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Link to Senate Judiciary Committee, other Testimony

Testimony of Daniel Smith
Executive Director, Northeast Dairy Compact Commission

Re:  S. 1157

 

Before the United States Judiciary Committee
Senator Patrick J. Leahy, Chair

  Room 226
Dirksen Office Building
Washington, D.C.  20510

 July 25, 2001

  Summary of Testimony

 

Mr. Chair, Members of the Senate Judiciary Committee.  I am Daniel Smith, founding and current Executive Director of the Northeast Dairy Compact Commission.  I am testifying in favor of S.1157, an act relating to reauthorization and expansion of the Northeast Interstate Dairy Compact and authorization of the Southern, Northwest and Intermountain Dairy Compacts.  I have been involved with Dairy Compacts in various capacities since inception of the first, Northeast Dairy Compact in 1987. 

My testimony is intended as a follow-up of Congress' action to authorize operation of the Northeast Dairy Compact as pilot project in the 1996 Farm Bill.  My testimony provides a comprehensive report on the Compact's legal, economic and administrative operation since Congress approved it in 1996.  This report is intended to provide this Committee with as many facts and figures as I can assemble, so that the Committee may assess the propriety of further congressional authorization of Dairy Compacts based upon the actual record of the Northeast's operation as a pilot project.

By way of introduction, as the Committee is aware, the Northeast Dairy Compact is a federalist initiative, being the function of both state and federal sovereign action.  The Compact was established under law by the six New England states in the early 1990s.   With congressional and federal executive authorization, the Compact assumed the power of federal law. Consistent with its federalist design, though, the Compact still remains the states' prerogative and responsibility to administer.

 

In summary:

·        The Compact has proven to be the legal solution to the vexing problem of how best to restore the two-part federal/state system of milk market regulation.  The Compact has successfully reinvigorated the legal ability of states to exercise regulatory authority in the public interest over a regional dairy market without running afoul of the constitution.  The Compact has been tested twice in Court, with two federal circuits of appeal finding resoundingly in its favor.  Most specifically, the First Circuit affirmed the Congressional grant of authority to the New England states for the uniform regulation of the interstate New England market

·        The Compact has accomplished the states' intended economic and social purpose of stabilizing the New England milkshed. The Compact Commission's price regulation has provided income stability as well as enhancement to producers, with a net positive impact on farm viability and sustainability.  As presented in my extended statement, there is strong evidence from a variety of sources that  the attrition rate among New England and New York farms subject to the price regulation has been slowed considerably.

 

·        The Compact has accomplished the further economic and social purpose of not unduly burdening consumers.  The price regulation's precise impact on retail prices remains an open question and the subject of vigorous debate.  In absolute terms, the data presented in my report indicates that, however calculated, the impact can only be described as marginal.   Moreover, the record indicates that the public interest is served by regulatory intervention into the procurement cost pricing dynamic for beverage milk, in the manner of the Compact price regulation.

 

·        Consistent with its design, the Compact has been administered without discrimination among market participants.  The price regulation is being successfully administered without discriminatory burden on either farmers or processors located outside the New England region.  New York farmers benefit uniformly with their counterpart New England farmers; the regulation is equally competitive-neutral in its effect on processors located outside of New England.  The price regulation has been particularly effective in its uniform treatment of packaged milk brought in from outside the region, and in this regard represents a significant advance in milk market regulation.  

 

·        The Compact has accomplished the objective of effectively incorporating the concerns of all market participants - from farmers to consumers - in the regulatory process.  The Compact Commission contains twenty-six members covering the whole spectrum of interested concerns in the marketplace.  This diverse, potentially divergent, group has proven most able to work together in the common, public interest.

 

·        Consistent with its design and statutory requirement, the Compact Commission has instituted a ground-breaking initiative in supply management.    As intended, the Commission is ensuring that the causal relationship between pay price and milk production is cemented and made  a vital part of its regulatory program.  The Commission has taken the first, concrete steps toward real progress in this truly difficult task. 

 

Mr. Chair and Members of the Committee.  I strongly believe that your review of the record I am presenting today will convince you that the Northeast Dairy Compact has functioned successfully and as intended by your authorizing action of 1996.  I believe that the record supports reauthorization, so that the Commission may continue its work on behalf of the New England public interest.

Daniel Smith, Executive Director
Northeast Dairy Compact Commission


 

Attachments

 

 

Table of Contents

 

1a

Producer Settlement Fund General Accounting

 

1b

Compact Commission Price Regulation Facts and Figures

 

1c

Producer Blend Price Zone 21
Federal Market Order vs. Combined Market Order + Over-Order Payment
Average per Year

 

1d

Producer Blend Price Zone 21
Federal Market Order vs. Combined Market Order + Over-Order Payment
Jan 96-April 01 by month (graph – to be added)

    

2a

 

Compact Pooled Farms by Herd Size
Number of Farms

 

2b

 

Percent of Compact Pooled Farms by Herd Size

 

2c

 

Over-Order Producer Payment by Herd Size

 

2d

 

Over-Order Producer Payment by Herd Size as Percent of Total

 

2f

 

Federal Market Order #1 Production from New England and New York, 1977-1999

 

3a

 

Typical New England Dairy Farm 1997
Compact Payment Impact on Net Farm Earnings

 

3b

 

Typical New England Dairy Farm 2000
Compact Payment Impact on Net Farm Earnings

 

4a

 

Impact of Northeast Dairy Compact on Financial Viability of New England Dairy Farms, 2000

