Report and Recommendations

National CommissionOn Dairy Policy

Washington, D.C. March 31, 1988

COMMISSION AND STAFF

Commissioners

Clyde E. Rutherford,ChairmanOtego, New York

Fred A. Douma,Vice ChairmanOntario, California

Fred Butler,Secretary{freasurerInwood, West Virginia

Gerald AycockFremont, North Carolina

James P. Camerlo, Jr.Florence, Colorado

Irvin J. ElkinAmery, Wisconsin

Kenneth FellerEverson, Washington

Robert L. FosterMiddlebury, Vennont

James A. HolteElk Mound, Wisconsin

Professional Staff

David R. DyerExecutive Director

T. Jeffrey LyonAssistant Director

Mary-Lucille Kaems

Steven D. Etka

Charlaine Thomas

Tamara Munford

Michael J. HornerLinton, North Dakota

H. Pearson Knolle, Jr.Sandia, Texas

John G. LaurieCass City, Michigan

Robert B. McSparranPeach Bottom, Pennsylvania

George F. Mertens, Jr.Sonoma, California

Clifford C. SchumacherSleepy Eye, Minnesota

Richard N. ShadeRockton, Illinois

Wilfrid J. TurbaElkhart Lake, Wisconsin

Charles WilliamsAvon Park, Florida

Executive Summary andSpecific Recommendations

Executive SummaryThis report outlines a dairy policy for the future. It is a policy that 18

milk producers believe will serve the dairy industry well into the 1990s, andbeyond. The National Commission on Dairy Policy reached its conclusionsafter examining national policy issues in nearly every facet of dairy policy.

The report 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 into several sections, including: (1)general agricultural policy; (2) family dairy farms; (3) milk price supportpolicy; (4) federal milk marketing orders; (5) regional issues; (6) advertisingand promotion; (7) technology; (8) food safety and product identity stand­ards; and, (9) trade and aid program~.

In many cases the report suggests needed changes in current law or ad­ministrative practices. Reviewing the present program was an explicit chargeto the Commission. However, the Commission did not recommend changefor the sake of change. Much of existing law, originating 40 years ago, canstill operate well, with proper administration.

Suggested changes include: amendments to laws; better administrationof existing programs; closer coordination of ongoing efforts; more coopera­tion within the dairy industry; and a greater effort to achieve goals.

The specific recommendations must be read in context. Many monthsof study and deliberation were expended to achieve a system of relatedproposals-some which might not be acceptable to milk producers withoutother accompanying changes recommended in the report.

The report is endorsed by all 18 Commissioners. Considering that theCommissioners come from all parts of the United States, with various sizeddairy operations, this complete endorsement is a remarkable accomplish­ment. The report is the first unified proposal for program changes from thedairy industry in more than a decade.

The report is far reaching-it is not intended to be another short-term,quick fix to get the industry through another year. Instead, the Commission'sreport outlines major steps toward a revamped, long-term federal dairyprogram. The report is intended to be a blueprint for dairy policy in thefuture.

As a result, it is unlikely that the recommendations will be enacted intolaw this year. Widespread industry understanding of the proposals is neededfirst.

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In establishing a context for the agricultural and dairy program recom­mendations, two questions needed to be answered. They were: (1) Whateconomic environment will promote the effective functioning of a market­oriented agriculture; and, (2) What agricultural policy is consistent withsound dairy policy?

The report states that U.S. policy should foster an economic environmentin which milk producers-including those small-and-medium-sized opera­tions that make up the majority of milk producers-have the opportunity toreceive a satisfactory return for their labor and investment. Those producerswho are efficient, innovative, and industrious will prosper under theCommission's plan.

Goals of federal dairy programs, especially those attempting to controlproduction, should not be thwarted by efforts to keep producers in businesswhen economic reality dictates otherwise.

The federal government should not attempt to define the term "familyfarm" for the purpose of targeting or restricting farm program eligibility. Tar­geting benefits to a particular size or structure of farm is inefficient andundennines the basic purpose of the federal milk price support program.

Agricultural and dairy policy should create an economic environmentthat makes profitability possible-but not guaranteed-for the nation's milkproducers.

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

should be market-oriented. Market forces, together with adjustments in thegovernment support price, should balance supply and demand for milk anddairy products. While the Commission recommends the use of "standby"production controls, their use on a permanent basis is not in the best interestof the industry.

Continue supporting prices with purchasesSupporting milk prices through government purchases of dairy products

constitutes a workable basis for any dairy program.

