UNITED STATES DEPARTMENT OF JUSTICE UNITED STATES DEPARTMENT OF AGRICULTURE = = = = = = = = = = = = = = = = = = = = = = = = = = = = = Public Workshops Exploring Competition Issues in Agriculture DAIRY WORKSHOP A Dialogue on Competition Issues Facing Farmers in Today's Agricultural Marketplace University of Wisconsin-Madison Union Theater = = = = = = = = = = = = = = = = = = = = = = = = = = = = = TRANSCRIPT OF PROCEEDINGS = = = = = = = = Date: Friday, June 25, 2010 Time: 8:45 o'clock a.m. Reported by NANCY L. DELANEY 2 1 I N D E X 2 Opening Remarks 3 Keynote Roundtable Discussion 4 Before: The Honorable Tom Vilsack, Secretary of Agriculture, U.S. Department of Agriculture; 5 The Honorable Christine Varney, Assistant 6 Attorney General for Antitrust, U.S. Department of Justice; 7 The Honorable Herb Kohl, Senator, United States 8 Senate; 9 The Honorable Russell Feingold, Senator, United States Senate; 10 The Honorable Tammy Baldwin, Congresswoman, 11 United States House of Representatives; 12 The Honorable Jim Doyle, Governor, State of Wisconsin; 13 The Honorable Rod Nilsestuen, Secretary of 14 Agriculture, State of Wisconsin. 15 Farmer Presentation of Issues 16 Moderators: The Honorable Tom Vilsack, Secretary of Agriculture, U.S. Department of 17 Agriculture; 18 The Honorable Christine Varney, Assistant Attorney General for Antitrust, U.S. Department 19 of Justice; 20 Dairy Farmers: Jamie Bledsoe, Riverdale, California; 21 Joaquin Contente, Hanford, California; Joel Greeno, Kendall, Wisconsin; 22 Frances Horton, Hatch, New Mexico; Ed King, Schuylerville, New York; 23 Bill Rowell, Sheldon, Vermont; Christine Sukalski, Leroy, Minnesota; 24 Darin Von Ruden, Westby, Wisconsin. 25 PROFESSIONAL REPORTERS, LTD. 3 1 I N D E X (Continued) 2 Public Testimony 3 Moderated by: John Ferrell, Deputy Undersecretary for Marketing and Regulatory 4 Programs, U.S. Department of Agriculture; Mark Tobey, Special Counsel for Agriculture and 5 State Relations, Antitrust Division, U.S. Department of Justice; 6 Panel I: Trends in the Dairy Industry 7 Moderated by: Josh Soven, Chief, Litigation I 8 Section, Antitrust Division, U.S. Department of Justice; 9 Panelists: Peter Carstensen, Professor of Law, 10 University of Wisconsin; Ron Cotterill, Professor of Agricultural and 11 Resource Economics, University of Connecticut; Bob Cropp, Emeritus Professor of Agricultural 12 and Applied Economics, University of Wisconsin; Jim Goodman, Organic Dairy Farmer, Wonewoc, 13 Wisconsin; Jerrel Heatwole, Dairy Farmer, Greenwood, 14 Delaware; Pete Kappelman, Chairman of the Board of 15 Directors, Land O' Lakes Cooperative; Marcus Peperzak, Chief Executive Officer, Aurora 16 Organic Dairy. 17 Panel II: Market Consolidation 18 Moderated by: James MacDonald, Chief, Agricultural Structure and Productivity Branch, 19 Economic Research Service; 20 Panelists: Calvin Covington, Retired Dairy Industry Executive, King, North Carolina; 21 Brian Gould, Associate Professor, Department of Agricultural and Applied Economics, University 22 of Wisconsin-Madison; Louise Hemstead, Chief Operating Officer, 23 Organic Valley Cooperative; Daniel Smith, Esq., former administrator, 24 Northeast Dairy Compact Commission; John Wilson, Senior Vice President, Dairy 25 Farmers of America. PROFESSIONAL REPORTERS, LTD. 4 1 I N D E X (Continued) 2 Panel III: Market Transparency 3 Moderated by: Mark Tobey, Special Counsel for Agriculture and State Relations, Antitrust 4 Division, U.S. Department of Justice; 5 Panelists: Stephen Obie, Director of Enforcement, Commodity Futures Trading 6 Commission; Andy Pauline, Assistant Director, Government 7 Accountability Office; Tanya Rushing, Dairy Farmer, Tylertown, 8 Mississippi; Dennis Wolff, Partner, Versant Strategies, and 9 former Pennsylvania Secretary of Agriculture; Robert Yonkers, Vice President and Chief 10 Economist, International Dairy Foods Association. 11 12 Public Testimony 13 Moderated by: John Ferrell, Deputy Undersecretary for Marketing and Regulatory 14 Programs, U.S. Department of Agriculture; Mark Tobey, Special Counsel for Agriculture and 15 State Relations, Antitrust Division, U.S. Department of Justice; 16 Josh Soven, Chief, Litigation I Section, Antitrust Division, U.S. Department of Justice; 17 The Honorable Russell Feingold, Senator, United States Senate. 18 Closing Remarks 19 20 21 22 23 24 25 PROFESSIONAL REPORTERS, LTD. 5 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 MR. VILSACK: Good morning, 2 everyone. I'm Tom Vilsack, Secretary of 3 Agriculture and I want to thank all of you for 4 being here today, especially I want to thank 5 Chancellor Martin and the University of Wisconsin 6 for giving us this opportunity to have this 7 beautiful facility. Dean Molly Jahn, who was 8 formerly associated with the USDA, it's good to 9 see her back as the Dean of the College of 10 Agriculture and Life Sciences. I want to thank 11 the participants who obviously for those in 12 Wisconsin need very little, if any, introduction, 13 but I appreciate the senators being here, the 14 Governor and the Secretary of Agriculture. 15 I want to acknowledge the fact that 16 Attorney General Eric Holder would normally be 17 here, but for the death of a very close and dear 18 friend whose funeral is today. He sends his 19 regards and apologies, but we have Assistant 20 Attorney General Christine Varney here who I will 21 introduce in just a little bit. This is the third 22 of a series of five hearings that are being 23 conducted throughout the United States. 24 We started in Ankeny, Iowa 25 discussing seed issues and consolidation and PROFESSIONAL REPORTERS, LTD. 6 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 competition in basic seed. We then traveled to 2 Normal, Alabama, where we had an extensive 3 conversation about poultry. We're here today to 4 obviously talk about an issue that's 5 extraordinarily important to Wisconsin and to the 6 country and that's our dairy industry. We travel 7 to Fort Collins, Colorado on August 27 to discuss 8 in more detail livestock issues and these hearings 9 will conclude on December 8 in Washington, D.C. 10 where we'll look at the financial aspects of 11 margins. 12 The reason we are here in 13 connection with the dairy industry is that Senator 14 Kohl and Senator Feingold have requested that 15 given the significance of the dairy industry to 16 the Wisconsin economy and given the importance 17 that Wisconsin plays in the dairy industry 18 generally, they felt that it was an appropriate 19 place for us to have a hearing of this kind and 20 the Governor was certainly supportive of that as 21 well. 22 10 years ago, we had 111,000 dairy 23 farms in the United States. Today, we only have 24 65,000 farms. The revenues for the top 10 25 processors have grown from 65 percent 10 years ago PROFESSIONAL REPORTERS, LTD. 7 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 to 82 percent and the size of processing plants 2 generally have increased by 70 percent. This is a 3 set of statistics that we've seen in other aspects 4 of agriculture which led to us conclude that we 5 needed to begin giving a forum for the 6 conversations that have been taking place in the 7 countryside for some time in this country about 8 precisely whether the playing field, the 9 marketplace is as fair and balanced as it needs to 10 be. 11 When we lose farming operations, it 12 not only impacts that specific family, but it also 13 has a significant impact on rural America. As 14 I've traveled around the country last year during 15 the rural tour and this year, I have a growing 16 concern about the condition of rural America. It 17 is a place of higher poverty than the rest of the 18 United States. In fact, 90 percent of the 19 persistent poverty counties in America are located 20 in rural America. It is a place that is aging. 21 It is a place that is losing population. 22 It is a place where there's a 23 significant difference between per capita income 24 of those who work and raise their families in 25 rural America and those who work and raise their PROFESSIONAL REPORTERS, LTD. 8 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 families elsewhere. It is not only the source of 2 our food and our fiber and our water, but it is 3 also the source of the importance of the value 4 system that this country depends on. Only one 5 sixth of America's population lives in rural 6 communities, but 45 percent of those who serve us 7 in uniform, who are serving us bravely in 8 Afghanistan and Iraq right now, come from rural 9 America. 10 And so it's important for us to 11 have these hearings and so that you know that we 12 are listening and in fact acting following the 13 seed discussions in Ankeny, we began a process at 14 USDA to begin asking the question what happens 15 when patents expire on seed technology and how can 16 we create a generic seed industry that gives 17 farmers a fair shake at getting the seed they need 18 to plant their crops. Following the poultry 19 hearings in Alabama, we announced significant 20 revision to the GIPSA rules, leveling, in our 21 view, the playing field. 22 It's now open for comment and we 23 will be looking at those comments and hopefully 24 finalizing those rules by the end of the year, the 25 most significant change in those rules probably PROFESSIONAL REPORTERS, LTD. 9 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 since the Great Depression. And so we come today 2 fully recognizing the struggles the dairy industry 3 has experienced over the long haul and certainly 4 over the last couple of years. We at USDA have 5 been sensitive to the concerns of dairy 6 producers. Have attempted to provide some degree 7 of temporary help, but recognize that there needs 8 to be a more permanent solution. 9 For that reason, we put together 10 the Dairy Council which has met twice already in 11 Washington, D.C. and will continue its 12 deliberations and discussions through this year to 13 try to determine how we might reach a consensus 14 position among dairy producers as to what we can 15 do to insure greater price stability and greater 16 prosperity for those who are in the industry. 17 I want to say one thing before I 18 turn it over to Assistant Attorney General Varney 19 and that is, I want to be clear about what these 20 hearings are not. There's been some concern that 21 these hearings are focused on doing damage to the 22 important work that cooperatives do throughout the 23 United States and particularly in agriculture. 24 That is certainly not the case. We recognize the 25 important role that cooperatives play in giving PROFESSIONAL REPORTERS, LTD. 10 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 farmers the capacity to come together in order to 2 have some more balance and fairness in the 3 marketplace and we expect and anticipate that 4 we'll continue to be supportive of cooperative 5 efforts throughout the United States. 6 With that, I want to explain just 7 briefly the process that we'll follow today. I'm 8 going to turn it over to the Assistant Attorney 9 General for her comments. That will be followed 10 by welcoming comments from Governor Doyle who 11 because of his schedule will have to leave after 12 those comments. Then I'll basically direct a 13 general question and start with Senator Kohl. I 14 want you to know, Governor, you put me on the spot 15 here. Now, as a former governor, I love 16 governors, but these guys are in charge of my 17 budget and Senator Kohl is really in charge of my 18 budget. 19 So you know, you put me on the spot 20 asking to go first, so Senator, I hope you 21 don't -- Mr. Chairman, I hope you don't take that 22 against me in the budget. It's his fault, not 23 mine. We will follow that conversation with the 24 political leaders who are here today with an 25 opportunity for a number of farmers from across PROFESSIONAL REPORTERS, LTD. 11 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 the country to visit with us, but during the 2 course of this hearing today, we will give as best 3 we can everyone an opportunity to comment and 4 participate. We are here very much to listen. 5 With that, I want to turn it over 6 to the Assistant Attorney General who has been at 7 every single one of these hearings and has been 8 engaged and involved very much in this listening 9 opportunity. The Assistant Attorney General comes 10 with a broad degree of experience in the private 11 sector and one of Washington's leading law firms 12 where she was engaged and involved in antitrust 13 litigation and review for about a decade. 14 Prior to that, she served as a 15 commissioner on the Federal Trade Commission with 16 obviously a keen eye towards competition and a 17 fair marketplace and prior to that, she served in 18 the Clinton administration in cabinet affairs, so 19 she has a broad array of interests and has been a 20 good partner in these hearings. So with that I'll 21 turn it over to Christine Varney. 22 MS. VARNEY: Thank you very much, 23 Secretary. It's a great pleasure to be here 24 today. Dairy farming has been vital to America 25 since before there was an antitrust vision and we PROFESSIONAL REPORTERS, LTD. 12 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 are -- division and we are here to learn about 2 what is going on in this industry from you, those 3 who have worked on dairy farms and in the 4 industry. As importantly, I am here to learn how 5 DOJ, working with the USDA, can improve 6 competition in the dairy industry. 7 I am disappointed, of course, that 8 Attorney General Holder could not join us, but not 9 as disappointed as the Attorney General himself. 10 He asked me to convey his most sincere regrets 11 that he could not be here personally to thank you 12 all, both for welcoming us to America's Dairyland 13 and for sharing your knowledge with us about the 14 important issues confronting the dairy industry. 15 As the Secretary said, unfortunately, a close 16 friend of his passed away this week and the 17 funeral is being held today. He would surely be 18 here otherwise. 19 I know how important a priority 20 these workshops have been for General Holder and 21 how much he values hearing from and learning from 22 the people on the ground, the people who live 23 daily with the market forces that we have 24 assembled these workshops to better understand. 25 It is clear, of course, why he values these PROFESSIONAL REPORTERS, LTD. 13 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 workshops so much. In our prior sessions, we have 2 heard personally from so many farmers struggling 3 to maintain a way of life that their family and 4 this nation has known for generations. 5 American agriculture provides the 6 livelihood for an enormous portion of the work 7 force and sustenance for the rest of us. For us, 8 the experience and insights of those of you who 9 work tremendously hard to make a living in these 10 fields are crucial not only to keep this great 11 nation healthy and strong, but to help us at the 12 Department of Justice get our job right. As the 13 Secretary said, this is the third session of these 14 joint workshops and from our perspective, they are 15 a major success and an important example of 16 government collaboration. 17 We have been working closely with 18 the Department of Agriculture and based on what 19 we've heard at prior workshops, we've formed a 20 task force to examine how we can better work 21 together to promote healthy competition in all 22 agriculture sectors. One focus of this working 23 group will be to review the enforcement of the 24 Packers and Stockyard Act, one of this Nation's 25 essential and historic competition laws. We have PROFESSIONAL REPORTERS, LTD. 14 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 been gathering information, building more time in 2 each session to hear from farmers about the issues 3 and industry dynamics that affect them the most. 4 This is leading to more fruitful 5 understanding and more successful cooperation 6 between our agencies than historically has ever 7 occurred. Today is a particular highlight for 8 us. Our discussion and panels will focus on 9 bringing together officials not only from the 10 Department of Justice and Agriculture, but from 11 Congress, the Commodity Futures Trading Commission 12 and the states, all of whom have a strong interest 13 in insuring the competitiveness of the dairy 14 markets. 15 These diverse panels of farmers, 16 academic and industry representatives will be 17 discussing the important trends affecting the 18 industry, the prevalence and increase in 19 concentration in the market for raw milk and 20 issues surrounding the way in which prices to 21 dairy farmers are set. We expect that what we 22 learn today will help us immeasurably as we 23 consider the ways in which government can help to 24 insure efficiency and competition in dairy markets 25 with low prices to consumers, from school children PROFESSIONAL REPORTERS, LTD. 15 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 to family pizza shops with a fair return to those 2 who run our nation's dairy farms. 3 We have taken some important steps 4 to protect consumers from undo consolidation in 5 the dairy industry. In January, we at the 6 Department of Justice filed a lawsuit against Dean 7 Foods, alleging that it had violated the antitrust 8 laws in its acquisition of Foremost Farms. As we 9 said in our complaint, we believe the transaction 10 will lead to higher milk prices for both school 11 children and everyday fluid milk consumers here in 12 Wisconsin, as well as Michigan and Illinois. 13 I have traveled with Senators 14 Leahy, Sanders and Schumer to Vermont and to New 15 York to speak with dairy farmers and we are 16 keeping a watchful eye on this industry, mindful 17 of the various comments we have heard. We know 18 that dairy farmers are concerned about a lack of 19 choices for buyers and about the way their milk is 20 priced, as well as a year of dispiriting returns 21 for their labors. It is my hope that today's 22 conversation will allow us to bring attention and 23 clarity to these issues and help us think hard 24 about the role the Department of Justice can play 25 with the Department of Agriculture in promoting PROFESSIONAL REPORTERS, LTD. 16 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 and protecting the health and competitiveness of 2 America's dairy farms. 3 Let me just say on a personal note, 4 you have no better champions in Washington than 5 Senator Kohl and Senator Feingold. Every time I 6 see them, they want to know what I'm doing about 7 dairy, so they keep the pressure on and I'm doing 8 my best to live up to it. 9 MR. VILSACK: Thank you very much. 10 I want to take this opportunity to just briefly 11 introduce the Governor. Obviously, he's no 12 stranger to Madison. He's a native of Madison and 13 elected to this position as Governor of Wisconsin 14 in 2002 and reelected in 2006. Prior to that, he 15 served as Wisconsin's Attorney General. To me, 16 Jim Doyle is a friend. He is someone who 17 passionately cares about the economy of Wisconsin 18 and is constantly talking to me about ways in 19 which the USDA can use its rural development 20 resources to provide expanded job opportunities. 21 He has been very proud of the work 22 that's been done in Wisconsin on energy issues and 23 has positioned Wisconsin to be a national leader 24 in this energy revolution that we are seeing in 25 this country. So it's my pleasure to turn the PROFESSIONAL REPORTERS, LTD. 17 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 podium over to my good friend Governor Doyle. 2 MR. DOYLE: Well, good morning, 3 everyone. I really, truly want to thank the 4 Secretary for being here today. I believe this is 5 his third trip to Wisconsin and he has come here 6 to listen carefully every time, particularly in 7 the last year when our dairy farmers were facing 8 some of the most difficult economic circumstances 9 that they have faced in many, many years and I 10 want to extend my deep appreciation to the 11 Secretary. He came here and listened and I will 12 tell you, he pulled every lever available to him 13 to help the dairy industry during that very, very 14 difficult time, of which we're not out of yet, 15 although things are a little bit better, but we're 16 not out of and I deeply thank the Secretary for 17 what he has done. 18 I also really want to welcome Chris 19 Varney here. I've known her for many years in my 20 days as Attorney General. She has a tremendous 21 national reputation in antitrust, somebody who 22 understands markets, somebody who fights for 23 consumers and somebody who I know will listen 24 carefully and take to heart the comments that are 25 made here today. We have the two greatest dairy PROFESSIONAL REPORTERS, LTD. 18 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 senators in the country and they are both here 2 with us today, who have fought tirelessly for 3 dairy, the dairy industry in this country, which 4 of course affects Wisconsin in many ways and so to 5 Senators Kohl and Feingold, I thank them. 6 I can't tell you the number of 7 times I've called on each of them with issues that 8 have come up in this state and as they relate to 9 all things, but certainly as they relate to dairy, 10 they have been with us every step of the way. Rod 11 Nilsestuen will participate today and Rod, I think 12 most people recognize in seven and a half years 13 has been an extraordinary Secretary of Agriculture 14 here in Wisconsin and in many ways, Rod has had a 15 vision that we have been able to carry out 16 together that has strengthened and built the dairy 17 industry in Wisconsin. 18 You know, there's probably no area 19 of our economy in which the interplay between the 20 Federal government and State government and 21 Federal policy and State policy is more 22 intertwined than it is in dairy. We are obviously 23 a state that benefits from a great dairy 24 industry. Mr. Secretary, the agriculture and 25 dairy, but the back bone is dairy in Wisconsin, is PROFESSIONAL REPORTERS, LTD. 19 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 a $60 billion a year industry in Wisconsin. One 2 out of ten employees, workers in this state are 3 employed in some way in the agricultural and 4 particularly the dairy industry. So it is 5 critical for us to have a strong and growing dairy 6 economy. 7 I'm very proud, you'll hear, I 8 think, today from a number of people, we've done 9 some really great things in the last seven and a 10 half years. When I came in, our milk production 11 had been falling for 20 plus years. California's 12 had been growing and they had surpassed us in milk 13 production. Everybody told us that California, 14 given where the vectors were going, was soon going 15 to pass us in cheese production, which was 16 something that we all decided in the dairy world 17 and agricultural community in Wisconsin we weren't 18 going to allow to happen. 19 So with the use of dairy 20 modernization tax credits, we have spurred the 21 investment of over a half a billion dollars in our 22 dairies in this state. With the added processing 23 tax credits that have been provided as well, we 24 now have spurred the investment of over $2.2 25 billion in farm operations and processing firms in PROFESSIONAL REPORTERS, LTD. 20 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 this state. What that has done is turned around 2 dramatically our milk production, where we are now 3 on the rise. California is on the decline. We 4 hope that those vectors will pass soon, but even 5 more importantly, the great threat to us that's 6 supposedly California was going to overtake us in 7 cheese not only didn't happen, but our cheese 8 production has stepped up dramatically while 9 California's has run into a few issues and is 10 going in the other direction. 11 And I wouldn't say we are safely 12 secure as the cheese making capital of the country 13 and of the world, but we are solidly there and 14 moving in the right direction, but we have some 15 very big challenges as well. Obviously, 16 protecting our great farmland is critically 17 important and the Secretary, I know, cares deeply 18 about the rural economy, as his comments have 19 mentioned, and part of that is making sure we have 20 a strong rural economy. 21 There's so many pieces to it, but 22 it's to make sure that there is good farmland in 23 our rural areas. And we have in the last year 24 significantly modernized our farm protection, 25 farmland protection programs in this state, taken PROFESSIONAL REPORTERS, LTD. 21 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 some old, outdated programs and consolidated and 2 moved them in a way to really help people be able 3 to stay on the farms and be able to -- to be able 4 to use that farmland for what God gave it to us 5 for, which is to farm. 6 We have also worked hard at regulatory reform and with 7 the work of many people in this room, we passed major 8 citing reform legislation that has allowed our dairy 9 farms to be able to grow and expand and we understand, 10 and, again, thank the Secretary for all the work he's 11 done, that one of our great strengths is 12 diversification. So whether it is managed grazing 13 and now over 20 percent of our dairy farmers do 14 some form of managed grazing, value added and 15 particularly biofuels are areas of enormous 16 opportunity for us in Wisconsin. So doing 17 everything we can to get this -- to get the 18 economic incentives lined up correctly and to make 19 sure that all farm operations, big and small, 20 that's our motto in Wisconsin. We're not for big 21 farms or small farms, we're for making sure that 22 every farm, big and small, can make money and 23 profit here in this state. And so we really thank 24 you for your attention on this very, very critical 25 issue. I'm sorry that I have to leave, but PROFESSIONAL REPORTERS, LTD. 22 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 Secretary Nilsestuen will be here and I look 2 forward to hearing the results of this 3 conversation that you'll have in the course of the 4 day and once again, to the Assistant Attorney 5 General and to you, Mr. Secretary, we really, 6 really thank you for the attention that you've given 7 this very crucial issue. Thank you. 8 MR. VILSACK: Thanks, Governor, 9 thank you very much. Thank you, Governor, 10 appreciate you taking time to be here this 11 morning. I want to turn the podium over now to 12 our two senators and I'll start with Chairman 13 Kohl, again, someone who doesn't need a great deal 14 of introduction, but prior to his successful 15 public career, as everyone knows he has a small 16 grocery store operation, at least it was small at 17 one time. I'm told it sells a lot of milk and 18 cheese, which I'm sure it does. 19 He served on the senate 20 appropriations committee, he is the chair of the 21 agriculture appropriations subcommittee, is on the 22 judicial committee where he is the chair of the 23 subcommittee on antitrust competition policy and 24 consumer rights. I will tell you that the senator 25 is passionately interested in all things relating PROFESSIONAL REPORTERS, LTD. 23 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 to agriculture. When I appear before his 2 committee, the questions are insightful, 3 comprehensive, well thought out and with a deep 4 concern about the future of rural America. 5 So Senator Kohl, I'd like to give 6 you the opportunity to make a few comments and 7 then I'll turn it over to Senator Feingold. 8 SENATOR KOHL: Thank you very much, 9 Mr. Secretary, Tom Vilsack, we so much appreciate 10 that you and the U.S. Assistant Attorney General, 11 Christine Varney, are here with us today. As we 12 all know, the agricultural industry is the state's 13 biggest industry and that dairy is the biggest 14 part of agriculture. It produces over $26 billion 15 of business a year here in our state and so 16 ensuring a fully competitive dairy marketplace is 17 crucial. 18 We appreciate that the Department 19 of Justice as well as the Department of 20 Agriculture are holding this workshop here in 21 Madison today. Recent years have been very 22 difficult for dairy farmers, not only here, but 23 throughout our country. Record high farm prices 24 quickly turned to record lows and while farm 25 prices plummeted, the price consumers paid for PROFESSIONAL REPORTERS, LTD. 24 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 dairy products saw only a modest price decline. 2 This discrepancy in price changes forces us to ask 3 whether or not consolidation in the industry is 4 leading to excess market power by some firms. 5 We need to ask, in other words, if 6 our farmers are getting a fair shake. Over the 7 last several years, the dairy industry, like many 8 sectors in agriculture that we have looked at, has 9 seen considerable consolidation in marketing, 10 processing and retail. The growing market power 11 by some firms leaves family farmers with few 12 bidders for their milk and very tough terms of 13 sale. This consolidation means that we need 14 strong antitrust enforcement now more than ever. 15 That's why it's encouraging to see 16 the Department of Justice and USDA here today. 17 They need to hear and learn from farmers, like 18 many of you who are here today, where the 19 consolidation is hurting our ability to receive a 20 fair price for the milk that you produce. We've 21 worked hard to preserve and enhance a competitive 22 marketplace in agriculture through the 23 subcommittee on antitrust, which I chair. We've 24 held several hearings to review competition in 25 agricultural markets. PROFESSIONAL REPORTERS, LTD. 25 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 In 2008, we conducted an 2 investigation on the proposed JBS/Swift meat 3 packing acquisition to expose the danger that 4 consolidation would have in meat packing. We 5 urged that the deal be blocked. A recommendation 6 that the Bush Justice Department followed in large 7 part. The lessons we learned from that 8 investigation apply equally to dairy. When 9 processors gain too much market power and too much 10 leverage, farmers suffer and lose the benefits of 11 a competitive market and that is not acceptable. 12 That is why we're planning to 13 develop a working group here in Wisconsin to 14 further analyze and make policy recommendations to 15 address competition, consolidation and other 16 issues impacting the dairy industry in our state. 17 We also must make sure that dairy pricing is 18 transparent. In 1997, the spot market for cheese 19 was moved from Green Bay, Wisconsin due to 20 concerns that it was thinly traded with only a 21 small number of buyers and sellers who could 22 potentially manipulate the market. The spot 23 cheese market is now housed at the Chicago 24 Mercantile Exchange, but the concerns about 25 potential market manipulation persist. PROFESSIONAL REPORTERS, LTD. 26 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 The Commodity Futures Trading 2 Commission has reported that the volume of cheese 3 traded in Chicago generally represents less than 1 4 percent of all the cheese produced in the United 5 States. Now, why is this so important? Because 6 that spot market sets the price directly and 7 indirectly for almost all the cheese and milk in 8 our country. This is a situation where the tail 9 controlled by a few traders in Chicago can and 10 often does wag the dog of the market for milk all 11 across our country. 12 At a time when Americans' trust in 13 financial markets is so low, relying on a market 14 that can be easily manipulated should worry all of 15 us. I call on the CFTC and the CME to strongly 16 monitor the spot cheese market, because we must 17 have market transparency that insures a fair price 18 for farmers. Additionally, we could get better 19 market transparencies through more frequent 20 pricing reporting and expanding the number of 21 products USDA uses to set prices on the federal 22 milk marketing order to include a more 23 representative sample of products sold in the 24 commercial markets. 25 Secretary Vilsack, I believe you PROFESSIONAL REPORTERS, LTD. 27 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 have the authority to help do these things and in 2 doing so, it would give our farmers a fairer price 3 for their milk and I would like very much to work 4 with you to implement some of these changes. As 5 the chairman of two committees with direct 6 jurisdiction over competition in agriculture, I'm 7 worried about the consolidation happening in 8 agriculture. Strong competition for farmers' milk 9 is the best insurance that they will get a fair 10 price. Today's session needs to determine whether 11 competition is healthy enough in the dairy 12 industry to protect farmers and if not, what we 13 need to do about it. 14 The farmers here have a lot to tell 15 us about the health of the market and we are 16 looking forward to hearing from them. We thank 17 each of you for being here today to share your 18 views and we particularly appreciate Secretary 19 Vilsack and Assistant Attorney General Varney 20 being here with us today. 21 MR. VILSACK: Thank you, Senator. 22 Now I'd like to give Senator Feingold an 23 opportunity to speak. As folks know, he was first 24 elected to the senate here in Wisconsin in 1992. 25 Prior to that, he was a member of the Wisconsin PROFESSIONAL REPORTERS, LTD. 28 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 State Senate. In the U.S. Senate, he serves on a 2 variety of committees, including the budget 3 committee, the judiciary committee where he serves 4 as the chair of the subcommittee on the 5 constitution. He's also on the foreign relations 6 committee where he's the chair of the subcommittee 7 on African affairs and he's a member of the 8 intelligence committee as well. 9 I think everyone in Wisconsin and 10 certainly many of us around the country appreciate 11 his legislative focus on campaign finance reform 12 and fair competition, fair trade and jobs. But he 13 also has, as has been expressed before, a keen 14 interest in agriculture, understanding the 15 important role that it plays in the Wisconsin 16 economy and the important role that it plays in 17 the United States economy, with one out of every 18 12 jobs connected in this country to agriculture. 19 So Senator Feingold, we appreciate you being here 20 today and taking your time. 21 SENATOR FEINGOLD: Thank you, 22 Mr. Secretary. I'd like to start by echoing the 23 words, obviously, of Senator Kohl and Governor 24 Doyle and thanking you, Secretary Vilsack, and 25 Assistant Attorney General Varney for coming to PROFESSIONAL REPORTERS, LTD. 29 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 Wisconsin, America's Dairyland, to have this 2 important workshop, and Secretary, despite the 3 advertising campaign, I know that our cows are 4 actually happier than the California cows. I do 5 recognize, though, that this is a national forum 6 on dairy, and I'll tell you, I've noticed the 7 increase in interest in the United States Senate 8 of numbers of senators that are vitally concerned 9 about this issue. 10 At the meeting you held, there were 11 like 25 senators there from all over the country. 12 Some of the -- Al Franken teased Tom Udall of New 13 Mexico whether he really thought there were any 14 cows down there, but it was a very strong 15 demonstration of what an incredibly important part 16 of our nation's economy it is and of course, no 17 place is it more important than here in Wisconsin 18 and I want to particularly thank you and 19 Ms. Varney for agreeing to have two public comment 20 sessions. 21 This was a specific request of mine 22 that this be done at this session today and I look 23 forward to returning for the second public comment 24 session so I can just hear that directly myself, 25 because I find the unfiltered stories I hear PROFESSIONAL REPORTERS, LTD. 30 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 directly from farmers and cheese makers and others 2 to be especially valuable. Senator Kohl mentioned 3 the Green Bay Cheese Exchange, my actions to deal 4 with that, that were very exciting to be able to 5 get that done, had to do with the fact that people 6 came to me on that at town meetings and I hear 7 these stories in every one of Wisconsin's 72 8 counties every year as I do my listening 9 sessions. 10 And I have to say, we kept hearing 11 it even when the previous administration was 12 turning a blind eye to the issue and I am very 13 encouraged by the turnaround in the Department of 14 Justice and Agriculture after years of inaction 15 and there is a new willingness to reach across 16 agency jurisdictions. I've been particularly 17 impressed by the turnaround that began when 18 President Obama took office and the team he put in 19 place at the Justice Department. 20 I raised similar concerns with the 21 previous administration, but frankly, they 22 essentially completely ignored anticompetitive 23 behavior in the agriculture community. They even 24 came up with extreme interpretations of antitrust 25 law that were so skewed in favor of giant PROFESSIONAL REPORTERS, LTD. 31 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 corporations that a majority of the Federal Trade 2 Commission had to take them to task. So I'm very 3 glad that the Obama administration reversed course 4 and has been working to address our long-standing 5 concerns to make sure that dairy farmers and small 6 processors and consumers are treated fairly in the 7 marketplace. 8 Now, during Ms. Varney's 9 confirmation hearing, I asked you to look into the 10 Bush administration's questionable decisions in 11 this area. This administration has already 12 responded, as shown by the decision to block Dean 13 Foods from acquiring two bottling plants of 14 Foremost Farms, as well as the decision to hold 15 these workshops. I was especially pleased by the 16 Antitrust Division's willingness to dig into this 17 complex issue from day one. At my suggestion and 18 even before the full senate confirmed it, in fact 19 I asked Ms. Varney to come to my office and said I 20 am so concerned about so many areas of antitrust 21 across the board, mega mergers in the media 22 industry and so on, I said, but today all we're 23 going to talk about is dairy. 24 And I asked you to meet with our 25 Wisconsin experts. I asked you to meet with PROFESSIONAL REPORTERS, LTD. 32 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 University of Wisconsin law professor Peter 2 Carstensen, an expert on antitrust law and 3 particularly the dairy industry and you did 4 exactly that, and your willingness to listen, of 5 your staff to listen has been even greater. With 6 other people, such as Pete Harden of the Milkweed, 7 whose come to my listening sessions almost every 8 year, you folks were willing to listen and learn 9 when it came to him and that has shown me your 10 seriousness about this. 11 Secretary Vilsack, I should also 12 note the Antitrust Division isn't the only cop on 13 the beat after a period of serious neglect. I 14 agree with Senator Kohl, you've shown exceptional 15 leadership and accessibility and a willingness to 16 use what powers you have in these areas. Just 17 last week, for example, I was glad to see your 18 announcement of a rule implementing a major 19 improvement to farmer protections under the 20 Packers and Stockyards Act, a recent issue that 21 Senator Grassley and I pushed with regard to beef 22 contracts that you have now implemented. 23 And while this rule is focused on 24 improving fairness in the livestock and poultry 25 markets, with cull cows going to slaughter being a PROFESSIONAL REPORTERS, LTD. 33 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 significant part of a dairy farmer's cash flow, 2 this is important news for us as well. So I again 3 want to thank you for your responsiveness. Now, 4 I'm pleased that Department of Justice and 5 Department of Ag are collaborating to hold these 6 workshops and also have shown an openness toward 7 involving other agencies, such as the FTC and the 8 CFTC. 9 It's good to see that the CFTC will 10 be part of a panel on market transparency later in 11 the day. I believe this is the only way this is 12 going to work, if there is this kind of 13 cooperation and frankly, I've rarely seen this 14 level of cooperation between different agencies in 15 the years that I've been involved with these kinds 16 of issues. This is really high on the charts. 17 Finally, I've been following two 18 trends for years now with growing concern. First, 19 the growing concentration at the cooperative 20 processor and retailer level and second, the 21 widening gap between what farmers are paid for 22 milk and what consumers pay for dairy products. I 23 remember way back when I was a state senator, just 24 a few blocks away here in my office I had a chart 25 that showed -- a graph that showed the growing gap PROFESSIONAL REPORTERS, LTD. 34 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 between what consumers paid for milk and cheese at 2 the market and the lower prices that farmers got 3 for the milk and cheese and that trend has 4 continued to get worse over the years. 5 The farmers' share has continued to 6 shrink and many farmers and other dairy industry 7 observers suspect that someone between the farm 8 and the consumer is taking a bigger slice than 9 they really should and I know that dairy farmers 10 agree with me on this. We are coming off a year 11 when dairy farmers were losing $100 per cow per 12 month for many months in a row while consumers 13 were often not seeing a drop in prices at the 14 store. 15 At the same time, some of the 16 entities in the middle of this supply chain were 17 posting massive profits and certainly no one was 18 struggling to the degree that farmers were. I've 19 had farmers just ask me at my listening sessions 20 if consumers are still paying about the same and 21 it isn't showing up in their milk check, where is 22 the money going. Well, dairy farmers and 23 competition experts like Peter Carstensen make it 24 clear that something is amiss. It is true, the 25 dairy industry is very complex and it's difficult PROFESSIONAL REPORTERS, LTD. 35 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 to target a specific culprit behind this unfair 2 situation. 3 This is where you folks come into 4 the picture and I agree with the Secretary about 5 the outcome that should come from this workshop. 6 This is not about assessing blame. The first goal 7 is to educate the agencies. After years of 8 neglect, getting out and hearing from individuals 9 on the ground is an important step. Secondly, the 10 workshops are not an end in themselves. I expect 11 to see each of those agencies use the information 12 from the workshop as a springboard for improved 13 investigations and enforcement to address 14 anticompetitive practices across agriculture. 15 And finally, we need to figure out 16 the answer to the question not only that I posed, 17 but so many of you have posed to me, what happens 18 between the farm and the consumer to cause such a 19 price spread. It's important to see whether 20 better enforcement of our current basic antitrust 21 and competition laws can solve this, whether we 22 need stronger laws in this area or whether it's 23 going to be a combination of that and reform of 24 the milk marketing orders and other pricing 25 systems. PROFESSIONAL REPORTERS, LTD. 36 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 But we need to make that 2 determination and then we need to act on it. 3 Again, my gratitude, this is a great thing for us 4 to be able to host this here and we are grateful 5 to you. Thanks so much. 6 MR. VILSACK: Thank you, Senator. 