 

4b

Projected Loss of Dairy Farms in New England With and Without the Compact

 

5a

 

Cost to Consumers Assuming the Full Cost of the Compact Over-Order Obligation is Reflected in the Retail Price

 
5b

 
Cost to Consumers Assuming Half of the Cost of the Compact Over-Order Obligation is Reflected in the Retail Price

6

Cost of Compact Over-Order Obligation in Context of Food Expenditures, by Income Group

 

7a

 

Class 1 Milk Prices, Zone 1

 

7b

 

Class 1 Milk Prices, Boston

 

7c

 

Class 1 Milk Prices, First Year of Compact: Boston

 

7d

 

Class 1 Milk Prices After Sept. 1998: Boston

 

Mr. Chair, Members of the Senate Judiciary Committee:

Thank you for this opportunity to testify today about the function and operation of the Northeast Dairy Compact Commission.

I am Daniel Smith, founding Executive Director of the Northeast Dairy Compact Commission.  I have been involved with the Northeast Interstate Dairy Compact, in various capacities, since its inception in 1987.  Looking around these august surroundings, perhaps it is enough to say by way of introduction that the Dairy Compact has indeed come a long way since that first, informal late night meeting with Representative Starr, Chair of the Vermont House Agriculture Committee, about the need to restore Vermont’s sovereign ability to regulate its dairy marketplace. 

My extended written testimony presents a comprehensive legal, administrative and economic impact report on the operation of the Dairy Compact since Congress first ratified the Compact pilot project as part of the 1996 Farm Bill.[1]   As set forth in my summary, I strongly believe the record presented provides a tangible basis for the Committee's review and a solid foundation of support for Congressional action to reauthorize the Compact.

My presentation today will primarily provide a summary economic impact review of the Commission’s price regulation since its implementation in July, 1997.   Presented as attachments to this statement are summary data about the price regulation’s impact on New England and New York dairy farmers and on New England consumers.  The information includes data on net farm pay prices, farm profitability, farm viability and milk production.  Also set forth is information about the price regulation’s impact on the procurement cost of raw milk and on retail consumer milk prices.  I have also provided data on the net relative impact on consumer spending for milk and for all food products, based on income.

Attachment 1a provides summary data for the price regulation’s operation from July, 1997 to present, by year and in total.  It sets forth the $159.2 million total compact over-order obligation imposed on the New England Class I or beverage milk market, and the $146.4 million total payment made to New England and New York farmers who supply the market.

The annual obligation amounts ranged from $19.9 million to $64.4 million, with a annual average of   The total annual producer payments ranged from  $16.7 million to $59.7 million, with an annual average total payment of $8,812.  These producer payment figures begin to describe the regulation’s combined function of producer price stability and enhancement.

Attachment 1b identifies an average total of 4217 New England and New York farms supplying the market.  These producers received total annual payments ranging from $3,900 to $14,700 per farm, with an average payment of $9812.

As can be seen from this and subsequent attachments, of the 4217 total farms, approximately 1300 are located in New York State.  New York farms in this proportion have historically supplied the New England market.  The attachments treat New England and New York farms, uniformly as milkshed farms historically supply the New England Market.

 As also indicated, the average annual total pool volume of  6.6 billion pounds of raw milk produced and processed for all purposes in the New England marketplace yielded an average net payment of $0.57 payment per hundredweight on all raw milk produced.[2]  The average annual amounts of the producer payments are also set forth per hundredweight, ranging from $0.25 to $0.91.  These amounts are also shown in combination with the federal minimum producer, or blend, price paid for federal Milk Market Order #1.

These per farm and per hundredweight producer payment figures display quite concretely the regulation’s combined function of producer price enhancement and stability.

Attachment 1c identifies the net, annual over-order obligation of 11.6 cents per gallon imposed under the price regulation on Class I milk in the New England market, for the period.  The Attachment places the over-order obligation in context with operation of the federal Milk Market Order Class I price, which establishes the underlying regulated minimum procurement price for beverage milk in the New England market.  The two regulated minimum pricing mechanisms in combination establish the net, overall increase of 11.6 cents in the regulated procurement cost of the raw, Class I milk.  The amount is established monthly as the difference for the given month between the federally established amount and the compact price regulation minimum amount of $1.46 per gallon.[3]

            Attachment 1a also identifies the price regulation’s total exemption payments made to the six New England state WIC programs and the total reimbursement payments made to the region’s school districts for school milk purchases.  Also itemized are the two payments made to the Commodity Credit Corporation, pursuant to the Congressional condition of consent.  Attachment I accounts also for the funding for the price regulation’s initial Supply Management Program, which the Commission is just now in process of administering.

            Finally, Attachment 1a accounts for the administrative assessment that finances operation of the Commission and the price regulation.  As can be seen, the Administrative Assessment on average was just under 2 percent of the total obligation collected for the period to present.  It can also be seen that the assessment was reduced by a half cent beginning in 2001.

Attachment 2a, 2b, 2c, 2d and 2f provide comprehensive data on farm numbers and production for the New England milkshed.  Attachment 2a,2b shows the average annual distribution of supplying New England and New York farms by herd size. The total, annual average production by herd size is shown in attachment 2f.  Total producer payments by herd size through 2000 are identified in attachment 2d.

