A. Issue: Farmer Cost of Production and the Pay Price Needed To Yield a
Reasonable Rate of Return to Producers

    The comment received makes clear that, despite the approach of
Section 9(e), there is very little agreement on what ``costs'' should
be included in the cost of production, and even how they should be
calculated. Beyond actual cash costs, there is considerable
disagreement over whether to include or exclude, and how best to
consider, depreciation, family living costs, return or equity, a
reasonable value for the farmer's own labor, and debt service. There
was no common definition throughout the testimony among farmers or
economists. Farmers, themselves, quite frequently, excluded the value
of their own labor and or depreciation in calculating their own costs
of production.
    The diversity of comment makes clear the difficulties of cost of
production analysis. Cost of production can and do vary widely from
farm to farm and year to year.\3\ Even one commenter who opposed the
adoption of a price regulation agreed that there is a lack of consensus
on the amounts that should be considered in calculating costs of
production.\4\ University of Vermont dairy economist Rick Wackernagel
suggests the difficulty of isolating the cost of producing a
hundredweight of milk from what is typically a diversified farming
operation, and that any such attempt is at best ``an approximation.\5\
---------------------------------------------------------------------------

    \3\ See December 19, 1996 hearing transcript (12/19/96 HT):
Putnam at 141, 148-49; Stevens at 158-60; Carlson, at 232-34;
Buelow, at 248; Beach at 288-90; Platt, at 292.
    \4\ Vetne, 12/19/96 HT at 264-66.
    \5\ Wackernagel, Compilation of January 2, 1997 Written Comment
(1/2/97 WC) at 482-83.
---------------------------------------------------------------------------

    As will be discussed, despite the diversity of their analytical
approach, the comments do reflect near unanimous agreement on at least
three important aspects of the cost of production equation:

    (1) For an extended period of time prices have not covered the
full costs of production, however defined,
    (2) price instability has caused financial stress and made it
impossible for farmers to plan financially; and
    (3) over time, net, ``mail box'' price levels received by
farmers have not kept up with inflation.

    In addition, the Compact Commission will review the comments
relating to the structure and health of the New England dairy industry.
    The Compact Commission's review of comment under this section
includes a comprehensive survey of the testimony and comment received
from dairy farmers, and a response to opposing comments received. The
Commission notes that very few conflicting comments were submitted for
consideration.