7 We're going to turn it over now to Wisconsin 8 Secretary of Agriculture Rod Nilsestuen. Rod, I 9 appreciate you being here today. As everyone 10 knows, he was appointed by Governor Doyle in 11 January of 2003 as the Wisconsin Secretary of 12 Agriculture, Trade and Consumer Production. Prior 13 to that he served as president and CEO of the 14 Wisconsin Federation of Cooperatives from 1993 to 15 2003. 16 He served a pivotal role in the 17 creation and establishment of the Wisconsin Milk 18 Marketing Board, as well as the Wisconsin Corn 19 Promotion Board and the Wisconsin Soybean Board. 20 The Secretary is also involved with the Wisconsin 21 Dairy 2020 program, the National Rural Cooperative 22 Development Task Force. He is past chair and 23 board member of the National Cooperative Business 24 Association. That is just a few of the things he 25 has done in his distinguished career. PROFESSIONAL REPORTERS, LTD. 37 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 I will tell you that every month at 2 USDA, we have a phone call with the state ag 3 secretaries and commissioners and I will tell you, 4 Wisconsin is well represented during those calls. 5 There is a constant level of communication between 6 the Secretary's office and my office. He is very, 7 very tuned to the concerns that his farmers are 8 expressing to him and he in turn expresses it to 9 us and we appreciate you being here today. 10 MR. NILSESTUEN: Thank you very 11 much for that very kind and overly generous 12 introduction, but as a Scandahoovian, I believe 13 every word, who said it will remember them always, 14 but having -- and that's the extent of the levity 15 for today, but I would echo the appreciation shown 16 to you, Mr. Secretary, and the great work that 17 you're doing and Assistant AG Varney for teeing up 18 this issue of competition and consolidation and 19 antitrust in Food and Ag. 20 It's certainly time to have a 21 vigorous national discussion about the structure 22 and direction of the industry which provides 23 Americans with their food, the nation with its 24 most consistently positive element in balance of 25 trade, our rural communities with most of their PROFESSIONAL REPORTERS, LTD. 38 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 jobs and with stewardship of the country's 2 productive land and natural resource base. The 3 meltdown that we saw in Wall Street, the massive 4 oil spill in the Gulf, the loss of lives of coal 5 miners in West Virginia have made crystal clear 6 to, I think most of us across this country, that 7 the lack of balanced and enforceable regulations 8 can exact a very, very high cost, both immediate 9 and long-term, to citizens, to our communities and 10 to our economy. 11 And as with the big banks and big 12 oil and big mining, it's long been evident that 13 meaningful enforcement of antitrust and 14 anticoncentration policy regs in our food and ag 15 industry have been sadly missing in recent 16 decades, as both senators have just clearly 17 indicated and their role in moving this forward is 18 very important and very timely and I know 19 appreciated by all of us in agriculture. 20 In terms of the trends, we've 21 already touched on a number here in this panel, 22 but clearly, the result of the lack of 23 enforcement, we've seen massive consolidation and 24 widespread vertical integration in poultry, in 25 pork, in beef, with packers and processors PROFESSIONAL REPORTERS, LTD. 39 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 exercising near total control over those markets 2 and the farmers who produce the livestock for 3 them. And so Mr. Secretary, we very much applaud 4 the work that you've done on the Packers and 5 Stockyards Act, in advancing this as a part of the 6 administration's overall approach in this area. 7 It may be the most significant 8 change in this since the Depression era and that 9 is no small statement. It's a beginning to level 10 the playing field, to provide some basic 11 protection for independent livestock farmers, and 12 as you said earlier, the picture in the seed 13 industry is similar, where the chemical or life 14 science companies have seized near total control 15 and they're extracting huge prices. 16 In just the last nine years, the 17 price for seed worn has gone up 135 percent while 18 the consumer price index 20 percent, and in the 19 process, the hundreds and hundreds of multi 20 generational, small seed companies that we've had 21 across rural America have largely evaporated. 22 These ongoing developments not only affect crop 23 producers, but also dairy and livestock, because 24 our farmers are major growers and users of seed 25 and crop inputs and so this policy area needs a PROFESSIONAL REPORTERS, LTD. 40 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 lot of attention, as well as dairy. 2 As the Governor said, dairy, 3 particularly in the Upper Midwest, has been the 4 most resistant and resilient against the 5 consolidation trend and vertical integration, the 6 oligopolies. This may be a result of our 7 long-term heritage of family sized farms, together 8 with perhaps the most robust system of farmer 9 owned co-ops in the country. Our co-ops now 10 market over 80 percent of the milk in the nation, 11 a higher percentage than any of the commodities 12 that I just mentioned and I think that's 13 significant. 14 Cooperatives can provide farmers 15 with a proven mechanism to aggregate marketing 16 power while still staying free of those very 17 restrictive entanglements which are almost 18 inescapable components of total vertical 19 integration. But nonetheless, given that fact, 20 even the largest of our marketing co-ops are small 21 businesses when compared to the retail giants. If 22 you take Land O' Lakes as an example which is both 23 in farm supply and dairy, it's $10.4 billion, only 24 $3.2 in dairy. 25 If you compare that with Wal*Mart, PROFESSIONAL REPORTERS, LTD. 41 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 which has $408 billion in revenues this year, 2 Kroger at $77 billion, Kraft at $40 billion and so 3 I think the emergence of the big box retailer is 4 radically and has radically changed the food 5 business from the farm to the food shelf and that 6 includes the dairy sector. And so no longer -- 7 for a long time we knew that manufacturers or 8 processors called the tune, but with their huge 9 buying power, the big box retailers can exert 10 incredible leverage and these retailers, given 11 their size, seldom want the inconvenience of 12 dealing with lots of small dairy processors or 13 ingredient suppliers. 14 Rather, they'd like a small number 15 of large suppliers and so as a result of that, a 16 predictable dynamic happens. If the co-op or 17 dairy processor wants access to that dominant big 18 box, they need to be able to become significantly 19 larger or exit and I've been to a lot of co-op 20 annual meetings and I've heard a lot of management 21 say it, and this is not a criticism, but a lot of 22 them say that we've got to become either number 23 one, two or three in our particular sector if 24 we're going to survive long-term and it becomes a 25 self-fulfilling prophecy. PROFESSIONAL REPORTERS, LTD. 42 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 So the Justices' charge in the Dean 2 suit of purchase of Foremost fluid operations 3 significantly can reduce the competition there via 4 acquisition, even though that may have been not 5 the intent of the seller. So Dean now has 6 eliminated a major food competitor, has 57 percent 7 of the marketshare in fluid milk in the Chicago 8 area and Wisconsin and the UP. That is a market 9 leverage change. 10 So in addition, the very existence 11 of long-term purchasing contracts with very few 12 big box retailers exerts an additional kind of 13 leverage there. It makes suppliers very reluctant 14 and tentative in pursuing any actions that might 15 jeopardize a contract which represents a big part 16 of their business. And so for these and other 17 reasons, we urge full consideration of creation of 18 antitrust guidelines and regulations which force 19 greater attention and active enforcement on the 20 buyer's side of the equation. 21 We think attention should be also 22 given to remedying the FTC's near nonexistent role 23 in the food marketplace and the need for a more 24 proactive, prospective approach there, with better 25 guidelines and more consistent and robust PROFESSIONAL REPORTERS, LTD. 43 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 enforcement. Dairy producers and their industry, 2 without those may be in jeopardy of going the way 3 of the other commodity sectors, whether it's 4 poultry or pork or beef that I've said and in 5 Wisconsin, as has been said here several times, 6 dairy is the biggest part of our ag economy, our 7 $59 billion economy and erosion of the size and 8 the number of sector participants is a blow to 9 dairy farmers of all sizes, but also to the rural 10 communities and the main streets that they 11 support. 12 And so one last point, while 13 there's widespread agreement in many sectors in 14 the dairy industry that we need better price 15 discovery, as Senator Kohl and Senator Feingold 16 clearly indicated, to determine the federal order 17 milk price formula, whether it's for cheese or 18 non-fat or whey or butter or other commodities. 19 Currently, and this has been true for too long, 20 that the product price formulas of the CME which 21 is very thin, lightly traded, have just too much 22 price volatility and it drives the federal order 23 system, distorts that and drives prices across the 24 country. 25 And so any market that's that PROFESSIONAL REPORTERS, LTD. 44 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 thinly traded is vulnerable to intentional or 2 unintentional manipulation and distortion and so 3 however -- so we really need serious exploration 4 of improved mechanism as was suggested to correct 5 that. There's a longer list here, but that's for 6 the rest of these panels, and, again, we greatly 7 appreciate the presence and the opportunity to be 8 a part of this. 9 MR. VILSACK: Thank you very much, 10 Mr. Secretary. I think what I'd like to do is 11 direct a question to General Varney for just a 12 second. I think it would be helpful for folks who 13 are here to better understand what the Justice 14 Department can do. If you're a struggling dairy 15 farmer and you want to know what your 16 opportunities or your remedies or your protections 17 are, what will the Department of Justice be able 18 to do, what can it do? 19 MS. VARNEY: Sure, let me take it 20 from the higher level and then bring it down to 21 specifics for people in this room. We at the 22 Antitrust Division basically have a couple of 23 baskets of activity that we do. It all centers 24 around blocking mergers that substantially lessen 25 competition or prosecuting combinations or PROFESSIONAL REPORTERS, LTD. 45 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 conspiracies that would restrain trade. 2 So the first thing we do and we 3 take very seriously is we put people in jail. If 4 there's price fixing going on, we will prosecute 5 it and you will go to jail. In the past decade, 6 we've brought over 100 school milk bid rigging 7 cases, so if you are aware or suspect that there 8 is bid rigging going on, let us know, we will 9 prosecute it. We work very closely also with the 10 U.S. Attorney's Office and they are here today and 11 I know they would also want to know if you've got 12 any evidence of any illegal price fixing going on, 13 whether it's at a corporate level or at a smaller 14 level. 15 The second thing we do is we 16 examine mergers very carefully and as everybody 17 has mentioned, we recently sued to unwind the Dean 18 Foods acquisition of Foremost. Should a merger 19 arise in this industry and you have concerns about 20 it, a merger, an acquisition, we want to know. We 21 can work on that and we will go to court and we 22 will block mergers that substantially lessen 23 competition, which we believe the more competition 24 there is for your product, the better price you're 25 going to be, the more competitive the marketplace PROFESSIONAL REPORTERS, LTD. 46 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 is going to be, the more we're going to get good 2 quality, safe product out there. 3 Our third basket of activity that 4 we do is we investigate conduct and I think this 5 is probably something at heart for many, many of 6 you. Big is not necessarily bad under the 7 antitrust laws, but if you have a substantial 8 share of the market, you have a special obligation 9 to vigorously adhere to the pro-competitive 10 antitrust rules that have been clearly established 11 by the Supreme Court. So we investigate 12 anticompetitive or predatory conduct on either the 13 buyer's side or the seller's side. 14 So we will look at both and that's 15 why we're always concerned when there's 16 concentration in any industry, in any part of the 17 industry. Many of America's dairy farmers have 18 come to us and said we are concerned about the 19 level of consolidation and we take those concerns 20 seriously and I have a number of staff people here 21 today whose principal job in Washington is to be 22 looking at consolidation that's happened in the 23 agriculture sector and in dairy in particular and 24 trying to determine whether or not all the rules 25 and laws are being fully adhered to. PROFESSIONAL REPORTERS, LTD. 47 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 And finally, Mr. Secretary, what we 2 have been doing is an unprecedented cooperation, 3 as you know, with your staff. We have lawyers who 4 are now sitting together on a day-to-day basis 5 looking at these very important issues with your 6 expertise that your staff brings to the 7 marketplace and the competition expertise that our 8 staff has. We're very interested in hearing from 9 you about issues that confront you on a day-to-day 10 basis that maybe in previous years people thought 11 well, there's not too much the government can do 12 about that. 13 I think what you're hearing from us 14 is we take pretty seriously our obligation to 15 enforce the laws and if we find that we're limited 16 by the current structure of the law, I've got two 17 people here I can go to and say this isn't working 18 and here's why and I know they're committed to 19 helping us make sure we can get the authority that 20 we need to make sure that you are protected as you 21 earn a living and bring food to our tables every 22 day. 23 MR. VILSACK: Thank you. I'd like 24 to direct a question to both of the senators. In 25 taking a look at the ag census that was published PROFESSIONAL REPORTERS, LTD. 48 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 last year, it was fairly obvious that the average 2 age of American farmers is continually and rapidly 3 aging. Today, the average age of a farmer across 4 the country is 57. It aged two years in the last 5 five years and so one can expect that five years 6 from now, the average age will be 60. 7 As we deal with the aging 8 population, the question then is how do we help 9 what needs to be done in terms of the market, 10 market trends, market structures, pricing 11 mechanisms or other ideas that you might have that 12 would encourage younger people to be able to 13 consider an opportunity in dairy instead of seeing 14 this contraction which we've seen over the last 10 15 years. Are there ways that this hearing can 16 inform how USDA and the government can provide 17 assistance to expand the number of farmers rather 18 than seeing a contraction? Senator Kohl? 19 SENATOR KOHL: Well, there are many 20 aspects of farming and dairy farming that are 21 enormously attractive to young people today. The 22 opportunity to be your own boss, to live out where 23 you can experience all the joys of living with 24 fresh air and a lot of open land. To raise your 25 family in that kind of an environment is extremely PROFESSIONAL REPORTERS, LTD. 49 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 attractive. I think particularly today with all 2 the difficulties that we find afflicting our urban 3 areas. So in a very basic way, farming can be 4 attractive to young people. 5 But, among other things, it has to 6 be profitable. When young people decide what 7 they're going to do with their lives, if they want 8 to either enter farming or stay in the farming 9 business which has been a part of their families, 10 in many cases, for generations, they want to see a 11 future financially for themselves as well as 12 quality of life. And as we're discussing it here 13 today, with the decline in the number of farms and 14 with the increasing difficulty of farmers to make 15 a decent profit, farming becomes less of a 16 desirable option. 17 And that is, in a sense, what we're 18 here today to discuss, is ways and means in which 19 we can insure that people who are operating farms 20 are getting a fair price for their product, seeing 21 to it that the markets operate in a way so that 22 they are decently compensated for all of their 23 work. I think in our country historically, 24 there's been an imbalance for many reasons, but 25 one reason is that we have so few farmers relative PROFESSIONAL REPORTERS, LTD. 50 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 to all of the consumers across the country. 2 So that when people in public life 3 make decisions, fairly or not, you know, they look 4 to satisfy consumers perhaps first and the 5 producers a close second. And I think that 6 predisposition to favor consumers over producers 7 over the years has made farming less attractive. 8 We have to try and turn that around, because as 9 has been said by many people here today, it's the 10 farmers, but it's also the rural areas all across 11 our state and all across our country that are 12 directly impacted by the decline in the number of 13 people who want to operate farms. 14 So we have our work cut out for us, 15 Mr. Secretary, and I think one of the reasons 16 we're here today is because we want to face it and 17 we want to do something about it. 18 SENATOR FEINGOLD: Senator Kohl, 19 obviously, I've seen this trend as well and it's 20 disturbing, but there are -- I'm sure Senator Kohl 21 has had this experience, too, there are groups of 22 young farmers that do come to visit with us in 23 Washington as well as here and I happened to be 24 next to one on the plane out here on Monday and 25 after he had a chance to hear me snore for a PROFESSIONAL REPORTERS, LTD. 51 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 while, he had said he remembered that I had been 2 out to his farm in Washington County and we just 3 talked about how much he loved doing this. 4 He was taking over for his dad, 5 he's got three sisters, two of them probably 6 aren't going to go into it, but one of his sisters 7 might. And you know, I just said what do you 8 think about this. He said I just love it. I 9 mean, you could tell the way Senator Kohl 10 described it, the passion for being there and 11 doing this. But you know, these are really tough 12 days for people in any part of our economy. 13 People are going to make a rational decision about 14 their futures. 15 So they have to believe not only, 16 obviously, that they can make a profit, but 17 they're not going to suddenly get undercut by some 18 decisions or trade agreements or something else 19 that is going to cause them to have the rug pulled 20 out from under them, so that has to do with the 21 pricing systems. That has to do with trade 22 agreements, such as let's say if somebody thought 23 it would be a good idea to have a trade agreement 24 with New Zealand, you know, young farmers have to 25 know that they're not going to suddenly put all of PROFESSIONAL REPORTERS, LTD. 52 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 this investment into this and then have themselves 2 having put that effort and all that education into 3 it. We have to make sure that there's some 4 stability and pricing stability, having a belief 5 that you can actually get somewhere near the cost 6 of production. 7 At some point, that this could 8 actually be something you could rely on, you're 9 not going to have a situation where one year it's 10 over $20, the next year it's under $10 and then it 11 gets a little higher and you expect dairy farmers 12 to be happy, when in fact they're not even getting 13 their cost of production. So I think these policy 14 matters would have a great deal to do with letting 15 people trying to make a good decision for their 16 family or their future families and I think that 17 will have a particular impact on young people. 18 MR. VILSACK: You know, it's 19 interesting, Senator, I've watched folks in 20 Washington over the course of the last number of 21 years talk about the necessity of having 100,000 22 police officers and 100,000 new teachers. Why not 23 100,000 new farmers as a goal. (Applause) It's 24 interesting, when I -- in my lifetime, the number 25 of farmers as a percentage of our population has PROFESSIONAL REPORTERS, LTD. 53 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 gone from 15 percent -- when I was born in 1950, 2 15 percent of our population were farmers. Today 3 it's less than 1 percent and I suspect when I was 4 born that the other 85 percent were probably only 5 a generation removed from the farm. 6 Today there are, Mr. Secretary, 7 there are multiple generations removed. I'm sure 8 you see this, where people don't fully appreciate 9 and understand where their food comes from. So 10 your thoughts -- I would be interested to hear 11 your thoughts. You know, 10 years from now, if we 12 convene again, what would you hope it would look 13 like in the dairy industry and what kinds of hope 14 can you provide, would you want to provide to 15 young people interested in getting into this 16 business? 17 MR. NILSESTUEN: Well, I would 18 think that my hope would be, and I think many 19 producers and certainly younger producers would be 20 to see a future where they and their family 21 members have an opportunity to have a good 22 lifestyle and to be able to choose alternatives to 23 them in production. One of the reasons that you 24 heard the Governor talk a lot about the various 25 initiatives that he undertook here was that we do PROFESSIONAL REPORTERS, LTD. 54 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 have a vision here in this state of trying to have 2 a diversified, growing dairy industry. 3 One of the -- for several decades, 4 we didn't see reinvestment, we saw a lack, a 5 stagnation, both in investment at the farm level 6 and at the plant. Many of our cheese plants were 7 70 percent full. You can't operate that way, you 8 can't reinvest that way. We were losing 9 marketshare and a lot of farm parents were telling 10 their kids you better think twice about whether 11 you want to do that and that's a hard thing to say 12 for all the reasons stated here. 13 With the right time in dairying and 14 a lot of other things and a partnership in this 15 state, that picture turned around radically and we 16 did see growth, not only at the high side of the 17 market in the larger farms, but diversification. 18 We have the largest organic marketshare. We have 19 over 50 percent of our new entering farmers are 20 grazers at this point. We've gone into specialty 21 cheeses in a big way. We now produce over 600 22 varieties of cheese in this state, more than any 23 country in the world. 24 That's important from a producer's 25 standpoint because many of those are artisan PROFESSIONAL REPORTERS, LTD. 55 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 farms, are farmstead cheeses or people that are 2 selling to that and so our marketshare has grown 3 about one to one and a half percent per year for 4 the last seven years. That is important. We're 5 now at 46 percent of all the specialty cheese that 6 the nation produces. That's the result of a 7 very -- of a balanced opportunity ,and so before 8 Wall Street crashed this whole economy, for two 9 years running at the World Dairy Expo at our 10 little booth there, the number one question that 11 we got, to my surprise, was from young farmers 12 from out of state asking how can we come to 13 Wisconsin to dairy farm. In my lifetime, that has 14 never happened before. 15 Now, if this recession and if the 16 other changes that we have, there's no guarantees 17 in this game, but the actions that you are trying 18 to take here and that are trying to be taken for 19 this economy can make that picture bright again. 20 Farmers don't want guarantees, but they want 21 greater predictability and less volatility. And 22 the commission that -- the dairy committee that 23 you appointed me to, and I felt a little like Mark 24 Twain's thing there, if it weren't for the honor, 25 I'd just as soon pass, after 30 years of dairy PROFESSIONAL REPORTERS, LTD. 56 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 policy. 2 But I think what you are trying to 3 put together is a coherent single approach to a 4 mish-mash and what I hear from dairy farmers from 5 across the country is a greater will to get that 6 done. 7 MR. VILSACK: Thank you. I see 8 we've been joined by another distinguished member 9 of our panel. Congresswoman, thank you very much 10 for being here. We appreciate you taking time 11 from your busy schedule. I wanted to give you an 12 opportunity to do what the other elected officials 13 have been able to do, which is to make a few 14 comments. As folks from this area know, 15 Congresswoman Baldwin has represented Wisconsin's 16 Second Congressional District since January of 17 1999. Madison, obviously, is in her congressional 18 district. 19 She serves on a variety of 20 committees as well, including energy and commerce 21 and judiciary, where she has also worked on 22 antitrust issues in dairy and has been focused on 23 providing freight rail to provide relief to 24 consumers. Prior to her service in Congress, she 25 served in the Wisconsin State Assembly and also as PROFESSIONAL REPORTERS, LTD. 57 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 a Dane County supervisor. So Congresswoman, thank 2 you for being here. 3 CONGRESSWOMAN BALDWIN: Thank you, 4 and I apologize for my tardiness, the airlines 5 were not cooperating this morning. Let me begin 6 by thanking you, Mr. Secretary, for coming here 7 and Assistant Secretary Varney, we're delighted to 8 have you here and focusing some really needed 9 attention on competition issues facing our dairy 10 farmers. I really can't think of a more fitting 11 location for you to have this workshop than 12 America's Dairyland. 13 You will hear from people who have 14 generations of knowledge handed down and to be on 15 this campus at this fine University where also so 16 much knowledge is located is very fitting. I 17 would be remiss if I didn't start with some 18 reflections about how difficult the last year and 19 some months have been in this area. You know, 20 dairy farmers are very familiar with price 21 volatility, but the historic low prices that were 22 experienced over the last year were really 23 something that was very drastic. 24 I remember reading an article in 25 the Milwaukee Journal Sentinel last August PROFESSIONAL REPORTERS, LTD. 58 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 indicating that on average, or the average dairy 2 farm was losing roughly $100 per cow per month in 3 their operation because of the historic low 4 prices, and you know, while they're accustomed to 5 this volatility, this crisis feels like it 6 threatened the industry unlike others that they've 7 experienced in the past. 8 I know that during the same time 9 period, I didn't see any relief at the grocery 10 store when I was picking out my dairy products. 11 So during this time, family farmers and their 12 advocates have told me truly heartbreaking stories 13 of their struggles to stay in business, to pay 14 bills, to get credit, some cashing out their 15 savings and sadly, for too many, losing their 16 whole farms and Mr. Secretary, as you know, many 17 of these farms have been in families for 18 generations and so losing a farm is not just 19 losing a small business, but it's a homestead and 20 the ripple effect goes through. 21 I particularly am troubled by the 22 human toll that it's taken. I am in contact with 23 those who take calls from folks in crisis. The 24 Wisconsin Farm Center certainly has been inundated 25 with requests for assistance, including suicide PROFESSIONAL REPORTERS, LTD. 59 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 prevention and I can furnish you with a lot more 2 information, but anyhow, to the topic of the day, 3 much of the concern about the dairy crisis rests 4 with the lack of competition in the dairy industry 5 and the effect that that has particularly on small 6 dairy farmers. 7 Now, I want to be clear, farming 8 cooperatives do play a really important role in 9 rural communities by improving farmers' bargaining 10 position with milk handlers and farmers have long 11 joined cooperatives to better market their 12 products and access farm related supplies and 13 services. And so I was pleased, Mr. Secretary, to 14 see your recent comments that the antitrust focus 15 is not so much on Capper-Volstead Act, but more 16 Sherman and Clayton Act issues. 17 That said, competition is necessary 18 in the dairy industry and I applaud the Department 19 of Justice's action and review of Dean Foods for 20 its acquisition of two plants formerly owned by 21 Foremost Farms. We certainly have a concern that 22 this acquisition will lead to increased 23 consolidation in the processing industry and more 24 limited competition in Wisconsin at the expense of 25 farm families. As a result of this acquisition, PROFESSIONAL REPORTERS, LTD. 60 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 Dean Foods now controls approximately 57 percent 2 of the market for processed milk in northeastern 3 Illinois, Wisconsin and the UP. 4 And while Dean Foods' bottom line 5 grows, dairy farmers struggle, you know, to avoid 6 hitting rock bottom. I am also interested in 7 consolidation and competitiveness issues, not only 8 among processors, but among retailers and those in 9 the food delivery business. Giants like Wal*Mart 10 and new changes that we see with discount mass 11 merchandisers and warehouse club stores are of 12 concern, but quite frankly, anticompetitive 13 practices have been around for a long time, but 14 until recently, I don't think enough attention has 15 been paid to this important issue. 16 And as I got a chance to tell 17 Assistant Secretary Varney when we talked on the 18 phone last year, I'm really glad that you're 19 giving it the attention that you are. We really 20 do need your emphasis on these issues. Today's 21 event is extremely important, in that farmers will 22 have a chance to be heard and express their 23 concerns about the declining number of family 24 farms, the fewer market options that they have and 25 less competition among processors, retailers and PROFESSIONAL REPORTERS, LTD. 61 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 food distributors, artificially depressed prices 2 and the possibility of price manipulation and the 3 resulting toll that this takes in our community. 4 Farming and family farming in particular is really 5 the back bone of the Wisconsin economy and we're 6 just so glad to have you here today calling 7 attention to these issues. 8 MR. VILSACK: Thank you. To the 9 Congresswoman and the two senators, one of the 10 issues that you've touched on in your comments is 11 the need for expanded market opportunities. And 12 as we look at consumption of dairy products, 13 notwithstanding all the specialty cheeses that are 14 being produced, we see especially among young 15 children less interest in dairy products and 16 particularly milk. 17 I'm interested in knowing your 18 thoughts about how we might be able to encourage 19 more consumption. I know that the Institute of 20 Medicine has suggested that with reference to our 21 school lunch and school breakfast programs, that 22 there could be greater focus on low fat dairy 23 products and greater consumption of that as a 24 possibility. Is that something that might provide 25 some degree of assistance and help to these PROFESSIONAL REPORTERS, LTD. 62 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 farmers if we expand markets in consumption, 2 comments or thoughts about that? 3 SENATOR FEINGOLD: Well, you know, 4 in my conversations with young people, I think 5 there's a lot of opportunity here. You know, 6 particularly given the number of people that 7 are -- unfortunately, if you're in other parts of 8 the agriculture industry choosing alternative ways 9 for diets, vegetarian, other diets, this is an 10 area that I find people pursuing. I find people 11 very interested in various dairy products. Yes, 12 the low fat helps, but also, you know, given the 13 fact that people are talking about making sure 14 that kids aren't drinking soda all the time, and 15 you know, that's a big change from when I was a 16 kid. 17 It was like any opportunity to get 18 at soda or pop, as we call it here in Wisconsin. 19 People don't believe that it's called pop, but it 20 is. So you know, you're right, there are trends 21 out there that would be potentially negative, but 22 if people are given the proper information about 23 not only the short-term, but the long-term benefit 24 of dairy products for people, obviously, for your 25 bones and your health later in life. If you PROFESSIONAL REPORTERS, LTD. 63 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 really are being educated as a young person about 2 the way to have a good diet, I think we can 3 counter some of these trends through some of the 4 strengths we really have in the dairy industry. 5 MR. VILSACK: Senator Kohl, do you 6 have any thoughts about that? 7 SENATOR KOHL: Yes, well, I think 8 the rise of the organic movement has had some 9 positive impact on dairy, because there are 10 increasing numbers of dairy farms that produce 11 organic and have attracted a real following, of 12 course producing more low fat, as Russ pointed 13 out, low fat dairy products is a positive in the 14 marketplace and of course, the marketers 15 themselves have to do a better job, I think, as 16 marketers in ever industry have seen to it that 17 their particular products are always more 18 attractive to consumers who have increasingly more 19 choices. 20 I happen to operate a milk stand at 21 the State Fair every summer. I've been doing it 22 for many, many years and we sell just flavored 23 milk and we have five different flavors every 24 summer and mothers can't wait to get their kids to 25 come to our milk stand, because the kids go wild PROFESSIONAL REPORTERS, LTD. 64 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 over the flavors and I've often wondered why more 2 marketers don't produce more flavored milks, 3 because young people in particular really like 4 that. 5 So marketing is a big aspect of it 6 and I think really, Mr. Secretary, if we can make 7 farming, dairy farming more attractive and more 8 profitable as a lifestyle for young people, there 9 will always be enough customers for dairy products 10 in our country. It has been that way since the 11 very beginning and I think it will continue to be 12 that way, but I believe our number one challenge 13 is to see to it that dairy farming can be 14 economically attractive to young people. 15 MR. VILSACK: Congresswoman? 16 CONGRESSWOMAN BALDWIN: Your 17 question leads me in a lot of different directions 18 and I don't want to talk too long, but I think 19 there's a new focus on this issue that is -- that 20 provides an opportunity for dairy farmers, I think 21 about the lack of nutritional literacy, the 22 childhood obesity epidemic that has gotten new 23 attention. It's now going to be, among others, 24 championed by our First Lady, and also as the 25 recession has deeply hit folks, poverty and food PROFESSIONAL REPORTERS, LTD. 65 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 choices are issues we need to understand more 2 deeply. 3 If the grocery store in your 4 neighborhood closes because you live in a poor 5 neighborhood, as many have in even our own 6 community here, the options, the array of options 7 you have, if there's only a 7-11 or a convenience 8 store in your immediate neighborhood and in order 9 to go to a grocery store, you're taking a taxi or 10 multiple buses, these affect people's food choices 11 and their nutritional health. 12 And as we pay more attention to it, 13 I think that clearly, educating people about a 14 balanced diet and things that are truly affordable 15 would absolutely include dairy products as a 16 cornerstone of that. 17 MR. VILSACK: General, I'd like to 18 ask you, we've only got a few more minutes here, 19 but the Congresswoman mentioned cooperatives and 20 the focus, I just thought it might be helpful for 21 folks to get your take on this, to reinforce the 22 fact that what this is and what this isn't. 23 MS. VARNEY: Sure, we understand 24 that co-ops are essential to the livelihood of 25 many of America's farmers and we are very, very PROFESSIONAL REPORTERS, LTD. 66 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 supportive of the mission of co-ops and of Capper- 2 Volstead. We have heard an alternative view here 3 and there, that sometimes some of the larger 4 co-ops are not as accessible to their members as 5 some of their members would like to be and in 6 particular, I've heard from one of the larger 7 co-ops that they are trying to become more 8 transparent and more responsive to their members' 9 needs. 10 So we're -- we don't have an agenda 11 here that is in any way anti co-op. We have a pro 12 farmer agenda and we're going to take that 13 wherever it leads us and just to assure you, 14 Secretary, we're very supportive of 15 Capper-Volstead. 16 MR. VILSACK: All right, thank 17 you. We have probably time for sort of one minute 18 summations, if anyone wants to have any additional 19 thoughts. Mr. Secretary, I'll start with you and 20 just kind of move down the line. 21 MR. NILSESTUEN: Well, hopefully, 22 this open session, Mr. Secretary, is teed up and 23 just touched the -- touched quickly on the variety 24 of the issues and their complexity here, that 25 there aren't any silver bullets, but to me, the PROFESSIONAL REPORTERS, LTD. 67 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 one takeaway that I have here is the recognition 2 by the Obama administration and you and leadership 3 in agriculture together with Justice that market 4 transparency, balance that well designed, 5 modernized, effective regulation and oversight 6 enforcement is good for markets and good for 7 producers and good for all the participants within 8 them. 9 And if we can do that, the other 10 things that producers and marketers and co-ops do 11 so well, we can have that bright future that 12 you're talking about, but if there is dislocation, 13 if we have a blind eye to structure, as boring as 14 sometimes those topics seem to be to the general 15 public, we'll have great dislocation and continue 16 to see the kind of consolidation that we've had in 17 too many sectors and I think the dairy industry 18 does not want to go down that road. 19 SENATOR FEINGOLD: I guess the 20 point I want to make is I've seen some changes in 21 terms of the emphasis on the issues in the dairy 22 industry. I'll tell you, some of the bloodiest 23 battles I've ever seen are the regional battles 24 between the Midwest and New England. Usually, we 25 often vote together on many issues and there's PROFESSIONAL REPORTERS, LTD. 68 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 some good natured joshing that goes on. It turns 2 out that Ben & Jerry's actually wanted to come to 3 Wisconsin, but their car broke down, so they 4 stayed in Vermont. They knew where to come. 5 But you know, there was great 6 ugliness and frankly tension not only between, but 7 even within our dairy community. What we're 8 talking about here today are things that bring us 9 together that unify dairy farmers across the 10 country and that is exciting to me, because I saw 11 us as not getting anywhere for years until, 12 frankly, you and Ms. Varney and others came in and 13 started to move us in this direction. 14 So I want to thank you and 15 particularly urge you on in the area of trying to 16 resolve this problem of where is the money going 17 that is being paid by consumers and not being 18 received by farmers. 19 SENATOR KOHL: Yes, I think it's 20 not hard for me and I think many people to 21 understand how many aspects of farming are 22 enormously attractive to young people as a 23 potential way of life. We've talked about some of 24 those characteristics this morning, so I need not 25 enumerate, but I would wager anything that if all PROFESSIONAL REPORTERS, LTD. 69 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 of a sudden federal policies were more aligned 2 with the need for people in agriculture to make a 3 good living and if that became apparent to young 4 people, then they would flock to farming for all 5 the obviously attractive qualities of life that it 6 does offer. 7 As I've said earlier, federal 8 policies over the years have favored consumers, I 9 believe, over farm producers because there are so 10 many, many, many more people at that level of 11 consumer, but I think we need to change that. 12 Secretary Vilsack pointed out, which is true, that 13 we have so many fewer farms today than in decades 14 and centuries past, but the most important reason 15 for that is that our farms are so much more 16 productive and ever more productive, so that a 17 farm unit, a farm acre produces so much more 18 product than was true in times earlier. 19 But I think with a little help from 20 our people at the federal level, we can make 21 farming in the next generation something that 22 young people really are attracted to and I think 23 with people like Tom Vilsack and Christine Varney, 24 we're going to accomplish that. 25 CONGRESSWOMAN BALDWIN: Thank you. PROFESSIONAL REPORTERS, LTD. 70 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 Well, the focus of today's workshops are so 2 critical to us as we move forward and Wisconsin is 3 America's Dairyland, it is our tradition and we 4 want it to be our future, too. And so getting it 5 right, as we know, some aspects of consolidation, 6 some aspects of concentration are positive, but 7 not all and that's where the policing function 8 needs to come in and it's been absent for, I 9 think, too long and we are just really delighted 10 that you are giving new attention to some of the 11 more disturbing trends that we're seeing that we 12 think will make it more difficult for our dairy 13 farmers. 14 MS. VARNEY: I'm here principally 15 to listen and there are a couple things that if 16 our panelists and others could talk about, this is 17 my third time visiting dairy country, although I 18 may have been in enemy territory a few times, and 19 what I'm very interested in is there are as many 20 views of the problems as there are potential 21 solutions. 22 And I've heard a lot about over 23 production, I've heard a lot about lack of 24 demand. I've heard about manipulation of 25 pricing. I've heard about consolidation and PROFESSIONAL REPORTERS, LTD. 71 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 concentration and I'm very interested in what the 2 people who are going to be talking to us today 3 have to say about those issues as we continue to 4 figure out our strategy. 