forc:es also playa significant

62

role in geographical shifts in producrive capacity. These trend~ are not new­such change has been taking place on a gradual basis since World WaI Il

Many milk producers are uncomfonable with this structural change and question whether the trend toward fewer farms can be aHowed to continue. Frequently, this discomfon leads to the notion of a "regional" dairy prograrrr-one thai preserves the milk production capaCity of individual geographical areas.

The third view of "regionalism" is also derive.d from the economic stress of production. Under the Food Security Act of 1985, speciflc annual adJust­ments to the price suppon level are made according to projected purchases of dairy products by the Commodity Credit Corporation. Accordingly, a great deal of concern arises regarding who sells dairy products \0 Ihe federal government. In !.his case, "regionalism" is an exercise in "finger pointing" undenaken on the inaccUI31e assumption Ihal data showing Commodity Credit Corporation purchases provide a clear indication of the SOUKe of ex­cess milk production.

A nalional program for a national goal The United States must have a rational, ilchievable set of goals for dairy

programs. One goal has been economic: reduction of excess production withoUI disrupting the niltional capability to produce an ildequate supply of milk in the future. Several political problems impede achievement of this goal. First, dairy program casts 10 the federal government must remain al a politically acceptable level. Budget constraintS Iimil future dairy policy op· tions Ihat maintain excess production. Second, many programs exist (farmers Home Administration credit programs, for example) thaI deliberately keep milk producers and other farmers in operalJon after condi­tionsdictate they can no tonger compete commercially. In an effon to avoid disruptions in rur::J communities, credit pOlicies subsidize [l'jlk production, in direct conflict with effortS to limit production through price suppon reduc­tions and other supply control measures. Finally, lack of villble economic alternatives to milk producnon keep some producers in operation at a low level of retum. Unwarranted production comes nom plOducers who could be expected \0 exit from the dairy industry if a betLCr opponunity \0 earn. in­come were ilvailable.

Any State or federal program adversely affecting !he working of federal dairy policy should be eliminated. All SUlte and federal programs should work in concen to achieve goals established for federal dairy policy. Con­tradictory policies, sllch as those cited above, should be reconciled. Similarly, no subsidized consrruction of milk processing capaciry should take place nor should continued operation of unneeded capacity be enhanced. Construction or continued operation of processing facilities should be dis­COllraged through changes in la:.: law or olher available means. As one

63

example, the manufacturing allowance established by the U.S. Depanment of Agriculture should be equally applied in all areas of the Nation. Specifi­cally, the California manufacturing allowance should be reduced to the uniform allow3Jlce established by the U.S. Depanmen.t of Agricuhure.

No State and federal credit assistaflce program should maintain ineffi­ciem milk production capacity through subsidies. Milk output from economically untenable milk operations contributes to overproduction and penalizes efficient milk producers.

If, as a matter of policy. adjustments to the milk price suppon are intended to reduce the amount of resources allocated to milk production through removal of least efficient producers, that process must be allowed to work. Some Farmers Home Administration and Farm Credit System policies ap­pear to maintain milk production on farms with no reasonable hope of commercial success. Such poliCies should be revised so as nOllO inhibilthe process of structural change. In essence, only the mOst efflcienl operations will continue to produce mille, and exit from the dairy industry must take pl<\ce for Those producers who cannot compete al current and projected prices. If this process of SOUCIUraJ change is ihwaned, tailoring the productive capacity of the dairy industry to Ihal which can produce only enough milk to satisfy anticipated demand t!trough use of price suppon adjustments is nOI a workable policy.

Federal milk price support policy should nOI be modified 10 prolecl producers in any area of the. United States. In particulaJ, federa.! policy should encourage maintaining a regionally dispersed milk proouction capabiliry 10 supply fluid markelS Ihrough use of federal milk: marketing orders. By con­trast, low COSt regions provide reserve supplies of both fluid milk-for use in areas where supplies are shon at certain times of the year-and manufac­tured milk products to balance the national milk market. A "regional" program Ihal interferes with or makes more COSIly the flow of milk under a normal marketing pattern results in the reserve supply function becoming morc costly because each "region" would have 10 build production capacity to produce an adequate supply of milk throughout the year.

Milk competes for markets in priority order: flIst in fluid fonn and, second, as bvrter, cbeese, and nonfat dry miJlc There is no nationally dominant area that produces manufactured nUlk products and, as a resul!, there is not a stable national market flow pattern for such products. A "regional" program Ihat might attempl \0 use incentives or penalties mal change from one locale to another in an auempt to "equalize" dairy produc­lion across the Nation wiD adversely effect industry effiCiency.

Issues During the past three decades, substantial consolidation of the dairy

industry's prtxiuctive capacity has taken place. That consolidation has tended to relocate milk production from relatively high COSt of production areas toward lower COS! of production areas, and to recombine production facilities into larger herds. As a result, there are today fewer milk producers and a greater percentage of national pJOduction takes place in States such as Wisconsin, California, New York than took place there in the past.

The degree of change, and the swiftness that change within the dairy in­dustry has occurred, leads many milk producers to question where Ibis crend will lead.

"Surplus" milk production nationally is lhe primary reason why attention 10 shifting patterns of production has swfaced. If there were no swplus. "regionalism" would nOllikely be a major issue. However, under conditions of surplus production, there are several reasons why attention on economic conflict based on location has increased:

(1) rapid productivity increases that accelerated advantages based on production econOlTlics;

(2) uneven responses to provisions of recent legislation; and, (3) skewed panerns of Commodiry Credit Corporation purchases of

dairy products.

Economic advantages based on location

The United States does not have a regional milk production problem. The problem is one of price-cost misalignment, between the federal suppon price and a low cost of production for many producers.

The California milk industry is often identified as the "guilty pany'o for problems wilh the price suppOrt program. California milk production has expanded rapidly in spite of milk prices that are among the loww in the country for both manufacturing grade and all milk. However, available statistics indicate that "finger pointing" at California onl~ hampers correct identification of the narional problem. For example, increases in milk production during late 1987 are generally attributable to production increases in five Slates. In July-September 1987. national production increased one percent or some 220 million pounds; production in some Stales increased while production in other States decreased. California, Wisconsin, Texas, Arizona, and Washington increased production by aboul6f:() million pounds, a five percent increase. While percentage gains were greatest in the western States, 'absolute production increases in Wisconsin accounted for over 200 million pounds, or nearly one-third, of the IOtal increase.

By contrast the southern Stares are generally milk deficit and present the other extreme in regional variation in milk production characteristics. In the

65

SOlllh. milk proCuction is dominated by high va..riablc costs, relatively high cash CQSts (primarily because of h.igh feed costs), and heal-humidity induced stress on cattle. As a result, on a state-average basis, milk production costs in the South, except for Texas. lend to average higher thllJ1 in any other region.

To partially compensate for higher com of production, milk prices have histOrically been the highest in Ihe South, 10 assure, delivery of adequate sup­plies of fluid milk Despite this compensation, net returns per hundredweight, on average, are generally the lowest in the Nation, and Ihe region is a def.cil producing area. (More dairy products are consumed than produced. Two states. Alabama and Florida are fluid defici!.)

Uneven response to recent legislation As the milk surplus began to build in the early 1980s, programs were in­

itiated to limit production and increase consumption. Since 1982, when assessmentS on milk production were imposed, reactions of various State governments and fann organizations have been mixed because of differing benefits or COStS of these programs in individual States. Both perception and ecooomic realiry contribute 10 these reactions.

First. large payments to California panicipanlS in the Dairy Termination Program created a negative image of the California dairy industry for prod).lcers in the other parts of the Nation. The program was panly funded by an as~cssment on all producers and California panicipan!s were thought to benefit disproportional because of their larger-sized operations.! Moreover, the per-hundredweight assessments that have been imposed in recent years have been includerl, in California, as pan of the marketing COStS for milk-and were passed through, in pan, to fluid users. This administra­tive decision to include assessments as COSt· or-production resulted in, or was perceived to have resulted in, the 50 cent assessment not affecting CaMor­nia dairy producers as severeJy as it did other dairy producers. In reality, bolh the assessments and subsequent reduction in suppon prices adversely affected CalifornIa milk producers.

Second, increases in Class I fluid differentials required under the Food Security Ac\ of 1985 benefitted cenain areas and encouraged additional production in some areas? Milk producers in the Upper Midwest began 10 fear encroachment on their traditional markets by milk producers in other arcas who havc Teceivcd an advantage from legislation.

Thisd. because of the highly visible. indicator of price suppon adjust­ment-the 5 billion pound level established in the Food Security Act of 1985--producers in each region began 10 blame producers in other regions for excess production. This view presumes that surplus and sales 10 the Com­modity Crcdi\ Corporation are synonymous renns.

----'-,2. See footnotes on p. 70.

66

Skewed patterns of CCC purc/,.(ues Proponents of regionalizing the milk price suppon program suggest thai

the magnitude of the problem of excess production varies from region to region. It is argued that benefits or penalties should be awarded according to regional differences. This approach implies that the volume of Commodity Credit Corporation purchasesofmanufaclured dairy products measures OVeT­production by area. This measure is inherently flawed. Commodity Credit Corporation product acqUisitions do not always take place in the same State where Ihe milk used to make the product was produced. In fact. such milk may have been produced more than 1.000 miles from lhe processing plane3

Federal policy Federal policy is what the government does or says it will do to achieve

specific national objectives. In many cases, carrying out a [)Olicy will require the modification of market forces because:

(1) markets are not sufficiently stable; (2) shon~tcrm adjustments may be required that would be inefficient

in the long tenn; and (3) market signals indicate adjustments so rapid or so great as to be

socially destructive.