It can be seen that almost three-quarters of the supplying New England and New York farms have fewer than 100 cows in their herds.  It can also be seen that of the remaining 1000 farms, about 20 percent have fewer than 200 cows.  This means that, of the farms regulated under the Compact, 400 farms or have herds in excess of 200 cows, with only about 80 farms having herds larger than 400 cows.  The farms subject to the Compact price regulation remain on balance, overwhelmingly small family farm operations.

It can also be seen that the farms under 100 cows, or about 72 percent of total farms of the total about provide only 35 percent of the total milk supply.  On the other end, the farms over 200 cows, or about 28 percent of total farms, supply about 35 percent of the milk supply.  It is thus the middle group of farms, between 50 and 100 cows, that is the essential anchor of the milkshed for both production and milk supply.  (Contrary to common understanding, this grouping rather than the larger operations also shows the greatest increase over time in New England.)

Attachment 3a and 3b provides data about the price regulation’s impact on farm profitability. The data establishes that the producer payments stabilized farm cash flow positions, and enhanced net income so as to allow many farms to operate in the black instead of the red, for extended periods of time.  This is apparent over time, and particularly for the year 2000.

The impact for the typical farm in 2000 is particularly striking.  For 2000, without operation of the price regulation, the typical farm showed net farm earnings of $23,000, with fully two-thirds of the income derived from the price regulation.

When family living expenses and taxes are factored in, the picture changes quite dramatically, with the farm showing net earnings still in the black but in the amount of only $400.  Viewed from this perspective, therefore, without operation of the price regulation, the typical farm would have slipped deeply into the red for 2000 in the amount of approximately $15,000. 

The analysis of the typical farm operation for 1997 provided by Attachment 3a indicates a similar, if less substantial impact attributable to the price regulation.  (The price regulation was only in effect for one half of the year, moderating its impact by definition.)

The final piece of Attachment 4a, an assessment of the regulation’s impact on the most credit worthy 200 plus operations in New England indicates that, even for the most successful operations, the Compact had a substantial, positive impact on farm profitability.  This data also describes the positive benefit over time of price stability, as well as that of price enhancement.

Attachment 4b provides an assessment of the price regulation’s impact on farm viability.  This farm viability assessment considers both the relative degree of financial stress confronting a farming operation and the absolute degree of financial stress resulting in a farmer’s decision to cease operating the farm.  The latter is of course a function of the former – the less financial stress confronting a farm, the less likely the farmer will be compelled to cease operation.

The assessment presented in Attachment 4b indicates that the price regulation has had a substantial, positive impact on the viability of the New England and New York farms comprising the New England milkshed.  By identifying the regulation’s impact on profitability, the data presented in Attachment 4a serves also to describe the price regulation’s effect on the relative financial stress confronting these dairy operations. 

Stabilized cash flow positions, enhanced net income and return on assets and equity serve most directly to reduce the financial stress experienced by a farming operation.  As also indicated, and perhaps most importantly, the producer payments allowed farmers to pay a significant portion of their living expenses for the period with a much greater degree of certainty than they would have been possible without operation of the price regulation.

According to the analysis presented in Attachment 4a, this overall reduction in financial stress resulted in a significant reduction in the likely net loss of dairy operations in the New England milkshed. According to the analysis presented, this effect of the price regulation may well have cut the attrition rate by more than half of what might have occurred without operation of the price regulation.

According to the first part of Attachment 4a, the price regulation had two striking impacts on farm viability in 2000:  1) the number of the most stable farms, or those experiencing no financial stress was increased from thirty to fifty percent; and 2) the most vulnerable farms, or those experiencing severe stress, was reduced in half, from thirty-four to seventeen percent.

The second part of Attachment 4a, which assesses the likely impact on farm attrition, follows from the above analysis.  According to this assessment, the price regulation may well have reduced the number of farm losses by as much as two and one half times.  This translates to approximately 400 farms remaining on the land, and remaining as vital participants of the New England milkshed.  

            The analysis presented in Attachment 4a and 4b probably understates the

 case according to the data presented in the individual assessments of the price 

regulation’s impact on farm loss provided by each of the New England State 

commissioners of agriculture.  (These assessments were prepared in response to 

a request made by Senator Snowe and Senator Collins of Maine.  I have attached 

their letters to my statement).   For example, Commissioner Steve Taylor of New 

Hampshire indicates that

“Since the Compact’s inception in July 1997 the number of farms producing milk for the commercial market in this state has declined from 187 to 176…If there had been no Compact I would expect that by now we would be down to 130 or even fewer farms.”

The remainder of my presentation provides some assessment of the impact of the price regulation on consumer retail milk prices and consumer spending on milk.  This portion of the analysis is much more difficult to present in concrete terms. At the least it can be said that the literature is extensive with regard to the impact on retail milk prices of the price regulation’s 11.6 cent increase in the regulated minimum procurement cost.

          Yet the literature is most inconclusive.  One study finds only a marginal

 impact; another finds somewhat similarly that some but not all, though still more

 than a marginal amount, was passed through; yet a third finds a substantial,

 marked-up impact well in excess of the actual amount of the price regulation.

These studies are presently all the subject of a raging academic debate on methodologies.  The Commission has yet to make its own determination, given the stark disagreement in this still developing literature.  My purpose today is not to contribute further to the array of opinions, but instead to provide some context.[4]

         Attachments 5a, 5b and 6 identify possible per capita and per family cost,

 annually, of the price regulation. Tracking the first two studies cited above, an

 analysis premised on a pass through of half the increase is also presented. For

 purposes of illustration, a complete pass through of the price regulation’s increase

 in the regulated minimum procurement cost is also presented.