5 MR. VILSACK: I want to thank the 6 first panel. I know that Senator Feingold has to 7 leave for a little while, but will be back, so we 8 appreciate you being here. I would encourage the 9 other panelists to sit tight and we're going now 10 to invite up to the stage a number of dairy 11 farmers now. This will be interesting, given the 12 pro Wisconsin bent of this conversation so far. 13 We are going to have folks from California and New 14 Mexico and New York and Minnesota come up here and 15 I think they may potentially have a slightly 16 different take on some issues, but we hope to have 17 a vigorous conversation, so I'd invite the farm 18 panelists to come on up. 19 We've got the panelists assembled, 20 if we could realize that this is a panel that's 21 following a panel that we didn't take a break, but 22 we will take a break after this panel for about a 23 half an hour, so I'm looking forward to this 24 conversation. I think what I'll do is introduce 25 the panelists, all of them at once and then ask PROFESSIONAL REPORTERS, LTD. 72 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 each of them to make a couple of comments starting 2 to my right and just moving to my left, and then 3 we'll have an opportunity for dialogue and I 4 certainly would encourage Senator Kohl and 5 Congresswoman Baldwin to ask any questions that 6 you might have, as well as the Assistant Attorney 7 General. 8 Let me start with Darin Von Ruden, 9 who is a third generation organic farmer. He is 10 to my immediate right, to the far right. Darin 11 was elected president of the Wisconsin Farmers 12 Union this year and has served in several 13 capacities for the organization, a patron member 14 of the Westby Cooperative Creamery, a founding 15 member of the Wisconsin Farmers Union, specialty 16 cheese chair of the Wisconsin Dairy Farmers Guild 17 and is a founding member of the Upper Midwest Milk 18 Producers Association. 19 Sitting next to Darin, and 20 hopefully they'll get along, is Jamie Bledsoe who 21 is a dairy farmer from Riverdale, California. He 22 served -- currently serves as president, board 23 president of the Western United Dairymen and is on 24 the board of directors of his cooperative, 25 California Dairies, Inc. He currently has 1200 PROFESSIONAL REPORTERS, LTD. 73 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 Holstein cows in two facilities and feeds over 2 2500 replacement heifers and 500 bulls for 3 breeding purposes, a third generation dairyman and 4 farms with his family. 5 Next to the Secretary of 6 Agriculture is Christine Sukalski. She is a 7 partner and dairy manager in Reiland Farms, LLP. 8 The farm consists of 360 dairy cows, 300 head of 9 young stock and about 1500 acres of crops. She 10 earned producer of the year from both the 11 Minnesota Milk Producers Association and the 12 National Dairy Shrine, as well as an excellence 13 award from the Minnesota Department of 14 Agriculture. 15 Sitting next to Christine is 16 Joaquin Contente, who served as president of the 17 California Farmers Union since he was elected to 18 that post in January of 2000. He owns and 19 operates a dairy farm with his brother and family 20 in Hanford which is in the central valley of 21 California. Joaquin and his family have owned and 22 operated this dairy farm since the late 1920s. He 23 is also a board member of the California Dairy 24 Campaign. 25 To my left sitting next to the PROFESSIONAL REPORTERS, LTD. 74 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 Congresswoman is Frances Horton. She's a third 2 generation farmer from New Mexico. Frances and 3 her husband own -- what I'm not going to get this 4 right, Las Uvas Valley Dairy, which consists of 5 14,000 milk cows. Additionally, they have a 6 heifer feed lot, black angus beef cattle and grow 7 alfalfa. She serves as a council representative 8 for the Dairy Farmers of America and is a board 9 member of the Dairy Producers of New Mexico. 10 Sitting next to Frances is Ed 11 King. He's been farming on a family farm since 12 1963. Since that time, the farm has grown to 2180 13 acres and 900 registered Holstein cows. The farm 14 founded by his grandfather is more than 100 years 15 old and is currently managed by two of Ed's sons. 16 In addition to his duties on the farm, he has 17 served as the director of the Dairylea Cooperative 18 since 1993, also as vice chair of the New England 19 Dairy Promotion Board and has recently been named 20 by the President Obama to chair the Federal Farm 21 Service Agency's New York State Committee. 22 And finally next to Ed is Joel 23 Greeno, who is a dairy farmer from Kendall, 24 Wisconsin, where he milks 48 cows on a 160-acre 25 farm with his family. His farm was purchased in PROFESSIONAL REPORTERS, LTD. 75 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 1990 and he began milking cows there in 1993, has 2 a sustainable forming operation using rotational 3 grazing, no chemicals or commercial fertilizers. 4 He is the president of the American 5 Raw Milk Producers Pricing Association, the 6 vice-president of the Family Farm Defenders and 7 serves on the executive committee of the National 8 Family Farm Coalition. He's one of the founding 9 producers of Scenic and Central Milk Producers, a 10 midwest cooperative marketing milk to many 11 processes in the last 12 years. So as you can 12 tell from the introduction, it's a fairly 13 representative sampling both in geography and in 14 size and in concept here today. 15 So with that, Darin, I'm going to 16 ask you to start, if that's okay and we'll just 17 move right down the line with any comments that 18 you all have. We have about five minutes each for 19 each of you and then we'll open it up for 20 questions. 21 MR. VON RUDEN: Thank you, 22 Mr. Secretary, and thank you, Assistant Attorney 23 General Varney for being here today. I thank you, 24 Senator Kohl, Senator Feingold, Congresswoman 25 Baldwin, thank you much for being here today. PROFESSIONAL REPORTERS, LTD. 76 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 This is a critical issue that needs to be 2 addressed. I've been involved in dairy pricing 3 issues now for the better part of 20 years, since 4 I've taken over the family farm from my folks. In 5 1996, I was part of a group of farmers that 6 organized the Upper Midwest Milk Producers 7 Association and we were actually brought to the 8 Attorney General's office here in the State of 9 Wisconsin for price fixing, trying to get a decent 10 price for our friends and ourselves, basically. 11 No action was taken off that, 12 because we did form the Upper Midwest Milk 13 Producers Cooperative because of that, but because 14 of that, I was also put on former Governor Tommy 15 Thompson's cheese pricing task force and in that 16 process, I tried to introduce some form of a 17 formula that would include cost of production in 18 the formula, which at that time was being 19 discussed for the 1996 farm. We ended up losing 20 the battle to get that included in that, so the 21 recommendations that that task force took to the 22 Attorney General at that time did not include the 23 cost of production, which was a disappointment to 24 me. 25 Then in the following years, or in PROFESSIONAL REPORTERS, LTD. 77 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 the following months, I should say, the Wisconsin 2 Assembly or Wisconsin Senate introduced a bill and 3 I'm not sure what the number is on that right 4 offhand, I haven't had time to look it up, but 5 they introduced a bill that would regulate the 6 Green Bay Cheese Exchange on trading against 7 interests. It was trading against interests rule 8 of 1996 or 1997, one of those two years, but 9 anyway, the senate passed 28 to five and the 10 assembly got held up in ag committee a little bit 11 and then pretty soon, the Green Bay Cheese 12 Exchange was announcing that they were going to 13 move out of the state. They didn't want to be 14 regulated. 15 And I think this is something that 16 needs to be looked at, because if the CME, which 17 is the old Green Bay Cheese Exchange, it's all the 18 same players, nothing has really changed there. 19 If they run away from being regulated in one state 20 they're going to and they move to another state, 21 if that state adopts the same type of regulation, 22 they're going to move to another state, they will 23 go to Kansas City or New York. 24 So this is something that has to be 25 done on the federal level to address that issue of PROFESSIONAL REPORTERS, LTD. 78 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 trading against interests. What trading against 2 interests is, really, is that a net buyer of 3 cheese, somebody that buys cheese all the time 4 cannot sell on that market or if they're a net 5 seller on that market, they can't be a net buyer 6 and that's what's happening on this market, is 7 somebody will buy too much product at a low price 8 and when prices start coming up which will reflect 9 a higher price for farmers, they sell it to drop 10 the price to the farmers. 11 Whereas if they were on their own 12 side of the block at all times, we'd have a, you 13 know, I think a more stable price for our 14 product. So that's one thing I think that, you 15 know, we really need to address. 16 Some of the other concerns that we 17 heard from the panel this morning, and just the 18 general feeling that I'm getting, my folks didn't 19 want me to farm because of the economics. It's 20 all about economics. 21 It's a great place to grow a 22 family. I've got a 16 year old son and an 11 year 23 old daughter and I knew this was going to happen, 24 but you know, I would like to see one of them take 25 over the farm, I really would, but can they. I've PROFESSIONAL REPORTERS, LTD. 79 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 had real good friends that their folks sold the 2 farm lock, stock and barrel just so they couldn't 3 farm and why, you know, they want to. 4 We're going into this period of 5 time in our lives where we're going to be looking 6 at non-Americans producing our food right in our 7 own territory. It's happening already today. And 8 I think with that sentiment, you get so much of 9 the working public that doesn't have the tie to 10 ownership and when you've got the tie to 11 ownership, you actually care about things. 12 But when you're there just working 13 an eight-hour day for a salary, you really don't 14 care about the animals and the land the way the 15 people that actually own it do, and if we keep 16 going down this road of larger and larger the way 17 the system is taking us, I think we're going to be 18 where Russia was 20 years ago where they and 19 Assemblywoman Baldwin or Congresswoman Baldwin 20 already said that there's local grocery stores 21 being closed up. 22 In 1992, we hosted a Russian at our 23 place and if they weren't in line by 8:00 on 24 Monday or Thursday mornings at the local grocery 25 stores, they didn't have food for the next three PROFESSIONAL REPORTERS, LTD. 80 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 or four days and if we've already got grocery 2 stores that are closing, local grocery stores that 3 are closing down, what's it going to be like here 4 in 10 or 15 years, are we going to be in that same 5 situation. 6 We're supposed to be the bread 7 basket of the world, but I think part of the 8 problem is the concentration. We're seeing it in 9 all the other aspects of agriculture, where more 10 and more people -- or I shouldn't say more and 11 more people, less and less people are controlling 12 the system and we need to move beyond that point. 13 Just one last comment, you know, I 14 think some of the things that we're going to hear 15 throughout today, I was rather encouraged by the 16 panel before us, because they're looking at let's 17 get back to controlling, you know, our own 18 destiny, basically. 19 And I hope that the panels this 20 afternoon are going to have some of that same 21 tone, but you know, I've sat in so many meetings 22 like this and come out of it with the same general 23 consensus, that there's nothing wrong and there is 24 something wrong, you know, and it needs to be 25 changed. Thank you. PROFESSIONAL REPORTERS, LTD. 81 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 MR. BLEDSOE: Good morning, 2 Secretary Vilsack and Assistant Attorney General 3 Holder and other elected officials at the table 4 today. I've prepared a statement because I'm 5 nervous, particularly because I don't do this 6 every day. I take care of cows and the other 7 reason is I'm from California. Some of the 8 comments I heard this morning, I'm glad Joaquin 9 Contente's here because that leaves two targets 10 for you. I want to thank you for holding this 11 workshop to examine competition in agricultural 12 markets. 13 The Secretary kind of gave me a 14 brief introduction, but I wanted to tell you my 15 wife's name is Elizabeth and we have four 16 children, and Liz is a third generation dairy 17 farmer, but I'm the first and my son came from 18 Cal-Poly last June to join us on the farm and help 19 run the farm and I have three daughters that are 20 finishing various degrees at state colleges in 21 California. 22 My experience has been many and 23 varied in this industry, including managing dairy 24 operations, the development of the lead dairy 25 cattle genetics, marketing of live cattle semen PROFESSIONAL REPORTERS, LTD. 82 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 and embryos all over the world, but my first love 2 is to develop a profitable dairy herd and my wife 3 and I started that in 2003 with 120 cows and as 4 you heard earlier today, I milk 1200 cows and have 5 a diversified farming operation. Our operation 6 supports my family as well as provides food and 7 shelter for 20 employees and their families. 8 I wanted to say that the dairy 9 industry is a competitive industry and that has 10 provided my family a chance to grow our operations 11 to where we are today, and our prices are not set 12 as many like to claim. Our farm prices are 13 responsive to market signals, but do not have -- 14 but do have processes in place to pay uniform 15 prices to farmers recognizing the perishability of 16 the product we have. In California, the dairy 17 industry has a huge impact, just like Wisconsin. 18 Milk production is the largest 19 sector of the largest industry in the state. The 20 California dairy industry is responsible for more 21 than 443,000 jobs and a typical dairy, which is a 22 dairy my size, can generate $33 million a year in 23 economic activity and provides 232 jobs in the 24 state. In total, the dairy industry in the state 25 of California contributed $63 billion in economic PROFESSIONAL REPORTERS, LTD. 83 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 impact in 2008. 2 The economic situation facing the 3 California dairy industry this past year was 4 ruinous. While things have improved slightly, 5 dairy farmers are still experiencing negative 6 margins. In fact, June marks the 19th consecutive 7 month of low milk prices and high input costs. 8 Farm milk prices and feed commodity prices tend to 9 be cyclical in nature. However, producers have 10 never witnessed such dramatically low milk prices 11 combined with skyrocketing production costs as 12 they did for all of 2009. People, margins just 13 haven't been low, they just simply haven't 14 existed. 15 The crash came earlier to 16 California. The California milk pricing system 17 responds more quickly to current market conditions 18 because it corresponds to the Chicago Mercantile 19 Exchange. In contrast, price reporting procedures 20 for federal milk marketing orders usually result 21 in a one or two-month delay. The U.S. has a huge 22 impact on the competitiveness. It's been the 23 world's low-cost volume milk producer for many 24 years. Unlike some other countries that may beat 25 us on price, we also have the advantage of the PROFESSIONAL REPORTERS, LTD. 84 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 most lucrative domestic dairy market in the 2 world. 3 New Zealand, for example, produces 4 roughly the same amount of milk as we do in 5 California, but has a domestic market of just 10 6 percent the size of the State of California. Our 7 competitiveness is borne out by the number of 8 companies based elsewhere that have come here in 9 search of milk and our markets, companies like 10 Nestle, Saputo, LALA, Fonterra and Glambia, just 11 to name a few. 12 Productivity gains on the U.S. 13 dairy farms for the past several decades are 14 nothing short of astonishing. However, all U.S. 15 producers will be higher cost producers in the 16 years to come as a result of the additional debt 17 load taken on to survive these negative operating 18 margins, and in my case, the last 25 years I've 19 built an equity. I lost it all in 2009. 20 Industry consolidation is occurring 21 at all levels of the dairy industry. Fewer farms, 22 fewer cows and more milk have been trends for 23 decades. The upside for consumers has been better 24 quality milk. You only have to look at how much 25 longer the sell by dates are on milk in retail PROFESSIONAL REPORTERS, LTD. 85 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 stores to know improvements in quality are being 2 made every day in this business. There are also 3 fewer cooperatives, fewer processors and fewer 4 larger retailers that always seem to want larger 5 suppliers. 6 Everybody works to squeeze costs 7 out of the system and every link in the chain. 8 Farmers, we tinker with our feed rations. We'll 9 milk more cows so the premium cost of production 10 goes down. Cooperatives get more efficient 11 hauling milk to reduce fuel use and miles on the 12 road. And if you ask any processor today what 13 it's like dealing with retailers these days from a 14 cost standpoint, you'll want to be prepared to 15 spend some time. 16 Through all these consolidations 17 and quality improvements, however, it is 18 undeniable that farmers have seen their share of 19 what the consumer pays for milk and other dairy 20 products go down significantly. The farm price 21 for a gallon of milk today is now roughly 30 22 percent of what you pay in the retail store. 23 Dairy farming is becoming unique in the livestock 24 industry. That was mentioned earlier, in that 25 milk production is controlled by the families who PROFESSIONAL REPORTERS, LTD. 86 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 own the land, the facilities and the cows. 2 We buy the feed, we make the 3 breeding decisions, we decide who buys our milk 4 and when it's time to cull a cow. Every farmer I 5 know wants to keep it that way and that's what I 6 want this hearing to be about. Here's a few 7 suggestions to keep it that way that I believe 8 will help. We need to insure transparency in all 9 markets accessed by producers. We need to build a 10 federal economic safety net and not in the 11 traditional terms we think of, for farmers that 12 recognize our significantly higher input costs. 13 We need to provide risk management 14 tools that work for farmers. We need to keep our 15 marketing options open, for example, for farmers. 16 For example, artisan cheese making has been a real 17 advantage for some of the families that have 18 chosen to diversify into it. Raw milk sales to 19 the public, however, pose a real health risk to 20 consumers and recurring consumer confidence crisis 21 to our industry and should not be allowed. 22 Keep farmers in control of the 23 regulatory system. Farmers have the right to 24 determine how and by which agency milk marketing 25 is regulated in their state and region and it PROFESSIONAL REPORTERS, LTD. 87 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 should stay that way. The last thing is to make 2 sure it's milk. Regulatory industries must, at a 3 minimum, ensure that products labeled milk meet 4 the federal descriptor to be called milk. And 5 while on the subject of minimum standards, I just 6 want to mention that we have a state requirement 7 in California that fluid milk be fortified with 8 additional milk solids in the form of condensed 9 skim. Dairy producers pay for that. 10 Our milk tastes better and at the 11 same time provides 30 percent more calcium per 12 serving and the most important thing is it's all 13 milk. That is a policy that's good for farmers. 14 It's good for the public health and it's one that 15 I hope the federal government will consider taking 16 nationwide. With that, I thank you for the 17 opportunity to be here today and talk about the 18 competitiveness and I look forward to answering 19 any questions. Thank you. 20 MS. SUKALSKI: I'm honored to be 21 here today. Thank you, Secretary Vilsack and 22 Assistant Attorney General Varney. After the most 23 difficult financial year I've ever known as a 24 dairy farmer, these discussions are appreciated. 25 I graduated from the University of Minnesota with PROFESSIONAL REPORTERS, LTD. 88 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 a degree in animal science and was working for a 2 dairy magazine in Ohio when my father indicated he 3 was going to sell his dairy herd and just crop 4 farm. 5 I returned home in 1988 and have 6 been managing the dairy herd ever since. Instead 7 of being dispersed, the herd has grown and now 8 supports three partner families, my parents, my 9 brother and his family, myself and my family and 10 13 employees. All through high school and 11 college, whenever I would push my father to adopt 12 some new tool or technology, his constant answer 13 was you come home and we'll do things your way. 14 I'm thankful my father was true to his word and 15 let me make changes, allowing me to see firsthand 16 the results of the tools and innovations I chose. 17 I appreciate having choices and 18 being able to do what I feel is right for my cows, 19 my farm, my family and my business and to watch 20 milk production per cow more than double in the 21 last 20 years. 22 This brings me to my first concern, 23 the mountain of misinformation and mis-perception 24 circulating about conventional agriculture. 25 Contrary to popular belief, conventional PROFESSIONAL REPORTERS, LTD. 89 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 agriculture is very sustainable. The first 2 measure of the sustainability must be financial, 3 which is the main reason we are here today. 4 But beyond that, utilizing science- 5 backed innovations to produce an abundant food 6 supply using continuously fewer and fewer 7 resources is sustainability. For example, since 8 1944, the carbon footprint of milk has actually 9 fallen by 63 percent. In spite of that, it seems 10 that everything about conventional agriculture 11 from size to science is being demonized by the 12 media, internet and books, while organic 13 agriculture, which accounts for a tiny portion of 14 total food, has been given some big green stamp of 15 approval with no science to prove that it is truly 16 produced with less total pressure on the 17 environment or is necessarily safer or healthier. 18 The constant barrage of mistruths 19 gets depressing to those of us who take such pride 20 in what we do. I wish U.S. consumers could come 21 to my farm and realize our care and commitment for 22 our cattle and our world. The average U.S. 23 consumer is generations removed from ever having 24 tasted hunger. I hope it doesn't take that 25 extreme for people to realize that food doesn't PROFESSIONAL REPORTERS, LTD. 90 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 just appear on shelves. 2 Please don't misunderstand me. 3 There is room for all types of farms. I 4 appreciate diversity in agriculture and I want 5 U.S. consumers to have as many food choices and 6 our grocery shelves can allow, but I want 7 consumers to have complete confidence in all food 8 choices and not be making decisions based on 9 misguided fears. Ultimately, my real concern is 10 that propaganda will influence policy, policy that 11 could potentially limit the U.S. ability in 12 agriculture to compete in a global marketplace, a 13 strength that I feel is critical to our economy, 14 food safety and even national security. 15 I also fear that the threat of 16 lawsuits or consumer backlash may inhibit future 17 agricultural research and innovation. Innovations 18 that we may need to feed a hungry world may go 19 undiscovered. I believe that only a well fed 20 world has any prayer of every being a peaceful 21 world. I'm relieved by the U.S. Supreme Court's 22 favorable decision on Roundup Ready alfalfa. 23 While others kept it in courtrooms, we actually 24 watched Roundup Ready alfalfa prove itself on our 25 farm. PROFESSIONAL REPORTERS, LTD. 91 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 From that one planting during the 2 narrow window of availability, we've harvested 3 continuously for five years. It has been by far 4 the best stand of alfalfa we've ever seen in our 5 farming lives, but we are losing hope to plant it 6 again in 2010. I hope the science based truth is 7 always upheld. Of course, like everyone else 8 here, I'm concerned about milk price and all the 9 other topics that go into it, many of which will 10 be thoroughly discussed later today. 11 Farmers are the eternal optimists. 12 Even after the dismal prices of 2009, just 3.8 13 percent exited the industry. Only three of the 14 last 17 years had lower exit rates. If farmers 15 made decisions based solely on numbers, we 16 probably all would have quit by the end of 2009, 17 but there's always our belief that things will get 18 better. I hope our never give up attitude isn't 19 being taken advantage of by others in the 20 industry. 21 In that respect, I am thankful for 22 dairy cooperatives. Before cooperatives, farmers 23 were being taken advantage of. The book, "Men to 24 Remember," outlines how farmers came together in 25 1921 to form Land O' Lakes cooperative. It's a PROFESSIONAL REPORTERS, LTD. 92 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 great read for anyone who eats. As I read this 2 book, I felt the personal connection to the 3 farmers in it as they struggled and strived just 4 to put top quality butter on to the tables of 5 consumers at a fair price for all. 6 Today most of our challenges are 7 different, but I realized how the commitment and 8 passion that founded Land O' Lakes is still alive 9 and well on our farms today. I can't imagine 10 feeling this committed to producing a quality end 11 product if I wasn't a part owner of the company. 12 Most importantly, co-ops allow farmers a 13 collective place at the marketing table and a 14 collective voice on policies that affect our 15 farms. Co-ops allow farmers to pool their equity 16 and jointly own what none of us could own alone 17 and hopefully garner a fair price for milk. 18 Maybe I'm biased, but I think the 19 dairy's cooperative system is the epitome of all 20 the facets of agriculture and perhaps why there's 21 less vertical integration in the dairy industry. 22 Even though it's almost 100 years old, the 23 cooperative system is the best marketing tool 24 farmers have. However, I am concerned that there 25 may be too much consolidation beyond our PROFESSIONAL REPORTERS, LTD. 93 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 cooperatives. The clear example is how dairy 2 farmers' share of the retail dollar has fallen 3 from 52 percent in 1980 down to 27 percent in 4 2006. 5 It seems that retail prices never 6 fall as rapidly or as far as prices on the farm 7 and I am concerned that this prolongs our lows, 8 because there is no price incentive for consumers 9 to increase consumption. Thank you for the 10 opportunity to share my concerns. 11 MR. CONTENTE: Good morning, 12 Mr. Secretary and Assistant Attorney General and 13 members of the panel and the audience. I'm a 14 second generation dairyman from Hanford, 15 California. My uncle and my dad originally 16 started the operation. My uncle started back in 17 the '20s, late '20s and my dad joined in later, in 18 the early '50s. Then my brother and myself now 19 have the farm. I have a son and a daughter that 20 are also participating there with us, and 21 hopefully, they can continue the endeavors that 22 we've worked so hard for. 23 What I'm going to do is go over 24 some of the things in my testimony and then just 25 try to come up with a visual of what happened in PROFESSIONAL REPORTERS, LTD. 94 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 this last year for the dairy farmers in America. 2 My topics that I'm going to be talking about are 3 dealing with the lack of a functioning marketplace 4 and I think the best way to address that is to go 5 back and see what happened in 2009. 6 In 2009, the consumption according 7 to the USDA data in the United States was 186 8 billion pounds. The exports on the fat basis was 9 4 billion pounds. There's one category that's not 10 mentioned in these numbers or in this data that 11 needs to be included in there. The unregulated 12 proteins that come into this country do not get 13 included in any of this data. Those unregulated 14 proteins, casein, caseinates and MPC. 15 Last year in 2009, those imports 16 were down significantly from the year before, 17 almost 40 percent down. However, they still came 18 in at a high rate. In my testimony, I provide a 19 chart that shows how much that volume is. That 20 equates to over 6 billion pounds of milk 21 equivalent on casein, caseinates and over 2 22 billion pounds in MPC that still came in and was 23 utilized. 24 After you sum up all the product 25 that was consumed including these unregulated PROFESSIONAL REPORTERS, LTD. 95 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 proteins, it's a figure of nearly 200 billion 2 pounds that was needed to satisfy the market in 3 the United States, which is, by the way, the 4 largest market in the world. We only produced 5 189 billion pounds of milk in 2009 and yet, the 6 price, the average price for 2009 in the United 7 States as an average was around $12.80. In my 8 area, it was actually a lot lower than that. 9 We all needed at least $18. We had 10 just come off of some extremely high feed costs 11 due to some of the speculations that had driven up 12 the commodity markets and yet we received 50 13 percent below cost of production in 2009 14 unnecessarily. The system is broken. We don't 15 even produce enough for our own needs and we were 16 receiving 50 percent below cost of production. 17 Let's compare another commodity. 18 In my area, where there's a lot of almonds grown 19 in my area. In 1995, the almond industry produced 20 400 million pounds of almonds. By 2008, 13 years 21 later, that production grew to a billion and 600 22 million. That's four fold that the almond 23 industry expanded their production four times in 24 13 years and by the way, over 50 percent of those 25 almonds cannot be consumed in the United States PROFESSIONAL REPORTERS, LTD. 96 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 because there's not enough market for them in the 2 United States. 3 In September of '08, we had a 4 financial collapse that was heard around the 5 world. Credit markets around the world 6 collapsed. They kept saying that the reason why 7 our milk prices are collapsing is because the 8 credit markets collapsed and people can't move 9 product around the world as easily. So I had 10 discussions with the almond industry people over 11 the last several months, and this is what they 12 tell me. 13 In 2009, the average price for all 14 the almonds produced, because there's some almonds 15 that are worth more depending upon size than 16 others, but the average price for 2009 almonds was 17 $1.60 something. The cost of production for 18 almonds as a general rule is about $1 a pound. So 19 the almond industry that does not have a market 20 for all their product in the United States that 21 has to export over half of their product, that has 22 quadrupled their production in 13 years, received 23 60 percent above the cost of production. We in 24 our dairy industry received 50 percent for most of 25 '09. PROFESSIONAL REPORTERS, LTD. 97 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 The system is broken. Now, what do 2 we do about it? By the way, this forum that we're 3 having here is an exercise in democracy. This 4 provides the issues to come to the table to be 5 discussed and to be aired and to have these 6 distinguished people, these two secretaries, 7 assistant secretary, that are here with us today 8 provides the credibility of what this country is 9 all about. 10 It's democracy that creates 11 prosperity. It's not trade or it's not resources, 12 it's democracy, because the democracy, you have 13 the ability to empower yourself. We as producers 14 now have this ability here through this exercise 15 that we're going through to empower ourselves to 16 gain a piece of what the consumer is putting on 17 the table when she goes to the store and lays down 18 that grocery dollar for dairy products. 19 This last year, if you look at what 20 the consumer was paying for milk, there's 11.6 21 gallons of milk in a 100 pounds and if the average 22 price for milk was $3 and it was around that 23 figure, give or take, some areas higher, some 24 areas a little lower, that's $35 a hundred weight 25 that the consumer was paying for that fluid milk. PROFESSIONAL REPORTERS, LTD. 98 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 We were getting $9 in California. Cheese that 2 sells for an average across the United States for 3 about $4.50 or $5, cheddar cheese yields are about 4 10 to 1, so 100 pounds of milk will make 10 pounds 5 of cheddar cheese. 6 A $4.50 pound of cheddar cheese 7 will yield $45 a hundred weight, $5 will yield $50 8 a hundred weight. The consumer is putting $35 to 9 $50 down a hundred weight, which, by the way, the 10 CPI consumer price for '09 dropped seven and a 11 half percent while our producer price went from 12 $18 plus the year before to $12 something. That's 13 a five percent drop and the CPI for consumers only 14 dropped seven and a half percent. The system is 15 broken. 16 Either we do nothing and watch our 17 industry follow the pork and poultry industry and 18 wind up with a totally vertically integrated -- I 19 disagree that we will not have dairy products. We 20 will have those dairy products. Some of the 21 panelists here mentioned that the food will have 22 to come from other countries. That's not true. 23 It will be produced here. It will not be produced 24 here by families, at least the majority of 25 families. It could be just a few small families. PROFESSIONAL REPORTERS, LTD. 99 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 In California, we have one family 2 that produces most of the chicken. It's called 3 Foster Farms, and the rest of you know what it's 4 like on the east coast. So what I'm saying here, 5 this is the opportunity for we as dairy farmers to 6 empower ourselves to reach out and get a piece of 7 that rock for us through this forum that we're 8 having here and this discussion and I thank the 9 Secretary and the assistant. Thank you. 10 MR. VILSACK: Thank you. Frances, 11 your thoughts? 12 MS. HORTON: Good morning, 13 Secretary and Assistant Attorney General. My name 14 is Frances Horton and I'm very pleased to be here 15 today to tell you a little bit about dairying in 16 the southwest, and I wish Senator Feingold was 17 here because I can assure him there are cows in 18 New Mexico. I was born in New Mexico and grew up 19 in Arizona. My grandfather was a cotton ginner. 20 My father grew cotton and had a small beef feed 21 lot. 22 In 1980, we started our first dairy 23 with 200 cows. Today, my husband Dean and I with 24 the help of our son Loren are milking 14,000 25 head. We are a closed herd and use sex semen to PROFESSIONAL REPORTERS, LTD. 100 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 provide our replacements. We employ over 200 2 people from the local community and buy most of 3 our silage and alfalfa from local farmers. To be 4 as efficient as we can in today's economy, we use 5 technology to help improve our income, such as 6 drip irrigation to conserve our precious water. 7 We use low till farming practices 8 with GPS equipment to save fuel. Every day, we 9 strive to improve our business by producing the 10 very best milk that we can, by testing for somatic 11 cell levels and antibiotics. We use best 12 management practices to provide top quality care 13 for our animals. We also use the latest computer 14 programs to maximize our feed usage and 15 efficiency. We keep records of all our cattle 16 with RFID tags to minimize use of medicine and to 17 improve breeding results. 18 We also use computers and 19 satellites to keep track of milk and feed markets 20 and weather reports. Our labor force comes from 21 the local community and includes many women and 22 high school students who work after school. We 23 have a bonus program for quality milk, a perfect 24 attendance reward program and a college 25 scholarship program. In spite of our size, our PROFESSIONAL REPORTERS, LTD. 101 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 business is totally family owned, and the only 2 other person who has a say in its operation is our 3 banker. 4 We are a family that supports other 5 families, those of our employees, our local 6 merchants and our local farmers. As everyone in 7 this room knows, and I hope they do, the dairy 8 industry is not in good shape. In the 32 years we 9 have been dairying, there have been ups and downs 10 and now there's only down. I am not an economist 11 or a statistician. I can't spout numbers or show 12 you charts with lots of colored lines. I can tell 13 you that my main job is taking care of the money 14 in our business. 15 I used to be able to make the 16 payroll, pay for the hay and feed, pay the bills 17 on time and pay my debt down in time to borrow it 18 again. Right now, I am lucky to pay the employees 19 and maybe part of the bills. Our debt is three 20 times what it was two years ago. I'm not sure 21 what the problem is. We attend many meetings and 22 I've listened to many experts say what the 23 problems are and I'm sure they're all right. I 24 don't think there is one perfect solution. 25 I don't want the government to run PROFESSIONAL REPORTERS, LTD. 102 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 my business or my industry. I think that the 2 government and my family each has an important job 3 to do. My job is to pay taxes, to protect the 4 environment where I farm, produce the best quality 5 milk possible, provide the best care for our 6 animals and have the best working conditions for 7 our employees. My government's job to protect me 8 from enemies, to enforce fair and reasonable rules 9 for the environment, to protect our animals from 10 abuse and make sure that my employees are treated 11 fairly. 12 I also think the government should 13 keep the playing field level, so that anyone who 14 works harder and smarter and is willing to make 15 sacrifices and take risks should be able to make a 16 success and provide for their families and future 17 generations. 18 I believe in co-ops. They help 19 us. They transport and market my milk so that we 20 can concentrate on doing what we do best. They 21 also have a job to do to help keep the dairy 22 industry strong and have unity in the give and 23 take of dealing with processors. 24 I have no problems with the 25 processing company being large. I do have a PROFESSIONAL REPORTERS, LTD. 103 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 problem with companies that take unfair or 2 dishonest advantage because they can. The 3 government's job is to set rules and limits and 4 enforce them fairly. The dairy industry is not in 5 good shape. However, I don't believe that drastic 6 changes will help with the government controlling 7 supply. 8 I want my government to do a better 9 job of regulating and enforcing the rules we 10 already have, such as improving the standards of 11 the pasturized milk ordinance and increasing 12 solids in milk. This would use more milk and 13 create a better product that would compete in the 14 world market. I also feel that we need to be more 15 careful on allowing imports into our market which 16 are incorrectly labeled, and these compete with 17 pure, wholesome American milk for the processors' 18 dollar. 19 I know that processors and food 20 companies need to make a profit. However, they 21 also need to pay the American dairyman a fair 22 share of the consumer's dollar unless they want to 23 end up buying their product from places that do 24 not guarantee the quality or safety of the milk 25 supply. U.S. dairymen are the best in the world PROFESSIONAL REPORTERS, LTD. 104 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 at what they do, but they are being squeezed by 2 the high cost of imports. This cannot last 3 forever. 4 We need a better system for pricing 5 milk that cannot be manipulated by thinly traded 6 CME markets. I think all dairymen in the United 7 States are united in their goals. They want to 8 provide the highest quality milk in the world. 9 They want to have a clean, unpolluted environment 10 for their families and their farms and they are 11 proud of their farming lifestyle and they want to 12 secure it for their families and future 13 generations. Thank you. 14 MR. KING: Secretary Vilsack, 15 General Varney, it's a pleasure to be here this 16 morning. I take some -- with all of the chatter 17 about Wisconsin and I have a lot of great friends 18 in Wisconsin and California. I feel a connection 19 with both of you because I know both of you, I 20 believe both of you had some educational 21 experience in New York. So any other way I can 22 bond with you? That's the way. 23 At any rate, I'm Ed King. My wife 24 and I and our sons, sons are very important, and 25 their families own and operate King's Ransom Farm, PROFESSIONAL REPORTERS, LTD. 105 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 a 900-cow dairy which is located in Saratoga 2 County, New York. It's about 30 miles north of 3 Albany, our capital. For those of you who like 4 thoroughbred horses, this is where the oldest 5 thoroughbred track in the country is located. 6 Thoroughbred racing reigns supreme there in July 7 and August each year. Okay. Now, on to the dairy 8 issues. 9 I consider it a privilege to be 10 invited to present my views on the challenges 11 facing our industry today. As you've already 12 heard, dairy producers are hurting. I can attest 13 to that. There are a number of issues which we 14 face as we struggle to survive in hopes of 15 restoring our businesses to profitability. Let me 16 identify just three of those issues. Number one, 17 the lack of market power. Number two, our share 18 of the retail dollar, and, number three, the lack 19 of market transparency. 20 Let me detail my concerns. First, 21 as I said, producers lack market power. We need 22 our cooperatives. Our family has marketed milk 23 through the Dairylea Cooperative for 20 years. 