Regional "protectionism" in the drury industry is based largely on the ar­gument thai markel-driven changes are "socially destrUctive." A question arises, then, as to whether a social goal should be addressed under a federal program, such as the dairy program, that exists to address business·oriented decisions.

Federal agricultural programs arc normally nationwide, not regional. The exceptions are limited, usually based on exrraon1inary conditions such as those Lhat exist when a commodity is produced only in one region. The basic commodity programs are national programs with certain very limited ·'regional" aspects. The grain programs, for example, eSla1:5Jish a single na­tional target price, and price deficiency payme01s are based on the national average loan rate. Price suppon loan rates differ by counties only as neces­sary [0 avoid disrupting nonnal marketing pancms. The panem of Joan differentials has been changed as nonnal marketing paneros changed.4

Cw-rent law considers Ihe market for dairy products to be national in scope. Existing law embodies the notion that an efficient allocation of resourccs in a market economy will, over time, result in mOSI milk produc­tion coming from low COSt of production milk producers. Because of climale and feed availability, that production will lend tOceme from areas of the Na· tion where many low COSI of production dairies. operate.

3. See footnote 0[1 p. 70. to. See footnote on p. 71.

67

Other policies could be design~ in an attempt to discriminate among various production regions. lnJt, several questions arise in connection with the theoretical and pnlClicai applic:l[ion of such policies:

(1) What nariona1 mterest is seJ"Yed by protecting dairy farms in onc pan of the Nation from market forces that would otherwise compel economic adjustments-adjustments resulting in additional or fewer resources devoled to milk production?

(2) Is the preservation of a regionally based milk production capability an issue thaI would be beJlef addressed through milk marketing orders?

(3) In a market economy where ef€iciency is a key to profilabiJiry, and profitability si&nalS economic exparosion Of cOn/Taction, is it con­sistent 10 impose penalties On low cost of production producers. so as to retard their expansion? Is it COIIsislent to impose penalties on geographical areas where many of soch producers operate so as 10 limit the milk output from /I specific geograph}cal area?

(4) In a marke t economy, is it consistent policy to provide prOlection from price competition fOf producers with high costs of produc­tion, or protection from economic competition for whole areas where many of such producers operate?

(5) Is a "regional" approach to dairy policy a sensible 1000g-tenTl policy, or a shon-term approach that retards the working of market forces?

(6) Should a federal policy treat all producers in lIle United Slates equally, or differently aCCording to geographkal kx:.ation?5

(1) Should {ederal policy affect processors differently_ depending on where the processing facility is located'f

The California "regional" program With much current discussion of "regionalism." a review of one form of

a regional dairy program that currently existS may be useful. From most points of view, lhe California S18lc milk marketing order constirutes a form of a "regional" dai.ry program. The sepatate and excessive manufacturing al­lowance was, for example, established by Slate adminiStr.ltors to faci lil.llte consuuction of sufficient processing capacity to handle production from all milk prodooers who wished 10 produce in mal State. From another poim of view, the Stale actions in California are disruptive of traditional milk market­ing pattems and, as a resull, producers in the Upper Midwest. fea.rlosing WCSt Coast markets.

When reviewing the California program two questions arise that poinllo the fUlure of the dairy industry in the United States. First, should this fonn of uregionar program be imitated by other States throughout the United

----,-,&. See footnOfes on p. 71.

68

Stale5. effectively ending a federal milk price support program? Second, should all areas of the United States conform \0 one basic milk price supPQn program?

California's fonnula pricing differs ITom pricing in other areas of Ine United Stmes. In addition, California uses a separate system for determin­iri.g and applying a manufacruring allowance?

Understanding Ihe make allowancedetennlnation in California is crucial 10 understanding California's role in "overproduction" for seyeral reasons. First, the origin of Ihe different, greater make allowance in California was Ihe intention of becoming self-sufficient in milk product ion and processing. This goal runs counter to national policy. The intent of a national dairy program is to supply !he national mme! with a sufficien! vdulT\(; of dauy products. A State program that interferes with the uniform pricing of milk used to produce manufactured dairy products undermines federal policy.

Second, the California make allowance determines the minimum price California producers are paid for milk used for manufacturi ng purposes and ensures thaI the minimum price (Class 4a) will be below the federal mini­mum price. In the rest of the United States, through the federal order classirted pricing policy the Minnesota-Wisconsin price is the minimum price that must be paid 10 milk producers. By contrast. in California, final product prices are deten-nined and the rerurns to milk producers in Califor­nia are computed as a residual in marketing cransactions. Because the Commodity Credit Corpormion purchase price for buller. cheese, and non· fat dry milk is identical in aU parts of Ihe Nation, this practice provides a subsidy to California processors by allowing them \0 purchase the primary ingredient-milk-used in the production of cheese or butter at a cheaper price [haJl muSt be paid by processors in other States_

AdditionaHy, in the rest of the United Slates, the Class I price is deter­mined by a differential added to Ihe Minnesota· Wisconsin price. By concrasl, in California, the Class I milk price is detennined by a fonnu:a; within that fonnula, 42 percent of the outcome is determined by the Class 4a price (i.e., the price of manufacturing milk for butter-nonfat dry milk production). Similarly, Class 2 and Class 3 prices are di~ctly lied [Q the Class 4a price. In shon, all prices are linked to the minimum (Class 4a) price, which does I/Ol direclty or indirectly guarantee California milk producers a federal min­imum price. Producer returns in CaJifornia are based on final product prices, minus the. cost of proce~~illg, witl! aClu;"l1 retuws dependillg 011 tile Slalewide proponion of milk utilized by each producI class (Class I through 4a).S

Possible consequences The objective of regional proposals is to isolate one or more specific

geogr:lphica! areas from the economic forces that will lead \0 i"unher

7,8. See footnotes on p. 7L

69

structural change. In terms of implementing policy [0 accomplish the objec­tive of isolating one or more geographical areas frorn actions taken in another area, one must assume that producers within the same geographical area will no! expand production if granted protection from price competition or will limit production to avoid imposition of an assessment. Otherwise, produc­tion in all regions will continue 10 expand. However, there is ample evidence thai COstS of production vary more within a region than among the regional averages of cost of production. Consequently, the low cost of production milk producers in a "protected" region have additional incentives to expand, and a policy of "regionalism" becomes one of deciding which low cost producers will be allowed to expand.

Regional alternatives 10 a national program will not resolve regional "dis­tOrtions" based on production economics. "Regionalizing" the federaJ milk price suppan program would lead to economlc distortions that subsidize the production of milk for manufacturing uses in high COst markets. The sub­sidy element would be introduced lhrough reduced shipments from low COSt of production areas, resulting in additional milk from low cost areas divened into manufacturing use.

Conclusion Federal dairy policies do not espouse regional milk production self­

sufficiency as 'a policy goal. "Regionaliring" the fedeIal milk price suppon program is based on the concept of self-sufficiency. Attempting to implement a "regional" program would lead to economic distortions arJd subsidization of the production of milk for manufacturing uses in high COSt markets. A policy of self-sufficiency would be very expensive for consumers and producers in milk deficit areas because higher prices must somehow be established under such policy in high COSt of production areas. At the same time. prodoctlon in low COSt of production areas must necessarily be reduced or somehow restricted from transshipment to higher cost of production areas.

Regionally based programs cannot change the geographical features that favor milk production in an area-such as favorable climate,abundant feed, and availability of diverse supplemental feeds. These features will lead to increased milk production capacity over time. An anernpllo "regionalize" dairy policy would be an attempt 10 counter basic market forces. Moreover, there is every reason 10 believe that efficient producers will continue to operate in all areas of the country: available Statistics indicate that differ­ences in costS of production among prodl.)cers within a region are greQler than differences in costs of production between regicms.

Increa~s in milk: production by geographical area correlate with areas where the costs of production are IOwe5L In other words. expansion in milk output is attributable to economic efficiencies (including plant efficiency). not favorable pricing policies. In the case of CaJifomia, producers in that

70

State receive the lowest milk prices in the Nation, and yet California's milk production has increased.

The volume of sales to the Commodity Credit Corporation from a State is an inappropriate indicawf, by itself, to discover who is "a1 fauh" for a Jarger-than-desirabJc volume arlota! sales to the CommodiTY Credit Corpora­tion. Disproportional sales volume [0 the Commodity Credit Corporation from California can be at!libuled to the State "make" allowance that eo­courages 100 rapid expansion of processing facilities. The USDA­detennioed allowance should be used instead..

Myths and beliefs tend to play an important role in shaping dairy policy. These "myths" can become obstacles that resoicl consensus policy fenna­non ir, the dairy industry. and in me case of a drive for a "regional" dairy program, obstacles have been created. Chief among these obstacles is a lack of recognition that milk, no matter where produced, conti,butc:s to the iOtal supply. "Finger pojnting~ at California producers obscures the fact that producers there are among the country's most efficient milk producers.

A second obstacle appears to be concern in the Southeast about Midwest policy proposals designed to curb excess production of milk. Because of ecunumic ChaTGICLtaisti<-~, the southem dairy i.llduslI"y has bee!1 di:;pwponioll­ally affected by the Dairy Diversion PcogTam and the Dairy Termination Program.

A third obstacle is the failure of the dairy industry to recognize that fun­damenlallaws of supply and demand work, but with long leads and Jags in these adjustments. In various ways, Iheseobstacles represent counterproduc­tive effons 10 have "the other guy" in "SOme other area" take responsibility for achieving national goals. These "myths" have prevented the daiIy in­dustry from working together to solvea national problem of overproduction and achieve national policy goals. ,-

EndnQtes

I. Anolller point of view is \hat. for each 2.000 cow herd that eNollcd in the DTf'. 50 herds of 40 cows each could remain in business, for any given bu)'-out Larget.