According to Attachment 5a, a pass-through of half of the regulated assessment, or 6 cents, would have yielded an annual per capita average increase in spending on milk in the amount of about $1.40, with a range of $0.75 to $2.35. According to Attachment 5b, a pass-through of the entire 11.6 cents would have yielded twice these totals, or about $2.75 on average.  By household, assuming a pass-through of half the amount, the annual impact on average would have been about $3.50, with a range of $1.90 to $5.80 for the period.  Again, a pass-through of the entire amount would double these impacts.

Attachment 6 provides a further context for assessing the annual household net impact of the price regulation.  This assessment considers milk purchases and total food purchases, by income group.   As can be seen, assuming a complete pass-through, the impact again ranges on average between $5 and $10, with the higher impact occurring for the higher income groups.  With regard to all food purchases, this increase appears as a one to two tenths of one percent increase for all food purchases; it does not appear at all statistically with regard to all purchases.  The attachment also provides some further context with regard to all food purchases.

A final note on consumer impacts with regard to the Women, Infants, and Children Nutrition Program (WIC) and School Lunch Programs.  The price regulation contains provisions exempting the WIC program and providing reimbursement to the School Lunch programs.  The purpose of the first is to ensure the WIC program is held harmless; the attached letter from Mary Kelligrew Kassler, Director of the Massachusetts WIC Program indicates that this purpose has been served.  (A letter from Peter Petrone letter, Compact Commission member-designee of the Rhode Island WIC Program, describing a similar outcome, is also being submitted for the Record.)

The School Lunch reimbursement procedure was intended to ensure the same result, while at the same time allowing for the possibility that milk processors might choose to compete over the potential impact of the over-obligation on the margin for school lunch milk.  The total amount of the reimbursements provided has been substantially less than originally provided for.  This indicates at least that the program has been held harmless.  

Finally, I have provided data in graph form (Attachments 7a, 7b, 7c and 7d) that illustrates the interrelationship between the regulated procurement cost for Class I or beverage milk and the retail price for the same milk in the New England market (Boston).  As noted earlier, the procurement cost for raw milk is a combined function of the federally established Class I minimum price and the Compact price regulation.  In combination, the bottom two lines of the graph identify the combined minimum procurement cost.[5]

Adding the top line for retail prices defines the margin between this combined regulated minimum procurement cost and the retail price.  As can be seen, this graphed illustration is presented in two formats.  The first is a single, continuous graph for the entire Compact period, (Attachment 7a).  The second shows the Compact period divided in two parts (Attachment 7b).

Attachment 7b indicates that the pattern of the margin between the regulated procurement cost and the retail price was dramatically different between the first and second of these two defined periods.  The first shows a period of stable cost and even declining price, while the second shows combined stability and fluctuation in cost accompanied by a substantial increase in price. For the moment, I can only let the graph speak for itself.  On behalf of the Commission, I will be attempting to reconcile these two periods as our assessment moves forward.  I can only hope that the analysis in the literature will move in that direction, as well.   

            This concludes my testimony.  I thank the Committee for its considerate attention.



[1] As an appendix to my testimony, I am presenting a detailed analysis in three parts; 1) A summary legal history, describing the state and congressional legislative actions resulting in the establishment of the compact, the administrative rulemaking conducted by the Compact Commission to adopt and administer the market-wide price regulation and the litigation involving the Compact and the price regulation; 2) an economic analysis of the price regulation’s impact, from farm-gate to consumer outlet, for the period of its operation, July 1997 – present; and 3) a compendium of the record for the meetings the Commission has held throughout the New England Compact region, during which the Commission has heard from state representatives and interested citizens about the Compact’s impact in each state.

[2] The total New England pool volume of 6.6 billion all milk is approximately 4.1 percent of the total, approximate 160 billion pounds of raw milk produced nationally. (FAPRI data)

[3] The average annual pool volume of approximately 3 billion pounds of Class I milk regulated under the Compact and consumed in New England is approximately 5.3 percent of the total, approximately 57 billion pounds of Class I or beverage milk consumed nationally. (FAPRI data)

[4] At the same time, though speaking only for myself and not on behalf of the Commission, I do not find the third study to be at all credible for its description of the retail mark-up pattern for milk and its resulting conclusion of a substantial retail mark-up attributable to the price regulation.  For this reason, I have not provided any illustration of this study, as presented for the others. 

[5] As also described earlier, their combination also defines the price regulation’s net, overall increase of 11.6 cents in the regulated procurement cost of the raw, Class I milk.  This amount is established monthly by the combined operation of the federal price regulation and the compact price regulation, being the difference for a given month between the federally established amount and the compact price regulation minimum amount of $1.46 per gallon


Letters:

Senator Olympia Snowe and Senator Susan Collins
Commissioner Stephen H. Taylor, New Hampshire Department of Agriculture, Markets & Food
Commissioner Shirley Ferris, Connecticut Department of Agriculture
Commissioner Leon Graves, Vermont Department of Agriculture
Commissioner Jonathan L. Healy, Massachusetts Department of Food and Agriculture
Chief Kenneth D. Ayars, Rhode Island Department of Environmental Management
Director Mary Kelligrew Kassler, Massachusetts Department of Public Health, WIC Program


The Northeast Dairy Compact Commission
64 Main Street, Room 21
Montpelier, VT 05602

phone: (802) 229-1941

fax: (802) 229-2028


 