24 It's been a great relationship. We're invested in 25 them and they're invested in us and we will PROFESSIONAL REPORTERS, LTD. 106 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 continue to rely on the cooperative's expertise 2 into the foreseeable future. Because of this, I 3 want to personally thank both the Secretary and 4 the General for the comments that they've made 5 this morning and have made previously in the 6 support of the Capper-Volstead Act. 7 And we know now that it's not a 8 real focus of this endeavor, so I want to thank 9 both of you personally for those comments and that 10 support. It means a lot to me. Second, the 11 producers' share of the consumer dollar has shrunk 12 substantially in recent years. USDA's Economic 13 Research Service, and you've heard this spoken to 14 before, has confirmed this by reporting that the 15 farmer's share of the retail dairy price fell 16 dramatically in the past two years to about 25 17 percent in '09 from about almost 38 percent in 18 2007. 19 This is particularly evident in the 20 fluid milk market, because consolidation in the 21 retail food marketing industry has reached the 22 point where major chain marketers can flex their 23 buying power muscle and demand price concessions 24 from processors in the name of keeping them 25 competitive. All of these price concession PROFESSIONAL REPORTERS, LTD. 107 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 demands quickly end up on the producers' doorstep 2 as we become the target of this feeding frenzy for 3 lower prices. Yet we producers have no place to 4 turn to apply pressure to keep us competitive. 5 Attention must be given to bringing 6 an end to the demands for inclusion of 7 competitiveness provisions in contracts. 8 Additionally, significant consolidation at the 9 retail level is seemingly making it easier for 10 retailers to capture an inordinate share of the 11 total margin on milk. Bottom line, farmers have 12 no control over this part of the equation. It 13 might be interesting for you to know that as a 14 result of this, our family has, after careful 15 analysis, coupled with our access to a very unique 16 consumer market opportunity, we've embarked on a 17 new business venture that includes weekly delivery 18 of fluid milk. 19 Our goal is to recapture some of 20 that retail dollar. We're encouraged, as in just 21 eight short weeks, this is a very new venture, we 22 have a growing customer list and apparently, many 23 opportunities ahead of us. 24 Finally, I would like to address 25 the lack of market transparency. Dairy producers PROFESSIONAL REPORTERS, LTD. 108 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 have a particular need to access market 2 reconnaissance from all regions of the country 3 where milk prices are more competitive. 4 Today, the market signals we 5 receive can be affected by the activity of a 6 handful of buyers on the cheese exchange, and 7 frankly, sometimes that activity does not fairly 8 represent true marketplace dynamics across our 9 nation and, yes, even the world. We need a change 10 in policy and the systems that we use that will 11 help to provide price stability for our industry 12 for the long term. 13 As I close, I want to thank USDA 14 and the Department of Justice for allowing me to 15 express just a few of my thoughts. Thank you very 16 much. 17 MR. VILSACK: Joel? 18 MR. GREENO: It's good to be here. 19 I'd like to thank Ag Secretary Vilsack and 20 Assistant Attorney General Varney for being here 21 and holding this session and you've been asked to 22 do a lot of things here today and I was just 23 wondering, my farm has seen 17 inches of rain in 24 the last four weeks and if you could call somebody 25 and just turn it off for two weeks, it would be PROFESSIONAL REPORTERS, LTD. 109 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 appreciated. 2 MR. VILSACK: That would be 3 Governor Doyle. 4 MR. GREENO: I'd just like to start 5 with the Greeno family has farmed in Monroe 6 County, Wisconsin for 150 years now and I'm the 7 last one, and that's unfortunate. And I guess I'm 8 here today to be a voice for the voiceless. I've 9 waited 17 years for this opportunity and I'm glad 10 to be here. My mom and dad's 29th wedding 11 anniversary present was a farm foreclosure and 12 their 30th wedding anniversary present was a 13 Sheriff's auction on the courthouse steps. 14 That forced me to move my dairy 15 operation out of their facility into an abandoned 16 FSA property that I had purchased in 1990. The 17 house and barn had all been completely vandalized, 18 no doors and windows in the house, no electricity, 19 and we had to set up shop and go into operation in 20 a matter of days, and the family pulled together 21 and came through and I've been milking cows there 22 now 17 years. You know, my dad battled through 23 polio, a debilitating back injury, cancer, but he 24 couldn't beat low milk prices and something has to 25 be done. PROFESSIONAL REPORTERS, LTD. 110 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 In mid January, a New York State 2 dairy farmer shot 51 of his cows and then 3 himself. We know of nearly 100 dairy farmers that 4 have committed suicide to date since the '08 5 crash. It's got to stop. Many of ours, a dear 6 friend, a Korean farmer by the name of Mr. Lee was 7 on his family's farm for 1000 years and he 8 committed suicide at the World Trade Organization 9 ministerial meeting in Cancun, Mexico and his last 10 words were WTO kills farmers as he shoved a dagger 11 in his chest and bled to death. These people's 12 lives had value. The work they did had value and 13 the products they produced had value and corporate 14 America didn't allow them to have that. 15 The crisis in dairy is real. The 16 problems in dairy are manmade. It's easy to do 17 nothing. Do we have the will to fix it? Dairy 18 pricing has a beginning and the beginning is the 19 Chicago Mercantile Exchange. Primarily, block 20 cheddar trading. The Chicago Mercantile Exchange 21 decides everything in dairy pricing. 22 When companies report cheddar 23 prices through the NASS survey, 30 of the 24 companies that report always report the CME cash 25 block market. CME block trading has a near PROFESSIONAL REPORTERS, LTD. 111 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 perfect correlation to dairy farmer's Class III 2 price. If supply and demand were true indicators 3 of the market, there should be a strong 4 relationship between American cheese stocks and 5 the price of block cheddar on the CME. There is 6 not. All volatility in milk pricing is caused by 7 the CME. 8 The CME cheese trading is a highly 9 leveraged, thinly traded market with few players. 10 Currently, two players mainly control CME block 11 cheddar trading, in Davisco being the main seller 12 and Schreiber's being the main buyer. Two players 13 do not make a market, and at least not a true 14 market indicator. All of the industry marches in 15 lock step with CME prices. With a history of 16 price fixing, the CME block trading cannot be the 17 deciding factor in milk pricing. 18 Commodity Futures Trading 19 Commission needs immediate jurisdiction over the 20 CME trading. DOJ needs to take swift action on 21 the ongoing dairy industry investigation began by 22 Ali Ramadan into the actions of DFA, Deans and 23 National Dairy Holdings, swift action on market 24 manipulation and price fixing of dairy commodities 25 and USDA needs to strongly reconsider relying on PROFESSIONAL REPORTERS, LTD. 112 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 the NASS survey, which is the vehicle of all 2 fabricated market information going to USDA that 3 is used in the milk pricing formula. 4 DOJ needs to move forward on the 5 creation of the food and ag unit with field 6 offices. Is the Antitrust Division the 7 appropriate division to investigate milk prices or 8 should it be shared or handed over to the 9 racketeering division? 10 Dairy farmers deserve dignity. 11 They deserve justice. They deserve cost of 12 production plus a profit. A friend of mine 13 recently had a position with Caterpillar and he 14 said that if farmers ran their farms like 15 corporate America ran their businesses, we'd all 16 be bankrupt. 17 And he's moved back to Pennsylvania 18 to take up his ag job again, and you know, it's 19 just a scenario that's went on far too long and 20 let's hope that today is the beginning of the end 21 and that we restore fair prices to our farmers. 22 Thank you. 23 MR. VILSACK: Well, in order to 24 keep on schedule, we're going to have to be sort 25 of quick on these -- on the Q&A, but I don't know PROFESSIONAL REPORTERS, LTD. 113 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 if the Senator or the Congresswoman have any 2 specific questions that they'd like to ask the 3 panel. If they do, I'd be happy to give them that 4 first opportunity. 5 CONGRESSWOMAN BALDWIN: I will be 6 an accomplice in being brief and maybe can get 7 some follow-up afterwards, but I would say I'd be 8 interested in knowing from Jamie particularly a 9 listing of some of the risk management tools that 10 you were talking about earlier and also a couple 11 of people talked about -- I think it was Christine 12 Sukalski and Ed King talked about the farmer's 13 share of retail price and the lag time in seeing 14 any sort of reflection of that in the grocery 15 store, and also often times not seeing it ever 16 appear. 17 I'm really interested in -- because 18 to me, those are signals of anticompetitiveness 19 and to sort of drill down -- not a good expression 20 to use these days, but to understand a little bit 21 more why the signals of a healthy competitive 22 market aren't occurring. 23 MR. BLEDSOE: So on risk management 24 tools, your question is how do we make them 25 available or educate farmers? PROFESSIONAL REPORTERS, LTD. 114 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 CONGRESSWOMAN BALDWIN: When you 2 were talking about policy recommendations to us 3 and since a couple of us are -- you said we need 4 better risk management tools and I figured there 5 was a lot more behind that sentence. 6 MR. BLEDSOE: Yeah, those are -- 7 risk management tools are things that aren't as 8 familiar to us in California and I think they've 9 been used a lot more out in the Midwest and even 10 as you look at -- from my perspective, if you look 11 at the whole policy, the whole dairy policy, risk 12 management, even if we love the CME or don't love 13 the CME or we like buying puts or calls or not, 14 risk management is something farmers can do today 15 to protect their margin. 16 We're not good at it. We're 17 learning about it. The program is thinly traded, 18 so you have to be right there and -- but I think, 19 you know, we have to educate farmers on how to use 20 those tools better. Perhaps, and we look at 21 further down the road discussions, perhaps when I 22 talk about safety net, there may be a possibility 23 to help fund or -- I'm trying to think of the word 24 right now, to help farmers buy puts. 25 Rather than just give them money to PROFESSIONAL REPORTERS, LTD. 115 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 produce milk when we don't need the milk, let's 2 help them manage their risk in some way. These 3 are things that we need to educate and are 4 actually talking about in the industry today, but 5 as a dairy farmer today, I know we lost a lot of 6 milk last year and a lot of money last year and 7 nobody did it, but in California, we had the 8 opportunity, as well as in the Midwest, having 9 contracted our milk in that brief period of time, 10 it was there for $19 or $18. 11 I wouldn't have lost as much money 12 as I did, but I need more education. I need to 13 learn how to use those totals and those tools need 14 to be affordable. 15 MS. SUKALSKI: On the reducing 16 share of consumer prices, you know, farmers we buy 17 all of our inputs retail which keeps a lot of 18 other industries in business and none of those 19 costs have gone down, but we sell our products 20 wholesale and so we're constantly in this 21 crosshairs of where we see what it is in the 22 grocery store and see it not coming down and I'm 23 on promotion boards. My number one passion is 24 promoting dairy products and I would just like to 25 see the opportunity for consumers to consume PROFESSIONAL REPORTERS, LTD. 116 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 more. 2 When we have a surplus, why can't 3 the store price reflect our price and perhaps the 4 consumers will consume more. 5 MR. BLEDSOE: Can I add to that? I 6 just have a real cute little story and in economic 7 terms, it's called elasticity and demand, but the 8 story, we have -- our family has a house on the 9 beach and one day we're having a barbecue and my 10 wife sent me down to the store to buy butter and 11 this is in 2003 when we started the cows. When I 12 started my cows, I was getting $9.25 a hundred 13 weight, that was my price. 14 So I went in to buy butter, it was 15 $5 a pound. So I asked the store owner, I go you 16 know, I'm a dairyman from the valley, why are 17 you -- I'm only getting $1 a pound for my butter, 18 why are you charging $5 a pound, and he said well, 19 you know, if I lower it every time your price 20 lowers, then one day the customers come in and 21 he's buying it for $2.50, the next time he has to 22 buy it for $5. Every time I raise that price, he 23 won't buy it. 24 He goes, it's not my fault you're 25 dumb enough to sell your milk to the processor for PROFESSIONAL REPORTERS, LTD. 117 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 $1 a hundred weight, $1 a pound. So that's from a 2 retailer's side, that's a small mom and pop store, 3 but that's maybe how they look at it. 4 SENATOR KOHL: I thought we all 5 feel that the testimony that we received here this 6 morning from these various producers across the 7 country has been very, very important and 8 stimulating and informative. Personally, I feel 9 that as a result of this workshop, if one thing 10 came out of it, it would be very productive, 11 Mr. Secretary and Christine Varney, that we would 12 undertake to do everything that's necessary to see 13 to it that the Chicago Mercantile Exchange and the 14 CFTC is really operating effectively in terms of 15 producing a national market price. 16 There probably isn't a producer in 17 the country that doesn't feel that it's not 18 operating correctly. I think they have a right to 19 expect us at the federal level to guarantee them 20 that either it is operating effectively or that we 21 see to it that we install procedures to accomplish 22 that goal. We owe it, I think, to the producers 23 of this country. 24 MR. VILSACK: I have a question for 25 all of the panelists. As you all provided your PROFESSIONAL REPORTERS, LTD. 118 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 testimony, you had a series of ideas and thoughts 2 and obviously very different geographic locations 3 and different types of operations. Do you believe 4 that there is sufficient interest across the 5 country, across dairy operators of all sizes and 6 kinds for some significant change in the way in 7 which we do business so that we have greater 8 stability, or do you think we will evolve back 9 into protecting our own regional turf? 10 I'd be just curious, do you think 11 the time is right or do you think we're going to 12 slide back to business as usual? Who wants to 13 take that? 14 MR. VON RUDEN: I might as well 15 start, being I started it, I guess, but we've only 16 got a minute, so I'll keep it short. I think 17 right now with the desperation that's among dairy 18 farmers, I think we're ready for something that's 19 going to be constructive. If we go back to the 20 same old song and dance of not having a mechanism 21 to raise our price with -- and that boils down to 22 the CME, you know. We've got to change that 23 mechanism. 24 And I would personally like to see 25 a consumer pricing index in that formula, whether PROFESSIONAL REPORTERS, LTD. 119 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 it's 100 percent or 50 percent. 50 percent of the 2 CPI in our pricing formula would certainly give us 3 a lot more money today than what we've receiving, 4 although I'd like to see that used as 100 percent 5 with the current market or any time you go in the 6 grocery store today, the grocery item runs across 7 a bar code, so that system is automatic. The 8 numbers are there on a daily basis. 9 It isn't like it was 40 years ago 10 when you'd buy a carrot and there would be a 11 little sticker on there that said 20 cents and the 12 clerk had to push it in for each carrot. You 13 know, everything today is so much faster, so that 14 information is there and I don't know why they 15 can't use the consumer pricing index as a part of 16 our pricing formula to allow us to receive our 17 fair share. 18 MR. BLEDSOE: And also to add to 19 that, we're in a different kind of a marketing 20 order in California, but I know the country is 21 looking now at that federal marketing order 22 reforms and I think there's things that you can do 23 in there, although I'm not an expert, that can 24 actually give you forward pricing, send signals to 25 dairymen ahead of time of what may be the price of PROFESSIONAL REPORTERS, LTD. 120 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 powder, what may be the price of cheese, as well 2 as things that are coming up as the dairy industry 3 globalizes. 4 We're looking at things like the 5 global dairy trade, which can actually give us 6 forward pricing. Rather than always looking back, 7 we can look ahead and I think that would help 8 dairy farmers as well and yes, the answer to your 9 question is dairymen want change and I know in 10 California, we're working for that change 11 regardless of what happens? 12 MR. VILSACK: How about 13 dairywomen? 14 MS. SUKALSKI: Dairywomen want 15 change even more. I do appreciate the foundation 16 for the future plan that I've seen come out of 17 National Milk Producers Federation. It's a good 18 start. There's definitely areas that we have to 19 discuss on it, though, and we are going to have 20 regional differences. Some of us in the Midwest, 21 we'd like to kind catch up to California. 22 MR. CONTENTE: Mr. Secretary, the 23 question was are producers ready to come together, 24 is that basically it? Yeah, all right. The 25 problem that we have as producers is that we PROFESSIONAL REPORTERS, LTD. 121 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 really don't have a strong voice for dairy 2 producers across the country. National Milk has a 3 tendency to lean more towards the processing 4 sector, which is understandable due to all the 5 plants that have the processing element in it. 6 The make allow structure that 7 decouples the plants from the marketplace is a 8 little bit of that problem and so we producers 9 across the country, and I talk to a lot of people 10 around the country, and people do want to change. 11 Of course, all you have to do is look at their 12 milk checks to figure that out. But the problem 13 is, is that we don't have the voice that carries 14 the producers' wishes. 15 MR. VILSACK: Frances, what do you 16 think? 17 MS. HORTON: Yes, I think we are 18 ready for a change and what I've seen from this 19 crises is that a lot of different groups, like 20 your trade associations, have found out that the 21 only way they're going to survive is to come 22 together for political power and within their 23 co-ops. And I know when we first got into the 24 dairy business, there was a lot of discord between 25 south and the west and everything and I think PROFESSIONAL REPORTERS, LTD. 122 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 people have found out you're either going to hang 2 together or you're going to hang by yourself, and 3 necessity, I think, will cause dairymen to work 4 together. And we need to change, because what 5 we're doing now is not very good. 6 MR. KING: The short answer is yes, 7 I think producers are ready to come together and 8 we need to do it quickly. I don't know, from our 9 farm operation, we've bled long enough and I'm not 10 sure how long the banker wants to hang on to 11 anybody's hand any more and those are just cold, 12 hard, brutal economic facts. So we can't afford 13 the time to debate and debate and debate and 14 debate and wait for whatever time period, two or 15 three more years. 16 I just can't imagine the credit 17 community sticking with farmers that long, so we 18 need to move. We need to come to consensus and if 19 we want to be -- elevate the issues of regionalism 20 and all of those kind of things, we're just 21 shooting ourselves in the foot. 22 MR. VILSACK: Joel, your thoughts? 23 MR. GREENO: I think more than ever 24 before, farmers have come together. The 25 availability of conference calls has helped us a PROFESSIONAL REPORTERS, LTD. 123 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 lot. You know, I've been 13 years now with 2 farmers all across the U.S. on calls and as 3 Joaquin said, we lack the vehicle to convey our 4 message to you folks in Washington, and hopefully, 5 this meeting has kind of created that bridge and 6 opportunity. I've worked a lot with farmers 7 around the globe, attending ag policy meetings in 8 Spain and Portugal and have met Ajmer Singh from 9 India, from the BKU who has 20 million members in 10 his cooperative, which is an organization similar 11 to the Farmers Union here. 12 And I recently had the president of 13 Family Farm Defenders and a board member of ARMCO 14 over in Germany for a worldwide dairy policy 15 meeting of which there was a dairy manifesto put 16 together which was just recently mailed to 17 Secretary Vilsack, Attorney General Holder, the 18 President, and that was farm organizations from 19 all over the world that were there and worked on 20 that document and, you know, it refers to dumping 21 practices and stable prices and, you know, we were 22 talking a minute ago about risk, risk management 23 and volatility and, again, it all goes back to the 24 CME. 25 The volatility is created, because PROFESSIONAL REPORTERS, LTD. 124 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 we have a stable milk supply. We have a stable 2 consuming public and all of the factors are 3 relatively predictable and stable. It is only 4 the, you know, act of, you know, a market where -- 5 I lost that word I was looking for, but a lot of 6 speculation and in speculation, you use risk 7 management, because that's where you make the 8 money. So this volatility that's being created by 9 the CME is the source of our problem. 10 And risk management makes them 11 money, but for dairy farmers, it doesn't work, 12 because we can't have a roller coaster milk price 13 like we've had and it has all begun since cheese 14 trading went to the CME. Never before, because 15 you can look at the graph of the last 60 years of 16 milk price and it went from fairly stable ups and 17 downs to looking like a heart monitor and it can't 18 look like a heart attack. 19 MR. VILSACK: We're going to take a 20 break, but before we do, I just want to -- just a 21 couple of closing comments. One, again, I want to 22 thank the panelists for their participation. 23 Secretary, thank you for being here. Senator, 24 thank you so much for spending time, 25 Congresswoman, thank you for being with us as PROFESSIONAL REPORTERS, LTD. 125 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 well. We're going to take a break. 2 We're going to come back after the 3 break for an hour of public testimony, people who 4 have comments. That will be recorded by folks 5 from the Justice Department as well as the 6 Department of Agriculture. There will be a brief 7 lunch break and we will then come back and have 8 several panels, one, trends in dairy industry 9 which will focus on regulation and enforcement 10 that will be moderated by a Justice Department 11 official. 12 We'll have an ag program focused on 13 farm size. That's going to be moderated by 14 someone from ERS. We'll have a panel discussion 15 on farm prices and farm trends and then there will 16 be another public opportunity. I do also want to 17 acknowledge the folks -- it's hard to see with 18 these bright lights, but I can see a lot of yellow 19 shirts, so I'm assuming there's a lot of UFCW 20 folks here. Thank you for being here. So we'll 21 take about a half hour break and come back at 22 11:45. 23 (A short recess is taken) 24 MR. FERRELL: Folks, I think we 25 will go ahead and get started with the public PROFESSIONAL REPORTERS, LTD. 126 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 comment portion of today. For this comment 2 period. It will run one hour. We have two 3 comment periods today. This first one will run 4 one hour and then we'll pick it up again in the -- 5 later in the afternoon. If you would like to 6 provide a comment, when you came in the doors 7 today, there was a ticket that you should have 8 picked up and what we're going to try to do is 9 when you come forward, there's a microphone on 10 each side in the aisle, and when you come forward, 11 we're going to have someone that will pick the 12 ticket up from you. 13 We're going to have two minutes for 14 anyone to be able to come forward and to provide 15 their comments, and we're going to do everything 16 we can to try to work through as many people as 17 possible, but I do need your cooperation. If you 18 can limit your comments to two minutes, that 19 ensures we get as many people as possible to be 20 able to come forward and provide their comments. 21 So with that, I think we will go 22 ahead and get started. If you would like to 23 provide a public comment, just come ahead and line 24 up along each side of the aisle by the microphone 25 and you can go ahead and get started. If everyone PROFESSIONAL REPORTERS, LTD. 127 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 could take their seats. Thank you. 2 AUDIENCE MEMBER: Hello, my name is 3 Ken Turner and I really appreciate the opportunity 4 given by USDA, Department of Justice for this 5 workshop. My comments will be exceedingly brief. 6 I just want to point out something that many of us 7 know here. Something is wrong here in America 8 when market manipulation is condoned by our 9 government. Something is wrong when market 10 manipulation closes processing plants and markets 11 to family farms. 12 Something is wrong when market 13 manipulation leads to the death of family farms 14 and rural communities, displacing family farms. 15 Something is wrong when corporate agriculture is 16 subsidized as it displaces family farms. 17 Something is wrong when corporate agriculture is 18 responsible for a redistribution of wealth from 19 rural communities to the hands of very few. 20 Recently, in America, many people are rethinking 21 the concept of acceptable risk. 22 From the coal mines in West 23 Virginia to the Gulf Coast and the oil spill, we 24 have problems with acceptable risk. Something is 25 wrong when corporate ag is above the concept of PROFESSIONAL REPORTERS, LTD. 128 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 acceptable risk. Is it acceptable today in 2 northwestern Illinois to place 43 acres of manure 3 pits leaking 40,000 gallons of untreated waste per 4 day, by their own engineer's witness and testify, 5 less than five feet above an aquifer that is the 6 drinking water for thousands. 7 Something is wrong in America, our 8 America, when this is allowed to happen. Thank 9 you. 10 AUDIENCE MEMBER: Hello, my name is 11 Sarah Lloyd and I'm a dairy farmer from the 12 Wisconsin Dells. My husband Nelson and I milk 300 13 cows with his brother and brother's family and my 14 in-laws, and we ship our milk to Foremost Farms. 15 I appreciate this ability to speak today. There 16 is something very wrong in the dairy industry. 17 It's been devastating to my friends in the dairy 18 farming community. This year, we have many people 19 on the verge of bankruptcy. 20 I know many farmers that have their 21 children on free and reduced lunch at schools, so 22 I urge the Department of Justice to take action 23 now. There are things that can be done on 24 existing enforcement actions and investigations 25 and you need to take action now. We need a fair PROFESSIONAL REPORTERS, LTD. 129 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 price. To give you an example of what could 2 happen in Wisconsin, we are the dairy state, but 3 not just on production, we actually have 12,500 4 dairy farms in the state, probably a little bit 5 more than that, but that's pretty phenomenal, when 6 you consider our friends in California have about 7 1900 dairy farms. 8 We have 12,500, but we produced 25 9 billion pounds of milk last year in Wisconsin and 10 we could actually do that with 250 5000-cow 11 dairies instead of 12,500 100-cow dairies and I 12 really think that it's important for communities, 13 for our schools, for our churches, for our land 14 that we keep a distributed production system and 15 so -- but we need a price that will support 16 families. 17 So I ask that the DOJ take action 18 immediately to make sure that a fair price can be 19 given to farmers for their production. We need 20 cost of production plus a reasonable amount of 21 money to make a living. Thank you. 22 AUDIENCE MEMBER: Hello, my name is 23 Irv Conley and I'm a member of the United Food and 24 Commercial Workers Union. I'm here on behalf of 25 about 3000 dairy workers within our union who are PROFESSIONAL REPORTERS, LTD. 130 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 part of 1.3 million nationwide in the meat 2 packing, food processing and retailing. We 3 appreciate the opportunity to speak to you today 4 and our concerns go beyond the relationship 5 between the dairy processing companies and the 6 farmers. 7 We want you to consider the state 8 of consolidation in the dairy industry, but also 9 into other agricultural markets in general. We 10 urge the administration to include in its 11 investigation the assessment of the role of the 12 retail grocer in this sector for playing and 13 driving consolidation in various agricultural 14 markets. The means of the involvement -- this 15 means the involvement of the Federal Trade 16 Commission in this process is critical. We're 17 concerned by their absence here today. 18 The market prior to these large 19 grocery retailers has grown dramatically in the 20 last two decades. Retail consolidation has had a 21 dramatic impact on the food supply chain and 22 everybody here knows the single most powerful 23 entity in food production in the world, single 24 largest retailer is Wal*Mart. Wal*Mart's 25 relentless quest for larger marketshare throughout PROFESSIONAL REPORTERS, LTD. 131 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 the nations of the world and its growing 2 marketshare provides it with the power to apply 3 increasing pressure on the food processors and to 4 lower price and cut costs, which in turn passes 5 losses down the food supply chain. 6 This drives down workers' wages and 7 farmers' prices. Caught in the vice of Wal*Mart, 8 many of our colleagues and friends and neighbors 9 have found themselves unable to support their 10 families and have lost their livelihoods and their 11 American dream. One of our members, a dairy 12 processing worker, was going to speak to you here 13 today. In the area where he works, Wal*Mart has 14 more than 30 percent of the grocery marketshare in 15 seven of eight markets. In one area, Wal*Mart has 16 50 percent of the grocery marketshare. 17 Until recently, Wal*Mart was the 18 major consumer of his dairy processing company, 19 but then without warning, Wal*Mart dropped the 20 company as a supplier because of a cheaper price 21 from a national conglomerate. Now his company is 22 threatening workers at the plant to work harder 23 and to produce faster products at a reduced cost. 24 We know that the quest to woo Wal*Mart back is 25 going to force concessions, wage reductions, PROFESSIONAL REPORTERS, LTD. 132 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 healthcare reductions can't be far behind. 2 This worker with his job and the 3 jobs of his co-workers are on the line. 4 Understandably, he was unwilling to speak in this 5 public audience, but I ask that this panel 6 consider him and his family, the farmers involved 7 in this, his ability to make a living and to keep 8 his lifestyle as he sees it today and look into 9 the pressure that retail consolidation and 10 Wal*Mart has put on the dairy industry as a whole, 11 that many of us here today depend on for our 12 livelihoods. This is urgent and I ask for you to 13 move on this immediately. Thank you. 14 AUDIENCE MEMBER: Yes, my name is 15 Howard Roeth(phonetic), I'm from southwest 16 Wisconsin. I'm a pork producer here in this great 17 dairy state, but I wanted to bring my views here 18 instead of traveling to Colorado or somewhere 19 else. The decline in the number of pigs whose 20 price is negotiated each day concerns me, but I do 21 not believe government intervention is the answer 22 to that problem. Focus on better information 23 systems and expanding markets for more 24 information. 25 The mandatory price reporting law PROFESSIONAL REPORTERS, LTD. 133 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 needs to be reauthorized in a timely manner. The 2 last time it expired in 2004, it took more than 18 3 months to get the reauthorization. The percentage 4 of all wholesale cuts reported to USDA under the 5 current voluntary system is between three and four 6 percent. Most weeks, that is so low that it casts 7 doubt about whether USDA's published count value 8 accurately represents U.S. carcasses value as a 9 whole. 10 It also leaves me and many others 11 uncomfortable using the published USDA cutout 12 value to price my hogs. In summary, I am more -- 13 I think more market information on hogs and cuts 14 and values are needed. Incentives, like tax 15 credits or low interest loans to medium and small 16 market retailers and processors would be helpful. 17 I also think to help young farmers get into the 18 business there, needs fob more education and money 19 spent in that process. Thank you. 20 AUDIENCE MEMBER: Hello, my name is 21 Ruth Simpson and I am on the board of the Family 22 Farm Defenders. I have been working on dairy 23 issues for over 20 years and it all has -- bottoms 24 down to farmers getting a fair price, and they 25 just aren't in the marketplace, they just -- it is PROFESSIONAL REPORTERS, LTD. 134 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 just not happening. There obviously are multiple 2 reasons for that that have been explained. 3 I want to have a couple of comments 4 that are a little bit off, but -- the pricing, but 5 have to do with farmer control and one is the 6 allowance of block voting in the dairy industry. 7 I don't think most farmers understand what's 8 happening with their pricing system because it's 9 done by block voting and they're not notified or 10 know anything about it and I think block voting is 11 very undemocratic and it should be -- should not 12 be allowed to happen. 13 Secondly, we all -- I think a lot 14 of us remember the farm crisis in the 1980s when 15 farm foreclosures were happening much too often 16 and that is obviously going to be happening again 17 very soon if we don't fix the farm system. You 18 have heard people say they have been losing money 19 and taking on debt. Well, what happened in the 20 1980s is very similar. We went through a 21 financial crisis in the early 1980s and within two 22 years, the farm sector was devastated. And we are 23 going to be seeing that happen again if the United 24 States government does not do something to help 25 set a fair price for dairy farmers, so I urge PROFESSIONAL REPORTERS, LTD. 135 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 action immediately to try and correct this 2 situation. 3 AUDIENCE MEMBER: Hi, my name is 4 Scott Schultz, I'm the executive director of the 5 Wisconsin Farmers Union. Before coming to the 6 Wisconsin Farmers Union, I spent about 35 years in 7 the newspaper industry, including 22 of them at 8 one of Wisconsin's leading rural publications, The 9 Country Today. Throughout my career, one thing 10 has become clear and in this day of technology, 11 it's becoming even more clear. 12 We're sitting in this room talking 13 about the effects of the -- of antitrust issues on 14 farmers. I believe fully that we have to take 15 that argument beyond this room of farmers. I say 16 that because if we read the online feedback from 17 the newspaper stories about this today, you will 18 quickly see from the people commenting about this 19 that they don't give a damn about farmers out in 20 the community. Non farmers just don't give a damn 21 about us, folks. That's a fact. A very small 22 handful do. 23 This has come down to an overall 24 economic development question, this issue of 25 consolidation. When I was a child growing up in PROFESSIONAL REPORTERS, LTD. 136 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 Clark County, Wisconsin, I was raised on a small 2 dairy farm, you know, diversified operation with a 3 few hogs and the like. There was a field 4 representative at our door from a small dairy 5 almost every day of the week, it seemed. Someone 6 wanted to offer my father a higher price for 7 milk. My dad in his earlier years used to sit and 8 tell me, someday when it gets narrowed down to 9 just a few players, we're going to get what we 10 deserve. 11 Little did he know how his words 12 were going to ring true, but in the total opposite 13 way than he had anticipated. It seems the dairy 14 farmers are getting what they deserve. In many 15 counties, including Darin Von Ruden's home county 16 of Vernon and my county of Clark County, there 17 used to be a dairy plant literally in every 18 township. There was competition. The competition 19 is gone. The competition is owned by one or two 20 players with the likes of Dean Foods leading the 21 way. 22 Now, we can say that really affects 23 us, but as I said before, until we take this issue 24 out and make it a rural economic issue, we aren't 25 going to hear very much progress. That same home PROFESSIONAL REPORTERS, LTD. 137 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 place where I grew up in Clark County virtually no 2 longer exists. It's a small bedroom community. 3 It used to be a thriving, economic place. Loyal, 4 Wisconsin, the chamber of commerce, used to tout 5 itself as the shopping center city and that no 6 longer is. It can't be, because there are no 7 retail stores, including a grocery store, left in 8 that town. 9 I can easily trace, and I think the 10 Department of Justice can easily trace the 11 economic losses that occurred in that small 12 community and other small rural communities and 13 bigger ones, as far as that goes, all the way 14 around in a circle to what's going on with the 15 consolidation and antitrust problems in our 16 industry and we have to as an industry get out and 17 tell people, this affects everybody. 18 So I think that when we get that 19 argument made, the Department of Justice and USDA 20 are going to hear on a much bigger scale that we 21 have to do something to control the consolidation 22 and control of the industry by one or two players. 23 AUDIENCE MEMBER: My name is Jim 24 Brown and I'm from Springfield, Illinois now, but 25 I spent my life as a corn, soybean and hog farmer PROFESSIONAL REPORTERS, LTD. 138 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 in north central Iowa and though I agree with the 2 stance of the farmer's union in Wisconsin and Iowa 3 and Illinois, I want to disagree with the 4 gentleman who just says that the consumers and the 5 cities don't care about farmers. When I went to 6 Illinois and began the work that I'm doing now, 7 when I got up into Chicago and got with the people 8 in Chicago, it's as though they wanted to touch me 9 because I had spent my life as a family farmer. 10 Farmers today are less than one 11 percent of the population. The urban dwellers 12 love the family farm. We do not have the 13 political power to change this, but those urban 14 consumers do and if you want to make a change, go 15 to the urban consumers, because they're going to 16 help us do this. 17 Now, back to the issue of 18 consolidation and concentration. This meeting 19 here today reminds me of the hundreds and hundreds 20 of meetings that I attended in the mid '90s when 21 the pork industry, my industry, was being 22 consolidated. 23 And we couldn't get it done. I met 24 with Joel Klein, President Clinton's special 25 appointee on antitrust and at a dinner meeting one PROFESSIONAL REPORTERS, LTD. 139 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 night when he and I were talking, he said Jim, 2 everything you are saying is true. We're going 3 after Microsoft and if we can't get Microsoft for 4 what they're doing, we ain't going to get 5 anybody. We've got a problem in the United States 6 that we need enforcement of the antitrust laws. 7 The laws are on the books. We have to strengthen 8 those laws and do what Teddy Roosevelt did to 9 break up the monopolies. 10 I'd like to cut through the 11 Creeping Charlie on the top to get down to the 12 heart of this issue and the heart of this issue is 13 really what is capitalism. This is the definition 14 of capitalism from the American Heritage 15 dictionary. It says, "An economic system in which 16 the means of production and distribution are 17 privately or corporately owned and development is 18 proportionate to the accumulation and reinvestment 19 of profits gained in a free market." 20 We keep hearing that word today, 21 free market, free market. What is a free market? 22 And I have two questions that I'd like to have you 23 ponder. I'm not looking for answers here today. 24 What control of a marketshare can an individual or 25 a monopoly or a conspiring group of individuals, PROFESSIONAL REPORTERS, LTD. 140 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 an oligopoly, have? What proportion of a 2 marketshare can any of these individuals hold 3 before it is no longer a free market? 4 The second question is, it is -- 5 capitalism is the investment in reinvestment of 6 money that is gained in a free market. What 7 happens to the free markets that are around the 8 consolidated markets that are no longer free when 9 the profits that are gained from a monopolized or 10 oligopolized market suddenly are invested into the 11 free market? How can we have free markets 12 according to capitalism if the capital that's 13 flowing around is all coming from monopolies and 14 oligopolies? 15 That destroys the whole free market 16 system and if we're going to get down to the heart 17 of the problem that's being discussed here today, 18 we're going to have to stop cutting the Creeping 19 Charlie off above the ground and we're going to 20 have to get down at the root of what the problem 21 is. This is the foundation of capital -- Adam 22 Smith capitalism itself and the foundation of Adam 23 Smith capitalism is that there has to be the 24 invisible hand of the marketplace that is out of 25 the control of any human or humans conspiring PROFESSIONAL REPORTERS, LTD. 141 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 together to manipulate or be able to control that 2 market. 3 And the only way we are going to do 4 that is not by having investigations over the 5 surface, we're going to have to get down to what 6 it requires to create an Adam Smith capitalistic 7 economy and that is a large number of unrelated 8 producers of a product enacting transactions with 9 a large number of unrelated purchasers of that 10 product and in that negotiation that's taking 11 place where nobody is able to control anything 12 except the price that is set in that small 13 transaction at that time. 14 Until we get this opening up where 15 there are so many producers of a product and so 16 many purchasers of a product that nobody can 17 control it, we are not going to have Adam Smith 18 capitalism. 