2. Because the 1985 Food Secwity ACI reduced Lt~ loan r;lteS for suppol1ed crops. the mllk·feed price ratio improved dramatically. This reduction in reed price~ prOVided an economic benefit to all producers, but was of greateSt benefit to milk. prOOlXcrs who pw­chase Lhe bulk of Lheir feed. The on·fanT! usc of grain for feed (a common pracuce in \he grnin.prodLlCing Slates of the Upper Midwest.) is \e5.S profiLllb!c (()(Jay than purch.:tsing feed (the prevalent practice is! California). As a result of the feed price recluctioll. California's cash expenses have decreased by 10 pero:n\ more than those III the Upper Midwest.

3. As a related maUeI, by e~amilling government purchases in California, one can see thai one majorcause of sales \() the CCC isan imbalance in the proce.~sing volum~s between butter and cheese. Reallocating Lhe usc of milk Dom bUlLer·nonfm dry milk production to cheese production might result in a redocoon in sa.1esoo the CCC in many regions. However,

71

sales of prodoclS 10 CCC from other ue&.S rna ywdl \ncn:ase bxauseof reduced sales ~olume ~ lllc markets thal are accomplishing reallocation,

4. The variation oftlle pric.e suppon loan rale by coonLies [or row crops is 0013 regional application of such prQgrafIlS in Ihe sarfle sense as "regional" variation is diswsscd in the dairy i!\duw),. Crop progrnm loan fllle vMaliens ar~ based on the COSl of shipping the produCt to nearby terminal markeLS and reOeclS oomul, hislOric markeling palls;ms. Such a policy is, in faci necessary LO avoil! markel disruption..

II has been suggesled!.hal the dairy price suppon: program be altered LO reneel the COSl of transporting manufactured dairy prodUCLS from surplus toderl(:il mMkelS. nus approach, il is argued, wO\lld more nearly renea administrative praclkes under olher programs. This paraUcl docs not hold.

S. For clample. lllioois milk produc(:l'S. geographicaUy juxtaposed to Wisconsin (a "wrplus" Stale by !l)OSI definiLions used by anal)'sts). would be included in a "surplus" region_ Should lUinols producers, produong [01 the Dlinois "deflci," markel (by mOSI def Illi· lions), be rt4uired \0 coruorm \0 program requirements different from those applicable to producers who are located in other "dcfici\" aJCaS of the Nation (for example. Florida)?

6. Milk moves across Stale lines COI1Stal\lly. If rnilk from South Dakota is mipp¢d \0

a plant in low;;, where it is separated and the cream shipped \0 a plant in MirmeSOUl \0 be churned into PlIller. what adminisw,u.ive contrOls mllSt be applied to the South Dakota producers under 3 regional program?

7. A manufacturing (or 'make") aUowance is used in tlle federal price support program to permit a "translation" 0/ the minimum milk price re<;eivet! by a milk producer into tlle an· nounced purchase prices of buuer, cheese. nonfat dry milk, The make allowance allOWS a manufacturer to recover the COSts of conyenlng maoofacwring grade milk intO dairy products the government buys and Stores. The U.s. Department of Agriculttm considers tJJ.e make aliowanceadequ3lC if, on an annual tJasis nalionwide, tJle producer price rcc.::ived (or manufacturing grade milk: equal~ or Qceeds Lhc S\lpport price for such milk.

8. California producers are paid according loa sUllewidesystem of milk usedetennina­Lion, WIth a lhrte-tier priority system, tndivid(l31 producers m:dve payment according to the amount of"quota: "base," and ~overbase" that is owned, See LJ, Butler, "Do Slate or Local Regula~ons Interfore with the Federal Milk Price Suppon Program?"

Chapter 6

• Recommendations:

Advertising and Promotion

Advertising and promotion boost consumption of dairy products, help­ing both !he fanner and the taxpayer. The National CommiSSion on Dairy Policy favors continuation of these programs, financed through mandatory assessments on milk producers.

However, advertising and promotion programs should be monitored to detennine their benefits 10 producers. Promotion should be COSt effective, with changes in consumption serving as a guideline for spending 00 adver­tising by the early 199Os.

To assure sufficient inforrnarion is available to the indusuy on the COStS and benefits ofadvenising and promotion programs. Congress should direct U:SOA to galher nationwide data peninent to evaluating dairy promotion ac­tivities. The Economic Resean::h Service should organize the data to produce a comprehensive set of statistics describing the dairy industry.

Consolidate to be more efficient The Dairy Production Stabilization Act of 1983 that established the National

Dairy Promotion and Research Board refers \0 a "coordinated" promotion program. ConSOlidating functions of the National Dairy Promotion and Research Board and the United Dairy Indusoy Association could reduce ad­ministrative expenses, lmprove communication, and save on program COSts.

The dairy industry should improve delivery of nutrition education through the National Dairy Council and its affiliated units. As a non-protit nutrition education and research organiz.ation, the National Dairy Council has received tax-e,-;empt status from the IntelT.al Revenue Servke. This al­lows it to receive contributions thaI are tax deductible to the donor. The Commission recogni1.es the value of this tax-exempt Status and SlIppons ef­forts to maintain the National Dairy Council's designation as a non-profit educational organization.

Funding for qualified Slate and regional promotion programs should be maintained at 10 cents per hundredweight. The National Dairy Promotion and Research Board, or a consolidated promotion group, should assure state

(73)

74

and regional panicipation in promotion programs. Funher, coordination among regional programs should be encouraged.

The Commission makes Ihese specific recommendations concerning dairy profflOlion and advertising programs:

• The functions of the National Dairy Promotion and Research Board and tOe United Dairy Industry Associa.tion should be consolidated in 1988 to avoid COSIly duplication of effon. It is expected thai this consolidation would nOI affect the National Dairy Council's status as a separate, non­profIt nutrition education and research org3J1ization.

• Mandatory participation by all milk producers in [he nalional promotion program, with a promotion check-off, should continue.

II No increase in the promotion assessment should be approved unless strong evidence verifies the COSl effectiveness of the proposed change. This effectiveness should be demonstrated through a study to detennine the benefits and the cost of the change.

• USDA should assist in dctennining cost e.ffectiveness by providing nationwide infonnation on changes in supply or demand for dairy products. This data should take into account consumption panems, in­come levels, demographic pallerns, and price responsiveness.

• Federa.l competitive grants should be aUlhoriz.ed specifically for research leading !O the development of new dairy products thaI would increase the dairy industry's efficiency, producliviry, and ability to compete imernationally.

75

• Background

Advertising and Promotion Dairy produci promotion has increased commercial sales of milk 3nd

dairy produclS. IJ'Icrcased s,a1es have resuhed in higher milk producer income !,han migh! olherwise prevail. Also, a dramatic redoclion in lhe volume of surplus has re$u\led from increased sales of milk aod daiiy prodllClS, ~r~·

by reducing lax payer costs for the milk price support program. While il is nQ! possIble 10 have a precise calculation of the payoff from ongoing promo­lion aJ'ld adven.i!:ing because of limited economic analysis, the effect of advertising On da.i.ry product consumption is po~itive. For an industry in which consumption shifts of less than 2 percent can change the mille: price suppon by nearly 10 percent, every effon must be made to stimulate con­sumpl;on increases.

Funhet gains in commercial sales of dairy products are possible. However, (0 achieve any increase in commercial sales, advertising program effectiveness must be maintained and improved.

Consolidation of promotion functions While the National Daisy Promotion and Research Board and the United

Dairy lndusU)' Association have served the dairy irKIustry's promotion effort well in the past, the functions of these twO organizations should be con­solidated 10 avoid unnecessary duplication and confusion, and to increase the efficienc), of dollars spen t on promotion.

ConsoLidatio;l of me promotion effort would increase the potential For prognro savings through advanced program planning and betler integration of state and regional groups into the planning process. Funher. by con­SOlidating thc functioos of the fWO groups and eliminating duplication. admitl istnove CQSLS can be reduced t/uoogh reductions in surf. facilities and (elated eKpenses.

The consolidated organiulioo should continue promoting and advertis­ing dairy produclS on 3 generic basis, but should remain open 10 possibilities of ~ting pn;IITlOfion toward specific .sectors of the population in :In effort to incro3Se sales. Also, promotion spending should be directed toward market analysis and devdopmcnl of new dairy prodOCIS, especially low·fal produclS which have great consumer appeal. Laws fhat prohibillhe use of dairy produc\S in non· traditional ways should be repealed.

76

In order 10 assure the necessary funding for such research, federal com· pelitive grants should be authoriz..erl specifically for development of new dairy products. Development and marketing of new products should result in an increase in (he efficiency, producliviry, and abiliry of the U.S. dairy in­dustry 10 compete internationally.

Theconsolidacion ofthe~ two organizations, however. should no\ jeop. ardiz.e Ihe efforts of the National Dairy Council and its aJrt.lial«i units. The National Dairy Council offers an errective nationwide network of mUliDan education programs that operate in the public inftrest. The National Dai.ry Council should therefore ~ supponed and encoor.lged in h~ activities. Fur· ther. Ihe national promotion groups or Ihe consolidated group shOuld encourage the grt.alercoordinalion of all regional dairy promotion activities. Such programs are beneficial to the dairy producer and Ihe JlUpayer alike.

licensing process There is a need (or greater cornmun ication between groups performing

dairy product reseuch and groop~ fundlng dairy producl reseuch. Pr~ent· Jy. time is being wasted in the product licensing process because of dlsagreements between thc researcher and the research f'-lnder regarding righlful owneclip of the product patent. The two concerned panics should make an agreement concerning palentownership prior [OConte3Ct selllemem 10 .runimize rime spt.nt licensing the new product.