The federal support price should establish a minimum price whichguarantees an adequate supply of milk. The Food Security Act of 1985 es­tablished a means of modifying government price support levels. TheCommission studied alternatives and believes a better method can bedeveloped.

Consistent with the intent of the Agricultural Act of 1949, CommodityCredit Corporation purchases of dairy products must serve primarily tobalance the domestic market annually. All other uses of surplus products,

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

The Commission asks the Secretary of Agriculture to make available tothe public quarterly evaluations of the acquisition and disposal of Com­modity Credit Corporation purchases of dairy products.

Milk price supports should be set by a formulaThe Commission concluded that market forces, together with adjust­

ments in the government support price, should balance supply and demandfor milk and dairy products. To determine the support price, an effective for­mula needs to be established in law. The formula must: (1) account forchanges in technology in an explicit calculation; (2) take into accounteconomic considerations in other agricultural segments; (3) be able to operateseveral years without major adjustments; and (4) have some latitude to ac­count for shifts in supply or demand to prevent either a build-up of costlysurpluses or decreases in production that result in shortages.

The Secretary of Agriculture should have discretionary authority to ad­just the price indicated by the formula by 5 percent either upward ordownward. However, in no case should the total price change-formula ad­justment plus any change dictated by the Secretary-be more than 50 centsper hundredweight in anyone year.

The Commission agreed to maintain the "action level" of 5 billion poundsof net Commodity Credit Corporation purchases. However, in the future, aspecified percentage of commercial use should be adopted as the "actionlevel." Since 5 billion pounds is 3 or 4 percent of commercial use today, thenpurchase volume should represent 3 or 4 percent of commercial use 10 yearsfrom now.

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

the best interest of the dairy industry. Price adjustments should generallybalance the market. However, if major price reductions were to be !1eededto balance supply and demand, then a production control program should beimplemented in lieu of a major price reduction to reduce unneeded suppliesof cheese, butter and nonfat dry milk.

The Commission believes the Secretary of Agriculture should have dis­cretionary authority to impose controls when Commodity Credit Corporationpurchases exceed the legislated "action level." If projected CCC stocks areto be 2.5 billion 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 federaldeficit is not consistent with the Commission's market-oriented philosophy.

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However, the Commission acknowledges that such a step may be necessaryto meet deficit reduction targets.

Choices for the Secretary of AgricultureThe Commission determined that the most effective production control

programs are either a dairy termination program similar to that carried out in1986-87, or a two-tier pricing program paying producers a price for milk usedcommercially and a lesser price for marketings in excess of that amount.

Factors such as: (1) the cost of the program; (2) the program's effect onother agricultural segments; (3) the economic conditions in agriculture; and,(4) fiscal goals; are all taken into account when a production control programis considered. The Commission determined that the Secretary of Agricultureshould have options, since each program has desirable characteristics, to ad­dress these factors. Depending on circumstances, one program may bepreferable.

The Commission provided the choice of programs to make it more dif­ficult for producers to anticipate a specific type of production controlprogram and thereby circumvent the program's intent. Allowing the alter­native of a dairy termination program, for example, would make it less likelyfor producers to "race for base" in anticipation of the two-tier program.

Any costs associated with a production control program, to the extentthat they exceed normal dairy program costs, should be borne by milkproducers. However, producers can bear those costs in ways other thanthrough assessments on milk production. A reduction in the milk supportprice may generate a reduction in government outlays sufficient to fund aproduction control program. Assessments are neither warranted nornecessary.

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

tion of the federal milk marketing order system are needed. Long delays inthe hearing process have contributed to frustration among dairy producers­frustration that led directly to provisions in the Food Security Act of 1985which increased Class I milk differentials.

Marketing orders should be combined where economic efficiencies willresult. However, timely amendment of market orders through the ad­ministrative process is preferable to changes made through legislation. TheCommission asks USDA and the dairy industry to work together to speed updecision-making and make marketing orders more effective.

Regionalism----don't protect some producersThe Commission rejects a "regionalized" price support program.

Federal programs cannot and should not attempt to change basicgeographical features favoring milk production in one area over another.These features, which include favorable climate, abundant feed, and a diverseagIicultural base, will lead to increased production in certain areas over time.

Regionalizing dairy policy in an attempt to protect milk producers in anyone area would counter these basic market forces. As a result, the Commis­sion believes price support policy should not be modified regionally toprotect producers in one area of the country.