19 Confucius said the breakdown of a 20 society begins when we mis-label reality with 21 words. A centrally controlled economy is a 22 centrally controlled economy. What is the 23 difference between the centralized control of the 24 U.S. economy by a few firms and oligopolies that 25 we label capitalism and what was going on with the PROFESSIONAL REPORTERS, LTD. 142 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 centralized control by a few individuals who were 2 living under the hammer and sickle in the former 3 Soviet Union? 4 We need to come to recognize that 5 we do not have Adam Smith capitalism at work in 6 America today and it's up to you folks. I'm glad 7 you're doing this. The time has changed. Joel 8 did what he could, but the time has changed and 9 hopefully we can raise the community's awareness 10 across America that we are living in an illusion 11 when we think that we are living in an Adam Smith 12 economy, because we are not. Thank you. 13 MR. TOBEY: Two minutes. We want 14 to give people an opportunity to talk. We also 15 want to have as many people who want to talk be 16 able to talk, so it's a balancing act and we would 17 ask everyone to please cooperate with us as much 18 as possible, because we want to hear you. 19 AUDIENCE MEMBER: Good morning, 20 Larry Bailey, partners in a family farm, thousand 21 cow dairy up in Upstate New York. I came here 22 today because I was under the impression and I'm 23 glad to hear that the Capper-Volstead Act has 24 taken a little bit more of a back burner, as I 25 would say. I'm glad to hear that we're focusing PROFESSIONAL REPORTERS, LTD. 143 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 not so much on the cooperatives, but I'm still 2 going to give my view on our cooperative that 3 we're members of. 4 We're members of Dairy Farmers of 5 America and, you know, it's a family -- it's 6 member owned, 9500 cows and I'm proud to be a 7 member of that cooperative, because it is one 8 large family. Some of the things that the -- our 9 family does, our membership does provide, you 10 know, is that we elect our own board members and 11 others to represent us and we're very proud to do 12 that. We do that in a very democratic way. 13 Then also, many services that DFA 14 provides, buying groups helps farmers with buying 15 tires, fuel, other sorts of supplies, dairy 16 supplies. They have programs for the young 17 farmers, we talked a lot about today. We heard 18 the panel talk about young farmers and getting 19 young farmers involved. That's very important to 20 DFA in continuing their membership to bring in the 21 next generation of farmers, and then also 22 contracting programs for both milk and feed. 23 DFA has provided us a fair and 24 equitable market for over 10 or 11 years that 25 we've been their members. All right. they've PROFESSIONAL REPORTERS, LTD. 144 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 helped us reduce our somatic cell count in 1000 2 cows to 135,000 mls. or lower and our bacteria 3 count low. All right. We also work with dairies 4 to make truck routes a lot more efficient. DFA is 5 always willing to educate their member owners in 6 all aspects of the industry, whether it's the 7 processors, the producers or the trucking 8 operations and they're never afraid to recognize 9 their dairies have success. 10 Over the past 18 months, we all 11 know the price has been low and I'm going to 12 equate it, this spring we wanted to by a new 13 tractor. Our newest tractor is five years old. 14 Our next newest tractor is eight years old and has 15 16,000 hours on it. That's about 175,000 miles to 16 the average consumer of a car. Consumers trade 17 their cars every four to five years. Dairy 18 farmers this past few years haven't been able to 19 buy new equipment. It all equates to higher 20 repair costs. 21 Everybody says that we don't have a 22 choice. We do have a choice. Every year, 60 days 23 before my anniversary date, I send DFA a letter of 24 resignation and say I'm going to find a new 25 market. For 10 years, I've done this and for 10 PROFESSIONAL REPORTERS, LTD. 145 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 years, I've remained with DFA because they are a 2 higher competitive, they are a very competitive 3 market and last year alone, in addition to the 4 $500,000 that we had to borrow to stay in 5 business, we would have lost an additional 6 $250,000 if we switched away from DFA. 7 Cooperatives are important. We're 8 glad to hear that the Assistant Attorney General 9 has taken a little back burner on the cooperatives 10 and focusing more. We do need a better system. 11 We do need more money for our milk and I 12 appreciate your time. Thank you. 13 AUDIENCE MEMBER: I want to thank 14 Ron Kind for being here. I don't see my 15 representatives here, Lee Nerison or Dan Kapanke 16 in attendance. That's because they're reactive 17 and not proactive. I'm here to tell the powers 18 that be to enforce the antitrust laws for the 19 world of agriculture. I live in Viroqua, 20 Wisconsin in Vernon County, which has more organic 21 farms per capita than any place in the U.S. of A. 22 If the government subsidized 23 organic farms as they do factory farms, we'd be 24 eating organic food at an affordable price. So I 25 say to the Justice Department to enforce the PROFESSIONAL REPORTERS, LTD. 146 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 antitrust laws. As Bob Marley sang, dem belly 2 full, but we hungry. And as the founder of Earth 3 Day, Wisconsin's own Gaylord Nelson would say, 4 don't forget to have a beer or three. Thank you. 5 AUDIENCE MEMBER: I'm Mike Ferguson 6 from Senatobia, Mississippi. It's about 30 miles 7 south of Memphis, Tennessee. I had to come a long 8 way to get here, but I appreciate the opportunity 9 to speak before this group. There's a perception 10 out there that in my part of the world, there's 11 not a lot of opportunity to market your milk. 12 Well, even though my state has 125 producers, 13 that's all we've got in the whole state, I've got 14 four different choices. 15 I choose DFA. The reason I choose 16 DFA is it gives me a piece of mind of marketing my 17 milk that I don't have to -- I mean, when you work 18 16, 18 hours day on the farm, the last thing you 19 need is a call in the middle of the night saying 20 well, we're not going to take your milk tomorrow 21 and DFA provides us with a stable market. The 22 services that we receive from things such as 23 healthcare that's provided -- naturally, we have 24 to pay for it, but healthcare is an issue for a 25 lot of people. We have a group policy that is PROFESSIONAL REPORTERS, LTD. 147 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 offered to every member. 2 Things such as loans, that Larry 3 said just a minute ago, the quality issues. We 4 have a first rate lab, a first rate field staff. 5 If you have problems on your farm, they're there 6 to help, and I can tell you firsthand, over the 7 course of the last six to seven years, I have 8 firsthand knowledge of how they responded during 9 Hurricane Katrina. The caring that they -- the 10 employees worked 7 days a week, 24 hours a day. 11 You know, in the last five to six years, we've had 12 a lot of things thrown out there at us. 13 I've got firsthand knowledge about 14 the change in the culture that has taken place at 15 DFA, you know, the transparency, the honesty, the 16 caring for the producers out there and that's why 17 I market my milk with DFA and if that changes back 18 to a negative, I won't be marketing my milk with 19 them any longer. Thank you. 20 AUDIENCE MEMBER: My name is Alfred 21 Wanner, Jr., I'm from Lancaster County, 22 Pennsylvania, so I also came a long distance. I 23 want to thank Secretary Vilsack and Assistant 24 Attorney General Varney for their public 25 statements in support of cooperatives and the PROFESSIONAL REPORTERS, LTD. 148 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 Capper-Volstead Act. It's been very good to be 2 here today to hear all the different comments and 3 I'm thankful for the opportunity. 4 I also want to say that I think we 5 need to support all segments of agriculture, not 6 just organic or small farmers, not just large 7 farmers, all farmers. We have room for everybody 8 in our country. To answer Secretary Vilsack's 9 question in the last session, now is the most 10 opportune time in my 45-year career for changing 11 the way milk is priced. Farmers are talking with 12 each other and coming together more than ever. 13 Farming for the future is a good 14 first step. We can build on that. We need 15 transparent price discovery, stable prices and a 16 fair share of the consumer dollar for the farm 17 families that are working. 18 AUDIENCE MEMBER: Good morning. 19 I'm Doug Wolf, a hog producer from Lancaster, 20 Wisconsin. I came here today because I, too, was 21 trying to save a trip to Colorado. My point being 22 today is on the proposed GIPSA rules. I have just 23 a little bit of concern I want to talk to you 24 about the unintended consequences of writing a 25 generic rule that's going to incorporate all the PROFESSIONAL REPORTERS, LTD. 149 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 livestock industries, especially the pork industry 2 with the chicken industry. 3 Contracting has been important to 4 the pork industry. It's been a way to allow young 5 people and other farmers to get involved, a large 6 means of sharing risk and allowing for the pork 7 industry to grow and continue on. Some of the 8 proposed changes in the contracting, I would 9 caution, are not in the best favor of hog 10 production. The other area of concern is some of 11 the pork market purchasing programs proposed for 12 the packers. 13 Be careful there that you don't go 14 overboard and in the end, cause a bigger problem 15 than what we have to today by eliminating the 16 packer to packer purchasing, which is exposed on 17 the market reporting service, could cause an 18 increase in concentration. So I would just 19 caution that during this, be careful on trying to 20 do something generic. Thank you. 21 AUDIENCE MEMBER: Hi there, my name 22 is Bill Anderson, I'm an apprentice Wisconsin 23 cheese maker. I'm very interested in making 24 artisanal cheeses, especially artisanal raw milk 25 cheeses. I was very disappointed recently in PROFESSIONAL REPORTERS, LTD. 150 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 Governor Doyle's veto of the raw milk bill. It 2 seems that our Department of Agriculture has taken 3 it upon themselves to tell consumers and small 4 family farmers that they don't have a right to 5 have a transaction to allow the dairy farmers to 6 connect directly with the consumers and sell high 7 quality milk directly to the consumers. 8 As a cheese maker, I think the 9 quality of the milk directly influences the 10 quality of the cheese and having a diverse and 11 high quality milk supply is critical to what I 12 want to do as a cheese maker. I also feel that 13 our regulatory system is geared towards medium and 14 large scale processors. The rules are just not 15 written to be conducive to encouraging small 16 artisanal agriculture. 17 Now, if you look at any country 18 which consumes a large proportion of dairy 19 products -- I like to use the example of France, 20 Switzerland, Italy -- there are long and respected 21 traditions of people consuming raw dairy products, 22 raw milk cheeses, artisanal, and they value their 23 artisanal agricultural products in those 24 countries. If we want that in this country, we 25 need to value it as well and I feel that there's PROFESSIONAL REPORTERS, LTD. 151 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 been -- rather than valuing, there's been 2 hostility from our regulators, hostility from the 3 large processors towards people that want to do 4 things that are unique, special and high quality. 5 So I just feel that that's 6 something that needs to be taken into account, 7 too, is creating a regulatory framework that is 8 conducive towards artisanal skill agriculture. 9 Thank you. 10 AUDIENCE MEMBER: Hi, my name is 11 Paula Maven(phonetic), I'm a dairy farmer from 12 Pennsylvania. September of '77 I said I do, I got 13 a husband and I got a dairy farm. It was on the 14 job training and I've been training ever since. 15 The last 18 months have been really tough, as 16 everybody knows, but one of the first decisions 17 that my husband and I made, and we do work 18 together, we make our decisions together, and that 19 was, where are we going to market our milk. 20 In northwest Pennsylvania, we have 21 four or five different places that we can market. 22 The one we chose was Dairy Farmers of America and 23 for a lot of reasons. It was because that was one 24 less stress we had to worry about. We knew they 25 were going to pick up our milk, they could do it PROFESSIONAL REPORTERS, LTD. 152 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 better than what we could as an individual, by 2 working as a family and they really are our 3 family. 4 My husband is an amputee. With 5 them, you get health insurance, you get workman's 6 comp. There are a lot of things that DFA has in 7 working with a family. Our milk hauler is my 8 brother-in-law. My brother-in-law married my 9 sister. When he has problems with the 14-hour 10 wait, he calls us. We call people at the plant 11 and say okay, what's the problem, can you fix 12 this, can you help us out and they do. That's 13 what is working with a family, is working with a 14 cooperative. 15 And as a member, I just want to say 16 thank you to DFA, thank you for the 17 Capper-Volstead and for having us here, but we do 18 have a problem as dairy farmers and the problem 19 needs to be fixed or we won't have dairy farmers. 20 AUDIENCE MEMBER: Hello, my name is 21 Jennifer Nelson and I am a farmer from Crawford 22 County in the Driftless area of Wisconsin, an area 23 uniquely suited to small farms and dairy farming 24 and grazing. Unfortunately, in my township, I was 25 studying some of the demographics and in a PROFESSIONAL REPORTERS, LTD. 153 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 ten-year period, we have lost 75 percent of our 2 farmers. It seems to be a consensus here today 3 that the price of dairy is too low and that needs 4 to be fixed. 5 But I'd like to speak to another 6 issue that the Department of Justice perhaps might 7 investigate and that is the proliferation of these 8 giant mega dairies in the state and where the 9 money is coming from, who is financing these 10 dairies. I would like the Department of Justice 11 to follow the money. We have heard rumors that 12 one of the largest mega dairy owner groups is 13 being financed by one of the retailers and if that 14 isn't illegal, it should be. 15 And so I'd like the Department of 16 Justice to look into this, specifically because 17 this does impact all of the producers, the medium 18 and small that are going out of business, and as a 19 consumer, I'm concerned about the supply of food 20 and the fact that this large scale-ness of our 21 agriculture is quite a vulnerable system and we 22 need to be looking at more fair and more equitable 23 ways of diversifying the food system. Thank you. 24 AUDIENCE MEMBER: My name is Steve 25 Hanson and I own and operate a family dairy farm PROFESSIONAL REPORTERS, LTD. 154 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 in Clovis, New Mexico with my three sons. Our 2 family has been in the dairy business now for 70 3 years. We milk 3500 cows and raise all our own 4 replacements. Previously, you mentioned the 5 figures of losing $100 per cow per month. It 6 even -- on large dairies, it works out to that and 7 you can figure out the numbers. 8 We had to refinance the facility 9 that we'd be paying down for many years. We went 10 in and refinanced and to get $6 million just to 11 stay in business and hopefully, we've seen the end 12 of that. The sad part was when we built the large 13 facility, I built that so that my sons would have 14 a place to dairy and I had a sigh of relief 15 recently when one of my sons decided he's going to 16 go ahead and stay in college and get his Ph.D. and 17 probably won't be returning to the farm. 18 It was a sad day, but it was a sigh 19 of relief and I know a lot of farms are going 20 through the same experience, large, small, medium, 21 it doesn't seem to matter what size. Nobody is 22 making any money right now. I would like to say 23 we do ship to DFA. In our area, we have choices. 24 There's roughly four co-ops we can ship to. DFA 25 has also been instrumental in starting up -- PROFESSIONAL REPORTERS, LTD. 155 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 Hilmar Cheese came into our area and we balance 2 them when they started up and so I don't feel that 3 they're trying to monopolize our area. If 4 anything, they've created choices for us. 5 There's no reason for me to go on 6 and talk about all the other services, they've all 7 been mentioned, but that's all I have. 8 AUDIENCE MEMBER: I'm Maria 9 Nye(phonetic). My family and I dairy in west 10 central Utah and despite the 3000 cows, it is a 11 family farm. We relocated from the northeast and 12 we have always been cooperative members and when 13 we relocated, we chose cooperatives again and it 14 is truly a relief to hear the change of direction, 15 perhaps, that we've heard that Capper-Volstead is 16 not under the gun as we have been told earlier. 17 I'd like to -- I do welcome to the 18 fight the Department of Justice and the USDA. We 19 need every farm that we have in this country. We 20 need people who milk 50 cows, we need people who 21 milk 5000 cows. We have to have that to feed our 22 country, to field our world. Our membership in 23 our marketing and supply co-op supports our family 24 by finding the best price for our product and low 25 costs for our inputs and both of those are equally PROFESSIONAL REPORTERS, LTD. 156 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 important, as we found out in spades in the last 2 year and a half. 3 As dairy producers, we are 4 tremendously good at what we do. We're not so 5 good at marketing most of the time and that's 6 where the strength of our cooperatives really 7 helps our business in particular. We need to have 8 that marketing expertise to get the best price for 9 our product. My concern, as I've heard from many 10 other people here today, is with the pricing 11 mechanism that we have. Our system is convoluted, 12 unduly complicated and antique. 13 And I told someone earlier that in 14 a lot of places, antiques are worth a lot of 15 money. This one is not. We really need to change 16 the way that we price milk in this country. Our 17 system worked well when it was created. That was 18 nearly a hundred years ago and things have changed 19 just a wee bit since then. We need to have a 20 system that values our product and our 21 contribution to our communities and our 22 consumers. I appreciate the opportunity to visit 23 with you today. Thank you. 24 AUDIENCE MEMBER: Thank you for the 25 opportunity to speak. My name is Bob PROFESSIONAL REPORTERS, LTD. 157 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 Cran(phonetic), I farm 650 acres and milk 165 cows 2 in Michigan. I'm a member of Michigan Milk 3 Producers Cooperative and those numbers are about 4 the average size of our membership. I'm here 5 today because my family and I strongly believe in 6 the cooperative principles and the business 7 framework that has been the backbone of American 8 agriculture for nearly a century. 9 My family and I choose to be 10 members of MMPA because we know belonging to a 11 milk marketing cooperative is the best way for us 12 to get a fair price for our product and have a 13 consistent market for the milk we produce 365 days 14 a year. In Michigan, there's an opportunity to 15 belong to one of 12 different cooperatives. Our 16 cooperative is owned by approximately 2200 members 17 with farms in Michigan, Indiana, Wisconsin and 18 Ohio. 19 MMPA members are family farm 20 operations. The average membership is 21 approximately 240 thousand pounds of milk every 22 month. MMPA was formed in 1916 in order for dairy 23 farmers to find a stable, reliable way to market 24 their milk. While many things have changed since 25 1916, the need still exists for the cooperative PROFESSIONAL REPORTERS, LTD. 158 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 market. Marketing cooperatives remain vital to 2 the success of our family farm and dairy farmers 3 in our country. MMPA's mission statement to 4 market MMPA's members' milk to the greatest 5 advantage possible is one of the main reasons why 6 our family depends on MMPA. 7 The primary advantage we receive as 8 members of a dairy cooperative is a guarantee of 9 market and a guarantee of payment for the milk our 10 family farm produces. Cooperatives do not 11 guarantee a profit for the milk sold, but rather, 12 the cooperative finds a market for a product and 13 collects the payments which are then passed to us, 14 the members. By providing this marketing function 15 to our farm, we can concentrate our efforts on our 16 animal care and farm operations while the 17 cooperative markets our product. 18 MMPA and the majority of other 19 dairy cooperatives own manufacturing plants that 20 turn the perishable fluid milk into stable shelf 21 dairy ingredients like condensed milk, powder and 22 butter. The ability to convert the fresh milk to 23 dairy ingredients helps balance the milk supply 24 when production out steps demand, especially on 25 weekends and holidays. The dairy ingredients PROFESSIONAL REPORTERS, LTD. 159 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 produced at the plants are vital ingredients 2 produced in a variety of food products, like 3 yogurt, baked goods, candy, cheese, pudding, 4 infant formula. 5 Our cooperative owns two milk 6 processing plants in its partnership arrangement 7 with a cheese manufacturer. Operations in the 8 cooperative plants fluctuate dramatically day to 9 day, week to week, season to season. During a 10 typical week, milk received at MMPA's plants on 11 Saturday and Sunday can exceed the daily intake of 12 the other five days of the week by more than a 13 million pounds each day. Our cooperative plants 14 also experience tremendous variability in plant 15 volume due to seasonal changes in demand from 16 bottling plants. 17 Operating during manufacturing 18 plants is just one example of the opportunities 19 dairy farmers have in the marketplace when they 20 can join together through a cooperative. It would 21 be unrealistic for individual members to have the 22 processing capacity on their farm to handle milk 23 not needed in fluid form and to meet the demands 24 of other dairy products. While producing a solid 25 market for milk is an important function of MMPA, PROFESSIONAL REPORTERS, LTD. 160 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 our farm relies on the cooperative to keep our 2 farm running efficiently. 3 MMPA offers a long list of member 4 services and programs that can help us to be 5 better dairy farmers and to meet state and federal 6 rules and regulations. I'd end with one question, 7 will we ever collect the dairy import assessment? 8 Thank you. 9 AUDIENCE MEMBER: Hello, my name is 10 Frank Ontario(phonetic). I farm in west central 11 Wisconsin. I have -- my wife and myself operate a 12 125-cow dairy farm, Holstein. Thank you for the 13 Justice Department for coming here. 14 Two points I'd like to make to the 15 Justice Department is, one, there is competition 16 for my milk out in the countryside. I presently 17 sell to Dairy Farmers of America. I have the 18 opportunity to sell to Foremost Farms. 19 I have the opportunity to sell my 20 milk to Land O' Lakes and I also have an 21 opportunity to sell my milk to AMPI and I also 22 have independent buyers of milk that would be 23 interested or milk if I would like to make that 24 choice. So as far as I'm feeling, there's nothing 25 for you guys to look there. PROFESSIONAL REPORTERS, LTD. 161 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 If there's anything that you folks 2 at the Justice Department need to address, it is 3 what is happening to the consumer that is buying 4 milk in the grocery store. Where is the 5 difference in this price? I think we've heard it 6 this morning. What the price of milk is, what the 7 dairy farmer gets and then the cooperative sells 8 it to these retailers and look at the margin 9 they're taking and none of it went down through 10 this great recession of '09 that we went through. 11 If that money could at least have been passed 12 through to the consumer, maybe we could have 13 turned this economy around a lot quicker. 14 Somewhere, somebody made a lot of 15 money in this last year and it wasn't the dairy 16 farmers and it wasn't the consumers that are 17 buying the milk. I think that's where the Justice 18 Department should be looking. Thank you. 19 AUDIENCE MEMBER: Thank you for the 20 opportunity to speak. My name is Clement 21 Gervais, I'm a dairy farmer from Enosburgh, 22 Vermont. I'm also vice chair of the St. Albans 23 Cooperative young cooperators executive 24 committee. Our farm consists of myself and three 25 brothers and my parents. We milk a thousand PROFESSIONAL REPORTERS, LTD. 162 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 cows. Our family farm was consolidated in 1995 2 when we started milking in one larger barn. 3 We now crop around 2000 acres of 4 grass and corn and our farm now employs ten family 5 members and 12 non-family employees. In northern 6 Vermont, I have choices where I can sell my milk. 7 We are proud to send our milk to St. Albans 8 Cooperative Creamery. I believe my cooperative is 9 fair in its dealings and has competitive 10 premiums. I also am very appreciative of the role 11 St. Albans plays in both the local and national 12 leadership for the dairy industry. 13 As a dairy farmer, I am always busy 14 with my daily chores and responsibilities. I 15 don't have time to always keep track of the 16 changing happenings in the dairy industry. 17 St. Albans through its farm report, its management 18 is always keeping its farmers informed as well as 19 impacting legislation and programs for the best 20 interests of its farmers. Without the cooperative 21 information conduit for its farmers and its 22 involvement and guidance of industry changes, I 23 believe the average farmer would not be able to be 24 heard on most of the industry changing events. 25 St. Albans has formed a partnership PROFESSIONAL REPORTERS, LTD. 163 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 with Dairy Farmers of America. This partnership 2 helps both cooperatives work together in the 3 marketplace. As well as having access to the 4 largest markets in the northeast, this partnership 5 helps all farmers by everyone working together and 6 not driving down premiums that can benefit the 7 farmers. I am concerned with the market 8 consolidation in processing and manufacturing and 9 the retail end of the industry. 10 As a result from this 11 consolidation, there are fewer markets for my 12 milk. There are several challenges that are faced 13 in the dairy industry today. The volatility in 14 the federal pricing policy we currently have makes 15 planning and budgeting very hard. The increasing 16 cost of production and fluctuating profit margin 17 are also uncontrollable factors. The pricing 18 mechanism needs to be examined and revamped. 19 My co-op is working with other 20 co-ops to come up with solutions to these problems 21 to help all dairymen. It is my belief that the 22 cooperative structure absolutely provides value to 23 me as a dairy farmer. With a busy daily schedule, 24 I feel the leadership from all the co-ops that is 25 driving the dairy industry is the best and most PROFESSIONAL REPORTERS, LTD. 164 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 effective with a for our dairy farmers' voice and 2 their concerns to ultimately come up with 3 solutions in the industry. 4 As our suffering dairy industry is 5 looking for answers to the current price 6 volatility, I want to ask all the dairymen and the 7 cooperative representatives here to not let 8 regional differences stop the much needed change 9 for our industry. We all need to stop worrying 10 about other regions' prices and look for a fair 11 price for everyone to work together. Thank you. 12 MR. TOBEY: I just want to say, 13 we'll probably take one more from each microphone 14 at this session, so that we can end on time, so 15 that people can get a little bite of lunch before 16 we do the panels this afternoon, but we'll have 17 another session this evening. I think it's at 18 5:00 and it will be the same process and we'll be 19 happy to be here for however long it takes. 20 AUDIENCE MEMBER: I want to first 21 thank the USDA and the Department of Justice for 22 bing here. I'm a certified public accountant. I 23 also want to state right away that I agree that 24 the free market system needs to continue to 25 prosper in America and that in the dairy industry PROFESSIONAL REPORTERS, LTD. 165 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 and in the farming industry, it does not prosper 2 in that way. I have been studying the 3 profitability of small dairy and diversified farms 4 for 10 years. 5 My former career path was in 6 manufacturing firms and the stark difference was 7 that they have to make a profit to stay in 8 business. The question was raised this morning, 9 how do we get younger farmers, since the average 10 age at this point is 57. Younger farmers have to 11 start small. They can't start with mega dairies 12 or large farms and often, they have to buy their 13 land, their buildings, their equipment. None of 14 that is given to them. Sometimes it is, but not 15 always. 16 Farming cannot be a volunteer, not 17 for profit career choice, needing an off farm job, 18 which everybody just is -- just of course you need 19 an off farm job, to support the family while it is 20 considered profitable if they just break even. 21 Since the 1970s, the USDA policy has been to 22 increase disposable income by reducing retail food 23 costs. This helps people have more disposable 24 money to buy other goods. However, it's at the 25 price of the farmer, because by reducing the cost PROFESSIONAL REPORTERS, LTD. 166 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 over and over as people have said, nobody passes 2 the buck past the farmer. It ends on their land. 3 Creating -- and this policy has 4 created an institutionalized, not for profit 5 business model that we even hear phrases like 6 coming close to covering operational costs or 7 well, this is without regard to labor and 8 capital. There are no other businesses I know 9 that can operate without labor or capital. 89 10 percent of farms in Wisconsin and the majority in 11 the U.S., approximately 65 percent, are small 12 farms. 13 I notice that 71 percent of your 14 farmer panel today was not made up of that group. 15 From -- I'd like to take it from macro to micro, 16 that the anti-competition clauses in the contracts 17 with the co-ops, even the most progressive ones 18 who you might say, if you believe that, from say 19 Organic Valley, that says that you cannot sell to 20 anybody else. That includes small, it's not just 21 fluid sales to other customers, it's also fluid 22 sales to small, unique cheese makers that don't 23 need a whole bulk tank's worth every single day, 24 that might only need one day's worth or one 25 tankful. PROFESSIONAL REPORTERS, LTD. 167 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 But these clauses keep them in a 2 serfdom type thing where they cannot exit, because 3 those producers hold their grade A dairy license 4 and without them, they do not have a grade A dairy 5 anymore and cannot sell to anybody and in fact, in 6 Wisconsin, the producer applies for and pays for 7 and holds your license. So if you don't agree to 8 their terms and you don't keep agreeing to their 9 terms, you not only no longer have them as your 10 customer, I mean as your buyer, you have nobody, 11 unless you now agree to another person's terms, 12 without any choice in the matter. 13 As time goes on, yes, you can 14 switch from one co-op to another, but that's a 15 small handful of options. The USDA/ERS study has 16 stated that small dairies will continue to 17 decline, large dairies will continue to grow 18 because of the economies of scale that they 19 represent, and unless you're able to have a value- 20 added product or do a premium price, which right 21 now is outlawed in most states and in contracts, 22 specifically, even if it's allowed in the state, 23 the contract outlaws it through contract law. 24 Therefore, the farmer is held 25 completely captive to these slave like prices that PROFESSIONAL REPORTERS, LTD. 168 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 are keeping them from even having a living, much 2 less staying in business and many are going 3 bankrupt. Thank you. 4 AUDIENCE MEMBER: I'm Mike 5 Hinkley(phonetic), I'm a dairy farmer with a 6 family dairy farm from Stearns County, Minnesota. 7 Stearns County is the leading dairy producing 8 county in Minnesota. I used to have six bulk 9 trucks that passed my farm every day. Now we only 10 have five and the reason for that is two of the 11 cooperatives decided that, you know, it's really 12 wise for us to put the milk in the same truck. 13 And why I bring that up is because 14 I think as we listened this morning and as we had 15 some testimony, the problem of our price is not 16 between the competition of the cooperatives. I 17 don't think there's anybody in this room that can 18 say that the problem with our milk price is the 19 competition from the cooperatives or a lack of 20 competition. What we did hear earlier was that 21 there's a big discrepancy from what the consumer 22 pays and to what the farmer receives. 23 In my opinion, the more farmers 24 work together in their cooperatives, and we don't 25 have to all be in one cooperative to do that, the PROFESSIONAL REPORTERS, LTD. 169 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 closer we can become -- the closer we can come to 2 the consumer and get part of that price. I think 3 that should be our objective as we work together 4 and go ahead and then this consolidation that we 5 talk about, it's not the consolidation of the 6 cooperatives or the farmers. 7 The consolidation is in the 8 Wal*Marts of the world, if you will, who probably 9 at this point would really like us all to come 10 with our individual trucks to their store and say, 11 hey, this is what we have for you this week and 12 they'll tell us this is what we pay you. I think 13 if we got together as farmers and took our trucks 14 together to a Wal*Mart, for example, and said this 15 is what we have, what are you going to pay us and 16 if it's not enough, let's go down the road to the 17 next person. 18 That we can only do if we put 19 ourselves together and that's should be our 20 objective today, thank you. 21 MR. TOBEY: Last one, thank you. 22 AUDIENCE MEMBER: Hi, I'll be fast, 23 it's lunchtime. My name is Patty Lavera(phonetic) 24 and I work for a group called Food and Water Watch 25 and our members and supporters are consumers and PROFESSIONAL REPORTERS, LTD. 170 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 we've heard a lot about consumers today and I just 2 wanted to say a few things about what consumers 3 think and what they're trying to understand about 4 this farm to retail price spread. 5 It is an important issue across our 6 food supply. It's particularly acute, I think, 7 and obvious in dairy and there's the obvious 8 economic issues of if the price goes down for a 9 processor, why does that not pass on to consumers, 10 but the bigger issues that consumers are starting 11 to understand is that this really breaks with what 12 they've been taught about how our market is 13 supposed to work. If we're supposed to be voting 14 with our dollars, which we're told to all of the 15 time, how do we do that when the dollar doesn't 16 reach the people producing the food? 17 And so as people get more and more 18 interested in our food supply, where our food 19 comes from, how it's produced, they can't do that 20 if their dollar doesn't reach the whole way 21 through the chain in an equitable way. And more 22 and more consumers want to vote with their dollars 23 and they want to vote against specific things they 24 see happening in the food supply that they're 25 learning about and they don't have good options to PROFESSIONAL REPORTERS, LTD. 171 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 do so when their dollar gets stuck in the middle. 2 So I would just say as a last 3 couple points, this interest in local food, buying 4 direct from farmers is also one way consumers are 5 starting to reject that spread. They're looking 6 for a way to give their dollar to farmers, because 7 they do support farmers and I think that that's a 8 trend that can't be ignored as we talk about the 9 marketplace. 10 And finally, we hear a lot -- when 11 we're talking about consumers, we hear a lot about 12 choice and how we're so lucky to have all these 13 choices. And we have these grocery stores that 14 are brimming over with options, but when it comes 15 to the dairy case, what we often have is a lot of 16 marketing. We have small regional dairies that 17 used to exist that have been bought up by larger 18 operators, but those labels are still there. 19 That's not choice and it's not competition, it is 20 marketing and when we explain that to our members 21 and supporters and they learn about it, they're 22 outraged and they ask how it got this bad. 23 So I would just end by saying that 24 consumers want action, too. They want it for 25 farmers so they can stay in business, but they PROFESSIONAL REPORTERS, LTD. 172 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 also want it for themselves and they want it now. 2 Thank you. 3 MR. TOBEY: Thank you all very 4 much. We're going to break for lunch, it's a 5 short lunch. We need to let our court reporter 6 take a rest and there are lots of options in this 7 building and in the area, so we'll see you back at 8 1:15. Thanks. 9 (Noon recess is taken) 10 (12:47 p.m. to 1:20 p.m.) 11 MR. SOVEN: Ladies and gentlemen, 12 if I could ask you to take your seats, we'll get 13 started in just a few minutes, thank you. Good 14 afternoon. We're now going to start the afternoon 15 session. We'll be doing three panels and we're 16 going to first begin -- the first panel will be on 17 trends in the dairy industry. I'm going to 18 briefly introduce myself and then set the stage 19 and then get out of the way of the very 20 experienced and distinguished panelists we have up 21 here today. 22 My name is Josh Soven. I run the 23 group at the Antitrust Division that prosecutes 24 antitrust violations in the dairy sector, and as 25 the Assistant Attorney General talked about this PROFESSIONAL REPORTERS, LTD. 173 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 morning, that involves reviews of mergers such as 2 the Dean acquisition of the Foremost Farms 3 consumer products division, as well as 4 investigations of anticompetitive conduct by firms 5 with market power. 6 It is a special privilege for me as 7 an antitrust enforcer to be here today. Sound 8 competition policy requires an excellent 9 understanding of how markets work and we can't get 10 that in Washington. We actually have to go out 11 into the market and talk to people such as 12 yourself to understand the on the ground reality 13 and how it really works. So with that, let me 14 briefly introduce our panelists. Again, they are 15 very experienced and we'll get going. 16 The topics we're going to cover and 17 try to leave some time for questions are briefly, 18 we're going to talk about the co-op structure and 19 regulation. We're going to talk about the well- 20 known trend amongst all of you about the decline 21 in the number of small farms. We'll then move a 22 little bit more into the regulatory structure with 23 a focus on the producer/handler exception and, 24 more generally, the milk marketing order system. 25 And then we'll finish, most likely, PROFESSIONAL REPORTERS, LTD. 174 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 with a discussion about a topic that was a big 2 issue this morning, which is consolidation, 3 concentration and market behavior in the 4 downstream processing and the retailer markets. 5 So very briefly, our panelists 6 first are Ron Cotterill, he's an agricultural 7 economist at the University of Connecticut. Peter 8 Carstensen probably needs no introduction to many 9 of you. He's a law professor at the University of 10 Wisconsin. 11 Bob Cropp, also an agricultural 12 economist at the University of Wisconsin. Jerrel 13 Heatwole, he's a farmer from Delaware. Marc 14 Peperzak, he is the -- just to make sure I've his 15 title correctly, chief executive officer of Aurora 16 Organic Dairy, Pete Kappelman, who is the Chairman 17 of the Board of directors of Land O' Lakes 18 cooperative and then last but not least, Jim 19 Goodman who is an organic dairy farmer from here 20 in Wisconsin. 21 So let me begin with co-ops. As 22 the Assistant Attorney General said this morning 23 and the Secretary of Agriculture said this 24 morning, there appears to be widespread consensus 25 about the benefits and the value of co-ops in the PROFESSIONAL REPORTERS, LTD. 175 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 market. However, there does appear to be sort of 2 a healthy debate as to how, if at all, those 3 co-ops should be regulated or not. Peter 4 Carstensen has given a fair amount of thought and 5 devoted a fair amount of research to that topic, 6 so I will begin with one of our hosts and turn it 7 over to Peter. 8 MR. CARSTENSEN: Thank you very 9 much. Before I turn to the co-op thing, I want to 10 flag everyone that at our 3:45 break, the law 11 school has made a treaty with the ice cream 12 department of the University to bring over some 13 ice cream for you all to have during your break. 14 It will be right outside here on the patio. 15 You're in Wisconsin, it's dairy month, what better 16 than to have some University ice cream on top of 17 that. 18 It is 10 -- well, almost 15 years 19 ago I began to get into some dairy and other 20 competition issues. It's taken 10 to 15 years to 21 get those issues on the front burner. I'm hoping 22 it doesn't take quite that long to get some of the 23 issues that I see as really important with respect 24 to especially large cooperatives. Capper-Volstead 25 and related statutes, the most recent, I think, PROFESSIONAL REPORTERS, LTD. 176 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 was adopted about 1934, the world has changed. 2 We need to think a lot more about 3 where and how to deal with cooperatives and 4 especially large cooperatives. A co-op often 5 represents the second or third largest investment 6 that a farm family has after their farm itself. 7 It is an investment that, unfortunately, in many 8 circumstances, it seems to me, does not have the 9 transparency, the governance rules, the kind of 10 oversight that is necessary. 11 You heard, and I want to second 12 this, co-ops are very, very important. But they 13 need, again, I think, especially large ones, a 14 different kind of oversight. Before the 1930s, we 15 had a public capital market in which corporations 16 were -- large corporations were not accountable 17 for their false reports of earnings and profits. 