Link to Senate Judiciary Committee, other Testimony

  Testimony of Daniel Smith
Executive Director, Northeast Dairy Compact Commission

Re:  S. 1157

 

Before the United States Judiciary Committee
Senator Patrick J. Leahy, Chair

  Room 226
Dirksen Office Building
Washington, D.C.  20510

 July 25, 2001

  Summary of Testimony

 

Mr. Chair, Members of the Senate Judiciary Committee.  I am Daniel Smith, founding and current Executive Director of the Northeast Dairy Compact Commission.  I am testifying in favor of S.1157, an act relating to reauthorization and expansion of the Northeast Interstate Dairy Compact and authorization of the Southern, Northwest and Intermountain Dairy Compacts.  I have been involved with Dairy Compacts in various capacities since inception of the first, Northeast Dairy Compact in 1987. 

My testimony is intended as a follow-up of Congress' action to authorize operation of the Northeast Dairy Compact as pilot project in the 1996 Farm Bill.  My testimony provides a comprehensive report on the Compact's legal, economic and administrative operation since Congress approved it in 1996.  This report is intended to provide this Committee with as many facts and figures as I can assemble, so that the Committee may assess the propriety of further congressional authorization of Dairy Compacts based upon the actual record of the Northeast's operation as a pilot project.

By way of introduction, as the Committee is aware, the Northeast Dairy Compact is a federalist initiative, being the function of both state and federal sovereign action.  The Compact was established under law by the six New England states in the early 1990s.   With congressional and federal executive authorization, the Compact assumed the power of federal law. Consistent with its federalist design, though, the Compact still remains the states' prerogative and responsibility to administer.

 

In summary:

·        The Compact has proven to be the legal solution to the vexing problem of how best to restore the two-part federal/state system of milk market regulation.  The Compact has successfully reinvigorated the legal ability of states to exercise regulatory authority in the public interest over a regional dairy market without running afoul of the constitution.  The Compact has been tested twice in Court, with two federal circuits of appeal finding resoundingly in its favor.  Most specifically, the First Circuit affirmed the Congressional grant of authority to the New England states for the uniform regulation of the interstate New England market

·        The Compact has accomplished the states' intended economic and social purpose of stabilizing the New England milkshed. The Compact Commission's price regulation has provided income stability as well as enhancement to producers, with a net positive impact on farm viability and sustainability.  As presented in my extended statement, there is strong evidence from a variety of sources that  the attrition rate among New England and New York farms subject to the price regulation has been slowed considerably.

 

·        The Compact has accomplished the further economic and social purpose of not unduly burdening consumers.  The price regulation's precise impact on retail prices remains an open question and the subject of vigorous debate.  In absolute terms, the data presented in my report indicates that, however calculated, the impact can only be described as marginal.   Moreover, the record indicates that the public interest is served by regulatory intervention into the procurement cost pricing dynamic for beverage milk, in the manner of the Compact price regulation.

 

·        Consistent with its design, the Compact has been administered without discrimination among market participants.  The price regulation is being successfully administered without discriminatory burden on either farmers or processors located outside the New England region.  New York farmers benefit uniformly with their counterpart New England farmers; the regulation is equally competitive-neutral in its effect on processors located outside of New England.  The price regulation has been particularly effective in its uniform treatment of packaged milk brought in from outside the region, and in this regard represents a significant advance in milk market regulation.  

 

·        The Compact has accomplished the objective of effectively incorporating the concerns of all market participants - from farmers to consumers - in the regulatory process.  The Compact Commission contains twenty-six members covering the whole spectrum of interested concerns in the marketplace.  This diverse, potentially divergent, group has proven most able to work together in the common, public interest.

 

·        Consistent with its design and statutory requirement, the Compact Commission has instituted a ground-breaking initiative in supply management.    As intended, the Commission is ensuring that the causal relationship between pay price and milk production is cemented and made  a vital part of its regulatory program.  The Commission has taken the first, concrete steps toward real progress in this truly difficult task. 

 

Mr. Chair and Members of the Committee.  I strongly believe that your review of the record I am presenting today will convince you that the Northeast Dairy Compact has functioned successfully and as intended by your authorizing action of 1996.  I believe that the record supports reauthorization, so that the Commission may continue its work on behalf of the New England public interest.

Daniel Smith, Executive Director
Northeast Dairy Compact Commission


 

Attachments

 

 

Table of Contents

 

1a

Producer Settlement Fund General Accounting

 

1b

Compact Commission Price Regulation Facts and Figures

 

1c

Producer Blend Price Zone 21
Federal Market Order vs. Combined Market Order + Over-Order Payment
Average per Year

 

1d

Producer Blend Price Zone 21
Federal Market Order vs. Combined Market Order + Over-Order Payment
Jan 96-April 01 by month (graph – to be added)

    

2a

 

Compact Pooled Farms by Herd Size
Number of Farms

 

2b

 

Percent of Compact Pooled Farms by Herd Size

 

2c

 

Over-Order Producer Payment by Herd Size

 

2d

 

Over-Order Producer Payment by Herd Size as Percent of Total

 

2f

 

Federal Market Order #1 Production from New England and New York, 1977-1999

 

3a

 

Typical New England Dairy Farm 1997
Compact Payment Impact on Net Farm Earnings

 

3b

 

Typical New England Dairy Farm 2000
Compact Payment Impact on Net Farm Earnings

 

4a

 

Impact of Northeast Dairy Compact on Financial Viability of New England Dairy Farms, 2000

