(1) Price Insufficiency
    Commenters indicated again and again that, in general, farmers in
New England had done a good job of holding down costs of production in
response to flat milk prices by increasing productivity and
efficiency.\6\ According to one survey of New England farmers, however,
this efficiency and productivity has not equated to profitability.
According to the survey conducted by the Farm Credit Services, forty-
two percent of the farms had a negative cash margin in 1995.\7\
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    \6\ See DeGues, 1/2/97 WC at 74; Sciabarrasi, 1/2/97 WC at 309;
and Smith, 12/17/96 HT at 36.
    \7\ See Smith, 12/17/96 HT at 36.
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    This survey included seventy-three New England farmers who
participate in Agrifax, a financial accounting service provided to
farmers by local Farm Credit Associations. Despite the relatively small
size of the survey sample, the results are useful to the Commission
because, according to the authors, survey participants are generally
larger and perhaps better managed than the average dairy farm in New
England. The survey indicates that the average adjusted cost of
producing milk by New England farms in this survey in 1995 was $15.37
per hundredweight, when including a 4% rate of return on equity. Before
the 4% rate of return on equity the net cost of production was
14.25.\8\
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    \8\ See Smith, 12/17/96 HT at 36.
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    Smith concluded

When you consider the average price received by farmers in our
survey for New England was $13.70 per hundredweight in 1995, it is
not surprising that many dairy farms are having financial
difficulty.\9\

    \9\ Smith, 12/17/96 HT at 36.
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    There was also abundant evidence in the record that costs of
production for 1996 will likely be as high or even higher than in 1995
and again not be covered by the price received. Jim Putnam, a Senior
Vice President with First Pioneer Farm Credit Bank, for

[[Page 23034]]

example, testified that he ``would estimate probably a dime or more
higher in 96'' primarily as a result of a 29% increase in purchased
feed prices which can account for up to 50% of the cost of production
in New England.\10\ The average 1996 mailbox price in New England was
measured as $14.25, leaving a shortfall of over $1.00, against this
commenter's estimated cost of production.
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    \10\ Putnam, 12/19/96 HT at 148-149; see also Smith, 12/17/96 HT
at 38; Andrew, 1/2/97 WC at 5.
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    Farmers consistently referred to the fact that low farm prices made
it difficult for them to reach their ``break-even'' point, let alone
generate any meaningful return.\11\ As one witness testified:

    \11\ See Mason, 12/17/96 HT at 87; d'Boer, 12/17/96 at 192;
Putnam, 12/19/96 HT at 144-45, 146.

    I have two young children and she'll say gee, Dad, we've had a
break-even for less price this year for a lower milk price and let's
go out and eat and I've got to explain to her that when you break
even, you don't eat, that's just paying the operating expenses and
says nothing about investing in your business and making it a long
range commitment.\12\
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    \12\ Holmes, 12/17/96 at 93.