Consumption of dairy products Dairy product consumption increased in IOta! by approximately to pet­

cen! during the three year period 1984 through 1986. Measured on a pet capi la basis, this increase amounts to an average rate of increase of more Ihan 2 percent annually. The increase is particulaJly impressive when compared to the downward trend in consumption that prevailed from the mid·1960s onward. Much of the increase is attributable 10 cheese consumption, espe­cially in<:reases in the away· from-home consumption category.

H.i$\oncally, price and income changes are the m<\ior influences affect­ing pel capita: consumption of dairy products. Strong evidence exists linkiog the rtctnl upturn in the consumption trend to; (I ) increased real consumer income; (2) deCTcased prices for some d3u-y produclS; and, (3)changes in the price of daily products relative 10 the prices of olher foods. "Ithough resuils· ase tenta:live because of limited economic a.'"Ialysis. advenising also appears 10 be responsible ror a panion of the increase.

The need for grealer data colleclion The direct benefits of the daily ad venising and promotion effons are dir·

ncult 10 mea&ure because of lack of usabl e informatioo, especially information concerning d!oiry product cons.umption through meals eatcn

77

away from home. Data and analysis regarding the effectiveness of promo­tion indicate that additional funding for dairy product promotion could be justified on the basis of increasi ng consumption. However, there are some indications that the increases in oonsumprion may not be significant enough to justify increased promotion assessments. Specifically, the per-dollar benefit to milk producers measured against the increased cost (promotion as­sessments) may diminish as moredollarsarespent. But the available an alysis on the subject is insufficient and inconclusive.

In this regard, the Commission Cllpec ts thaI additional research and data collection will be undertaken by the U.S. Depanment of Agriculture to:

(1) gauge the cost effectiveness of promenon effons; (2) provide usable informariOfl 00 the effects of dairy product price

changes on consumpt ion of dairy products in the away-from-home market, and especially on use or dairy products as ingredients or intennedi::ue products; and ,

(:3) identiry any likely benefits nom a redisuiborion of funding for promotion effon, from one geographical area 10 anot her, from one product group to another, or a combillation of the two.

Chapter?

• Recommendations:

Technology Technological advancements in sorne areas--including genetics. animal

nutrition, disease control, and computers-will bring major changes 10 the dairy industry in the next d¢:;ade. The National Commission on Dairy POlicy recog­nizes mal these changes are Likely to increase efficiency, lead to increases in milk production, and could boost U.S. dairy surpluses.

The dairy industry should plan for both the challenges and opportunities these changes present Likewise, the federal government should recognize, plan for, and accommodate technological advancements in determining fUMe dairy policy.

Move safe technologies quickly to producer use New technologies should not be barred from use based on their potential ef­

fect on milk industry structure. However, before technologies are marketed, it is imponant forfedcral authorities to detenninc their effects on: (I) wholesome­ness of product; (2) consumer perception of products made with the technologies; and. (3) the health of animals 10 which they are applied

New technologies that are shown to be safe should move quickly to the farmer and dairy processor \0 maintain the U.S. position as a worldwide leader in dairy production. However, the United States should use caution in prOvid­ing technological knowledge to ilS international competitors. Comprehensive educational programs should be-adopted for controversial technologies such as oovine somatotropin. These programs should be d.irocted toward farmers,. con­sumers, food distributors, the media. and the medical community, among others. Despite such efforts, some prooucers will fail to adopt new technologies. The economic viability of their farms may be hampered as a result.

Concerning teclvwlogical advancement in the dairy industry, the Commis· sion makes this specific recommetUfution:

• New technologies should be explained through media·oriented educational programs. The Agricultural Extension Service, with adequate funding from Congress, should playa major role in this effan. The education of milk producers concerning technologiCal advances, especially in production techniques, should have a high priority. The consumer represenlS a separate but imponant audience for such educational. programs.

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81

• Background

Technology In view of iLSmandlltc \oSludy technological changes in milk production

expected by the year 2()(x), the National Comm;ssion on Dairy POlicy re­quested technical papers on a variety of subjects induding animal nutrition, pest conrrol, disease control, and reprodUCtion. Based on !Ivai lable informa­tion concerning the effects of emerging technology on Ihedairy industry, the Commission finds thai, in the nCM future:

{I )The national dairy herd will be genetically superiorto today 's herd.

(2) The reproductive process could be almOSt tOtally conrrolled.

(3) Dairy science will produce faster growing and faster developing animals, with less unproductive lime in the animal's life span.

(4) Dairy animals will be more disease resistant and management of animal heaJth wiU be easier, less lime consuming, and less costly.

(5) The use of new technology will be dependent on both the manage­ment ability of the milk producer and the actual profitability of the technology practically applied.

(6) New prodoctive technology may be used first and predominantly by rums specificaJJy organized to produce dairy cows, leading to increased specialization and new enterprises in the dairy induscry.

(7) Production COSts pef hundredweight of milk could be reduced as more efficiency in (he conversion of feed (0 milk occurs.

(8) Management ability of milk producers will be enhanced by com­puter and ,nfonnation systems.

Livestock reproduction Reproductive inefficiency is one of the moSt costly and production·limit­

ing problems facing the dairy induscry. However, opportunity for improvement lies in research permitting milk producers to control or altef reproduction, reduce losses, and increase milk production. ., Applied genetics" in livestock breeding already inOuences dairy prices and profits. Areas in which advances are expected over the next 10 years include semen s1Orage. early pregnancy testing, superovulation. spenn/embryo sexing, ar­tificial insemination, "heat" synchronization, in vitro fertilizalion. and freezing, transfer, and spEning of embryos.

9&-555 0 - 89 - 4

82

Together, these technologies make possible almoSt toW control of the reproducuve process of farm animals. Research in this area could resuh, by the year 2000, in marketing genetically engineered embryos with gene$ that could boost fertility and result in improved rates of gain. increased milk pr9duction, and more resistance to disease.

Nulrition, health, pest control, and plant science With feed costs faCing an uncenain future, nunition research will be

extremely imponam in the years ahead. The availability and cost of forages. grains, protein sources, nonconvemional fewsruffs, and other nutrient resources must be evaluated for effective animal producLion. Advances in microbiology and digestive physiology will affect O1Hk production, milk composition, and efficient feed use.

Health delivery aJso wlU change as new technology becomes available, In the future, computers a.1d biotechnology will allow better m3Jlagernem, more rapid and accurate diagnostics, and safer, more effective vaccines. Computers and rapid diagr,ostic substances will perroitquick assessmenlSof animal health while computerized health management will enhance produc­tion monitoring and the sche<1uling of vaccinations and treatments.

Parasites cause the dairy industry to Jose more than $175 million a year. Although farmers will continue 10 use standard insecticides. the technology of application is changing. For blood-feeding insects, research is develop­ing slow· release pesticides. Recombinant DNA technologies will be used to develop vaccines for insect·vectored ws.eases such as blue lOngue and pinkeye.

In the area of plan I bimechnology, genetic engineering initially will em­phasize such traditional targets as increased crop yield, improved quality, and reduced production costs. Ultimately. the technology will lead 10 the development of unimagined improvements. Traits such as resistance to her­bicides and pests and tolerance to various stresses appear manageable using gene transfer technology. Properties such as protein and oil contenl, amino and fatty acid composition, and pigmentation also an-: likely to be modified

Computer/information systems New applications of computer technology on farms are being devised

constantly. Software programs already can analyze agricultural projects fmancially. compare two enterprises, schedule a preventive medlcal program, a.ud perfonn many other tasks. Addilional use of communication lech· noiogies wiU make more information available to farmers. boosting profits and permitting more efficicm use of resources. Farmers should be en· couraged to apply more information management techniques in their operations.

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SST; Animal or human health concerns I n the area of tcchnological innovation, considerablo iOieresl and specula­

tion has centered on growth hormone (bovine somatotropin) or B5T. In dairy catde, !his hormone is one factor regulating milk production. Studies show that SST, which may be routinely available as early as 1989, could increase a cow's milk production as much as 25 percent.

Based on available evidence, Lhe CoITUTI.ission concludes BST, when properly used, does not pose a health threat to animals. Further, milk produced Eromanimals treated with BST is indistinguishable from milk from animals not treated with BST. However, BST has not been approved by the Food and Drug Administration for commercial use. The Commission does not intend to prejudge final evaluation by appropriate federal agencies.

Current and planned tests will establish the degree of health risk-if -any-that SST presents 10 animals. Improved and more intensive manage­ment of dairy herds may be necessary to evaluate problems. However, decisions concerning SST use----once it is approved by FDA-are for milk producers 10 make.

Despite all evidence to the concrary, consumers may perceive that milk from SST-treated. cows constitutes a health risk. An effective educational program explaining the nature of SST and its use in milk production could be e)(.tremely effective in blunting consumer concerns. Accurate infonna­tion will minimize possible adverse reactions and harm !O the dairy industry.

A thorough, comprehensive educational program penaining to SST, C)(.­

plaining its appearance as a natural component of milk from cows, should be undenaken. Initially, the program should be directed toward farmers, con­sumers, cooperatives, handlers., and grocers. Beyond that, it should target newspapers, maga:rines, radio, television, and other media that educate con­sumers.. the medical community, and government policy-makers.

Primary responsibil.ity for funding this program rests with the phar­maceutical companies producing SST. The dairy industry shOl.lld be involved to assure the program does not adversely affect dairy product promotion.