 

4b

Projected Loss of Dairy Farms in New England With and Without the Compact

 

5a

 

Cost to Consumers Assuming the Full Cost of the Compact Over-Order Obligation is Reflected in the Retail Price

 
5b

 
Cost to Consumers Assuming Half of the Cost of the Compact Over-Order Obligation is Reflected in the Retail Price

6

Cost of Compact Over-Order Obligation in Context of Food Expenditures, by Income Group

 

7a

 

Class 1 Milk Prices, Zone 1

 

7b

 

Class 1 Milk Prices, Boston

 

7c

 

Class 1 Milk Prices, First Year of Compact: Boston

 

7d

 

Class 1 Milk Prices After Sept. 1998: Boston

 

Mr. Chair, Members of the Senate Judiciary Committee:

Thank you for this opportunity to testify today about the function and operation of the Northeast Dairy Compact Commission.

I am Daniel Smith, founding Executive Director of the Northeast Dairy Compact Commission.  I have been involved with the Northeast Interstate Dairy Compact, in various capacities, since its inception in 1987.  Looking around these august surroundings, perhaps it is enough to say by way of introduction that the Dairy Compact has indeed come a long way since that first, informal late night meeting with Representative Starr, Chair of the Vermont House Agriculture Committee, about the need to restore Vermont’s sovereign ability to regulate its dairy marketplace. 

My extended written testimony presents a comprehensive legal, administrative and economic impact report on the operation of the Dairy Compact since Congress first ratified the Compact pilot project as part of the 1996 Farm Bill.[1]   As set forth in my summary, I strongly believe the record presented provides a tangible basis for the Committee's review and a solid foundation of support for Congressional action to reauthorize the Compact.

My presentation today will primarily provide a summary economic impact review of the Commission’s price regulation since its implementation in July, 1997.   Presented as attachments to this statement are summary data about the price regulation’s impact on New England and New York dairy farmers and on New England consumers.  The information includes data on net farm pay prices, farm profitability, farm viability and milk production.  Also set forth is information about the price regulation’s impact on the procurement cost of raw milk and on retail consumer milk prices.  I have also provided data on the net relative impact on consumer spending for milk and for all food products, based on income.

Attachment 1a provides summary data for the price regulation’s operation from July, 1997 to present, by year and in total.  It sets forth the $159.2 million total compact over-order obligation imposed on the New England Class I or beverage milk market, and the $146.4 million total payment made to New England and New York farmers who supply the market.

The annual obligation amounts ranged from $19.9 million to $64.4 million, with a annual average of   The total annual producer payments ranged from  $16.7 million to $59.7 million, with an annual average total payment of $8,812.  These producer payment figures begin to describe the regulation’s combined function of producer price stability and enhancement.

Attachment 1b identifies an average total of 4217 New England and New York farms supplying the market.  These producers received total annual payments ranging from $3,900 to $14,700 per farm, with an average payment of $9812.

As can be seen from this and subsequent attachments, of the 4217 total farms, approximately 1300 are located in New York State.  New York farms in this proportion have historically supplied the New England market.  The attachments treat New England and New York farms, uniformly as milkshed farms historically supply the New England Market.

 As also indicated, the average annual total pool volume of  6.6 billion pounds of raw milk produced and processed for all purposes in the New England marketplace yielded an average net payment of $0.57 payment per hundredweight on all raw milk produced.[2]  The average annual amounts of the producer payments are also set forth per hundredweight, ranging from $0.25 to $0.91.  These amounts are also shown in combination with the federal minimum producer, or blend, price paid for federal Milk Market Order #1.

These per farm and per hundredweight producer payment figures display quite concretely the regulation’s combined function of producer price enhancement and stability.

Attachment 1c identifies the net, annual over-order obligation of 11.6 cents per gallon imposed under the price regulation on Class I milk in the New England market, for the period.  The Attachment places the over-order obligation in context with operation of the federal Milk Market Order Class I price, which establishes the underlying regulated minimum procurement price for beverage milk in the New England market.  The two regulated minimum pricing mechanisms in combination establish the net, overall increase of 11.6 cents in the regulated procurement cost of the raw, Class I milk.  The amount is established monthly as the difference for the given month between the federally established amount and the compact price regulation minimum amount of $1.46 per gallon.[3]

            Attachment 1a also identifies the price regulation’s total exemption payments made to the six New England state WIC programs and the total reimbursement payments made to the region’s school districts for school milk purchases.  Also itemized are the two payments made to the Commodity Credit Corporation, pursuant to the Congressional condition of consent.  Attachment I accounts also for the funding for the price regulation’s initial Supply Management Program, which the Commission is just now in process of administering.

            Finally, Attachment 1a accounts for the administrative assessment that finances operation of the Commission and the price regulation.  As can be seen, the Administrative Assessment on average was just under 2 percent of the total obligation collected for the period to present.  It can also be seen that the assessment was reduced by a half cent beginning in 2001.

Attachment 2a, 2b, 2c, 2d and 2f provide comprehensive data on farm numbers and production for the New England milkshed.  Attachment 2a,2b shows the average annual distribution of supplying New England and New York farms by herd size. The total, annual average production by herd size is shown in attachment 2f.  Total producer payments by herd size through 2000 are identified in attachment 2d.