Also in the area of regionalism, the Commission considered the ap­propriateness of California's separate manufacturing allowance for milkmade into butter, cheese, and nonfat dry milk. It concluded the Californiaallowance has interfered with the orderly working of the federal price sup­port system by: (1) lowering the price received by California milk producers;(2) encouraging construction of additional California manufacturing plantcapacity; and, (3) increasing federal purchases of dairy products fromCalifornia plants.

The Commission believes USDA's specification of a manufacturing mar­gin for milk should apply to all areas of the United States. Federal actionsshould prohibit California, or any other state, from establishing a separate al­lowance to promote the use of grade A milk to make butter, cheese, or nonfatdry milk.

The consumer must be informedIn the area of advertising and promotion, the Commission endorses the

current programs, financed through mandatory assessments on milk produc­tion. But it believes these programs must be monitored to determine theirbenefits to producers. Promotion should be cost effective, with changes inconsumption serving as a guideline for spending on advertising in the future.

The Commission notes that the Dairy Production and Stabilization Actof 1983, which created the National Dairy Promotion and Research Board,refers to a "coordinated" promotion program. Consolidating functions of theDairy Promotion Board and the United Dairy Industry Association wouldreduce administrative expenses, improve communication, and possibly saveon program costs.

Technology-challenges and opportunitiesThe revolution in technology expected to hit the dairy industry in the next

10 years-in areas including genetics, animal nutrition, disease control, and

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

The dairy industry needs to plan for both the challenges and opportunitiesthese changes will present. Likewise, the federal government should recog­nize and plan for technological advancements in determining future dairypolicy.

The Commission does not believe new technologies should be prohibitedfrom use based on their effect on either milk prices or industry structure.However, before technologies are marketed, federal authorities should deter­mine their effects on: (1) wholesomeness of product; (2) consumerperception of products made with the technologies; and (3) the health ofanimals to which they are applied.

New technologies shown to be safe should move quickly to the farmerand dairy processor. They should be explained through media-orientededucational programs, with an adequately funded Agricultural ExtensionService playing a major role.

Product identity and labelingThe Commission also considered issues of dairy product labeling and

standards of identity. It concluded that current standards of identity foragricultural products should be preserved. Additional efforts to preserve theidentity of standardized dairy products should be funded in part by the dairyindustry. Also, the Food and Drug Administration should place a higherpriority on enforcement of standards of identity by providing more resour­ces for monitoring the misbranding of foods, particularly new foodsdeveloped to simulate standardized products.

Uniformity in labeling likewise is essential to the efficient marketing anddistribution of dairy products. The Commission concluded federal lawshould require application of the term "imitation" to any food product thatsimulates a standardized food in order to promote honesty and fair dealingin the interest of consumers.

International trade--ehallenges and opportunitiesThe United States has opened talks with member countries of the General

Agreement on Tariffs and Trade on an agricultural trade reform proposalaimed at eliminating all export subsidies, tariffs, quotas, and domesticsubsidies.

The Commission supports fair trade in international markets. It believesa free international trading environment is unachievable right now.However, it would welcome an economic analysis of the proposed zero-sub­sidy trading environment indicating what benefits-if any-U.S. dairyfarmers would receive after one, five, or 10 years. Before the United States

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

The Commission strongly supports U.S. import quotas on dairy productsauthorized under Section 22 of the 1933 Agricultural Adjustment Act. Itbelieves these provisions should not be negotiable in the current UruguayRound of talks under GAIT.

As a practical matter, without some means to limit dairy imports, theUnited States, with its high per capita income, would quickly become thedumping ground for subsidized world dairy surpluses. Milk: price supportswould become ineffective and costs would significantly increase as importsdisplaced domestic production-production that would be purchased by theCommodity Credit Corporation under the price support program.

The Commission believes that casein imports interfere with the milkprice support program and increase the outlays made under that program.Casein should be reclassified in the tariff schedule as a dairy product andthereby made subject to Section 22 quotas.

Look to the futureThe report outlines a dairy policy for the future-a policy that 18 milk

producers believe will serve the industry well into the future.

In many cases, the report suggests needed changes--either administra­tive or legislative. But the Commission did not advocate change simply forthe sake of change. It has not put forward ill-advised recommendationssimply to make headlines.

The report outlines the tools needed to make the dairy industry moreprofitable in the future. The Commissioners believe this report is theindustry's best opportunity to tell Congress and the Secretary of Agriculturewhat dairy producers want as policy. The report can and should influencetheir future.

The Commission looks forward to the expeditious but thorough reviewof its recommendations and, ultimately, their implementation as the basis forthe federal dairy program of the 1990s.

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