Adoption rate of EST Management and economic relationshIps primarily will delennine

whether SST is w1dely used when it becomes commercially available. Sk..illed managen: w111 quickly evaluate any health change in their herds and w111 calculate the difference between profll!> before and after BST adoption.

Profitability will be determined both by the technical characteristics of BST and the management skills applied to its use. The method used to ad­rninis.ter a dose of SST-that is.. daily injections versus slow-release

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implants-and the marketing of BST are other factors thaI could lirriit usc. Neither of these is conrrollable by Ihe dairy industry.

Since BST use does not require substantial capital outlays or changes in operation, it is unlikely!O be economically advantageous (orone size of dairy herd over anolher. Concerns about consumer acceptance of dairy products are unlikely to inhibit use because fanners could rapidly withdsaw use of BST from their herds,

Social effects of technological advances Past improvements in technology have resulted in reduced labor and COStS

in dairying and penniued rremendOll$ increases in milk production per cow. BUl these benefits have not come without cost. There are fewer dairy farms today. In some rural areas, fewer farms result in fewer rural residents, with a corresponding decline in the number of schools, churches, and businesses.

Will BSTand other emerging technologies affect the trend IOward fewer bu; larger dairy farms? Most research indicates the "fewer bUllarger" trend will continue, especially in the South and West, regardless of BST use, However, adoption of BST could reinforce the trend to larger herds.

Effects on production and feed What scientists have leamed aboutlivcslock, plants, and computers has

increased U.S. agricultlJ.I<ll productivity 40 percem over the last hal r century. Milk production per cow has more than doubled since 1950.

Technologies expected to become pan of the dairy indusoy in the near future undoubtedly wiU result in additional increases in milk production and ,a sO'ong potential for milk supplies to be greater than consumption. Reduced costs to c.onsumel1i could boost consumption but there is no indication this increased consumption wJI offset increases in supply_

Increased milk supplies could cause dairy products 10 accumulate and boost government purchases under !he price suppon system. Based on tes· timony at 10 regional hearings, the Commission observes !hat most milk produc(;fs believe, in the absence of a specific program lir.tiring production, each fanner should be able to produce unlimited quantities of milk. While new technologies will offer farmers the chance to reduce herds and maintain production levels, most will increase production if the profit incentive is Ihere. If individual decisions result in even marginal increases in produc­tion, total output of milk could increase dramatically. However, the dynamics of this process will eliminate producers who choose not 10 adopl new technologies.

Improved (eed err lCiency likely will result from the introduction of some new chemical and biotechnological products in thedairy industry. While !his is a positive resull, it has (I number of major economic implications. Some

85

lechnologies will decrease the number or 3<:TtS ntcdcd 10 produce feed . However. BST' l1eated cows demand increasal nutrientS 10 suppon Ihe in­creased milk yield. They can obwn these nulrienlS by increasing volun.My feed imake and by increased nulricnl density in the raoon.

Both govemmem and the dairy induSITY should anticipate Ihe arrival of new technologies and adjusl3Ccordingty to Ihe challenges and opponunities these Icchnologits prestO! . USDA. (or (:'.(3J1'I9Ie. should considel the effects of new teChnologies before adjusting the $uP90n price for millt;. Likewise, increased production stemming from emerging technologies should prompt !.he dairy industry 10 increase its market expansion efforu, both foreign and domestic.

Research direction For many years. research to increase productivity h.as been the 101' priority

of the d;liry industry. However, with ample milk supplies and Ihe capability of producing a greater volume in a soon time period. it has become neces­sary 10 bllllflce n:se.arch funding among productivity, new product development, and market developmenl .

It is still vital th8.1 research be conducted on improving the effieiency of milk production. However, greater emphasis-with more funding from all sources-must be placed on product development and market research directed toward increQSing consumption of dairy products.

Chapter 8

• Recommendations:

Food Safety and Product Identity Standards

Maintaining the m.1rketing o f safe, high quality, nutritious. and identifI­able milk and dairy prodUCIS is of prime imponance to the dairy industry. To further this goal. 1m: National Commissk>o on Dairy Policy believes USDA and the Food and Drug AdminiSlnuioo must work more closely to assure a wholesome food supply to consumers.

Adequate funding to provide milk safety training resources to stale regulatory agencies and to the daisy indusuy s~uld be provided. Education progr3.ms for milk producers and veterinarians should be expanded (0 en­courage safe and effectiyt animal heallh to minimize the potential (or milk or meal Contamination .

Congress shou ld undenake oversight hez.rings on FDA's health claim labeling proposal of Augusl4. 1987. If adopted, this proposal would require that health claims on food be supponed by valid, rel iable, and publicly avail­able sciemif1c evidence.

The Commission encourages research aimed ale liminating dairy product surpluses in addition to research increasing efficiency of production. FUlUre regulations should not restrict use of new dairy plod\>Cts but shoold assure that the content of the product is properly labeled.

USDA should continue cooperating with the industry to develop guidelines and standards for sale of product to the Commodity Credit Cor· poration and to promote cost·effective, in.plant surveillance of products under USDA inspection.

Grealeruse should be madeofthe "Real Seal" emblem 10 idenliry Henuine dairy products. However, this industry·sponsored program does nOI re lieve lhe r\!deral government from its respoosibiJiry for preventing fraud and deception in iood product labeling.

,.71

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Concerning milk/ood saJeryandprodu.cl idcnfiry standards, rile Commission makes these specific recommendations:

• The Food and Drug Adminisrration should specify allowable levels for residues thaI arc detectable by scientific valid lesling procedures based upon a significant relationship 10 public health. Major emphas.is is needed to develop practical and sensitive on-farm procedLlres capable of screening agriculture products to measure allowable levels.

• Currently FDA has neither the resources nor a high priority program for enforcement of economic standards which prevent fraud and deception in [he markerplace. Greater emphasis is needed in two specific areas: (1) enforcement of existing Standards of identity \0 protect the consumer from fraud and deception; and, (2) enforcement of misbranding provisions of the Food, Drug and Cosmetic Act, panicularly with regard to non-standardized foods which purport to resemble foods for which standards of identity or common or usual names have been established. If properly carried out by FDA, such effortS should prevent fraud and deception in the marketplace and Should, therefore, be funded in pan by the t.axpayer. Present standards of identity for traditional agriculrure prodUCts should be maintained. Efforts thai serve 10 preserve Ihe iden­tity of standardized daiJy products should be funded in pan by the daiIy industry. The Food and Drug Administration should place a higher priority on enforcement of standards of identity by providing greater resources for monitoring the misbranding of all foods, panicularly new foods developed to simulate standardized products.

• Individual state laws aJld regulations, such as California's Proposition 65, thaI supersede federal food safety standards for tm:ic cherrUcals and carcinogens should be prohibited In situations where no federal stand­ards exist. they should be established.

• UnifomUty in product standards and labeling remain essential to the promotion of efFicient produciion, marketing, and distribution of food moving in interstate commerce. Federal law should requireLhe term "im­itation" to be applied to any food product that simulates a standardized food in order to promote honesty and fairdealing in the interest of con· sumers. Congress should define the term "imitation" toelanfy existing FDA regulations which base imitation solely on the crileria of nutritional inferiOrity, contrary to Ihe intent of Section 403 of the Food, Drug and CV~1I1t:tic Act.

• f-DA should withdraw ils health claim labeling proposal of August 4, 1987.

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• Background

Food Safety and Product Identity Standards

As the National Commission on Dairy Polky probed into areas of economic importance to milk producers and the dairy indusrry, it became evidem th:l! the- dairy indusrry w-iH continue to be in a strong position to

market safe, high quality, nutritious and identifiable dairy products.

When examining the probable effects of new technology, it became evi­dent that tremendous strides have been made in Lhe last several years [0 develop rapid. sensitive and sophisticated diagnostic equipment which has the capability to literally redefine the legal definition of "zero tolerance."

For the dairy industry to cominue to meet more stringent standards governing microbiological contamination and residue standards for an­tibiotics, pesticides and toxic substances, more effort is needed to develop on-farm ~creening methodologies which relate 10 the sensitivities of laboratory d¢teclion and conformity methods uS«! for enforcement purposes. Without such emphasis and capability, the milk producer and processor wiD not be able to cope with the sensitivity method policies being implemented by FDA and USDA.

It is essential that regulatory agencies develop allowable limits for levels of residues that can be related to a significant public health risk under an ap· propriate risk·assessment analysis.

The effect of technology is not limited \0 the development of new products of biotechnology, suc.:h as SST or diagnostic eQ.uipmenc Tremen­dous advances in food science provide manufacturers and marketers with new food products which have advanced capabilities to simulate the identity and composition of agricultural products such as Cheddar cheese, yogurt, and other rraditional dairy products for which standards of identity have been prescribed by FDA. Without proper emphasis and enforcement of such standards, fraud and deception becomes more commonplace in the market

While FDA has been charged under the Food, Drug, and Cosmetic Act with the responsibility to prevent fraud and deception, the Commission has received testimony that FDA lacks resources and has thus relegated the en­forcement of oconomic standasds to the lowest of the low priorities of Ihe agency. More funding for this effort should be provided. The Commission

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urges cooperation between the dairy industry and FDA \0 place a greater priority on enforcement of misbranding and economic standards which \ViII prevent fraud and deception in Ihe marketplace for Ihe benefit of bOlh producers 300 consumers.