It can be seen that almost three-quarters of the supplying New England and New York farms have fewer than 100 cows in their herds.  It can also be seen that of the remaining 1000 farms, about 20 percent have fewer than 200 cows.  This means that, of the farms regulated under the Compact, 400 farms or have herds in excess of 200 cows, with only about 80 farms having herds larger than 400 cows.  The farms subject to the Compact price regulation remain on balance, overwhelmingly small family farm operations.

It can also be seen that the farms under 100 cows, or about 72 percent of total farms of the total about provide only 35 percent of the total milk supply.  On the other end, the farms over 200 cows, or about 28 percent of total farms, supply about 35 percent of the milk supply.  It is thus the middle group of farms, between 50 and 100 cows, that is the essential anchor of the milkshed for both production and milk supply.  (Contrary to common understanding, this grouping rather than the larger operations also shows the greatest increase over time in New England.)

Attachment 3a and 3b provides data about the price regulation’s impact on farm profitability. The data establishes that the producer payments stabilized farm cash flow positions, and enhanced net income so as to allow many farms to operate in the black instead of the red, for extended periods of time.  This is apparent over time, and particularly for the year 2000.

The impact for the typical farm in 2000 is particularly striking.  For 2000, without operation of the price regulation, the typical farm showed net farm earnings of $23,000, with fully two-thirds of the income derived from the price regulation.

When family living expenses and taxes are factored in, the picture changes quite dramatically, with the farm showing net earnings still in the black but in the amount of only $400.  Viewed from this perspective, therefore, without operation of the price regulation, the typical farm would have slipped deeply into the red for 2000 in the amount of approximately $15,000. 

The analysis of the typical farm operation for 1997 provided by Attachment 3a indicates a similar, if less substantial impact attributable to the price regulation.  (The price regulation was only in effect for one half of the year, moderating its impact by definition.)

The final piece of Attachment 4a, an assessment of the regulation’s impact on the most credit worthy 200 plus operations in New England indicates that, even for the most successful operations, the Compact had a substantial, positive impact on farm profitability.  This data also describes the positive benefit over time of price stability, as well as that of price enhancement.

Attachment 4b provides an assessment of the price regulation’s impact on farm viability.  This farm viability assessment considers both the relative degree of financial stress confronting a farming operation and the absolute degree of financial stress resulting in a farmer’s decision to cease operating the farm.  The latter is of course a function of the former – the less financial stress confronting a farm, the less likely the farmer will be compelled to cease operation.

The assessment presented in Attachment 4b indicates that the price regulation has had a substantial, positive impact on the viability of the New England and New York farms comprising the New England milkshed.  By identifying the regulation’s impact on profitability, the data presented in Attachment 4a serves also to describe the price regulation’s effect on the relative financial stress confronting these dairy operations. 

Stabilized cash flow positions, enhanced net income and return on assets and equity serve most directly to reduce the financial stress experienced by a farming operation.  As also indicated, and perhaps most importantly, the producer payments allowed farmers to pay a significant portion of their living expenses for the period with a much greater degree of certainty than they would have been possible without operation of the price regulation.

According to the analysis presented in Attachment 4a, this overall reduction in financial stress resulted in a significant reduction in the likely net loss of dairy operations in the New England milkshed. According to the analysis presented, this effect of the price regulation may well have cut the attrition rate by more than half of what might have occurred without operation of the price regulation.

According to the first part of Attachment 4a, the price regulation had two striking impacts on farm viability in 2000:  1) the number of the most stable farms, or those experiencing no financial stress was increased from thirty to fifty percent; and 2) the most vulnerable farms, or those experiencing severe stress, was reduced in half, from thirty-four to seventeen percent.

The second part of Attachment 4a, which assesses the likely impact on farm attrition, follows from the above analysis.  According to this assessment, the price regulation may well have reduced the number of farm losses by as much as two and one half times.  This translates to approximately 400 farms remaining on the land, and remaining as vital participants of the New England milkshed.  

            The analysis presented in Attachment 4a and 4b probably understates the

 case according to the data presented in the individual assessments of the price 

regulation’s impact on farm loss provided by each of the New England State 

commissioners of agriculture.  (These assessments were prepared in response to 

a request made by Senator Snowe and Senator Collins of Maine.  I have attached 

their letters to my statement).   For example, Commissioner Steve Taylor of New 

Hampshire indicates that

“Since the Compact’s inception in July 1997 the number of farms producing milk for the commercial market in this state has declined from 187 to 176…If there had been no Compact I would expect that by now we would be down to 130 or even fewer farms.”

The remainder of my presentation provides some assessment of the impact of the price regulation on consumer retail milk prices and consumer spending on milk.  This portion of the analysis is much more difficult to present in concrete terms. At the least it can be said that the literature is extensive with regard to the impact on retail milk prices of the price regulation’s 11.6 cent increase in the regulated minimum procurement cost.

          Yet the literature is most inconclusive.  One study finds only a marginal

 impact; another finds somewhat similarly that some but not all, though still more

 than a marginal amount, was passed through; yet a third finds a substantial,

 marked-up impact well in excess of the actual amount of the price regulation.

These studies are presently all the subject of a raging academic debate on methodologies.  The Commission has yet to make its own determination, given the stark disagreement in this still developing literature.  My purpose today is not to contribute further to the array of opinions, but instead to provide some context.[4]

         Attachments 5a, 5b and 6 identify possible per capita and per family cost,

 annually, of the price regulation. Tracking the first two studies cited above, an

 analysis premised on a pass through of half the increase is also presented. For

 purposes of illustration, a complete pass through of the price regulation’s increase

 in the regulated minimum procurement cost is also presented.

