(3) Failure of Milk Prices to Account for Inflation
    Both economists and farmers identified the failure of milk prices
to keep up with inflation as a factor contributing to farm financial
stress. A recent study conducted and submitted by University of Vermont
dairy economist, Rick Wackernagel presented a comprehensive analysis of
the impact of these two variables--price insufficiency and inflation--
upon farm profitability.\30\ Because of its comprehensive approach, the
Commission finds this study persuasive and relies on it extensively.
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    \30\ Wackernagel, 1/2/97 W/C at 467 et seq.
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    The Wackernagel study analyzes the economic effects of three
different price trajectories for two different farm sizes--an 80 cow
herd and a 350 cow herd. Wackernagel's first trajectory used a macro-
economic model developed by the Food and Agriculture Policy Research
Institute (FAPRI) for 1997 modified to reflect local price levels and
yields as a base. The base scenario is premised upon a Class I price of
$16.17 per hundredweight at Zone 21 and a blend price of $14.70 per
hundredweight. Under this scenario, both farms operate at low to modest
levels of profitability. They are stressed financially during several
periods of price instability and by a general downward trend in price,
however. The financial results for these two farm sizes are ``marginal
to somewhat unattractive'' at these price levels, providing ``an
extremely modest return on investment of 0.4 to 3.0%''.\31\
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    \31\ Wackernagel, 1/2/97 W/C at 473.
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    The second trajectory attempts to moderate price instability by
holding the Class I price constant. Wackernagel estimates that the
Class I price accounts for about forty percent of the variation in the
blend price and that stabilizing the Class I price could potentially
reduce the variability of the blend price by about half. The economic
impact of this approach upon farm income and survival, however, was
similar to the base (first) trajectory, suggesting that price
instability is not the only factor placing financial stress on these
farming operations. Inflation, was a factor as well, as Wackernagel
explains: ``The Consumer Price Index (CPI) shows a third source of
financial stress for these farms, inflation. In contract to its steady
upward progression, the first two trajectories have downward
trends.\32\
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    \32\ Wackernagel, 1/2/97 W/C at 473.
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    Wackernagel's third price trajectory raises the Class I price to
$17 per hundredweight (Zone 21), yielding a project blend price of
$15.45, and increases the Class I price by one-half the rate of
inflation in subsequent years. This price trajectory has the greatest
positive impact on retention of equity, net farm income and
survivability, even though its upward slope is less than that of the
CPI.
    Farmers also identified inflation as a significant source of
financial stress. Ellen Paradee, a dairy farmer from Grand Isle,
Vermont testified that:

    Since 1985, our property taxes have increased two hundred
percent. Our grain costs have increased one hundred percent. And our
utility costs have increased one hundred and twenty five percent. In
1985, the average blend price for Zone 25 was $12.57 per
hundredweight. In 1995, the average blend price was $12.56 per
hundredweight. Essentially, there has been no increase in the blend
price. If the price of milk had kept pace with inflation, it would
be approximately $26 per hundredweight.\33\

    \33\ Paradee, 12/17/96 HT at 232.
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    Ralph McNall commenting on his own farm finances and inflation
said:

* * * utility cost, electricity, for example, has gone from, in the
year 1991 it's gone from $3,600 to $5,800 for an increase of fifty
two percent.
    Purchased feed is another example--$37,000 to $76,000 for an
increase of one hundred and five percent. Fertilizer--$4,900 to
$8,100 for an increase of sixty six percent  . . . It is important
to note that steps have been taken to reduce electricity costs, for

[[Page 23036]]

instance through plate coolers and heat reclaimers within the milk
house and yet as I said before the cost went up fifty percent.
Reliance on purchased fertilizer has been reduced, supposedly,
through the installation and utilization of liquid manure.\34\

    \34\ McNall, 12/17/96 HT at 222 and 223.
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    John Mordasky, dairy farmer and Legislator from Stafford,
Connecticut, said:

    I lost from eight to ten thousand dollars a year in the last
four years and I feel that this has come about because the relative
price of milk has stayed the same. Fuel has gone up, grain has
jumped out of sight and it just--all the other costs that are
involved--equipment, parts--have gone very, very, high and they're
not relative anymore.\35\
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    \35\ Mordasky, 12/19/06 HT at 12.
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