Wnh respect 10 labeling and misbranding of dairy products, the Corrunis­sian lakes issue wilh the FDA regul,l[ion which provides lhat a food that resembles and ~ubsti[U!es for anolher food must be labeled an "imitil[ion'· only if i\ is nutritionally inferior 10 Ihe food for which il SUb$lilllles. TIm regulation is inconsislem with Section 403(c) oflhe Federal Food, Drug and Cosmetic Act which stales thac

a food shall be deemed 10 be misbranded ifil is an imitation of snOiber food, unless its label bears, in type of uniform siz.e and prominence, the word "imitation" and immediately thereafter the name of the food imitmed.

The FDA regulation should be changed so that it is consistent with Sec­tion 403(c). In Lhis regard, Congress should define the term so it is consistent with the law it e-Stablishecl. The Commission believes thalconsomers should easily be able to know whether the dairy product they are purchasing is a rraditional dairy product or an [nUtation.

With regard to the FDA health claim labeling proposal of August4, 1987, the ComnUssion believes there should be additional review of the proposed guidelines to assure that: (1) a heallh or nuoition;u related claim is clarified in relation to the need for a balanced diet; (2) a proper basis for enforcement is established; (3) FDA and the Federal Trade Commission coordinate policy and Implementation of guidelines on health claim labeling and advenisUJg; (4) health claim comparisons made between individual foods or classes are restricted; and, (5) FDA gL;idetines addressing [nOSe foods which are qualified to carry health related claims or messages be consisteD\ with FDA's fortification policy.

The Commission urges FDA to withdraw and resubmit its proposal after addressing these concerns.

As the Corrunission learned of new developmentS which effect the. m3Ikeling of milk and mil.\:: products, it became obvious that Ihe role of in­dividual slales in lhe development of product swndards and regulations designed to protect food safety can have a significant effect on milk producers.

Califotnia's Proposition 65 is a prime example of a well-intentioned in­dividual Slate iniliative which drastically changes the underlying b3sis and assumptions inherem in food safety standards promulgated under the Food, Drug and Cosmetic Act.

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The Corn:atiss ion believes such state inioarives can be very demmenw 10 lhe production atld tmrkeling of food within reason3bk economic COSts. Wilhoul D'IOI'e scienriflC evidence lhal the cum:nl federal system is inade­qua lc, the Coovnission has dClcrmined thai unifonn State standards are e»entia] to avoid a major disruption in 8griculrural matkering.

In rtaction to the lack of federal initiatives lodevelop new produci stand­ards for low-fa t dairy products or to modify existing special dietary regulations 10 encounge!he development of new or modified low-fat aher­naLive dairy products. several stales have undertaken jrutiatives to develop intra-Slate staru:lards.

Continued effons on Ihe pan of individ ual Slates to develop new SraJld­aids for low-fal dairy prodUCIS prescms a piecemeal effort to rectify a probleru requiring federaJ initiative 10 develop new standards for lower fat dairy products The Commission discourages inruvidua1 smes from promul­S31ing such st3t1dacds and encourages unifonn development of new dairy product st.andatds with appropriale f«lera! initiative and resources.

Chapter 9

• Recommendations:

Trade and Aid Programs

The Nalional Corrunission on Dairy Policy urges [he dairy industry 10 ex.plore and develop additional market opportunities overseas, making par­ticular use of long-leon marketing and con$umereducalion plans. However, these effortS should nOI adversely affect an importing country's plans for developing ils internal milk production potential.

Efforts 10 boost expons for markel development should concentrate on low-income nations where markets do not now exist. Research should con­tinue to develop products for foreign diets and lower-income nations.

More information needed on trade reform proposal The United Stales has proposed agricultuJ4..l trade refonns to the General

Agreement on Tariffs and Trade aimed at eliminating tariffs., qUOlas, and both domestic and elqlOn subsidies. The Commission believes a free international trading environment is unachievable righl now. Before the United States agrees to any modification to GAIT as an outcome of the current negotia­lions. the advantages of any such agreement for the dairy indusrry must be snown. The Commission would welcome an analysis showing what benefits-if any-U.S. milk producers and consumers would receive after one, five, or 10 years under such a system.

The Commission recommends that tmprovements be made to the trade negotiation process currently being used. These improvements speCifically include an increase in the communication between dairy indusrry leaders and the U.S. trade negotiators. The Commission recommends that the U.S. Trade Representative's Officese!ect individuals with previous rrade negotiating ex­perience and either specific public or private industry experienct. in dairy policy. The negotiators should be thoroughly knowledgeable of the agricul­tural and trade policies of major U.S. trading partners, and should be familiar with the negotialing process of those nations.

The Commission notes that some past foreign policy decisions have 1:x':en exrremely disruptive to agricultural trade. Federal policy-makers should lake inlO account the effects of economic and social policies that hinder the trade competitiveness of the dairy industry when formulating trade policy.

(93)

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Imemationally, such policies include monetary policies aJld import restric­tions. Domestically, they include solei health and environmental standards that assure dairy productS produced in the United Stales are attractive to con­sumers. Such policies and standards, however, increase COStS and decrease opportunities for overseas eJl;pon sales,

U.S. should not adopt foreign dairy practices Afler surveying the d~ policy and industry characteristics of those na­

tions considered 10 be imponam U.S. trading partners--AuslT3lia, Canada, New Zealand, and the i2-nation Europeao Economic Communiry-the Commission concluded thai neither the U.S. dairy industry nor U.S, con­sumers would benefit significantly from adopting the dairy practices or policies of these nations. Many of the policies were considered dlfflCUlt to implemem or unnecessary.

To encourage export sales of dairy products, the Commission recom· mends that in the event the Secretary of Agricuhure implements a production cono-ol program (here could be compensation for any penalties as~essed on over-base production for those dairy products sold for eJ\port use.

The Commission makr!s lhese specific recommendmions in me area ofillier. nalionallrade:

• import quotas on dairy products authorized under Sec.ion 22 of the 1933 Agricultural Adjustment Act Should be maintained and enforced as long a~ "free international trade" does nOt exist. They should nOt be eliminated or increased during negOI iations of the General Agreement on TaJiffs and Trade.

• Because the current volume of casein impons interferes with the milk price suppon program, Ihe volume of casein impons should be reduced and casein should be reclassifioo as a dairy product and subjected 10 Sec­lion 22 import quotas.

• There should be pubhc and private funding of -studies to ascertain which countries represent a potential market for U.S. dairy products and which countries are potentially self-sufficient in production of rn.ilk and dairy products.

• USDA should maintain dairy product disoibtltion programs that en· courage the increased use of dairy products.

• USDA should require an annual mimmum quantity of domestic dairy preduct.'> 10 be used in Food for Peace programs.

• USDA should encourage the development of inlem:llional markets for dairy products and dairy callie by assisting industry-initiated aClivities through useof the Dai..,"), Export Incentive Program, or by greater use of

95

the Export Enhancement Program. Dair, products must be made avail­able for such efforts (or an extended period of lime. \Vlleredairy products can be used in overseas donation programs thaI eould lead 10 new markets, such use should be great! y expanded.

9'7

• Background

Trade and Aid Programs Possibilities for international trade in dairy productS must be revtcwed

in the contexl of !.he commitment (0 serving the domestic market The milk price support program exists \0 assure consumers an adequate supply of milk and dairy products al reasonable prices, Over the Iong-[cnn, fulfi lling th is Objective requires maintaining Ihous3Jlds of profitable and efficiem dairy encerprises. The dairy industry of the United Stales effectively uses finan­cial, human, and natw'al resources 10 produce a valuable product under these conditions.

Currently the dairy industry directs mark eting t ffons 10 increasLng sales in the domestic market However. the domestic mmel is:I Limited market because our popuJalion renec[$ an inelastic demand for foodsruffs. One pos­sible approach to inmasing product sales, and hence industrY profit. is to market dairy products overseas. This approoch has been taken by OI.hercom­modity groups in the past. and. while the overseas rrwkel is a source of economic risk and uncenainty. il can be a potential source of additional economic rerum 10 the U niled States dairy UtduSIJ'y_

The following infonnation describes signif.c.a.tlt 3SpeclS of opponunities for either trading or distributing dairy products on the overseas markets. The information is categorized under the following subject he3dings: distribu­tion and export possibilities in ovuseas markets; competitiveness of agriculture in international Dade; a review of the current Genera! Agreement on Tariffs and Trade negotiations. the role of Section 22 at the GATT negotia­tions, aJ'ld a summary of dairy programs of four major trading partners of the United Slales.

After tcviewiIlg the available inform.Uion. the National Commission on Dairy Policy has reached severa) conclusions:

(I) USDA must assist iniriaJly with aJ'ly overseas profit-seeking ventures proposed by !.he dairy industry and should include dairy products in its over­seas donation ~d sales programs. If the dairy industry is to expand to overseas markels. USDA must assist with any industry proposed profit­seeking vemures. USDA asSiSL~ with er.pon.ing many commodities through either donation or Wes. programs. USDA should include dairy products in these programs-for example, the Expon Enhancement Program.

98

(2) There should be public and privatt: fU Ming of srudies 10 asceruin which countries represent a potentiaJ markel for U. S. dairy prodUCt s and which countries are potentially self-sufficie nt in proouction of milk and dairy products. The Commission believes lhal dfons should be :aken to Siudy market potential for U.S. dairy products in olht!f nalions, panicularly those of strategic importance. There is a need for both public and private funding to perform such sludies. 1£ any such Studies presenlly exist. Ihe informaoon is no! readily available 10 the dairy industry, nor is it in a fonn Ih:ll is easUy usable.