According to Attachment 5a, a pass-through of half of the regulated assessment, or 6 cents, would have yielded an annual per capita average increase in spending on milk in the amount of about $1.40, with a range of $0.75 to $2.35. According to Attachment 5b, a pass-through of the entire 11.6 cents would have yielded twice these totals, or about $2.75 on average.  By household, assuming a pass-through of half the amount, the annual impact on average would have been about $3.50, with a range of $1.90 to $5.80 for the period.  Again, a pass-through of the entire amount would double these impacts.

Attachment 6 provides a further context for assessing the annual household net impact of the price regulation.  This assessment considers milk purchases and total food purchases, by income group.   As can be seen, assuming a complete pass-through, the impact again ranges on average between $5 and $10, with the higher impact occurring for the higher income groups.  With regard to all food purchases, this increase appears as a one to two tenths of one percent increase for all food purchases; it does not appear at all statistically with regard to all purchases.  The attachment also provides some further context with regard to all food purchases.

A final note on consumer impacts with regard to the Women, Infants, and Children Nutrition Program (WIC) and School Lunch Programs.  The price regulation contains provisions exempting the WIC program and providing reimbursement to the School Lunch programs.  The purpose of the first is to ensure the WIC program is held harmless; the attached letter from Mary Kelligrew Kassler, Director of the Massachusetts WIC Program indicates that this purpose has been served.  (A letter from Peter Petrone letter, Compact Commission member-designee of the Rhode Island WIC Program, describing a similar outcome, is also being submitted for the Record.)

The School Lunch reimbursement procedure was intended to ensure the same result, while at the same time allowing for the possibility that milk processors might choose to compete over the potential impact of the over-obligation on the margin for school lunch milk.  The total amount of the reimbursements provided has been substantially less than originally provided for.  This indicates at least that the program has been held harmless.  

Finally, I have provided data in graph form (Attachments 7a, 7b, 7c and 7d) that illustrates the interrelationship between the regulated procurement cost for Class I or beverage milk and the retail price for the same milk in the New England market (Boston).  As noted earlier, the procurement cost for raw milk is a combined function of the federally established Class I minimum price and the Compact price regulation.  In combination, the bottom two lines of the graph identify the combined minimum procurement cost.[5]

Adding the top line for retail prices defines the margin between this combined regulated minimum procurement cost and the retail price.  As can be seen, this graphed illustration is presented in two formats.  The first is a single, continuous graph for the entire Compact period, (Attachment 7a).  The second shows the Compact period divided in two parts (Attachment 7b).

Attachment 7b indicates that the pattern of the margin between the regulated procurement cost and the retail price was dramatically different between the first and second of these two defined periods.  The first shows a period of stable cost and even declining price, while the second shows combined stability and fluctuation in cost accompanied by a substantial increase in price. For the moment, I can only let the graph speak for itself.  On behalf of the Commission, I will be attempting to reconcile these two periods as our assessment moves forward.  I can only hope that the analysis in the literature will move in that direction, as well.   

            This concludes my testimony.  I thank the Committee for its considerate attention.



[1] As an appendix to my testimony, I am presenting a detailed analysis in three parts; 1) A summary legal history, describing the state and congressional legislative actions resulting in the establishment of the compact, the administrative rulemaking conducted by the Compact Commission to adopt and administer the market-wide price regulation and the litigation involving the Compact and the price regulation; 2) an economic analysis of the price regulation’s impact, from farm-gate to consumer outlet, for the period of its operation, July 1997 – present; and 3) a compendium of the record for the meetings the Commission has held throughout the New England Compact region, during which the Commission has heard from state representatives and interested citizens about the Compact’s impact in each state.

[2] The total New England pool volume of 6.6 billion all milk is approximately 4.1 percent of the total, approximate 160 billion pounds of raw milk produced nationally. (FAPRI data)

[3] The average annual pool volume of approximately 3 billion pounds of Class I milk regulated under the Compact and consumed in New England is approximately 5.3 percent of the total, approximately 57 billion pounds of Class I or beverage milk consumed nationally. (FAPRI data)

[4] At the same time, though speaking only for myself and not on behalf of the Commission, I do not find the third study to be at all credible for its description of the retail mark-up pattern for milk and its resulting conclusion of a substantial retail mark-up attributable to the price regulation.  For this reason, I have not provided any illustration of this study, as presented for the others. 

[5] As also described earlier, their combination also defines the price regulation’s net, overall increase of 11.6 cents in the regulated procurement cost of the raw, Class I milk.  This amount is established monthly by the combined operation of the federal price regulation and the compact price regulation, being the difference for a given month between the federally established amount and the compact price regulation minimum amount of $1.46 per gallon


Letters:

Senator Olympia Snowe and Senator Susan Collins
Commissioner Stephen H. Taylor, New Hampshire Department of Agriculture, Markets & Food
Commissioner Shirley Ferris, Connecticut Department of Agriculture
Commissioner Leon Graves, Vermont Department of Agriculture
Commissioner Jonathan L. Healy, Massachusetts Department of Food and Agriculture
Chief Kenneth D. Ayars, Rhode Island Department of Environmental Management
Director Mary Kelligrew Kassler, Massachusetts Department of Public Health, WIC Program


The Northeast Dairy Compact Commission
64 Main Street, Room 21
Montpelier, VT 05602

phone: (802) 229-1941

fax: (802) 229-2028