    Other farmer-witness testified that they, themselves, were living
below the poverty line and were eligible to participate in the WIC
program.\13\
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    \13\ See Mason, 12/17/96 HT at 85-86.
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    The result of these depressed prices and the inability to make ends
meet will, according to one commenter, cause farmers to ``tighten their
belt'' or ``hunker down'' and ``wait out the point in time when they'll
go back to breakdown.'' \14\ Farmers, thus, are struggling to make ends
meet.
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    \14\ Putnam, 12/19/96 at 147-48.
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    The testimony and comments also made clear that this failure of
milk prices to cover, or even meet, the costs of production is not a
short-lived phenomenon, but rather, is part of a long-term trend that
extends back into the mid-1980s. Numerous studies, which were
corroborated by substantial anecdotal evidence from farmers, documented
the chronic price insufficiency over the last decade.
    The USDA Economic Research Service estimates that during the 1985
to 1990 period, cash receipts of Northeastern dairy farmers rose from
$13.96 to $16.00 per hundredweight while the cost of production jumped
from $12.06 to $16.46. In 1990, dairy farmers in the Northeast average
a net loss of .46 cents per hundredweight of milk sold.\15\
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    \15\ Pelsue, 1/2/97 W/C at 274.
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    Several other studies reached similar conclusions. For example, in
a study commissioned by the Maine Milk Commission submitted by Mike
Wiers, the Commission's Chair, economists Robert Milligan and Wayne
Knoblauch analyzed total costs of production (cash costs, depreciation,
a 5% return on equity, and a return on the farmer's labor) in Maine and
the five Southern New England states of Vermont, New Hampshire,
Massachusetts, Connecticut and Rhode Island--the six Compact states.
They found that for Maine the total costs of production per
hundredweight to be $17.24 in 1982 and $17.17 in 1987. For the Southern
New England States, the costs were $16.65 and $16.62 respectively.\16\
For these years, the Market Administrator's Report indicates that the
blend prices for Order 1, Zone 21 were $13.61 and $12.56, reflecting
pay prices below the costs of production.
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    \16\ In reply comment, Bill Gillmeister indicated that the
higher cost of production in southern New England was a significant
issue that must be addressed. See Gillmeister, Reply Comment, (RC)
April 9, 1997. The Commission agrees that the loss of milk supply
nearest to the population centers is an issue of utmost concern, and
the reasons for this particular decline should be most carefully
scrutinized. As described at footnote 3, the Commission has
concluded that it should initiate a regional cost of production
study by the close of the regulation adopted under this rule. The
comparative costs of production within the region will be a key part
of this analysis.
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    University of Vermont Extension economist Rick Wackernagel
submitted a study which relief upon an analysis of farm income and
expense data from Agrifax and ELFAC farms to estimate costs of
production for 1988 through 1990. The costs considered included cash
operating expenses, capital costs (other than land) and the labor
provided by the farm family; they did not provide for any return on the
owner's equity in land. According to this study, net costs of
production on these Vermont farms in 1988 were about $13 per
hundredweight. In 1990, they had risen to $15 per hundredweight.\17\ By
comparison, the Market Administrator's Report indicates blend prices
for 1988 and 1990, Order 1, Zone 21 were $12.22 and $13.95,
respectively. This study again confirms the fact that prices were
inadequate to enable farmers to meet the break-even point.
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    \17\ Wackernagel, 1/2/97 W/C at 515.
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    Economist Neil Pelsue submitted another study of the costs of
production in Vermont, conducted by the Community Development and
Applied Economics Department at the University of Vermont.\18\ This
study analyzed cost of production by considering all cash expenses,
capital replacement costs, and unpaid farm labor, using a hired wage
rate. For 1990, the study found the average cost of production to be
$14.33 per hundredweight, or about $0.67 less than the Wackernagel
study determination. When the economic or ``full ownership'' costs of
production was analyzed, however, which included a residual return to
management and risk, the measurement of cost of production ballooned to
an average of $16.41 per hundredweight. This determination is
substantially higher than the Wackernagel analysis and well above the
reported blend price of $13.95 for the year.
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    \18\ Pelsue 1/2/97 W/C at 282.
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    The Pelsue study also determined that nearly two-thirds of the
surveyed farms had negative residual returns. The study concluded, that
``[m]ore than half of the survey farms had economic costs of production
that exceeded their receipts. This implies that if current market
conditions do not improve, those farms may find it hard to continue
operating in the long run.'' \19\
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    \19\ Pelsue, 1/2/97 W/C at 282.
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    Vermont Department of Agriculture economist Reenie De Geus provided
testimony indicating that:

    In 1995, the most recent year, costs of production averaged
$14.06 for the group. (Vermont Dairy farmers) This is $0.83 lower
[sic] than the actual milk prices received of $13.23. In fact, in
each of the last 5 years, milk price received was lower than the
cost of production by an average of $1.08.\20\
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    \20\ De Geus, 1/2/97 WC at 74.
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    Finally, as mentioned above, there was near unanimous testimony
from farmers that price levels were inadequate to enable them to cover
their costs of production. As one commenter summarized, the result of
these chronically depressed prices will be ``attrition.'' \21\
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    \21\ Putnam, 12/19/96 HT at 148.
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    The evidence submitted to the Commission regarding the inadequacy
of prices paid to farmers currently and over an extended period of time
is persuasive. Although the degree of the price inadequacy varies from
commenter to commenter, the evidence supports the conclusion that costs
of production exceed prices paid to farmers. \22\
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    \22\ The Commission again notes the disparities in study
methodologies. While repeating its belief in the broad breadth and
strength of these studies for the conclusion that current prices are
not covering costs of production, the Commission also has identified
the need for a uniform, regional, cost of production study, to be
initiated before the close of the regulation imposed by this rule.
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