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Link
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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
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.
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.
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
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.
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.
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.
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