18 They were not required to disclose information. 19 They were not required to have a governance system 20 which allowed their shareholders actively to 21 participate in the governance of the corporation. 22 With some cooperatives having 23 thousands of members and billions of dollars, they 24 look an awful lot like those early American 25 corporations. What we have found with the public PROFESSIONAL REPORTERS, LTD. 177 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 capital market is when you regulate in terms of 2 transparency, governance rules and a national 3 oversight of the internal activities of the 4 corporation, it improves the behavior of the 5 corporation. It provides the investors, the 6 owners of those corporations a degree of 7 certainty, a degree of reliability as to what's 8 going on. 9 I think that the classic economics 10 talks about this is the separation of ownership 11 and control of a corporation. The same thing 12 happens with cooperatives. We have seen in recent 13 history some fairly serious problems of sweetheart 14 deals, of funds suddenly moving out from the 15 cooperative without appropriate approval, so I've 16 had calls from various co-op members of large 17 co-ops specifically, worrying about what 18 management is up to, how do they get the 19 information. We do not have a systematic way of 20 assuring the owners of co-ops that they have that 21 information. 22 So the number one reform that I 23 think ought to come is to put the large co-ops 24 under some -- either under the '34 Securities Act 25 which is the basis on which the SEC would PROFESSIONAL REPORTERS, LTD. 178 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 regulate, or some comparable in terms of 2 reporting, disclosure and an oversight to make 3 sure that the books are being honestly kept, that 4 they are being audited by appropriate federal 5 officials. 6 Right now, USDA has no authority to 7 do that, and there are civil and criminal 8 liabilities for managers who misuse the resources 9 of the enterprise. That got highlighted very 10 recently by a Supreme Court decision that cut back 11 on one of our few other criminal statutes that can 12 be used to deal with misappropriation, so we 13 really need to make sure that there is that kind 14 of governance oversight for corporations. I think 15 for co-ops, you probably want a somewhat different 16 governance system than you use for ordinary 17 corporations. 18 I also think as a second level that 19 the no outside investor eight percent, no outside 20 equity investor, the eight percent maximum return 21 ought to be revisited. I think there are 22 important tax laws that need to be retained, but 23 large co-ops need the flexibility in their capital 24 structure that comes from revisiting, again, rules 25 that were adopted in 1922. They may have made PROFESSIONAL REPORTERS, LTD. 179 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 sense then, I don't think they make sense now. 2 Lastly, there is this little 3 antitrust thing that seems to worry a lot of 4 folks, that somehow they're all going to go to 5 jail if the Capper-Volstead antitrust exemption is 6 repealed. I know a lot about antitrust law and 7 I've been trying to figure out what it is that 8 co-op managers are up to that is, but for this 9 exemption, a felony and would send them to 10 prison. 11 I'd like that disclosure, because I 12 don't think they're doing that and if they are, 13 the other question then would be why are not 14 farmers doing a whole lot better, if these guys 15 are committing price fixing felonies out there, 16 raising prices, extorting money in some way. 17 Bottom line, though, the way the 18 antitrust laws impact with co-ops, anyway, doesn't 19 really matter a whole lot whether there is an 20 exemption or not. There are a couple of places 21 where it would be important. I'd like to have it 22 rethought. 23 If it's the holy grail, if it is 24 the bible of the co-op movement that they must be 25 exempt from antitrust law, given the way Capper- PROFESSIONAL REPORTERS, LTD. 180 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 Volstead has been interpreted, I could live with 2 that. I do want to deal with the Agricultural 3 Marketing Agreement Act, but that's a question 4 that will come up a little bit later. 5 MR. SOVEN: Pete Kappelman, 6 Professor Carstensen appears to see some room for 7 some regulatory changes, do you agree or how do 8 you think about the subject? 9 MR. KAPPELMAN: Well, first of all, 10 let me express my appreciation for the invitation 11 today. My family milks 400 cows. In addition to 12 being chairman of the Land O' Lakes board, my 13 primary job in life is to farm and my family milks 14 400 cows on the land purchased by my 15 great-grandfather. It's great to be back at the 16 UW. My oldest two children are here and are now 17 the fourth generation of UW-Madison attendees. 18 I'm proud of the job they're doing here. 19 When I get asked about co-ops being 20 big, I wonder about who gets to decide what big is 21 or too big or big enough and I wonder about what 22 you might use for criteria. But what I think that 23 what really matters to farmers is whether their 24 cooperative is effective, truly valuable to them 25 in a business world where farmers seem to continue PROFESSIONAL REPORTERS, LTD. 181 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 to lose margin in the value chain of food 2 production. 3 Cooperatives are one of the last 4 vestiges of hope left for dairy farmers as they 5 attempt to bargain effectively with the burgeoning 6 size of processors and retailers. I've been told 7 that Land O' Lakes is big. The dairy side of our 8 business in a typical year is about $4 billion of 9 sales. Some might say that's big. 10 When our -- one of the customers we 11 deal with is called Wal*Mart. They are 12 approximately 100 times larger than we are. 13 Kroger's is 20 times larger than we are. We do 14 not feel the power of big as they negotiate to 15 bring down the price of food and we are wrangling 16 to negotiate the best price we can for our 17 members' products. 18 So I ask all of you, who is big and 19 what is big enough? According to a 2007 USDA 20 cooperative development report, 83 percent of all 21 U.S. milk is marketed through -- was marketed 22 through 155 cooperatives. That number has grown 23 steadily over the years, yet co-op membership is 24 not mandatory. 25 As a dairy producer, there is no PROFESSIONAL REPORTERS, LTD. 182 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 inherent home for my milk. I have to find a 2 market for it. I chose a market where I invest my 3 equity in value added, branded products that allow 4 me to share in the manufacturing and marketing 5 margins of the milk I produce, sharing in that 6 value chain, down the value chain. So how do 7 producers ensure that their co-op remains relevant 8 and beneficial? 9 The answer is simple, but it 10 involves a lot of hard work. Good governance, 11 good governance is not dictated by size, be it big 12 or small. It's a function of effectiveness. Most 13 co-ops use a form of representative democracy and 14 they do it pretty well. Public companies are 15 regulated by the SEC in an attempt to protect 16 investors by dictating accounting and financial 17 reporting procedures and those companies are also 18 required to use sound judgment -- or legally 19 required to use sound judgment, sound governance 20 and moral business practices. It's tough to 21 legislate morality. 22 A cooperative business is our 23 stockholders' business. The member's engaged, 24 their livelihood and their equity investment 25 depends on it. We hold numerous member meetings. PROFESSIONAL REPORTERS, LTD. 183 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 I can't tell you how many chicken dinners I've had 2 over the years, but I can tell you who serves the 3 best chicken around the state. At those meetings, 4 we elect delegates. We choose the director 5 candidates versus a public company where most 6 director candidates are hand picked by 7 management. 8 So at our member meetings, we 9 choose the director candidates. We elect 10 directors. We discuss the policy affecting our 11 producers and we update the members on their 12 business. In fact, when Land O' Lakes was a 13 public registrant, our governance system was less 14 effective, because we could only discuss our 15 members' business with them after we had made a 16 public release of that information. We had less 17 information for our producers and as a result, 18 discussions with members about their business 19 became less relevant. 20 The fiduciary role of elected co-op 21 leaders is a tremendous responsibility. It's not 22 one that I take lightly. Our members expect sound 23 financial reporting and auditing. It's the board 24 members' responsibility to deliver on that 25 expectation. Other fiduciary roles include PROFESSIONAL REPORTERS, LTD. 184 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 oversight of management, policy setting and 2 communication with members. I get judged on the 3 job I'm doing at every member meeting, but 4 especially at election time. It's quite simple. 5 If I'm not delivering on member expectations, I 6 get replaced. 7 So in summary, I think co-op 8 governance is alive and well. It's our business 9 and we own it. 10 MR. SOVEN: Thank you. Jerrel 11 Heatwole, we'll talk some more with specificity 12 about the situation for small farmers, but before 13 we turn to that topic in general, your thoughts on 14 more regulation, less regulation, different 15 regulation for co-ops. 16 MR. HEATWOLE: Well, Josh, I concur 17 with everything that Pete just said and let me say 18 in terms of governance and information, I think if 19 you look at -- and we had here on the panel this 20 morning members of Congress and the Senate. I 21 think at the cooperative level, we have a much 22 more robust representation system than we do in 23 our country and our democracy and I don't think 24 any of us want to change that. 25 Let me just pick at a few things in PROFESSIONAL REPORTERS, LTD. 185 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 a little different angle from what Pete just 2 said. Look, I'm a small dairy farmer. My wife 3 and partner this morning milked 61 cows on the 4 82-acre farmstead that her grandfather started. 5 Our business is sustained through use of about 6 five different cooperatives in various aspects of 7 our business. Over the years, I've marketed my 8 milk from the farm through four different 9 cooperatives, two small local cooperatives over 10 the years and then a bigger regional cooperative 11 and now through a national cooperative and they 12 all operated under Capper-Volstead. 13 Their method was the same, the 14 difference is the effectiveness that we can have 15 working together in a bigger mass, bigger scope. 16 You know, I have great respect for these 17 professors. My brother is a professor at Virginia 18 Tech, Ph.D. and research professor and he'll tell 19 me that you can take two professors that are 20 equally qualified and come up with three opinions 21 that are on different ends of the spectrum. 22 What I will say is that as a dairy 23 farmer, my life, my income depends on the choices 24 that are made, and the professor's choices don't 25 impact his income or his tenure or his future. So PROFESSIONAL REPORTERS, LTD. 186 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 you know, from a standpoint of the impact that it 2 has to me as a farmer, I'm very intense and 3 farmers are very intensely committed and tied into 4 what goes on in these kinds of forums. 5 You know, like Pete, I'd say what 6 defines a large cooperative. We tend to just 7 think about numbers of farmers, but we've got farm 8 cooperatives in this country that produce, that 9 market billions of pounds of milk and you can 10 count their members by the tens or the hundreds. 11 We have cooperatives that market the same billions 12 of pounds of milk in this country and you can 13 count their members by the thousands. You've got 14 cooperatives that market their milk through 15 further processing, a large percentage of their 16 milk versus cooperatives that just take it 17 directly from the farm to a different customer. 18 So what defines a large 19 cooperative. We work in a world that many -- 20 several countries have one cooperative, 21 effectively, for the whole country. So you know, 22 I think that you'll find that no matter what the 23 cooperative structure we have here in the U.S., 24 the members that own and are a part of those 25 cooperatives all find value in those organizations PROFESSIONAL REPORTERS, LTD. 187 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 or they wouldn't stay. In fact, you know, in our 2 organization, each year members have an option. 3 In the Lancaster County, 4 Pennsylvania area, one of the areas that I 5 represent, I just counted last night, there's 16 6 different people that will pick up milk, procure 7 milk or market milk from any farm in that area, 8 about six or seven cooperatives and eight to ten 9 proprietary companies. Despite this -- and that's 10 just not unique to Lancaster County area, but 11 despite this, for every two farmers that chose to 12 market their milk elsewhere for whatever reason, 13 seven chose to market with us. 14 Let me put the size in just a 15 little different context. In the top six dairy 16 states, two in the west coast, California and 17 Idaho, two here in the heartland of -- beautiful 18 heartland of the country, Wisconsin and Minnesota, 19 two in the northeast where I'm from, Pennsylvania 20 and New York, DFA's marketshare, member share of 21 milk is -- runs from six percent to 14 percent. 22 There's lots of choices, lots of opportunities. 23 Contrast that with the number one 24 cheese retailer, that's number one in market after 25 market after market with no close second, but -- PROFESSIONAL REPORTERS, LTD. 188 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 and operates under different structure, different 2 governance structure, and look at the retailer 3 that is number one in market after market after 4 market with few markets where there's even a close 5 number two and tell me where you think the market 6 power is. 7 These companies, no matter how you 8 measure them, as Pete said, are many, many times 9 larger than even the largest cooperative and 10 growing, getting larger. Who do you think needs 11 the regulation the most? Do I think that we need 12 more regulation as cooperatives which is just by 13 extension us as farmers? I think the answer is 14 clearly no, no matter what size the cooperative 15 is. 16 MR. SOVEN: Thank you. Marc 17 Peperzak, as the head of Aurora, what is your 18 perspective on the topic? 19 MR. PEPERZAK: I've been a dairy 20 producer since the 1970s, and since then, Aurora 21 has been a producer member of several cooperatives 22 across the country, big and large, and quite 23 frankly, after this nearly 40 years of experience, 24 I would say that cooperatives generally failed 25 us. I think they stifle competition, I think they PROFESSIONAL REPORTERS, LTD. 189 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 stifle innovation. 2 The fact of the matter is that if 3 you want to do anything on your own, if you, for 4 example, in the early 1990s when I decided that we 5 had to take one of our farms and make it organic, 6 so I went with the concept of organic to our 7 co-ops, more than one, I might add, they basically 8 said don't do it, we'll fight you. Anything 9 that's innovative, anything that's out of the box, 10 no, can't do it. 11 I remember at that time asking for 12 a list of members, I'd like to talk to them 13 directly. They wouldn't give me the list of 14 members. I remember trying to approach the board 15 of directors meeting, they shut down the board of 16 directors meeting before I showed up. Having said 17 all that, co-ops play a good role, but what really 18 surprised me from this morning is people kept 19 talking about how the system is broken, the system 20 is broken, but at the same time, they're saying 21 co-ops are fine. 22 Well, co-ops are very much part of 23 the system. I don't think they've done a pretty 24 good job, frankly. Somebody said something about 25 that they didn't feel like they had an ear in PROFESSIONAL REPORTERS, LTD. 190 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 Washington, didn't have a spokesman. What's the 2 co-op doing, where are the co-ops? Contrary to 3 Jerrel's experience, when I think about Colorado, 4 we have 160 or 170 producers, 20 processors, one 5 co-op, one choice. 6 If you want to go to any of those 7 20 producer processors, you're out of luck. It 8 happens that way in much of the country. It may 9 be different in Lancaster County. Anyway, so in 10 2003 -- what we are today is Aurora Organic today 11 is five farms with 4900 acres of pasture and we 12 are vertically integrated. We have our own plant, 13 we have our own farms and quite frankly, we don't 14 have a lot of choice. It's the only way we can 15 operate the business. The co-ops wouldn't help us 16 get the milk, never mind keeping us out of the 17 processing channels. 18 It wasn't a choice. I do think 19 there should be some regulatory changes in terms 20 of how cooperatives are treated. I think it's 21 necessary to get co-ops in the basket of 22 facilitating innovation and competition as opposed 23 to the opposite, because effectively, that's what 24 they've done in my experience with us. 25 MR. SOVEN: At the Antitrust PROFESSIONAL REPORTERS, LTD. 191 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 Division, we have many, many lawyers and I'm one 2 of those, so I'd like to think we're doing a 3 pretty good job, but we also have many, many 4 economists and when we get stuck, we always turn 5 to the economists to bail us out or to wrap us up, 6 so with that, I will turn to Professor Cropp to 7 offer his perspective on the co-op regulation 8 issue. 9 MR. CROPP: Well, I don't think we 10 need a great change in regulation. The Capper- 11 Volstead Act passed way back in 1922 and the 12 purpose was to try to equal out the end balance of 13 economic power between farmers and their buyers 14 and that's just -- all the Capper-Volstead Act 15 does is give limited exemption to antitrust, not 16 total. They're still subject to any predatory 17 practices and basically it allows farmers to 18 organize, to bargain, process and market on their 19 behalf to try to bring some balance of economic 20 power. 21 And there's been a lot of 22 consolidation of co-ops, mergers, consolidation 23 through time and the reason that has happened is, 24 well, farmers have changed, modern transportation, 25 processing markets have changed. The size of PROFESSIONAL REPORTERS, LTD. 192 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 processing plants has changed, so the board of 2 directors of co-ops have been responsible to 3 change their structure to respond to the changes 4 in the market conditions. 5 The thing is, that the 6 concentration of the food industry has been much 7 greater beyond the farm and co-op level, so 8 really, the imbalance today between say farmers 9 and their buyers is probably greater than it was 10 back in 1922. So they still need a protection, 11 the right to organize and bargain. 12 There was talk this morning about 13 what's big, you know, co-ops are small business. 14 There is about 155 co-ops in existence today and 15 of those 155, 109 are pure bargaining, relatively 16 small bargaining co-ops. There's only 25 that 17 actually operate processing facilities and they 18 don't dominate any real aspect of the dairy 19 industry. I mean, they have about 71 percent of 20 the butter and 96 percent of the powder, but when 21 it comes to the cheese, we heard about that drives 22 milk prices, actually, their marketshare has 23 declined to about 26 percent back in 2002, about 24 34 percent. 25 So if you compare dairy PROFESSIONAL REPORTERS, LTD. 193 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 cooperatives to their customers or their 2 customers' customers, they're really small 3 businesses. We mentioned the Wal*Mart, you know, 4 business this morning, number one on Fortune 500 5 company. They have about 230 or so billion 6 dollars on the food side, but if you take our 7 largest agriculture co-ops, there's only two that 8 appear on Fortune 500 lists. One is CHS, the 9 largest co-op, number 91, with sales of about 10 $26 billion, but that's a diversified farm supply 11 petroleum. 12 One in dairy, and that's Land O' 13 Lakes, about $10 billion. They list 226, but I 14 think dairy, as Pete Kappelman said, is only about 15 $4 billion of that. So you can look at Kroger's 16 and Super Value, Kraft, everybody is on Fortune 17 500 with revenues much greater. If I take all the 18 dairy co-ops and add the total revenue together, 19 it's less than $40 billion, all of them together. 20 And one way like to measure concentration is what 21 does the top four do. 22 If I take the top four dairy co-ops 23 and the top four market a little over 6 billion 24 pounds of million a year annually. That's a lot 25 of milk, but not a lot. There's another range PROFESSIONAL REPORTERS, LTD. 194 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 between three to six billion, but over half market 2 less than 500 billion pounds of milk in a year. 3 Take the 10 largest dairy co-ops thrown together, 4 they'd have about 57 percent marketshare. If you 5 take, you know, DFA, which is the largest co-op, 6 has around 20 percent of the market. 7 California dairies, number two 8 drops down about nine percent, Land O' Lakes is 9 about seven percent of the total market, so pretty 10 small. Any one co-op by themselves do not have 11 the sufficient market power to really influence 12 that market and so under the Capper-Volstead Act 13 we allow market agency in common, where co-ops go 14 together and bargain together to have an influence 15 on that market. And that's been successful. 16 If I look last year at federal 17 order data, the over order premiums that co-ops 18 have been able to negotiate with the buyers, it 19 averaged about $2.45 a hundred weight of 20 additional revenue. And why is that? Well, a lot 21 of the focus is on the fluid side of this 22 business. Cows are milked every day, but milk is 23 seasonal, demand is seasonal. Even within the 24 year, when you have holidays, school is in, school 25 is out, the amount of milk needed by a bottler PROFESSIONAL REPORTERS, LTD. 195 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 varies considerably. 2 Early in the history of dairy 3 co-ops, they've taken on the responsibility of 4 coordinating this needed milk for fluid versus 5 other uses. That's why they're heavier in the 6 manufacturing side. To move the milk around, to 7 balance it, that is a market wide service that 8 makes the whole marketing system more efficient, 9 benefits farmers, processors and, believe it or 10 not, consumers. So some of this over order money 11 that is bargained for is needed to pay for to 12 compensate the co-ops providing market wide 13 service, balancing the market, moving milk around 14 where it is best needed. 15 And it does result in higher prices 16 to farmers and our position is in some cases here, 17 is that co-ops are going to pay farmers. Again, 18 if you look at mailbox prices, which is the actual 19 price that farmers get and compare it to federal 20 order prices, believe it or not they average 21 higher in all markets except a couple. All 22 markets last year, it averaged about 30 cents 23 higher, some markets $1 or more higher for mailbox 24 prices. 25 It means competition is there, PROFESSIONAL REPORTERS, LTD. 196 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 they're paying farmers more than the minimum 2 prices that are required under federal orders. 3 Another topic, and this to -- or a lot of the 4 criticism, I think, is the relationship of co-ops 5 say with a bottler, full supply arrangements, that 6 keeps out others that participate in federal 7 orders. Well, that may be true, but the full 8 supply arrangement, that benefits the market. The 9 difficulty is today that 97 percent of the milk is 10 grade A. 11 The major purpose of the federal 12 order is to assure consumers have milk to drink. 13 Not all that milk is needed for that purpose. The 14 average utilizational orders is 37 percent. 15 There's only three orders that have utilizations 16 over 45 percent. There's more grade A milk 17 available than is needed, but yet everybody wants 18 to participate in the federal orders, because the 19 fluid milk price is the highest, the manufacturing 20 price is lower. 21 There's a weighted average, so the 22 fluid leaves some money in and the manufacturers 23 draw it out. It's not all needed. So some of the 24 criticism of those relationships between co-ops 25 and their buyers maybe is really a federal order PROFESSIONAL REPORTERS, LTD. 197 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 issue to look at. Some changes need to be made 2 there or what have you, but if we allow everybody 3 to participate in the federal order, it kind of 4 waters down the pool or whatever. 5 So that's kind of a complicated 6 thing, but I think there's a lack of understanding 7 of this milking system and pricing system that 8 criticized co-ops more and it really is not a 9 co-op issue. And one last thing as far as 10 governance, every member of the co-op has one 11 member and one vote at some level. The larger 12 co-ops naturally will -- they have districts, 13 elect delegates, what have you, then vote for a 14 board of directors, who are very accountable. 15 They're active dairy farmers, 16 they're very accountable, they're accountable for 17 the co-op, held responsible for the co-op and to 18 protect members' equity. They hire management, 19 they set policy and they show management 20 accountable. So the governance I think is pretty 21 good. It's to get qualified people to run for 22 those boards of directors on these co-ops, but I 23 have no difficulty with that. 24 There's always communication 25 problems with members and that, as you communicate PROFESSIONAL REPORTERS, LTD. 198 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 what's going on for transparency and co-ops are 2 trying to do a good job with that, with websites, 3 newsletters, district meetings, et cetera, so 4 anyway, I think I see no need for change in the 5 regulation. 6 MR. SOVEN: All right, thank you. 7 Unambiguously, one of the most profound and 8 dynamic trends in the dairy industry, of course, 9 is the reduction in the number of small farms. 10 The statistics were referred to this morning. 11 They're well known to people in this audience. 12 Jim Goodman is a small dairy farmer and your 13 thoughts on that topic, please. 14 Well, let me actually do a little 15 bit more of a segue to put a sharper point on it. 16 At the end of the day, the bottom line, what do 17 you think is driving it? Are those trends 18 consistent and what should be done about it from a 19 regulatory standpoint or a competition 20 standpoint? 21 MR. GOODMAN: Well, that's -- I 22 guess that's really easy to answer in just a few 23 words, and I don't think it's just a small 24 farmer's point of view either. The milk price is 25 too low. I mean, why are you going to continue to PROFESSIONAL REPORTERS, LTD. 199 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 farm if you can't make a living doing it. If 2 somebody told a lawyer, well, I'm only going to 3 pay you $2 an hour for your work, they'd probably 4 say well, I'm sorry, I can't do it for that. 5 Many farmers don't have that 6 option. They have loans to pay off and from my 7 point of view as a small farmer, it's maybe a 8 little bit more critical, because there is some 9 truth to the size of scale, the economy of scale. 10 Credit is sometimes more difficult for small farms 11 to get. I know I went in our local bank, it's 12 probably been five or six years ago, to borrow 13 money for fertilizer and they said well, you've 14 got a pretty good credit rating and that shouldn't 15 be a problem, but you know, we're really getting 16 away from making farm loans. 17 And I thought well, this is a 18 community of 1500 people, most of whom -- most of 19 the businesses in town depend on farmers and they 20 aren't going to make farm loans anymore? So 21 that's a problem for a small farmer and it can be 22 a problem for large farmers, too. I know a couple 23 of panelists this morning and some of the public 24 comments said that they hope to get their debts 25 paid off so they can borrow more and I thought PROFESSIONAL REPORTERS, LTD. 200 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 well, that's an awful way to have to live, isn't 2 it? 3 I mean, if you can't even do a job 4 that you enjoy doing with your family, supporting 5 the community and you live from one loan to 6 another, there's something really wrong with 7 that. A couple of the people this morning 8 mentioned the reduction in milk prices at 50 9 percent. Well, that's quite a loss when you think 10 about having your income cut in half and I don't 11 care what job you have, think about if that were 12 you. If tomorrow morning, suddenly your paycheck 13 was half of what it had been. 14 We've talked and it's been 15 mentioned on this panel, too, about consolidation 16 in the industry. I think that has a lot to do 17 with small farms going out of business. Now, I'm 18 not a legal expert, I don't know a lot about the 19 Capper-Volstead Act, but it seems to me from what 20 I've read about it that paying volume premiums for 21 milk is illegal under that Act, and when you're 22 getting more money just because you're big, that's 23 not, as the Act states, operated for the mutual 24 benefit of all members. It's more benefit to the 25 big members, because they're getting paid more PROFESSIONAL REPORTERS, LTD. 201 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 just because they're big, so that's a problem 2 being small. 3 Now, I'm glad to hear that there 4 are a lot of choices where farmers can send their 5 milk in some places, and Wisconsin is probably one 6 of those places where there are still a lot of 7 options, but a lot of parts of United States, 8 that's not the case. If you're not big enough, 9 they're not going to come and pick you up. 10 People would say, well, you know, 11 that's not a good place for you to farm then, but 12 that's not -- that's really not true, because at 13 one point, there were options in most parts of 14 Wisconsin, the northern part of the United States, 15 everywhere, to send milk. Somebody mentioned this 16 morning there was literally a processing plant in 17 every township and a lot of people said that 18 wasn't efficient, but it employed a lot of 19 people. It produced local products. 20 They were differentiated on 21 different parts of the state and it made small 22 farmers and small communities a lot of money, and 23 now we see this trend going back to this artisanal 24 production, Swiss cheese from Monroe, Wisconsin, 25 Italian cheeses from other parts of the state. PROFESSIONAL REPORTERS, LTD. 202 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 But when that system was taken away from us when 2 farmers lost their local processing plants, we 3 lost our options. We lost the ability for 4 competition. 5 I remember when I was a kid, my 6 cousins, one day the Carnation truck would pick 7 their milk up and the next day it was the cheese 8 factory down the road a few miles. Now, they had 9 a pretty good idea what their milk was worth, 10 because two separate entities were buying their 11 milk. They got a test from each one on butterfat 12 and protein. That's not allowed anymore and 13 someone earlier addressed the grade A licensing. 14 Small farmers need an honest 15 accounting of what they're producing. They need 16 to get paid fairly, whether they're small or 17 large, but they can't be discriminated against 18 because they're small. I read an article the 19 other night from the Iowa Independent, I think it 20 was last week's issue, and it said government and 21 industry experts are talking about volatility in 22 the milk market and they said it's because there's 23 too much supply, and their solution for a remedy 24 was that, in time, enough producers will be forced 25 out of business and the market will correct itself PROFESSIONAL REPORTERS, LTD. 203 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 without government intervention. 2 Now, I've been hearing that for 30 3 years that I've been farming, well, eventually, 4 we'll get enough farmers out of business and then 5 everything will be okay for everybody, and folks, 6 it just hasn't worked yet. It just hasn't 7 worked. True, a lot of small farmers went out of 8 business, but from what we've heard to today, the 9 big farmers aren't doing too well either. 10 And I guess I base a lot of it on 11 the fact that the retail spread between farmer and 12 consumer is not at all accurate anymore. There's 13 no relationship between what consumers pay and 14 what farmers get paid. Small farmers, you know, 15 are trying to find ways to stay in business. We 16 got certified organic because we didn't want to 17 get bigger, we wanted to stay small. We found a 18 local cheese plant that we can send our milk to. 19 We started direct marketing beef and soon we'll be 20 doing cheese. 21 A lot of small farmers are trying 22 to figure out a way to stay in business because 23 they actually like farming. They actually like 24 milking cows. Some farmers don't and maybe their 25 choice is to get big and hire people to do that PROFESSIONAL REPORTERS, LTD. 204 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 for them. The land that we farm has been in our 2 family since 1848 and so that means something to a 3 lot of farmers, too. 4 I think imports is another issue 5 that we haven't hit on yet on this panel, but it 6 was mentioned this morning and that doesn't just 7 hurt small farmers, it hurts all farmers. 8 When farm milk prices began to fall 9 in 2008, they said well, there's just too much 10 milk and that's why they're going down, but if you 11 look at the government figures for imports, they 12 were actually going up in 2008, whether it was 13 powdered milk, butter, milk fat. Cheese imports 14 were actually increasing from the end of 2007 into 15 2008 and the amount of milk consumed in the United 16 States, commercial disappearance actually 17 increased as well. 18 So we are actually in a milk 19 deficit situation and they're making more imports, 20 but they said well, there's too much milk and the 21 price is going down. Now, somebody is lying to us 22 and it needs to be investigated as to why they 23 keep importing more and telling us we're producing 24 too much. 25 Now, we've been a milk deficit PROFESSIONAL REPORTERS, LTD. 205 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 nation since 1996 and the trend has been, as was 2 mentioned, small farmers are going to go out of 3 business. We'll get weeded out first, but 4 eventually, it's going to get everybody. 5 Eventually, big farms are going to suffer, too, 6 and we have to make room for everybody. 7 Now, people have talked a lot about 8 price volatility. Well, you know, that can be a 9 problem. It's nice to have steady income, but as 10 long as that volatility never drops below a cost 11 of production, below a point where you can make 12 money, it doesn't really concern me that much. 13 You know, if it wants to go really high, that's 14 fine, but just don't let it go too low. 15 We've talked about protecting, 16 farmers protecting themselves, with -- what do 17 they call it, price stabilization. We're supposed 18 to sell our milk on the futures contracts. Well, 19 you know, USDA did a study of that, I think it was 20 a couple, three years ago and they found out that 21 the farmers that sold their milk on futures 22 contracts actually came out 50 cents a hundred 23 weight behind those that didn't. The farmers that 24 didn't sell on contracts had more volatility, but 25 in the end, they made more money. PROFESSIONAL REPORTERS, LTD. 206 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 I guess I started to look at it, 2 it's kind like Las Vegas, you know, that town 3 wasn't built on winners and the industry seems to 4 have a little bit better handle on milk and what 5 it's going to be used for and how much of it there 6 is than farmers do, so we're supposed to be 7 competing against them and betting that we'll be 8 smarter than they are and it generally doesn't 9 work. 10 I think that -- and there's a few 11 people mentioned it this morning in the public 12 comments about local food, and I think this is 13 something that small farmers are all sort of 14 looking to as a strategy. USDA has come out with 15 a know your farmer, know your food program. A lot 16 of people say well, you can't feed the world that 17 way and that's fine. We don't really need to feed 18 the world, they can feed themselves if we let 19 them, if we don't have too many wars and too many 20 droughts and we don't send our corporations there 21 and take all their natural resources and land 22 base. I think we need to feed ourselves first and 23 until we do that, they're not going to be able to 24 feed themselves. 25 I guess the final point that I'd PROFESSIONAL REPORTERS, LTD. 207 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 like to mention is I think something that Pete 2 mentioned about Wal*Mart and I've heard a few 3 people in the hallways talking about how 4 processors are really at the mercy of these huge 5 grocery buyers and that's probably true. That's 6 probably true, that they tell you this is what you 7 sell to me for or we will not buy from you, but I 8 don't think we're going to get ahead. We're not 9 going to help farmers, we're not going to help 10 consumers if we let our cooperatives play the same 11 game as the big processors. 12 I think we have to be better than 13 that and I think cooperatives, instead of saying, 14 well, we got to play the game, I think 15 cooperatives need to look back to the principles 16 of cooperatives, fair treatment of all members and 17 the sixth principle of cooperatives, cooperation 18 among cooperatives. I think we need to -- I think 19 they need to work together to say we're not going 20 to drag ourselves down in the gutter like you. 21 We're not going to put profit on 22 top of the heap, because farmers are people. 23 Their lives have value and so do consumers and 24 that's who we need to look out for. 25 MR. SOVEN: Professor Cotterill? PROFESSIONAL REPORTERS, LTD. 208 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 At the Division, we spend a lot of time actually 2 thinking about the size of firms. It comes up in 3 various contexts, obviously it's often -- the 4 argument is frequently made to us that a merger of 5 firms will produce a larger firm that's more 6 efficient, but it's also clear at times that the 7 innovation and the entrepreneurship and the new 8 ideas come from small farms and you will 9 frequently see in companies' documents that look, 10 if we get too big, a lot of that spark will go 11 away. 12 So as an economist, your thoughts 13 on big, small, where we're going, where we're 14 headed. 15 MR. COTTERILL: Well, actually, I'm 16 going to do you a favor and I'm going to not say 17 anything right now, because I'm going to 18 consolidate my comments on that very question 19 under channel consolidation at the end, so I'll 20 let other people go ahead. 21 MR. SOVEN: All right, very good. 22 That's a clear sign we're definitely going to get 23 to the consolidation topic. Jerrel Heatwole, very 24 quickly, I'm going to sort of enforce the 25 two-minute rule. PROFESSIONAL REPORTERS, LTD. 209 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 MR. HEATWOLE: Two minutes. I 2 think this is a good question and as a small 3 farmer, I think there's several ways with boots on 4 the ground that I would say are trends that we 5 need to look at. 6 One is the cost, we all experience 7 this. I bought the farm in '84 from my wife's 8 brother, milked 29 cows then, just my family. Now 9 with a partner, we milked 61 cows this morning, 10 two families. My farm insurance is up 300 11 percent. Nitrogen costs up 400 percent, county 12 taxes up 500 percent, seed corn was 56 pounds -- 13 units in '85, I paid about $40 for. I paid $173 a 14 unit average on my 80,000 unit corn seed, y'all 15 know about that. So economic costs are a huge 16 driver in this, and I think that's something, 17 whether it's your grocery store or your hardware, 18 we need to look at as a society. 19 The second driver that I would see 20 is regulations. We're about regulated to death 21 and I'm disappointed that regulation is the first 22 thing that we think of in terms of a solution. 23 But you know, nutrient management, nutrient 24 management classes, recordkeeping, pesticide, 25 herbicide classes, licenses, crop reporting, PROFESSIONAL REPORTERS, LTD. 210 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 special requirements such as Chesapeake Bay, and I 2 know you all have other things here, animal care 3 requirements. Now it's EU requirements. 4 Customers, large customers have special PI somatic 5 cell requirements above that that's required in 6 our PMO. Did I mention recordkeeping? 7 You know, as a dairy farmer that's 8 on the ground and does my work with my wife and 9 partner, you know, I have a hard time getting done 10 everything I need to do from 4:30 a.m. in the 11 morning until 7:00 at night, seven days a week, 12 every week of the year. 13 And then, you know, I envy families 14 that have multiple families on the farm and they 15 can put this recordkeeping on one person and 16 spread it out, because as a small farm, if you're 17 required to do all these things, it becomes an 18 impossibility. 19 The last thing I'd say is this 20 hellish volatility that we're -- that's been 21 increasing since the mid '90s, and I know, you 22 know, if there was an easy solution, somebody 23 would have solved it and we'd be glad to send them 24 to the French Riviera or some other opulent place 25 that, you know, I don't know about. PROFESSIONAL REPORTERS, LTD. 211 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 We'd be glad to pay for their 2 lavish lifestyle because ours would be so much 3 better, but it's not and only by working together 4 as cooperatives of all sizes, of all types, coming 5 together, coming together through organizations, 6 such as National Milk or National Council of 7 Farmer Cooperatives, working together with the 8 USDA and the Secretary and others that are -- that 9 have a vital interest in rural America and 10 agriculture will we have a chance to solve this. 11 I as an individual dairy farmer, 12 small dairy farmer have zero percent chance, 13 that's a guarantee, of making it in this kind of 14 an environment. 15 MR. SOVEN: Bob Cropp? 16 MR. CROPP: Well, quickly, what's 17 small, what's large, I guess is part of 18 definition, but if you look at 2009 dairy farm 19 structure provided by ERS, we find that farms that 20 have less than 29 milk cows still constitutes over 21 30 percent of the dairy farms and then under 50 22 cows actually added up about 49 percent of the 23 dairy farms that have less than 50 milk cows, so 24 we have a lot of small farms. 