(3) Some policies hinder Ihe dairy industry 'S trade competitiveness. There are economic and social policies which hinderthe U.S , dairy industry's competitiveness on Ihe international market. Internationally, lhese policies include the monelary polkies and impon reso1ction ~ of other nalion s. DOrn¢stically. U.S. mHk producers adhere to so1Ct health and envitonmeOlal standards. TheSe standards ensure a quality level which atcr:l.CtS customers. However, these standards also increase production costS which decreases the level of net re\Urn.

(4) The quO!ClS establi sh<Xl. under Section 22 should not be renegot iated in future GArr negotiations. JU St as the Commission stroJlg ly supports the milk price support program, it also strongly suppons the Section 22 quotas for dairy products-the two are tightly linked. Section 22 authorities.. effee· tivdy applied, prevent interference with the effective working of the mill: price suppon program. These quotas should nOt be renegotiated in Ihe cur· rent GAlT trade talks.

(5) The volume of casein impons should be red uced ane! casein should be reclassified as a dairy product and subjected to Section 22 itnpon quoUis. Casein is the principal protein in milk and serves as the U.S. govern ment standard against which all other protein is measured. Casein and nonfat dry milk are alternative end products from the processing of ~kim.med milk . Casein, in its fonn as sodi um caseinate, is not produced domestical ly, and the dairy industry claims that it is subsidited by the major exponers. In ad, dition, dairy indu stry cri tics claim it interferes with Ihe rrulk price suppon program by increasing the amoum of government purchases of nonfat dry mill:.. Casein is used in consumer packaged food products and for fabricated food products. In addition it also has indusoiaJ uses-in paintS and g l ue~­

and is classilietl as an industria.! ptoducl.

(6) The Commission is interested in asce~;ning the benefits of Ihe U.S . agricultural trade reform proposal plesented at the current OAn negOlia­lions. While [he Commission suppons fair trade in intema uonal markets, III Ihis point in time, an international free trade environment appears to be 3n unachievable goal. The Commiss.ion is imereSled in ascertaining the benelits ofa zero· subsidy trading environment and would welcome an analysis of the benefits thai rrught accrue 10 U,S. m.ilk producer~ and consumers if a free

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trade environment, as described by the United Slaies at the GAIT, were achieved.

(7) The Comrmssion surveyed Ihe dai.ry industries of four major trading partners and concluded thai neither the United States dairy industry nor the consumer would significantly benefit by incorporating any of the dairy prac­[ices or policies of these nations.

(8) Government programs should use only domestically produced dairy productS. Some impons interfere with the industry's domestic market. The industry has but a few adminisO"alive or legal measures available in which to seek relief from products \hal have been dumped on the market. The Com­mission suppons those domestic food assistance programs which distribute dairy products toti1ose truly in need. However the Commission is concerned that these programs may be administered ineffectively.

Distribution and export possibilities in overseas markets The United States depends on world agricultural markets for certain goods

and is asigni.ficantseller in these markel5 as well. The fastest-growing markets for agricultural products are not in Japan or the counoles of Western Europe, but in the developing COWltrleS that are experiencing rapid economic growth. For example, South Korea, once a recipient of U.S. food aid, now purchases more than $2 billion a year in American fann producL<.---¢ven as its own food output increases 3 percent a year. BrariJ, while expanding its agricultural production by 5 percent a year, increased the volume of its imports of U.S. fann commodities by 15 percent over the last dttacle.

Market export potential exists for a number of agricultural products produced in the United Slates. For example, U.S. exports of wheat, rice, $oybeans, and com represent a large part of each year's crop and a ~ignificanl share of the world market's total volume. However, the dairy industry, un­like other commodity groups, exports linle product and does not use USDA's marketing and export programs to the extent as other commodity groups, Some reasons for this include the dairy industry not actively pursuing an overseas mar.keting program and USDA's administration of product disposal programs which resulted in a lack of available prodUCI sW'plus to be dis­tTibuted in 1988.

The Commission believes that efforts shodd be taken to study market potential for U.S. dairy products in other nations., particularly those of srrategic importance. There is a need for both public and private funding to perfonn such studies. {fany such studies presenliy exist, the infonnation is nOI readily available to the dairy industry at large. Specifically, little is known about future potential for increased dairy sales to Mexico, despite that country's obvious strategic importance as a neighboring nation. Nor has there been any analysis of the potential for involvement by U.S. agricultural

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industries in the development and maim.enance of tbedomestic dairy industry of Me);icQ. Other U.S. commodity groups have found greal success in the international markel-the U.S. dairy industry can no longer alford to resoicl itself to domestic markets_

USDA export programs ThedaiJy industry could benefl1 in the long-run from panicipation in cer­

lain USDA programs.

USDAcurrentJy administersexpon programs wilh potential applications 10 dairy. Such programs, directed toward market develo~meol and assisted credit sales, are used only minimally by the dairy industry. In adcLilion j there are programs available undercurrent Jaw that the dairy industry has not used.2

USDA also assists with exporting commodities overseas either through donation or sales programs. These programs are one avenue through which world hunger can be relieved while building future markets for agricultural products. USDA should work in cooperation with the dairy industry (0 en­sure that export sales and distribution programs which are mandated to consider dairy products are administered effectively and for tbe profit of the dairy industry. USDA should also step up use of expon credit programs, con­cessional sales, and product donations in order to create a presence of U.S. produced products in overseas markets.

The. dairy industry is disappointed with the Administration's recent proposals to reduce the PoL. 480 budget and its inability \0 reach the minimum level of dairy sales as specified by the Food Security Act of 1985. Addition­aUy, cenain provisions of the Dairy Export lncentive Program appear 10 be inappropriate and unworkable because, unlike the Expon Enhancement Program, they require the ellponer to receive as a bonus tbe scme commodity that is exported under the program. Also, \.he commercially sold commoclilies must leave the U.S. port befOre my bonus commodities are released, thus reo quiring [WO shipments. Minor adjustments to the program, such as providing certificates [0 be redeemed for bonus conunodities, eliminating the require­ment that the oldest dairy producl5 be Shipped fust, and aUowing the bonus corrunodity [0 be Shipped at the same rime as the initial quantity, could great­ly improve its effectiveness and benefi\\o the dairy industry.

Despite the availability of these USDA programs, prevailing economic or social conditions may discourage private dairy interests from exploring over­seas markets. Such conditions include monetary policies, difficulties in identifying markets, and political or social uncertainty in many nations. Moreover, the CU/Tent world market price for dairy products is lower than the

U.S. price fordairy products--mainly because of the exlensiveuse of subsidies to increase eltpon sales of daiiy prodUClS from some nations. Therefore, if dairy producfs an: to be e){ported, USDA would have to provide a '·subsidy"

--'-,.2. See footnotes on p. )07,

101

10 compensate for price differences. (Such assislaIlCc would run contraJ)' 10

the underlying principle espoused in the agricultural trade reform proposal sub­nutted by \he United SLales to lhe Uruguay Round of the GATT negotiations.) The will.ingness of other nations \0 continue to subsidize expons of dairy products should cause the United Stares to seriousLy consider USc of dairy sub­sidy programs in an attempt to gel a "fair share" afthe world dairy market.

Export sales The Cornrn.ission has dctcnnined mal the moSt praclical programs \0 con­

crol production levels are either a dairy lermination program or a two-tier pricing program. One provision of the two-lier pricing program is for producers \0 receive the fuU price for a set percentage of milk marketings and a reduced price for marketings in excess of thaI amount. [f the Secretary should elect to implement a program \0 reduce milk production in the United States, the milk equivalent of dairy products sold in export markets shou ld not be assessed as "excess" milk.

Generally, increasing export sales of dairy products will only take place at a price lower than tbe price that wiU prevail in th~ United States. However. if mitk producers and handlers mUSt pay the fuJi over-base assessment for milk produced in excess of dOmestic demand under the program, there would be no incentive to develop overseas marketS---Cuuing back on milk produc­lion would be the least COSt alternative. Use of a progmm to achieve additional export soles is p\ausiblc only if the over-base charge is refunded for milk sold for export use.

Dairy product reserve Although the Commission encourages efforts to increase the efficiency

of thc U.S. dairy industry, the Commission does nO( support a level of produc· tion that will result in a burdensome surplus of milk.. Achieving and maintaining a specified level of product in reserve is one aspect of price sup­port programs that operate for other commodities. such as feed grains. Such reserv~s are intended to balance production from year to year and can allow the United States to quickly exploit opportunities for sales in export markets. In fact, the wide swings in demand for export commodities in the 1970s provided the impetus for establishing reserves. Ho~ver, the production cycle for dairy products is fundamentally different from that of field crops. Accordingly, dalry products acquired by govemment purchases of surplus should be used primarily for balancing the annual domestic market for dairy products as an integral part of the milk price support program All other uses of such products should be secondary and CCC should be reimbursed for produc(s made available 10 overseas donation programs.

104

Ihal IU this poim in lime, II free inlemaliooal trading environment is a yet unachievable goal. Ascenaining the benefits 10 u.s. milk producers and con­sumers thaI mighl result from 3 zero-subsidy trading environment is a topic of great iOfereSt to the CommissiOfl . The Commission would welcome an economic a.naJysis of Ihe pmposed zero-subsidy rrading environment. Th is analysIs should indicale whaf. if any, bcndilS U.S. milk produce!s may receive ooe, five. or Icn years aflef implemenlalion. The Commission ins-iSIS Ihal should a fTee uade environment resuh from these negotiations, lhe U.S. dairy industry must be an I.>nequivocal beneficiary.

U.S. trade negotiators 1" order 10 increase the. po~ibility that the U.S. dairy industry might

benefit from trade negotiations, the Commission recommend~ improvements ill the process whereby the dairy industry panicip31es in trade negotialions. Specifically, [here should be greater opponuniry fordairy industry leaders to provide advice 10 agriculn:re trade flcgotialOTS, bOlh befole and during any negol iations.

