Milk Pricing Inequities Discussed at Hearing

Charlene M. Shupp
Espenshade
Special Sections Editor

HARRISBURG, Pa. — Here’s the question: has Pennsylvania used all of its options to secure a fair, transparent dairy price for dairy farmers?

The Pennsylvania Senate’s agriculture and rural affairs committee called a hearing Wednesday in an attempt to answer that question. Testimony was provided from all aspects of the industry as part of the committee’s fact finding session.

Both majority chair Sen. Mike Brubaker (R-36) and minority chair Sen. Michael O’Pake (D-11) said their offices have been flooded with calls and letters regarding this year’s low milk prices. As a result, the meeting was called to see if there are any options available to the state in assisting dairy farms.

In his opening comments, Brubaker conceded that milk pricing is mainly a federal issue, but he was still interested to hear what actions, if any, could be taken by the committee. Most testimony focused on what options could be available through the over-order premium program, administered by the Pennsylvania Milk Marketing Board (PMMB).

The over-order premium is a price paid to farmers above market value to Class I milk (fluid milk) produced, processed and sold in Pennsylvania. The PMMB holds hearings throughout the year to set the premium based on testimony submitted from dairy farmers and processors.

The hearing was led off by a dairy farmer panel of Rick Ebert, Dan Rice, Logan Bower and Dan Brandt.

Ebert, who farms in Westmoreland County and is the Pennsylvania Farm Bureau’s vice president, said, “our members support abolishing the state minimum retail price, which would permit retailers to use milk as a loss leader, while maintaining the minimum wholesale prices, enabling the continuation of the payment of the over order premiums to producers.”

Ebert also expressed concern about the widening price margin between producer and retail prices on milk sold in Pennsylvania. He said Farm Bureau would like the PMMB to investigate the issue.

Dan Rice, a Perry County dairy producer, said “2009 was the poorest cash flow year I have ever experienced.” To keep going, he has had to secure a line of credit and pull down his family’s savings, including money set aside for his children’s college education. He said the farm benefited from the fact his wife had an off-farm job to support the family.

Logan Bower, past president of the Professional Dairy Producers of Pennsylvania (PDMP) and Perry County dairy farmer, was critical of how the over-order premium is paid in the state. Bower, who is a cooperative member, said his over-order premium is blended into other premiums paid to all of its members. In contrast, independent dairy farmers receive a higher level over-order premium, paid directly to them by the dealers based on the percentage of Class I milk they sell.

“The Milk Marketing Board has set up a system whereby the independent farmers in my valley have access to a higher price than me,” he said. “The cost of production on our farms is similar and there is no difference in the quality of the milk from our cows, yet a Pennsylvania government agency has set up a system that discriminates in its distribution of benefits.”

Dan Brandt, a Lebanon County dairy producer and vice chairman of the new Dairy Policy Action Coalition (DPAC), said pooling should be considered for the distribution of over-order premiums. Brandt, who also is a cooperative producer, agreed with Bower’s assessment that the distribution of over-order premiums is flawed.

The producers also walked the committee through their milk checks to show the premiums and deductions on each check.

Earl Fink, executive vice president for the Pennsylvania Association of Milk Dealers (PAMD) responded to the widespread farmer belief that consumer milk prices remained high while farmer prices fell. In Pennsylvania, he said, retail milk price has fluctuated in response to farm milk prices. Citing a recent court case, he said, “Pennsylvania is better at having retail prices track producer prices because retailers in Pennsylvania tend to sell (fluid milk) at the minimums.”

Jim Dunn, Penn State economics professor, testified on the lack of transparency in the milk pricing system.

“Transparent is an adjective no one would ever apply to milk pricing,” he said.
Dunn provided an economic view of milk markets and the inherent challenges for farmers. Adjusting production is not easy. “They have little alternative but to produce as usual and ride it out if they can,” he said.

Dunn and Paul Huber, acting market administrator for the Mideast Federal Order, shared how the federal order system operates.

Speaking on behalf of the Greater Northeast Milk Marketing Agency (GNMMA), a group of cooperatives including Dairylea, Dairy Farmers of America, Land O’Lakes, Maryland and Virginia Milk Producers, and Upstate Niagara Cooperative, Edward Gallagher expressed concern on “stranded producer dollars.”

Gallagher described stranded producer dollars as the discrepancy between the 25-cent premium being paid on each gallon of milk by consumers and the amount returning to the farm. He said the 25 cents is being paid on all milk, however it is not known where the premium is going that is paid by consumers on milk that does not meet the “produced, processed, sold” requirement. He specifically cited milk that might be produced by Pennsylvania farms, but is processed outside of state, and then returns to Pennsylvania for retail sale.

Calling his statistics conservative, he said there were 1.5 billion pounds of milk that received the over-order premium, while the state sold 2 billion pounds of milk in 2008, leaving unaccounted a half billion pounds worth of milk payments.

One key debate that emerged from the testimony was the desire to see more premiums captured. However, the looming question is if PMMB has legal jurisdiction to expand premiums.

Ross Pifer, director of the Agricultural Law Resource Center, provided some legal insight into the regulation of state dairy pricing and the dormant commerce clause which oversees interstate commerce regulation. He outlined the legal tests the regulation would need to pass and several examples of case law.

Richard Kriebel, chair of the PMMB, shared how the over-order premium was priced. He stressed that, in setting the premium, it is important to keep all aspects of the industry in balance (producers, marketers, retailers) if one goes out of balance in comparison to surrounding markets, it could cause significant problems. David DeSantis, PMMB chief of enforcement and accounting, stressed that the PMMB can not regulate milk outside of Pennsylvania.

Acting Pennsylvania Agriculture Secretary Russell Redding listened to all testifiers before addressing the committee. He said that department staff, the governor’s office staff and PMMB staff met earlier this week to look at other possible options for the board to assist the state’s dairy farmers. The Rendell administration has also filed an appeal in court regarding the rejection of the PMMB of the administration’s proposal to capture an over-order premium for milk produced and sold in Pennsylvania, but processed in New Jersey. The proposal is based on the fact that New Jersey has an over-order premium for its producers.

“Never waste a crisis,” Redding said. “We have to go beyond (the belief that milk pricing is) ‘too complex’ to start resolving this.”