25 We did lose about 38 percent of our PROFESSIONAL REPORTERS, LTD. 212 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 farms between 2000 and 2009. If you take less 2 than 50, that declined 34 percent less. There's 3 actually been a bigger decline in that time 4 period, though, between 50 to 99 cows. They 5 actually went down about 45 percent. What's 6 driving this? The trends are -- one is we've got 7 a lot of small farms, older farmers are going to 8 retire. 9 They've got facilities that if 10 somebody is going to milk on, it needs to be fixed 11 up. There's some of that going on. We got some 12 of those that say milk at 75, 90 cows, they're 13 going to stay in business and they have a son or 14 daughter that's wants to come in. They're going 15 to modernize, fix it up, facilities are outdated, 16 probably put a free stall milking parlor in which 17 means they're going to go 175, 200, maybe 300, 400 18 cows, not all thousand cow operations. 19 And I guess the other is a change 20 in lifestyle. I think that's important. There's 21 a lot of young people who talk about getting into 22 farming. I teach a farm short course class. A 23 lot of kids that are going back to farm, most of 24 them say well, I'd like to have time off, vacation 25 and be more involved in the community, so a larger PROFESSIONAL REPORTERS, LTD. 213 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 farm operation that supports more than one family 2 allows some of that. 3 But I think the bottom line is, and 4 you heard that this morning from our Secretary of 5 Agriculture of Wisconsin, diversity, and that's 6 really the strength in Wisconsin. There are 7 opportunities for small farms where there's 50 8 cows or so, but they probably have to do something 9 different than just produce milk. Either they're 10 grazers, maybe they're an organic, maybe they're 11 selling to one of the specialty cheese plants that 12 add value, rather than just selling milk. 13 And if that's what they want to do 14 and do not want to invest a lot of capital and 15 machinery and that, you can do that and we have 16 the larger farms that can do it as well. So 17 diversity, I think, is our key, but whatever you 18 do, it's a business. It's got to be well managed, 19 what have you and to assist some of the smaller 20 farms, this is something we do in Wisconsin with 21 business planning grants for farmers to do 22 business planning, grants for value added, things 23 of this sort, so support activities for them to 24 make a change in their operation. 25 But the trend will be fewer farms. PROFESSIONAL REPORTERS, LTD. 214 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 The average size farm in Wisconsin is still only 2 91 cows, nationwide it's about 145 cows. 3 MR. SOVEN: This spring, the 4 Department of Agriculture made a change to the 5 producer/handler regulations in a manner that 6 reduced the number of farms that qualified for 7 that part of the regulatory structure. Obviously, 8 how that plays out remains to be seen, but I will 9 ask Marc Peperzak to offer his thoughts on that 10 topic. 11 MR. PEPERZAK: Well, unfortunately, 12 I've had a firsthand lesson that rather than 13 innovating, adapting to meet evolving market 14 demand, the dominant cooperatives and processors 15 use the federal order system in anticompetitive 16 ways to advance their interests, reduce 17 competition and protect their marketshare through 18 this action. As both dairy farmer and processors, 19 in other words, as a producer/handler, doing both, 20 we're well positioned to innovate and compete to 21 satisfy market demand, transfer differentiated 22 products, such as organic milk, traceable milk, 23 high Omega 3 milk, whatever. 24 The marketplace wants fully 25 traceable, innovative milk products at PROFESSIONAL REPORTERS, LTD. 215 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 consistently high quality. The dairy industry is 2 a traditional producer to cooperatives, to 3 processors or bottlers has a hard time satisfying 4 this demand for full traceability, something that 5 producer/handlers can do. We became a 6 producer/handler in order to assume control of 7 both the milk supply and conditions under which it 8 was processed. 9 There were limited supplies of 10 organic milk in Colorado. There's a pooling cost 11 issue, of course, and we assumed that risk and we 12 bear the cost of balancing ourselves, but most 13 importantly, we were able to control the quality 14 all the way to the customers. The 15 producer/handler option let us operate 16 independently from the federal milk order pricing 17 and pulling requirements, which frankly don't mean 18 anything in the organic world except that they 19 charge us. Being a producer/handler allowed us to 20 devote our resources to serving our market rather 21 than burdening our customers with the cost of 22 pooling. 23 The federal order system is 24 controlled by and benefits a very small number of 25 very large, powerful cooperatives and processors PROFESSIONAL REPORTERS, LTD. 216 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 through the use of full supply contracts, arcane 2 and non transparent milk pricing structures, 3 byzantine pool access requirements and block 4 voting. 5 Basically, they've got the scope 6 and scale to make the thing work. People think 7 we're large, we're relatively small. We don't 8 have that scope and scale. We can't play the 9 game. At the demand of the dominant cooperatives 10 and processors, USDA recently eliminated 11 producer/handler status for producers like us and 12 frankly, new, innovative future competitors that 13 could use the same system to bring to market 14 differentiated products. The producer/handlers' 15 experience shows that dairy's dominant market 16 participants will not tolerate economic 17 competition. 18 So in summary, what I'm saying is 19 the dominant processors and co-ops, quite frankly, 20 brought about the change. They've been there for 21 seven years because they didn't like the 22 competition. It was anticompetition as its best. 23 MR. SOVEN: Jim Goodman, your 24 perspective on the issue? 25 MR. GOODMAN: I think I'll just PROFESSIONAL REPORTERS, LTD. 217 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 pass, because I talked quite a while on my last 2 thing, but I guess the one comment I would make is 3 that I'm a fan of small, you know, I think that 4 that's, as Dr. Cropp said, one of the things that 5 we need to look at and if a producer and the 6 producer/handler situation can be more 7 competitive, if he can make more money putting it 8 into the community, you know, I guess that's 9 good. 10 So but really, it's not an issue 11 that I put a lot of time into thinking about, so 12 I'll just move that on to someone else who can 13 talk about it a little more. 14 MR. SOVEN: Fair enough. I'm going 15 to do what moderators sometimes do with some 16 trepidation, but I'm going to call a little bit of 17 an audible on my panel, because I do want to make 18 sure Professor Cotterill has time to talk about 19 the channel and I'll give a brief segue and then 20 turn it over to the experts. The bulk of the 21 discussion thus far, obviously, has been on what 22 as antitrust enforcers we would call the upstream 23 market or the producer market, how that's 24 structured and how it's regulated or not 25 regulated, the role of USDA, et cetera, et PROFESSIONAL REPORTERS, LTD. 218 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 cetera. 2 We've talked very little thus far 3 on this panel about the role of the downstream 4 market, which are is what's going on in the 5 processing structure and what's going on in the 6 retailing structure. And here I'll turn it over 7 to Professor Cotterill and then segue over into 8 Professor Carstensen and some of the other 9 panelists where we can both talk about the 10 regulatory issues and also give the panelists a 11 chance to turn the focus on the moderator and talk 12 about the antitrust issue. Professor Cotterill? 13 MR. COTTERILL: Thank you. That 14 was a good signal he picked up from me. Well, I'd 15 like to thank everyone for being here and also 16 listening to everybody and I like to interact with 17 people that have come before me to give you a 18 perspective on some of these issues, because not 19 everybody agrees with everybody here. So I'm 20 going to highlight some of the differences and 21 I'll say some things that are perhaps new. 22 First of all, I'd like to motivate 23 my talk of channel consolidation with a notion of 24 efficiency. It's always amazed me how in the 25 dairy marketing channel, the dairy farmer is PROFESSIONAL REPORTERS, LTD. 219 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 probably the most efficient member of that 2 channel, having tremendous efficiency gains over 3 the last 30 or 40 years, absolutely amazing 4 efficiency gains. But has the dairy farmer been 5 able to capture any of that in terms of any kind 6 of stable return, and the answer is no. 7 And then the processors and the 8 retailers look at the dairy farmer and say, well, 9 you're not making any money because you're not 10 efficient and then these same people go to the 11 Justice Department and say you should allow our 12 mergers, you should allow us to combine and do 13 these different things, because they are 14 efficiency enhancing. We are efficient. And the 15 answer there is show us, please. 16 Because the antitrust laws say that 17 they not only have to show you that they're 18 efficient, they also have to show that they pass 19 it on, either to consumers or farmers, the two 20 ends of the system. They're supposed to be 21 competitive and they're supposed to reward people 22 at both ends of the channel. They should show us 23 where the money is. 24 So my advice to the Justice 25 Department on channel consolidation is that merger PROFESSIONAL REPORTERS, LTD. 220 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 policy has been broken for at least 10 years, if 2 not 20 or 30. Fix it first is a description of 3 when somebody comes for a merger, you allow them 4 to negotiate and spin off and divest. Fix it 5 first doesn't work, because the Justice Department 6 has no good way of evaluating what the spin-off 7 assets are. They should look carefully at fix it 8 first and in the first instance, they shouldn't do 9 it. 10 The other thing that they should 11 enforce going forward is what I call no second 12 bite. The idea of no second bite is that the -- 13 these companies come before Justice and the 14 Federal Trade Commission like a Stop&Shop retailer 15 in New England acquired its horizontal competitor 16 in '96 and that was part of a fix it first. It 17 spun off $500 million of grocery stores that we 18 thought would preserve competition and they 19 promised that, in fact, they would lower prices. 20 Well, the fix it first didn't work 21 and three years later, they come back to the 22 Federal Trade Commission in New York City and want 23 to acquire Pathmark. And we went and looked at 24 what happened to prices after the '96 one and we 25 found that prices went up, not down, after the PROFESSIONAL REPORTERS, LTD. 221 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 merger in New England and we said to the Federal 2 Trade Commission, no second bite at the apple. 3 They can't come to you and argue efficiency and 4 we're going to pass it on to the consumer when 5 they didn't do it the last time. 6 And if Justice just instituted that 7 rule, somebody like Dean or Suiza, we wouldn't 8 have the mergers that we've had in the last 10 9 years, we would not have them. I believe that 10 firmly, if they just introduced a no second bite 11 rule against that company. 12 Okay. Then with regards to 13 justice, one of the things in antitrust is they 14 have to define the market. It's absolutely 15 critical in a monopolization case or a merger case 16 to define the market. 17 And we've had just on this panel 18 two very radical, different, implicit definitions 19 of the market. Bob Cropp has told you 20 cooperatives don't have a big share of the market, 21 they only have 14 percent, 9 percent or whatever 22 else. Implicit in Bob's market shares is a 23 national market for fluid milk, a national market 24 for cheese, and then Marc from Colorado says we 25 only have one buyer. Implicit in his definition PROFESSIONAL REPORTERS, LTD. 222 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 is the State of Colorado is a market, one buyer. 2 Why can't Marc go sell to somebody in Chicago or 3 New York or Boston, you know. 4 So my point is, is that the Justice 5 Department needs to very carefully define these 6 markets and with all due respect, we don't have a 7 national fluid market for fluid milk in this 8 country. Markets are still regional. Cheese, 9 butter, perhaps, okay, but that would be it. 10 Then let's go on to the issue -- 11 another thing that everybody has said here is we 12 hate the -- we really, gee, we really don't like 13 the processors. We really don't like their 14 retailers. 15 Farm prices are low and retail 16 prices don't respond and we really -- what is 17 going on? And then we've also heard that 18 cooperatives are the countervailing power, that 19 cooperatives are a farmer's last hope for 20 exercising power against these powerful people. 21 Well, let's take that to task. First of all, 22 generally, in economic theory the notion of 23 countervailing power has been disproved in many 24 theoretical contexts and in some practical 25 empirical ones. PROFESSIONAL REPORTERS, LTD. 223 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 Countervailing power, where you 2 have two say monopolists going against each other 3 head to head in a market, a buyer and a seller 4 crashing heads, that's supposed to be 5 countervailing power. But what happens is they 6 coalesce and they exploit the two ends, the 7 consumers and the farmers. There's coalescing 8 power as well and it's a distinct possibility in 9 theory and in practice in the dairy industry. I 10 think we've seen that in many of our regional 11 markets. 12 One of the more unsettling things 13 I've ever had in my professional career as an 14 agricultural marketing economist is in 2003, I was 15 at the federal marketing orders administrators 16 conference in Newport, Rhode Island and I spoke 17 about these kinds of issues to probably 200 people 18 in the room. 19 And afterwards, Rick Smith got up, 20 who was at the time the CEO of Dairylea and the 21 head of DMS, it had just been formed and Smith 22 basically said to the group, he said, look, that 23 is not the way co-ops are going to behave in the 24 future. We are not going to fight with these 25 people in the channel. We are going to go for a PROFESSIONAL REPORTERS, LTD. 224 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 channel efficiency. We're going to work with 2 these people for efficiency. Think about that for 3 a minute, and where does that leave the idea of a 4 cooperative as a farmer's representative. Just 5 think about it. 6 So let's go next to the issue of 7 cheap food policy in this country. I would submit 8 that cheap food policy is bankrupt. Who is food 9 cheap for? Cheap food is a notion that the farm 10 price and the market is low because possibly of 11 federal subsidies, also because of possibly buyer 12 power against them. Farmers are getting low 13 prices, so cheap for who? 14 Well, I would submit that the 15 lion's share of that cheapness and the low market 16 price that you're receiving stays with the 17 processor and the retailer. You're quite right 18 there in that the retail prices are not 19 responsive. So it's cheap, by and large, for 20 corporate America and now let's think about that 21 for a minute. Cheap food for them, that means 22 they get a raw commodity that they can innovate on 23 and how have they innovated compared to you on 24 farm? 25 You've produced a wholesome product PROFESSIONAL REPORTERS, LTD. 225 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 at a low price. They've innovated by massive 2 product differentiation and a great number of 3 different varieties of products, and quite 4 frankly, the result has been expensive food to the 5 American consumer. Food is not cheap and we have 6 an obesity epidemic. Corporate America produces 7 food that makes us fat. We have health costs that 8 are everybody's damaging charge. Overweight 9 people are less healthy. 10 So what does this mean? It means 11 that farmers have a natural ally with consumers 12 for healthy, low-cost product that generates 13 health. I think that you need to look forward all 14 the way to the White House and the woman that's in 15 the White House as an ally for the kind of things 16 you're saying. 17 Another thing about the market 18 channel, in supermarkets over the last 20 years 19 there's been a massive shift in the way milk is 20 priced. It's commonly known -- 20 years ago, milk 21 was often a loss leader, something that was sold 22 low to bring people into the store. Now milk is a 23 cash cow. Milk is the largest product in the 24 American supermarket by sales volume in dollars, 25 it is. It's also the most profitable in many PROFESSIONAL REPORTERS, LTD. 226 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 supermarkets. They have margins of 40 percent 2 now, 45 percent are common, whereas 20 years ago, 3 the margins were 20 percent. You're quite right, 4 that in fact, that the margin has expanded in 5 those areas more than costs have justified it. 6 It's fundamentally a shift in the way they price 7 milk. 8 Well, what else? Flat milk 9 pricing, you've probably never heard of that, but 10 at the University of Connecticut we've watched it 11 for several years in the northeast. The idea that 12 supermarkets in the northeast charge the same 13 price for a gallon of skim milk as one percent, 14 two percent and whole. They're all like $3.49 a 15 gallon. Now, what does that tell you about 16 competition, if competition is based on cost? 17 Because every farmer in this room 18 knows skim milk is much cheaper than whole milk. 19 There is no competition. That pricing is not 20 competitive pricing. That should stop, because it 21 does not reward the consumer or give the 22 opportunity for them to buy lower cost, healthier 23 milk. Flat milk pricing is a policy that should 24 stop. 25 Well, what do we see? Basically, PROFESSIONAL REPORTERS, LTD. 227 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 another thing I see here that's been talked about 2 a lot is the notion that the last year and a half, 3 we've had low prices and before that we had very 4 high prices and the idea of a cycle that's getting 5 progressively more violent in terms of the 6 swings. I think that's related to the change in 7 the structure of America's dairy farms. 8 I don't have clear evidence, I'm 9 not a production function economist, but I would 10 raise the issue of the over production trap. It's 11 a classic area in ag policy, that if a dairy 12 farmer has a lot of say leverage on the farm or if 13 the dairy farmer has a lot of cash inputs and is 14 being squeezed because of higher costs and these 15 kind of phenomena might be very true on a 5000 or 16 a 10,000-cow farm, where the banker is an integral 17 part in the operation. It could also be true on a 18 small farm where the banker is part of the 19 operation. 20 But I think by and large, a lot of 21 the leverage is on the larger farms. A lot of the 22 larger farms also buy a lot of their inputs and 23 unless they're very savvy in futures market 24 hedging of corn and soybeans, they're going to get 25 stuck a year ago on that kind of high price cycle PROFESSIONAL REPORTERS, LTD. 228 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 there and that probably is exacerbated in dairy, 2 because these people have no choice but to cover 3 their cash costs by expanding production, not 4 shrinking. 5 So I think the shift in the 6 structure of the industry towards more leverage 7 and more input costs in these larger 8 industrialized farms has created the kind of swing 9 that we see. That's a hypothesis, I don't have 10 hard research on it, but it should be looked at. 11 Another thing that I would say, earlier people 12 have said that the CME needs to be fixed. If just 13 if the CME were fixed, dairy's problems would be 14 solved. Now, that might be true if you're 15 producing for the cheese market in Wisconsin. 16 Okay, but coming from the east 17 coast where we're mostly for the fluid market, 18 it's not true at all, because quite frankly, the 19 CME does not set the fluid market price. Since 20 1987, with the relaxation of federal market orders 21 to a minimum floor, the fluid market price every 22 month is basically the class minimum plus what Bob 23 has mentioned and everybody knows is the over 24 order premium. 25 The co-ops bargain or coalesce with PROFESSIONAL REPORTERS, LTD. 229 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 the processors to set the fluid market price in 2 all the markets in the United States today. It's 3 been that way since '87, and for better or for 4 worse, that's how that price is set. So fixing 5 the CME is not going to fix the fluid milk market 6 price, because it's the CME plus the over order 7 premium, the CME as is reflected into the class I 8 mover, all right. So just understand that, you 9 know, fixing the CME is not everything to the 10 dairy farmer. 11 So where are we at? It's clear we 12 need a higher price via a larger share of the 13 consumer's dollar. There's no doubt about that. 14 The question is just how to do it. We also need a 15 more stable price. There's no question about that 16 as well. I think that the -- we need a 17 competitive market channel for efficiency in 18 that. Antitrust can give us a competitive market 19 channel, it can, through increased enforcement. 20 I'm a skeptic of enforcement. 21 I think frankly the Justice 22 Department could bring 10 cases in this industry 23 and they'd probably lose eight. It's very, very 24 hard in federal courts to prevail. I think 25 there's probably going to need to be changes in PROFESSIONAL REPORTERS, LTD. 230 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 the underlying antitrust law, so I was very 2 encouraged to hear Senator Kohl and Feingold say 3 they're willing to do that, because I think we're 4 going to be there quicker, and the quicker the 5 better, than you think. 6 So what else? There's the issue of 7 social justice or the issue of the health u of 8 rural America. It was interesting to hear 9 Secretary Vilsack say that 10 percent of the 10 population is rural and 45 percent of the people 11 serving in our military are rural people. I think 12 rural people do have a very fundamental, American 13 set of values beyond even serving in the 14 military. I think it's worth keeping, because I 15 think we raise good people in rural America. 16 Not that we don't in urban America, 17 urban America raises tougher people. I think 18 rural America raises more moral people or people 19 with more of a notion of what's good or bad. That 20 is -- so if you want a cynic, look for a kid from 21 Brooklyn. If you want a greenhorn, look for a kid 22 from a farm in Upstate New York. So that's it. 23 On fair trade for rural America, I 24 think there's still a role for something like the 25 milk program that provides subsidies for smaller PROFESSIONAL REPORTERS, LTD. 231 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 farms, farms with less than 150 cows. I think 2 there's a place for that until we figure out a lot 3 of this other thing. I think there's a place for 4 organic milk, to protect small farms that want to 5 do that. 6 And I think that in terms of 7 policies for a market channel, I've suggested 8 something that politically is probably extremely 9 unpalatable, because IDFA has fought it tooth and 10 nail in Vermont and is now fighting it in New 11 Jersey and probably would fight it elsewhere. 12 That's the notion of collecting some kind of a fee 13 from the retailer and paying it back to the milk 14 shed. If the retailer or the processor have such 15 a wide margin, 30 cents a gallon times 11.6, you 16 figure it out, on fluid milk, that's over $3 a 17 hundred weight. 18 You could do it nationwide, okay. 19 If you want to go after the margin in the channel, 20 that's one thing, and you would put it with 21 something like the New York State price gouging 22 law which says that retail prices can be no more 23 than something like 200 percent of the farm price 24 and it's not a fixed thing. It's just that if 25 they are above that, then the agency is empowered PROFESSIONAL REPORTERS, LTD. 232 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 to go to the retailer and say please justify your 2 costs, because if you're a retailer in Manhattan, 3 perhaps maybe more than twice the farm price is 4 justified because of the extremely high retailing 5 costs. 6 But it gives the retailers on 7 notice, that in fact, somebody is looking at 8 margins and so that is an option. And if you are 9 really talking about going after the margin kind 10 of thing, you're going to have to do something 11 like that and like I said, the International Dairy 12 Foods will fight that tooth and nail, as well as 13 some people like the Food Marketing Institute, and 14 I want to tell you how powerful they are. This is 15 the last thing and then I'll be quiet. 16 In 2003, Peter and I were invited 17 by Senator Kohl and Senator Leahy down to the 18 senate judiciary committee to testify on the issue 19 of buyer power against farmers. And you know, 20 Peter and I, we had a great day. We went in there 21 and we went forwards and backwards on this. If 22 you read my testimony, it reads like a road map 23 for what's happened since with the issues of 24 vertical power and exercising of corporate power 25 against farmers and consumers. PROFESSIONAL REPORTERS, LTD. 233 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 After the senators had gotten done 2 bouncing us around, Peter and I got up and turned 3 around and looked at the room and there were about 4 200 people in this hearing and if looks could 5 kill, every one of them would have had a knife 6 through our heart and I turned to Peter and said 7 Peter, we just filled their political contribution 8 coffers. There was nobody there from farmers, 9 there was nobody there from consumers. The room 10 was full of lobbyists for the food industry. 11 That's how hard a battle you will 12 have, because they are extremely powerful, but it 13 is ultimately in dairy a political answer. It's 14 not an economic answer, to get these markets to 15 work better for you and for the American economy. 16 Thank you. 17 MR. SOVEN: Well, predictably, 18 given the level of talent and experience on the 19 panel today, we did not cover everything, but 20 their answers did a terrific job of weaving in all 21 of the issues and demonstrating that, in fact, 22 look, these issues are not unitary or insular or 23 singular, they are in fact related. All of these 24 gentleman took substantial time to come here 25 today, so I'd just like to express our PROFESSIONAL REPORTERS, LTD. 234 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 appreciation to them and turn it over to the next 2 panel. Thank you. 3 (A short recess is taken) 4 MR. MacDONALD: Good afternoon, 5 it's time for our next session, and as soon as we 6 get done with that, we get the free ice cream. My 7 name is James McDonald. I'm with USDA's Economic 8 Research Service. This panel is on market 9 consolidation. 10 Now, before we get started, I want 11 to make one other brief announcement. If you see 12 the kids in the halls, in the aisles here wearing 13 their colors that say Wisconsin Association on the 14 back, they're with Future Farmers of America. 15 They handle questions, if you have 16 questions for the panelists. They have index 17 cards with them. If you think of a question you 18 want to pass up to us, signal one of those kids in 19 the aisle, get an index card from them, fill it 20 out with your question. They'll bring it up to 21 our DOJ staffer at the end of the table here and 22 they'll pass it down to me and we'll see if we can 23 work these in. 24 Now, as I said, the -- today's 25 panel is on market consolidation. Our charge, PROFESSIONAL REPORTERS, LTD. 235 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 I'll just briefly tell you, is the following: 2 Firms that produce, process and sell milk and milk 3 products have grown dramatically in certain 4 geographic regions throughout the United States. 5 While the growth of cooperatives and processors 6 has almost certainly lowered production costs, in 7 some regions there are concerns that there may be 8 so few cooperatives and processors that the 9 remaining firms can exercise market power against 10 their customers. 11 You've heard of that touched on 12 throughout the past few sessions. Processors may 13 also achieve sufficient size in some regions to 14 exercise power against cooperatives and farmers. 15 This panel will explore how such changes in farms 16 and firm size are affecting both farmers and 17 consumers. 18 Now, to address those issues, I 19 have a panel of five distinguished experts. All 20 the way to my right is Brian Gould, an associate 21 professor in the Department of Agricultural and 22 Applied Economics here at the University of 23 Wisconsin. He's an expert on dairy marketing and 24 dairy price risk management. To my immediate 25 right is Calvin Covington. Calvin is a former PROFESSIONAL REPORTERS, LTD. 236 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 chief executive officer of Southeast Milk, whose 2 members are in four states, most dairies in 3 Florida and approximately half in Georgia are SMI 4 members. SMI also has members in Alabama and 5 Tennessee. 6 To my immediate left is Louise 7 Hemstead, who serves as chief operating officer at 8 the Crop Cooperative in La Farge, Wisconsin, 9 better known as Organic Valley, which is the 10 nation's largest organic dairy cooperative. 11 Louise is also a graduate of the University of 12 Wisconsin where she appeared on this stage. 13 MS. HEMSTEAD: Let's not go into 14 that. 15 MR. MacDONALD: All right. Next on 16 my left is Daniel Smith, an attorney in sole 17 practice in Montpelier, Vermont with 18 specialization in state and federal milk market 19 regulation. Dan, between 1992 and 2001, was the 20 founding executive director of the Northeast Dairy 21 Compact. Finally, to my far left is John Wilson, 22 senior vice-president for marketing and industry 23 affairs of Dairy Farmers of America. In that 24 position, he oversees DFA's governmental and 25 public affairs, regulatory initiatives and PROFESSIONAL REPORTERS, LTD. 237 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 national milk marketing activities, including 2 customer relations and economic analysis. 3 Now, what I'd like to do is get a 4 series of questions focused on three broad 5 topics. First, I want to quiz the panel members 6 and get some interaction among them on the factors 7 behind changes in cooperative organization and 8 business practices over the last couple of 9 decades. Secondly, we're going to talk about 10 changes in the organization of processing, and 11 finally, we're going to talk about some 12 interaction between those and particularly, we're 13 going to talk about competition and market 14 relationships in fluid and manufactured product 15 markets. 16 Let me start then with our section 17 on changes in cooperative organization and what 18 I'd like to do is toss the first question over to 19 Brian Gould and ask him if he could briefly 20 summarize for us the major changes that he's seen 21 in the organization of dairy cooperatives over the 22 last 20 years. Brian? 23 MR. GOULD: Thank you very much and 24 I hope with such an esteemed panel that I'm going 25 to learn quite a bit today, because I think I'm PROFESSIONAL REPORTERS, LTD. 238 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 the rookie on the panel. There's been mention 2 made throughout today about trends in terms of 3 consolidation, both at the processing level and 4 the co-op level. What I'd like to do now in terms 5 of this first topic is just to bring some basic 6 statistics and through my discussion not only on 7 this topic, but as we go throughout the panel, I'm 8 going to emphasize what information we have and 9 what information we do not have in terms of trying 10 to evaluate the competitive environment facing not 11 only dairy producers, but also dairy 12 manufacturers. 13 Just in general, dairy co-ops maxed 14 out in terms of number during World War II. There 15 was over 2300 dairy cooperatives. Those 2300 16 represented about 48 percent of the marketed milk 17 in the U.S. at that time. By 1980, that 2300 had 18 gone down to 435, but that 435 had accounted for 19 77 percent of marketed milk, so again, they were 20 getting larger with fewer numbers around. In 21 2007, as Dr. Cropp indicated in the last panel, 22 there were 155 dairy cooperatives representing 23 about 82 to 83 percent of marketed milk. 24 What happened over the '60s and 25 '70s in terms of the consolidation of PROFESSIONAL REPORTERS, LTD. 239 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 cooperatives, there was a trend towards local 2 cooperatives merging and trying to get large from 3 a regional perspective and then there was a 4 regional federation established. But again, '60s 5 and '70s was a period of consolidation with a 6 regional focus. After the '70s, during the '80s 7 and '90s, there was a change in that into a 8 consolidation trend of national focus. 9 That is, multi regional 10 cooperatives came into existence and, again, I'm 11 not going to go through in detail, but I think 12 it's in 2001, the GAO, the Government 13 Accountability Office, did a great study on the 14 market structure in the dairy industry, and they 15 reviewed the growth of DFA and LOL in terms of 16 going from basically nothing in terms of DFA's 17 case to a multi national cooperative. I'd really 18 suggest you take a look at that, because there's 19 an example of a growth in a cooperative, not 20 organically, but through purchasing of existing or 21 merging of existing firms, but again, a very, very 22 interesting story. 23 In terms of why there is mergers, 24 again, there's a variety of theories. Professor 25 Cropp has noted a couple of them in his talk and PROFESSIONAL REPORTERS, LTD. 240 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 he also had a 2001 publication where he gave three 2 or four reasons why cooperatives may want to merge 3 and I thought I'd briefly go through those and 4 provide some current examples of why they may be 5 relevant, and some of these are obvious and some 6 of them may not be. 7 The first reason, possible reason 8 for a merger or consolidation may be to look for 9 gains in efficiency in procurement, processing, 10 just the fact that you're dealing with volumes. 11 Volumes is a non linear relationship, so the 12 larger you get, the more volume you can deal with, 13 the lower the cost per unit. Again, the reason 14 behind this, again, is the fact that dairy 15 cooperatives are trying to hold their place at the 16 bargaining table with the larger sized processors 17 and other processors are then dealing with larger 18 retail establishments. 19 I want to quote somebody from 2009, 20 this really illustrates this point, and this has 21 been referenced a couple of times so far today and 22 this is with respect to the purchase by Dean Foods 23 of the two bottling plants in Wisconsin that is 24 currently the subject of litigation. I'm going to 25 quote Dave Fuhrmann, who's president of Foremost PROFESSIONAL REPORTERS, LTD. 241 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 Farms, to give -- he gave a Wisconsin State -- I 2 don't know if it was the State Journal or 3 Milwaukee Sentinel article or quote in terms of 4 why they decided to sell those plants and I'm 5 going to quote him, it's from April 2009. 6 "As food retailers consolidate to 7 gain marketshare and operating efficiency, 8 Foremost Farms has been challenged to efficiently 9 supply customers who have a significant regional 10 or national presence and prefer to have a sole 11 supplier." Again, that really illustrates that 12 first point about needing to meet the needs of 13 larger processors as well as final purchasers. 14 The second reason why mergers may 15 be appropriate for cooperatives historically is 16 that there are tight marketing margins and capital 17 constraints and one way to get around those 18 constraints is through purchasing other firms that 19 may have less tight margins and may have 20 additional capital to bring into the operation. 21 A third reason may be market 22 entry. Market entry is expensive, that is 23 entering a new market and you can enter a new 24 market relatively cheaply by finding a firm that's 25 currently in that market. PROFESSIONAL REPORTERS, LTD. 242 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 Rapid advances in information 2 technology, we all know how automated dairy farms 3 are getting as well as obviously cheese plants. 4 Again, with advances in information technology, 5 it's much easier to coordinate production 6 activities, whether for larger operations, whether 7 you're talking at the farm level or at the cheese 8 plant. 9 And finally, changes in Federal 10 dairy product support policies, again, we've had 11 an increase in volatility in dairy markets. 12 Everyone knows that. One way to minimize the 13 risk, whether you're an investor or a plant, is to 14 diversify your portfolio of products and one way 15 to do is that is to buy operations that maybe make 16 a different product than you're currently getting 17 involved in. So again, those are possible reasons 18 and there's a whole slew of other ones that may be 19 the reasons behind a lot of these mergers. 20 In terms of size distribution of 21 cooperatives, using publicly available data, and I 22 have to emphasize that I only have access to 23 publicly available data, looking at 1987, there 24 were only two firms or two cooperatives with more 25 than 6 billion pounds marketed a year and those PROFESSIONAL REPORTERS, LTD. 243 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 two firms accounted for 24 percent of the co-op 2 milk and 17 percent of U.S. milk. By 2008, there 3 were four firms with greater than 6 billion pounds 4 of marketed milk and they accounted for 48 percent 5 of the co-op milk and 40 percent of the U.S. 6 milk. 7 And again, there's a great 8 publication that comes out, I think, around 9 October every year in Hoard's Dairyman. They list 10 the marketings of all the largest top 50 dairy 11 cooperatives. I suggest you get ahold of that, 12 it's a great resource in terms of looking at 13 trends in the industry. I'm almost done, sir, 14 just a couple more things here. 15 Economists like to use numbers, as 16 you know, and there's several ways of measuring 17 concentration. One of them is what's known as a 18 concentration ratio, which is simply the sum of 19 the percentage of whatever market you're looking 20 at, whether you're looking at the value of sales 21 of the marketing of raw milk. 22 You sum up the marketing share of 23 the total marketings in that commodity by the 24 firms of interest and we call that the 25 concentration ratio value. The greater the value, PROFESSIONAL REPORTERS, LTD. 244 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 the more concentrated that market. In 1987, in 2 terms of CR values, again, getting back to that 3 size distribution of the co-op firms that I just 4 reviewed, the CR4, that is the four largest 5 cooperatives, accounted for 33.4, that's CR4 6 values of 33.4 and, again, that was 48.7 by 2008. 7 Again, an increase, showing an increase in 8 concentration. 9 Another measure economists like to 10 use is what's known as the -- we call it the HHI 11 index, that's what I'm going to say. I can say 12 that. The HHI index, which is simply the square 13 of the sum of the marketshare of the firms that 14 you're studying in the industry of concern. And 15 why we take the square is because it weights more 16 the larger the firms. The DOJ uses the HHI scores 17 as a measure of concentration of an industry. 18 In 1987, I calculated using 19 publicly available data the HHI scores for co-op 20 milk. That is, I'm trying to see how concentrated 21 co-op milk is in terms of the marketing of that 22 raw milk. In 1987, the HHI was 546.1. Anything 23 over a thousand is considered to be a moderately 24 concentrated market. Anything over 1800 is a very 25 concentrated market. So in 1987, again, 546. In PROFESSIONAL REPORTERS, LTD. 245 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 2008, we have a HHI value of 981, so almost up to 2 that 1000 value. Again, I'm not trying to make 3 any judgments, this is just a matter of looking at 4 the values. 5 As has been alluded to throughout 6 the day, when one looks at concentration, one of 7 the key things to define is market. What's the 8 extent of the market, and I just gave you numbers 9 pertaining to the total U.S. market. That may not 10 be very relevant, especially on the fluid side, 11 when you're dealing with say bottled milk, because 12 a lot of those markets are local markets. There's 13 a 2001 GAO report that looked at deliveries by the 14 four largest dairy co-ops in 11 of the existing 15 marketing orders and remember those CR4 values I 16 gave you. 17 U.S. CR4 in 1997 was 35.8 and in 18 2002 was 40.2. In looking at individual cities, 19 the CR4 values ranged from 63.5 in Minneapolis to 20 97.1 in Dallas, so again, giving evidence that we 21 need -- in terms of information, we need something 22 other than national numbers to really do an 23 analysis of whether there's an increase in 24 concentration in the industry and unfortunately, 25 that GAO study had access to confidential data PROFESSIONAL REPORTERS, LTD. 246 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 that I as an academic do not have access to. 2 As Professor Cropp indicated, 3 there's been significant changes in the importance 4 of cooperatives in various products, a loss on the 5 cheese side and we've lost since '87 half of the 6 production of fluid milk by dairy cooperatives and 7 we're going to be revisiting that issue in a 8 minute. I've overextended my time. 9 MR. MacDONALD: Thanks, Brian. All 10 right. We've gotten mergers towards much larger 11 cooperatives, somewhat higher concentration among 12 cooperatives, as a quick summary. Let me turn to 13 John Wilson from DFA to talk about that a little 14 bit. As I see from your website, DFA members milk 15 about 1.8 million cows. By my calculation, that's 16 about 20 percent of all the cows in the country. 17 What do you get from being so big? 18 MR. WILSON: Well, thank you, Jim. 19 Let me start by stating five indisputable facts. 20 First, we do have about 17,000 farm families, all 21 dairy farmers, that belong to DFA. They live on 22 about 9500 dairy farms across the United States. 23 These members own, govern and control the 24 organization. Second, while DFA has a diverse 25 membership, you've heard from some of them this PROFESSIONAL REPORTERS, LTD. 247 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 morning and this afternoon, we have large and 2 small dairy farms. Over 70 percent of our members 3 milk less than 100 cows. 4 Third, of all the milk produced in 5 the United States, 20 percent, to reconfirm your 6 fact, Jim, 20 percent is produced by DFA members. 