Agriculture currently enjoys an elevated stams in the GAlT negotialions . For example. the chief agricultuI31 negotiator has ambassadorial status and repons directly to the U.S. Trade Representative. Clearly that status can help U.S. agrieuiNre. However, because international trade in dairy products is fundamentally different than rrade in other commodities, such as wheat, a scronger presence for the dairy indusrry would be desirable. Specifically, the Commission urges that the negotiating leam be comprised of individuals who have previous trade negotiating experience and explicit knowledge of the dairy indllStry and governmental policies that affect it.

AgricllJturaJ organizallons tend to have rapid turnover of personnel in key positions. ThaI rate oflurnover may exceed the turnover rale of govern­ment official s. To Counter !.his shifting, and assure a consistent base from which advise cao and ~ould be fonhcoming. the dairy iOOllSOY must take steps 10 see that qualified and knowledgeable industry representatives are ap· poinled to lhe Agricuhural Policy Advisory Committee and to the Agricohoral Technical Adllisory Commitu:e. Ln addition, lhe dairy indusay should ham.ine the need rOT a rrade advisory cOO'llTlillce 10 provide an inde· pendem soUlte of counsel to tbese and future trade negotiations.

GATT and St'ction 22 The ex plicit purpose of Ihe jmpon protection afforded 10 the daily in·

du stry ul'\der SeCI Ion 22 is 10 prOtecl the milk price suppan program. Since the Commission strOngly suppans the milk price suppon program, mequolas 311thoriled uoder Section 22 should nOl be negoti3blc in th~ Uruguay Round or GATT negotiations.

L05

Section 22 of the L933 Agricultural Adjusunent Act and lhe 1979 GAIT ln1emational Trade Agreeme nt both defUK a procedllft by WAich the United States can counter or prevent inlentrence wilh !he efreelive operation of a domestic agriculru.ral price support prognm by impons of a commodity. Specific procedUle~ lodeal with impons thaI interfere with. agricultural price support programs are set rOM in law.)

As is practical mauer. without some means to limit dairy importS, the United Slates. with its high per capita income, would Quickly become the dumping ground ror world dairy su.tplllSes. The milk price support program would be rendered ineffective and COStS would soar as imported products dis­placed dor.nestic production-production Ihal would be offered to Ihe Commodity Oedit CorporalicL'l under lhe price support program.

Dairy programs of Olher nations The Commission. recogniting!.he i,mponanceofintemational tr3de, sur­

veyed the dairy industries of three nations: Australia, Canada, New Zealand and the 12-n800n European Economic Community. These nations wcrc selected because of !.heir importance to the United Slates dairy industry as trading paraters and their potenlial influence on our domestic agriCUltural programs.

AuSlro/id The Commhsion reviewed Ausl1a1ian dairy policies with the AgriculruraJ

Counselor of the Embassy of AusO'a1ia. Policies reviewed included: the dual priCing system, Il'11de relationships with other countries (especially New Zealand), the role of the AUSD'alian Dairy Corporalion, and domestic subsidies.

Canada

In addition to iMonnalion focusing on general produclion practices and production S\3tisLi.cs. the Commission reviewed specific aspects of the Canadian dairy indusll")' with the Com.modity Coordi nator (Dairy) for Agricuhtm Canada . These aspects included the federal quota supply system for indusoiaJ milk, provincial quotas for fluid milk, subsidies, pricing, and the role of the Canadian Oairy Commission. Although the Commission ae­k.tIo ..... ledges that a national mil.k production quota or base plan may be implemented in the fUfUIe, the Caoadian quota plan is nOt adap!.il.ble 10 the U.S. dairy industry.

European Economic Community

In reviewing general features of the EEC's dairy program with their First Secretary of Agricu!rure. the Commission focused on such topics as prociutt purchase policies. milk production quotas, export rerunds and the oulgoers scheme which is similar to the U.S. Dairy Termination Program.

- - '-. See foo t note on p. l01 .

106

New Zelllllltd

The Minister-Commercial for the embassy of New aaland provided ill­format ion OIl the geographical and climatic conditions which aHecl their dairy industry. ltI addition the discussion focused on such tOpics as their de­pendence on the world mark.ct. pricing polici~ the role of the New Zealand Dairy Board and domestic promotion programs.

The Commission , after reviewing the dairying practices and government policies of these nations, concluded thaI ne ither the U.S. dairy industry nor consumers would Significantly benefit by iocorporillin~ any of their practices or policies. In part, Ihe different poliCies were considered difficult or un· necessary 10 implemcnI for ecOflOtruc COnsiderations. For example, New Zealand's banning of new dairy enterprises, Canada's provincial marketing regulations. and Australia's individual Slate regulations were all considered viol3tions of current US interSlalecommerce law which Ulay be diHiculi to amend and generally undesirable in any case. The pricing Jnd sobsidy policies of other counmes were viewed as economical ly infeasible and per· haps deuimemalto the producer. For example, New Zealand's policy of using the world market price (0 detemtine a milk producer's income or Canada's policy of taxirlg all proou~rs to compensate for expo" losses ~ both infeasible for the US. dairy indusny.

Similarly, none of the pT<Xluction tcchniques or agri<: uhural policies used by dairy industries of other nations appear to benefll consumers with ei ther a lower priced product or increased level of quality. Currently U.S. coo· sumers of dairy products benefit from high quality prodUCtS which are produced in the moSt effi cient manner possib!t.': and sold al reasonable prices. The dairy industry is always suiving 10 incretJse ils domestic market :md 10 introduce new proouction t~hnjques in order to attract new cuslomers. II can do this beSt under the U.S. system

Summary The u.s. dairy industry, in order to remain competitive with other na·

tions. must incorporate new tcchnology. promote research , and adopt beneficial domestic policies.

While the Commission suppons fair o-ade in international markets, a free international trading environmenl is 3.11 unachievable goal al Ihis point in time. The Commission is interested in ascenaining Ihe benerlls of a zero­S(lbsiciy rrading envlronmenr and WOtlld welcome an Malysis of the benefilS that might accrue \0 U.S. mill produt..:e.rs if a froe trade environmenl were achieved.

In Qrder 10 increase [he possibiliry that the U.S . dairy indusoy mighl benefit from tl1I.de negotia!ioos. theCornmission recommends improvements in Ihe process w~ereby rhe dairy industry panicipates in trade negolia [ioos.

109

An edited IfID'lScripL of all 10 hearings was published by the GQvcm.ment Prinling Office ·and made available for sale from the Superintendent of Documents, U.S. Govemmen! Printing Office, Washington, D.C. 20402. Stock No. 00 l-IXX}-04508·3.

From September 198710 March 1988, \.he Commission mel in Washington at least once a month to develop recommendations for the Secrelary of Agriculture and Congress.

During the course of its work, the Commission engaged a number of economic and agricultural consultants to provide expert and technic-.l advice. Many of these consuiLant.:5 prepared lengthy written papers. Tbesc; pap:r.> will Ix: publhhcd in several technical dPpe:ldix.es to this report and made available through the Com­merce Deparunem 's National Technical WormalionSeNlce. 5285 Port Royal Road, Springfield, Va .. 22161.

To carry 01.11 ilS responsibilities, the Commission had funds avaiJable to it amounting to $1 miUion. 1bese funds came from the Commodiry Credit Corpora­tion of the U.S. Depllrtment of Agriculture. The Commission is pleased that it will meet itS obligations and be able to rerum approximately o'le-quaner of that money (0 USDA.

The Commission wishes!O thank the many agencies, offices, and individuals who pTOvid~d assistanCe during the last 18 months. Space does not pemlit publica­lion of a comprehensive list. However, among individuals. the Commission especially wishes to thank its Ex.ecutivc Director, Dr David R. Dyer. without whose help over a 13·month period this repon would never have been wrirten. The Com­mission also thanks its other full-time staff: Assistant Director, T: Jeffrey Lyon and Professional StaIf Members, Mary-Lucille Kaems, Steven D. Elka, CharJaine Thomas. and Tamm Munford,

While nOla pemlanem sllIff member. David K, Waggonera( Virginia Polytech­nic [nsti\lHe also provided valllable services, especially in the Commission's study of emerging tcchnology in the dairy industry. Ukewise. Arthur S. Jaeger greatly as­sisted with lhe writing and editing of this report.

Among the many consultantS employed by the Commission, WiUiam C. Motes of Economic Pe~pectives, Inc., Mclean, Va., was especially helpful, offering ad· vice and providing background infomlation at many Commission meetings.

The Commission thanks the National Cooperative Bllsiness Association for the lease of office space in Washington. D.C and ror providing sllppon services to !he Commission staff. It thanks the Government Printing Ofr\Ce for printing this report. and itS (echnical appendixes.

The Commission thanks Secretary Lyng; Chaimlan E (Kika) de fa Garza of tJle House Agriclllture Commillee: Chairman Patrick 1. Leatly of tJle Senate Commit­tee on Agricutrure. Nutrition. and Forestry: Chainnan Olar!e.~ W Stcnholm of th~ House Subcommillee on Livestock, Dairy. and POllltry; and Congressman SIeve Gunderson for tJle;r help and the assistan~ of their respective staffs. The Commis­sion;s especially grateful \0 the staff ofthc House Agriculture Committee, and Dan Waggoner, St.uf Di reClor of t.be Livestock, Dairy, md Poultry Subcommittee. fOr invalllable a.<;sistancc in printing the technical appendi;<;es to this repon.

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