7 Fourth, and this has been well documented today, 8 DFA members, as well as all dairy farmers, have 9 suffered badly because of low milk prices and high 10 costs. Fifth and final point, DFA is a voluntary 11 organization. Every dairy farmer and every member 12 has the opportunity to leave or join DFA every 13 year. 14 Now, to get to the specifics of 15 your question, we have to remember back in 1998, 16 four cooperatives voluntarily came together and 17 the members of each of those four cooperatives 18 voted to create DFA. They knew that in a world of 19 consolidating retailers and consolidating 20 processors, that in order to help themselves, they 21 would be better off coming together and working as 22 one cooperative. Some of the things that happened 23 back then which kind of goes to the benefits of 24 the size, some of the things that happened 25 immediately when DFA was created, we eliminated PROFESSIONAL REPORTERS, LTD. 248 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 inefficiencies. 2 Specifically, one easy one, really, 3 is hauling inefficiencies, because clearly, when 4 you have multiple cooperatives, you run the risk 5 of having milk trucks meeting each other on the 6 road, going essentially down the same roads, 7 picking up neighbors. Lots of diesel fuel gets 8 saved when you take away that inefficiency in 9 procurement and hauling. Our members realized 10 there was a much better opportunity to get a fair 11 price when you have one organization competing for 12 sales rather than four organizations in our case, 13 and the critical mass is important as well. 14 Today, we're able to provide 15 services nationwide to dairy farmers, including 16 health insurance, I think that was alluded to 17 earlier, price risk management which is to many of 18 our members a very, very important piece and the 19 way to avoid disasters like 2009, farm supply 20 purchase programs, just to name a few of the 21 services that we provide our members, which we 22 wouldn't be able to do without the critical mass 23 that we have. 24 Another significant piece is the 25 capital. Yes, we have a large balance sheet, but PROFESSIONAL REPORTERS, LTD. 249 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 our members utilize that large balance sheet to be 2 in business in marketing things like Borden 3 cheese, so we can not just sell raw milk, we can 4 sell finished products, in some cases directly to 5 consumers. So I think there's -- our members 6 firmly believe that size does matter and it can 7 work to their benefit. 8 MR. MacDONALD: Thanks, John. Let 9 me direct a question related to this to Louise. 10 You have the largest organic cooperative, but your 11 members are spread widely across the country. I 12 guess I'd like to wonder, given the discussion 13 that we've had so far, how you manage to aggregate 14 that volume and particularly, if you could talk a 15 little bit about co-processing agreements and 16 whether that's a way for you to aggregate your 17 organic volumes. 18 MS. HEMSTEAD: Certainly, thank 19 you, appreciate the opportunity to be here. I am 20 also a dairy farmer. My husband and I operate a 21 fourth generation dairy farm about 90 miles 22 northwest of here, so in addition to my day job, I 23 do milk cows on occasion. That being said, Crop 24 was founded or Organic Valley is our brand name, 25 in 1988 by seven dairymen in western Wisconsin. PROFESSIONAL REPORTERS, LTD. 250 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 And the goal was to return a sustainable pay price 2 to the farm by means of organic production. 3 Now, nobody really knew what 4 organic production was about and they went away 5 and really studied and came up with a process that 6 ultimately there was action in D.C. to establish 7 an organic rule and in some sense, it's an 8 artisanal sale of milk. And last year, we 9 returned a premium to our farmers of $14 a hundred 10 over conventional price by the artisanal sale of 11 their milk. Now, of course, that artisanal work 12 starts on the farm. 13 And so over the years, we started 14 with our seven farmers and we were so small, we 15 couldn't, A, get a milk hauler to pick up the 16 milk, so the chairman of the board went out and 17 signed a note to buy a milk truck which we ran 18 every other day and then we found a cheese 19 manufacturer in La Crosse, Wisconsin who was 20 willing to make cheese out of our milk and then we 21 started knocking on doors and trying to sell that 22 and it was brutal and it was ugly. 23 The farmers established what they 24 considered a fair pay price for the milk and if 25 they were able to sell it organically, it received PROFESSIONAL REPORTERS, LTD. 251 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 that pay price and if they had to sell it 2 conventionally, it went on the conventional 3 market. It was not blended down. The price was 4 blended back to the farmers based on how effective 5 the organization was. 6 Over the years, we've elected to 7 stay out of the brick and mortar business. We 8 have one processing plant where we manufacture 9 cultured butter and we have a cutting room where 10 we convert pounds of cheese into retail product. 11 That, too, born out of necessity because nobody 12 would do it, we were so small. And we had part- 13 time employees when I started in 1993 that would 14 come in and convert 40-pound blocks of cheese for 15 us once or twice a week and that's how we got 16 started, so very small. 17 And then over the years, we 18 developed customers for bulk milk, we developed 19 customers for powdered milk, we developed our 20 brand. We didn't have a brand back in 1988, that 21 came a couple years later and we gradually moved 22 out of Wisconsin into Minnesota. That was a big 23 decision. Then we went to Oregon, we went to New 24 York and today, we have 1300 members in 30 25 states. We have one processing plant. We work PROFESSIONAL REPORTERS, LTD. 252 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 with co-processors all over the country, big folks 2 like HP Hood, who's a name I haven't heard yet 3 today, to small folks like Guida Dairy in 4 Connecticut, Byrne Dairy in New York, family owned 5 dairy processors who manufacture products, our 6 products, for us. 7 Smith Dairy, another family dairy 8 in Indiana, Schroeder Milk in Minneapolis-St. Paul 9 which is now part of Agropur, a Canadian owned 10 company, Borden down in Texas owned by LALA in 11 Mexico, Dairy Gold, a co-op in the northwest. 12 Those are just a few of the 70 co-processors that 13 manufacture our products to our specifications. 14 They have to follow organic rules. They have to 15 receive our milk in a clean pipe, a clean 16 unloading. They have to process it first of the 17 day. We take a line lost hit for the entire plant 18 because we're running at the beginning of the day 19 and those things add up and build the cost of 20 goods. 21 But the model has worked well for 22 us because it's allowed us to come up with a 23 diversified product line for the customers. If we 24 had to sell all our milk as fluid milk, we would 25 truly suffer. The other thing we haven't talked PROFESSIONAL REPORTERS, LTD. 253 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 much about today, Dr. Cropp mentioned it, is the 2 seasonality of milk. There's a seasonality of 3 milk consumption. There's a seasonality of milk 4 production and they are not the same season. As 5 co-ops, we all deal with that, how we balance 6 that. 7 Typically, in May and June and 8 July, there's more milk coming off the farms and 9 consumer consumption in the fluid milk market 10 drops significantly. It doesn't matter if it's 11 conventional or organic, folks, go look at the 12 stats. It's the same. So this balancing of milk, 13 not only is it the fluid milk market, but it's the 14 cheese market. We've talked quite a bit about the 15 CME and the way the price of milk is set, and 16 there is a challenge there and we do need to 17 address it. Thank you. 18 MR. MacDONALD: Thanks, Louise. 19 That mention of seasonality both in production and 20 demand gives me an opening to shift a question 21 over to Calvin. At this stage, what we're trying 22 to do is get some warm-ups on cooperative 23 structure. Calvin has been an executive with two 24 southern dairy enterprises and I'd like, Calvin, 25 to see if you can give me your reactions on how PROFESSIONAL REPORTERS, LTD. 254 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 you think organization of cooperatives and 2 business for southern dairy production has changed 3 in your career. 4 MR. COVINGTON: Well, I'll speak to 5 Southeast Milk where I served as chief executive 6 officer for the previous 10 years and during that 7 10 years, because of changes in the marketplace, 8 Southeast Milk had to make a major change in its 9 strategy. When I went to Southeast Milk, 10 Southeast Milk was basically a marketing 11 cooperative. It owned no brick or mortar. Its 12 job was to get the milk picked up, market that 13 milk to the best of its ability, collect the 14 money, pay that money back to its dairy farmer 15 members. 16 Then when the Dean/Suiza merger 17 took place, which I consider to be one of the most 18 significant changes in the fluid dairy industry in 19 modern times, that really changed things at 20 Southeast Milk, because our main challenge turned 21 into finding fluid markets for our milk 22 production. It became a major challenge. Because 23 of that and then because of some other processors 24 in our marketing area who were almost forced to 25 sell because of things happening in the PROFESSIONAL REPORTERS, LTD. 255 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 marketplace, Southeast Milk had to end up buying 2 those processing plants in order to have local 3 markets for its milk production. 4 And so just in a short period of 5 time, Southeast Milk, because of changes in the 6 market through consolidation of processors, had to 7 move from being a marketing cooperative to a 8 processing cooperative. Also because of changes 9 in other structure in the southeast, you've heard 10 Louise talk about balancing, which is a major 11 function, balancing the market, its supply with 12 demand, especially in the southeast part of the 13 country with its seasonal milk production, we had 14 to end up building our own balancing plant in a 15 short period of time. 16 So our strategy really changed 17 because of consolidation, from being a marketing 18 cooperative to a processing cooperative and when I 19 left, it was probably handling about 25 to 30 20 percent of its own milk through its own processing 21 plants. So that's a major change that Southeast 22 Milk had to make during the past 10 years. 23 MR. MacDONALD: Thanks, Calvin. 24 Our last warm-up with Dan Smith, you've been 25 involved in northeastern dairy markets, what are PROFESSIONAL REPORTERS, LTD. 256 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 the major changes that you've seen in dairy 2 cooperatives and dairy markets in the northeast in 3 your career? 4 MR. SMITH: I'd just like to say 5 thank you to Jim for putting me on the panel. It 6 gave me a reason to come back to Wisconsin, I also 7 am a graduate here and it's always nice to return 8 and see the campus. I would like to basically 9 follow up on Brian's sort of macro description of 10 changes in the industry. I think this question 11 speaks directly to the issue that Ms. Varney posed 12 to panelists, which is to address the questions of 13 manipulation and concentration in the 14 marketplace. 15 From the perspective of my training 16 in law school with Professor Carstensen, actually, 17 her question relates to market structure on the 18 one hand, in terms of concentration, and market 19 conduct in terms of manipulation, with the design 20 being that the -- how a market is structured 21 dictates how the participants in the market will 22 conduct themselves. So from my observation and in 23 listening to Brian's description, often those two 24 parts of the puzzle get combined and it's 25 important to pull them apart to begin with. PROFESSIONAL REPORTERS, LTD. 257 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 The other piece of the puzzle that 2 needs to get pulled apart is the clear distinction 3 between fluid markets and the manufactured market 4 which has been spoken to about all day. I think 5 most of most concern, as Brian alluded to, the 6 fluid markets tend to be very pronounced in their 7 regional configuration in terms of market 8 structures compared to the manufactured dairy 9 industry, which is really more of a national and 10 increasingly an international market. So at least 11 from the basic definition of their structure, 12 they're quite distinct markets. 13 The third piece of market structure 14 that tends to get bundled in is the function of 15 the federal order system, and as Professor Cropp 16 said earlier this afternoon, a lot of issues that 17 relate to conduct by market participants are 18 really dictated by the structured presence of the 19 federal order system and are not really a function 20 of just free market forces in terms of processors 21 and how they interact with each other. It's 22 strictly dictated to them by the presence and 23 requirements of the federal order system. 24 That being said and in terms of the 25 big picture response to Brian's initial PROFESSIONAL REPORTERS, LTD. 258 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 discussion, I'd just like to put a face on what's 2 happened in the fluid market in the northeast in 3 more direct response to Jim's question. Back in 4 1991, I did a market structure conduct and 5 performance which is the resulting price of 6 conduct analysis of the New England and Vermont 7 fluid milk markets, primarily to look at Senator 8 Feingold's question in our market of where was the 9 money going between the farm and the supermarket. 10 So I had the opportunity and then 11 in my work with the Compact to follow up on sort 12 of a direct, in between participant and observers 13 view of the market structuring conduct. Back in 14 '91, there were seven cooperatives in place. The 15 top two cooperatives had roughly 60 percent of the 16 market, the top three something on the order of 65 17 percent of the market. The other four co-ops were 18 very active participants in the market on a very 19 pronounced smaller scale. 20 There was the Massachusetts Milk 21 Producers Federation, obviously working in 22 Massachusetts, the Independent Dairymen's 23 Association working in Vermont, so producers had 24 access to two regional co-ops primarily in New 25 England and then a variety of smaller co-ops PROFESSIONAL REPORTERS, LTD. 259 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 operating within each state. It goes without 2 saying all of the smaller cooperatives at this 3 point are basically gone in New England. We're 4 down to Agri-Mark and St. Albans remain and DFA is 5 also on the scene. 6 DFA didn't swallow up the other 7 cooperatives and that's the other piece, I think, 8 of the puzzle that actually hasn't been talked 9 about too much today, which is the presence of 10 Dairy Market Service, Dairy Marketing Service, 11 which has essentially taken on the function of 12 representing what used to be the smaller, 13 independent marketing co-ops that were present in 14 New England. So we're down to a much smaller 15 number of operating cooperative entities, 16 consistent with what Brian said. 17 I think here it's pivotal, as has 18 been also said, and I'll just put a face on it, 19 most recently by John, is that the concentration 20 at the processor level in large part was a direct 21 response to concentration at the retail level, and 22 there, the picture is completely transformed. 23 Back in the '90s, we had roughly 20 supermarkets 24 in operation. Most of them are long gone. There 25 were a series of very active convenience stores PROFESSIONAL REPORTERS, LTD. 260 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 that had their own labels for milk, in some cases 2 processed their own milk. 3 For the most part, those are all 4 gone. Seward's Dairy remains, Cumberland Farms 5 was bought out by Dean Foods. They still sell 6 milk. It changes a lot, as far as who's putting 7 up their milk, I can't say, but in essence, the 8 concentration at the supermarket level has really 9 transformed what the New England retail market 10 looks like. The other piece, as has been alluded 11 to is the emergence of the big box stores has 12 really pushed out the convenience stores in terms 13 of being a retail outlet. 14 So we had initial concentration at 15 the retail level followed by concentration at the 16 processor level followed by concentration at the 17 farm level. Again, function of market structure 18 in terms of what we have now, it's important to 19 keep the concentration at the farm level within 20 the context of concentration at the processor and 21 retail level. 22 Just to finish with the processor 23 level, we had roughly 30 processing firms in 24 operation in New England back in 1990. The top 25 eight firms had roughly 80 percent of the market PROFESSIONAL REPORTERS, LTD. 261 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 at that time and there was vibrant competition, 2 different types of processing firms, in large part 3 in response to the retail market being a vibrant 4 and much more differentiated market. Essentially, 5 all of the processing firms at this point in New 6 England are gone. Guida is still there, Hood is 7 still there, but basically, other than that, Dean 8 Foods has swallowed up most of the plants and 9 either shut down other plants or the other plants 10 have basically gone out of business. 11 There was also a vertically 12 integrated supermarket in our market back at that 13 time which played a pivotal role, had a lot of 14 milk, direct relationship with one of the co-ops 15 so that there was an additional competitive 16 dynamic in the marketplace that both disciplined 17 the market on the retail level and offered 18 pressure up in terms of premiums to the farmers on 19 the other end. That's gone. So transformation in 20 the industry, not just on the farm level, but at 21 every sector of the industry. 22 As far what is this means, I was 23 struck this morning in terms of discussion about 24 bringing young farmers into the industry. My 25 observation over the 25 odd years I've been doing PROFESSIONAL REPORTERS, LTD. 262 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 this is that when there were more commercial 2 relationships, farmers among themselves and 3 co-ops, co-ops and all these different customers 4 that used to exist with all the characters that 5 were in the industry that are mostly gone from the 6 scene now. It's mostly suits that show up at 7 meetings, and there's much less room, I think, for 8 young farmers in the industry than there used to 9 be. 10 Not just because of the milk price, 11 which certainly can't be gainsay, but also I think 12 the farmer from Wisconsin, and I apologize for not 13 remembering his name, in terms of direct ownership 14 in the business, that is one thing that's gone by 15 in terms of market concentration. There are just 16 fewer companies operating in the dairy marketplace 17 of which different people have an ownership 18 interest in. 19 MR. MacDONALD: Thanks. Let me 20 follow up on points both that actually, I think, 21 came out of each panel member and I want to direct 22 a couple of questions across the panel on the 23 organization of processing. The first thing I'd 24 like to get at is changes in fluid processing and 25 fluid milk markets as distinct from manufactured PROFESSIONAL REPORTERS, LTD. 263 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 markets. I'll start with Brian, because you may 2 have something on this, but can we say that we 3 have far fewer processors today than we had two 4 decades ago in local markets and do you have any 5 information on that? 6 MR. GOULD: Again, this is an 7 information problem not at the local level, but if 8 you look at the national numbers, if you were to 9 compare 1973 versus 2008 and you say put that in a 10 little graph where you have a line graph showing 11 the number of plants and the other lines showing 12 the number of pounds throughput per plant, per 13 year, it looks like an X. The number of plants 14 are substantially reduced and the throughput is 15 substantially increased. 16 For example, in 1973, there were 17 1627 fluid bottling plants in the U.S. putting out 18 about 32.3 million pounds of milk a year. By '08, 19 it was 319, so we have about an 80 percent -- 20 about 75 percent reduction in the number of 21 plants, but that production went up from 32.9 to 22 195 million pounds a plant, so that's six times as 23 much throughput per plant. Now, obviously, with 24 the fluid milk and the standards of identity that 25 are required, there's obviously limited milk sheds PROFESSIONAL REPORTERS, LTD. 264 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 that can go to those plants. 2 So I don't have any direct 3 knowledge in terms of the ability to service those 4 plants from a competitive perspective, but again, 5 getting back to this little bit dated GAO study in 6 December '99, they again used confidential data 7 and they looked at the CR value, CR4 values for 8 fluid milk across the federal orders and they 9 ranged from 52.4 in New Orleans to 97.4 in Phoenix 10 and Boston, Dan's market was 88.1, and the 11 national CR4 value in 2002 was 42.6. 12 So again, you need information 13 below the national level and, again, that's 14 usually proprietary, so as analysts we're very -- 15 don't have the ability to answer specific 16 questions. 17 MR. MacDONALD: Let me come back 18 then to specific experience and I'll start with 19 Calvin and I'm going to ask other panel members if 20 in their experience we've had substantial 21 increases in concentration, that is declines in 22 the number of buyers in fluid markets. 23 MR. COVINGTON: Well, I'm going to 24 speak more to the southeast and Brian, if you 25 don't mind, I'm going to give you just a round PROFESSIONAL REPORTERS, LTD. 265 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 number I always try to keep in my head about fluid 2 milk plants. If you look back at the census 3 numbers, back in 1985 which wasn't all that long 4 ago, there was about 1000 fluid milk plants in the 5 United States. If you look at the most recent 6 census, that number is down to about 350 and 7 you've got one organization that probably has 8 about 100 of those, so the number has 9 significantly dropped. 10 If you look in my part of the world 11 in the south and southeast, if you set aside any 12 on-farm operations, which are generally, you know, 13 strictly family operations, there's really only 14 one milk processing family left in the southeast. 15 All the others have either gone out of business or 16 been sold, so it has, you know, got a whole lot 17 less. Really, what's creating a lot of the 18 challenge, as I see it, in the fluid milk 19 business, is that our pie is not getting any 20 bigger. 21 Unfortunately, we're selling the 22 same amount of fluid milk in this country today as 23 we were back in 1970. And so you've got everybody 24 chasing that same pie. The pie is not getting any 25 bigger and with margins getting smaller and the PROFESSIONAL REPORTERS, LTD. 266 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 kind of pressure being put on by retailers for 2 small margins, the only way you can make your 3 plant bigger is to take it away from somebody else 4 and that's really created a lot of the challenges 5 in the processing business and why it's made it so 6 difficult for the smaller processors. 7 You know, I can attest to that with 8 our cooperative, we consider ourselves a small 9 processor. Why it's so difficult to compete and 10 especially with your big retailers who want to buy 11 across regions and your plant is not big enough to 12 supply them, but again, since we're not increasing 13 fluid milk sales, that's creating a major 14 challenge in the fluid industry. 15 MR. MacDONALD: Let me pass it down 16 here for anybody that wants to respond. Do we 17 have -- do you see in your markets significant 18 declines in the number of buyers for fluid milk? 19 Keep it to that side. 20 MR. SMITH: Just very quickly, just 21 to tie up, in '91 there were 16 buyers, basically 22 100 percent, 98 percent, so there were 27, of the 23 27, 16 had 98 percent, what did you say Brian, 24 we're at 80 -- 25 MR. GOULD: 88.1. PROFESSIONAL REPORTERS, LTD. 267 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 MR. SMITH: And that's basically 2 three companies at this point, so we've gone from 3 essentially 18 at 100 percent to three. 4 MR. MacDONALD: What do you see, 5 John? 6 MR. WILSON: There's no doubt, it's 7 happening nationwide. There's been consolidation, 8 sure, certainly. 9 MR. MacDONALD: I see Louise 10 shaking her head. 11 MS. HEMSTEAD: Absolutely, I go out 12 and look for processors and there's a lot less of 13 them than there used to be. 14 MR. MacDONALD: Let me follow up on 15 one other point that I think was in Brian's quote 16 regarding the merger in Wisconsin which was the 17 argument that you needed to get large in order to 18 deal with contract requirements for retailers. 19 What do you think, is that a driver? Are 20 retailers' volume requirements and their interest 21 in dealing with a sole source supplier, is that a 22 driver in concentration on the processing side? 23 Anybody want to take that? 24 MS. HEMSTEAD: I absolutely think 25 it is. Before I started working for Crop, 17 PROFESSIONAL REPORTERS, LTD. 268 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 years ago I worked for AMPI for 10 years. It was 2 an issue there and it's an issue here. People 3 want to -- retailers want to one stop shop. They 4 want to place one purchase order and not only do 5 they want to get all their dairy products, they 6 want to get anything that's sold in the dairy case 7 and that takes some muscle. 8 MR. COVINGTON: It's definitely, 9 yes, I know from experience at Southeast Milk with 10 our processing plants, it's very, very difficult 11 to get any business from the large retailers 12 because they wanted you -- if you got their 13 business, they wanted you to serve such a big 14 geographical area and your plant wasn't that big, 15 nor did you have enough products to meet all their 16 needs, whereas your larger processors can draw 17 from more than one plant and have different plants 18 that make different products, so yes. 19 MR. MacDONALD: Let me quick jump, 20 before getting to competition, we've talked a 21 little here and we've jumped into fluid markets, 22 let me ask if anybody on the panel wants to 23 respond, do we see similar changes on the 24 manufactured product side in terms of the number 25 of buyers or do we still have significant PROFESSIONAL REPORTERS, LTD. 269 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 competition? And I know as Louise mentioned, we 2 have what looks like national markets rather than 3 local markets in cheese. 4 Do we have significant changes 5 in -- or declines in competition or the number of 6 buyers on the manufactured products side? Anybody 7 want to take a shot at that? 8 MR. WILSON: I think there are 9 certainly fewer plants, by the statistics. I 10 don't have solid statistics in front of me here, 11 but I'd have to say that one of the things -- and 12 certainly the average plant has gotten larger. 13 One of the things I think, Jim, that has partly 14 driven that, particularly in cheese, you know, 15 cheese has been the growth engine really in the 16 past 30 years of the industry and the new cheese 17 plants that get built, typically, are big ones and 18 so that by its very nature brings the average 19 plant up. 20 There certainly has been some 21 shifting geographically of the cheese business in 22 the last many years and I have to say there's 23 still really quite a lot of competition out there 24 I believe, from my experience. 25 MR. GOULD: Just to follow up on PROFESSIONAL REPORTERS, LTD. 270 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 that, if you look at -- remember I talked about 2 this HHI value. Again, that's anything above a 3 thousand is concentrated. For the cheese industry 4 using census data, the HHI has actually gone down 5 since '87, which means there's more competition. 6 It's surprising, I was -- those are national 7 numbers. Again, that could be very -- it could be 8 due to the fact that I'm looking at national 9 numbers. 10 I was very surprised to see that. 11 In contrast, again, just to put sort of a nail in 12 this, in terms of fluid milk, again, at the 13 national level, we know that fluid milk markets 14 are really local in nature, so this could be 15 considered a lower bound in terms of local 16 concentration. 17 From '87 to '02, and this is 18 data -- again, I collected the data for 50 plants 19 and, again, it's from a publication called Dairy 20 Foods. From '87 to '02, the HHI went up from 195, 21 so extremely low, very competitive environment, up 22 to 1060 in 2002, so that's six years ago and I 23 think that's a lower bound in terms of what we've 24 got today nationally as well, so quite different 25 markets, cheese versus fluid. PROFESSIONAL REPORTERS, LTD. 271 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 MR. MacDONALD: We've talked a 2 little about structure and organization of 3 cooperatives and of processing. What I'd like to 4 do now is shift over to outcomes, to prices, 5 competition and market relationships, and the way 6 I want to set this up is I want to start it off 7 with a hypothetical for John. Suppose instead of 8 having DFA, your members belonged to five 9 different cooperatives instead of one large one. 10 Would they have received a lower price from fluid 11 processors, do you think? 12 MR. WILSON: Yes. I think I want 13 to -- you have to look back, again, at when DFA 14 was created. 1998, go back to 1996, '97, that 15 period, it's really what drove the decision of the 16 dairy farmers that came together and created DFA, 17 was some of the dynamics that they got into by 18 having really at that time four regional 19 cooperatives. There were times where dairy 20 farmers through their cooperatives, okay, they 21 would fight over sales and that is never good for 22 price. 23 And so one of the things that drove 24 our guys together was the prospect of being able 25 to make sure that they didn't compete against each PROFESSIONAL REPORTERS, LTD. 272 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 other, put them all under one roof and they could 2 have a better opportunity to maintain premiums for 3 all sales, for that matter, class I, II, III, IV. 4 Collaboration can take place through common 5 marketing agencies of course, but one of the 6 weaknesses of a common marketing agency is it's 7 not permanent. 8 You can have cases where 9 cooperatives can work together one day, one year, 10 one decade sometimes and yet something happens, 11 another day comes along and somewhere in the 12 marketplace, something gets sideways and the 13 cooperatives are then at odds and so certainly in 14 our case, it's very proven that membership is 15 better off as one large cooperative rather than 16 four or five. 17 MR. MacDONALD: Let me move this 18 question along a little bit, because the flip side 19 of it is with fewer processors, do we get lower 20 prices. So let me come back to Dan, you've been 21 involved in dairy markets in the northeast. We've 22 just gone through a discussion of a large decline 23 in the number of processors, do you think they've 24 been able to reduce premiums paid for their milk 25 as a result of having fewer processors in the PROFESSIONAL REPORTERS, LTD. 273 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 northeast? 2 MR. SMITH: I can't help but say 3 that we've gone from four co-ops to one. At least 4 the way Cal says pie, you know, when I started and 5 there were the four co-ops available, at least 6 that still exists today. The accent is different 7 when you go around the country, that could never 8 understand -- it took me to figure out what pie -- 9 I got it, though, okay. 10 MR. COVINGTON: Maybe everybody 11 else will get it now. 12 MR. SMITH: I think what's most 13 confounding is this question. If there were more 14 co-ops, you would expect more competition for milk 15 and higher premiums, but again, if you just -- you 16 can't look at it in the vacuum, because now we 17 have four co-ops and at least in New England, 18 three processing plants and basically three or 19 four supermarkets. This is where market structure 20 with the federal orders starts to intrude itself. 21 In contrast to what everybody 22 understands as an opaque operation on the 23 manufactured pricing side, the fluid pricing, 24 regulated fluid pricing side is extremely 25 transparent. Everybody in the industry knows what PROFESSIONAL REPORTERS, LTD. 274 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 the basic class I price is from supermarkets down 2 through the commercial channel to the dairy 3 farmer. The class I price is the class I price. 4 However it's arrived at, it is the class I price 5 that everybody is subject to. 6 So in terms of the size of the 7 downstream market processor to supermarkets, given 8 their size, they have the ability tremendously to 9 discipline this supplier of the raw milk, so 10 there's tremendous pressure not to pay premiums. 11 The supermarket contracts are the governing wheel 12 of the industry, very few of them, and there's 13 very little room to maneuver. So it's not 14 necessarily the case that with consolidation or 15 without consolidation that farmers would see 16 higher premiums. 17 The other piece of the puzzle with 18 the federal order system is, as has been said more 19 than once, with milk used for manufacturing 20 purposes representing surplus product for the 21 fluid dairy industry, in the very few markets that 22 exist with high class -- there really aren't any 23 markets really that have high class I utilization 24 at this point, other than the one market in Cal's 25 market. PROFESSIONAL REPORTERS, LTD. 275 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 There's always plenty of milk to 2 serve the fluid plants, so the basic market 3 dynamic that should push a premium with 4 consolidation of the federal orders has been 5 diluted, so that there's increasing downward 6 pressure, again, from market structure of the 7 federal order system on premiums. 8 MR. MacDONALD: Let me follow this 9 just a little bit more with a question for Louise, 10 and I'll try a related hypothetical with you. 11 Suppose a large buyer of organic milk from your 12 organization, whether it's a retailer or 13 processor -- well, you use co-processors, so let 14 me put it as a retailer. Suppose they sought to 15 reduce the price they're paying to you by five 16 percent, what options would you have, what do you 17 think you'd do in response to that? 18 MS. HEMSTEAD: It's a tough one and 19 I would say we've met that before. We do sell 20 bulk milk and so sometimes that comes up with the 21 bulk milk side, oh, no, you know, my market is too 22 small. We consider the farm price sacred, so if 23 the farm price for organic milk is X, that's what 24 goes into the jug, that's what goes into the bulk 25 tank, it doesn't matter, it's X and we build up a PROFESSIONAL REPORTERS, LTD. 276 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 cost of goods from there and there isn't any five 2 percent in our business. 3 There's not five percent profit in 4 our business that you can just take it down and 5 say zero and so we will look at it. We will look 6 at everything we can take out. Sometimes it's a 7 tenth of a percent and we will go back and say 8 this is what we have and, you know, this is what 9 it is, and they will either stay or they will go. 10 On the flip side, a few years ago when we were 11 very short on organic milk in the country, which 12 most of the last decade, we've been short of 13 organic milk. 14 We were faced with the opposite bit 15 of a problem and we took a unique stance to it. 16 We built our business with a lot of small 17 customers over the years and then when organic got 18 so big, the supermarkets got in and Wal*Mart got 19 in and they were buying a substantial portion and 20 we were faced with a day we called black Friday in 21 our business. We could tell that in the near term 22 for the upcoming, at that point seven or eight 23 months, we wouldn't meet the demands of the 24 marketplace and we could short everyone and have 25 everyone mad at us or we could elect to drop some PROFESSIONAL REPORTERS, LTD. 277 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 customers. 2 We dropped some customers. We 3 dropped Wal*Mart and we stayed with all the small 4 customers that built us up to that point. 5 MR. MacDONALD: Let me just quickly 6 follow up and see if anybody on the panel has 7 anything else they want to say about pricing and 8 competition in fluid markets and local markets. 9 Your reactions? 10 MR. COVINGTON: Well, I'll just 11 add, if you look at the over order premiums and 12 you look at over order premiums across the country 13 and especially in the southeast, over order 14 premiums are probably about the highest they've 15 been in a long, long time, maybe setting record 16 levels. The reason that's been able to happen is 17 because cooperatives have been able to walk 18 together through common marketing agencies which I 19 think is a very, very critical. 20 But even though premiums might be 21 up, we need to take a look at actually how much of 22 that is getting back to the dairy farmer and 23 that's one factor I'd like to look at. We can 24 have a high over premium, but if we're not getting 25 it back to the dairy farmer, it doesn't mean a PROFESSIONAL REPORTERS, LTD. 278 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 whole lot. And we are starting to see a challenge 2 now in the southeast, as the processors are 3 bigger, have multiple plants, you're starting to 4 see pressure on those over order premiums, because 5 they get to a certain size that they can even 6 start doing some of the things since they're so 7 big, balancing functions and those types of things 8 that cooperatives were doing. 9 They think they can do them cheaper 10 and plus, if we as cooperatives don't get a high 11 percent of that premium back to the dairy farmers, 12 then that gives those processors even greater 13 incentive to go out and procure their own milk, 14 and so I think that's something we have to be very 15 aware of. 16 MR. MacDONALD: Let me shift the 17 question slightly here. In an earlier panel, one 18 panel member said that in Lancaster County and in 19 that region, producers there had 16 options for 20 where they send their milk. We had a panelist 21 from Colorado who said there was one option for 22 where you could send your milk. Let me throw out 23 to the panel, that's a pretty wide range. Are 24 there areas of the country where farmers have 25 little choice regarding where to sell their milk? PROFESSIONAL REPORTERS, LTD. 279 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 Now, this is a question, in a 2 sense, about both cooperative and processor 3 consolidation. Any reactions, how do you guys 4 react to that range of numbers, one to 16, do you 5 have a sense that there are substantial parts of 6 dairy country where you have very limited options 7 for who might able to take your milk? 8 MR. WILSON: Well, let me take a 9 crack. Certainly, there are some sparsely 10 populated areas where probably, if it weren't for 11 the cooperative, the dairy farmer might have a 12 hard time finding anywhere to market his milk, 13 particularly smaller farmers that don't -- that 14 can't put together a load of milk, but you know, 15 for the most part, all over the country, anywhere 16 there's any significant critical mass of milk 17 volume, there's competition. 18 MR. COVINGTON: In the southeast, 19 most of the majority of the milk is marketed by 20 cooperatives, and again, I probably might look at 21 it a little bit different than my good friend John 22 on the end down there, but you've got Southeast 23 Milk or you can market your milk through another 24 cooperative who's a member of the Southern 25 Marketing Agency. They work together, I think PROFESSIONAL REPORTERS, LTD. 280 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 there's three or four cooperatives in that, so 2 that is basically your choice, Southeast Milk or a 3 cooperative member of the Southern Marketing 4 Agency. 5 And you are now seeing one large 6 processor start taking on some independent milk, 7 but they're being selective on what they take on. 8 MR. MacDONALD: Let me shift from 9 there a little bit and we're getting towards the 10 ice cream, so let me focus a little bit on supply 11 contracts for milk. It's been mentioned a couple 12 of times here, let me ask, I'll throw it out to 13 the panel, but ask -- I think probably ask my -- 14 our cooperative panelists to think about this and 15 give us their response. 16 What advantages would a cooperative 17 gain from writing a long-term supply contract with 18 a processor or retailer, whether it's exclusive or 19 non exclusive, anybody want to take a shot at 20 that? 21 MR. SMITH: I'm getting out of the 22 way on that one. 23 MR. COVINGTON: Well, I can speak 24 for the members of Southeast Milk, it's security 25 and long-term planning. You know, dairy farmers PROFESSIONAL REPORTERS, LTD. 281 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 make such a large investment in our operation and 2 especially if you have dairy farmers that want to 3 expand, add facilities or whatever, it sure adds 4 them a lot of comfort and especially a lot of 5 comfort to their bankers if they know that they're 6 going to have a market for their milk longer than 7 six months or a year, hopefully three years or 8 five years. 9 So with our membership, when I was 10 there, it sure was important to me, boy, Calvin, 11 you get them as long as you can, because we want 12 to know we're going to have a market for our milk 13 for a period of time so we can put investment back 14 in our facilities. 15 MR. WILSON: I'll take a crack. 16 You know, we have situations around the country 17 where we have full supplies for given plants. We 18 don't have very many, if any, full supplies for 19 the entire company, but for given plants, one of 20 the -- I think your specific question was what's 21 the benefit? 22 MR. MacDONALD: Yes. 23 MR. WILSON: One of the benefits to 24 the members is, and this really goes back to the 25 co-op, is the planning capability. It's much PROFESSIONAL REPORTERS, LTD. 282 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 easier to plan on a full supply arrangement as 2 opposed to a partial supply arrangement when 3 you're going to be the balancer, because when 4 you're the balancer, you're going up and down, all 5 over the place and so -- and I would say we get -- 6 through negotiation, we end up with all kinds of 7 arrangements, partial, full, some cases probably 8 the easiest way to do it is to just have a flat 9 buy. 10 But there aren't many people that 11 really want to buy just on a flat volume, because 12 they want to buy based on their demand, so it 13 invariably gets around to either a percentage of 14 the plant or a full supply or something along 15 those lines, but it all goes back to having 16 predictability and market security for the 17 members. 18 I mean, that's ultimately -- you've 19 got to have a reasonably local place to sell your 20 milk and that's probably one of the biggies in 21 many parts of the country where we have full 22 supply arrangements with customers. 23 MS. HEMSTEAD: Likewise, we have 24 arrangements of supplying milk and you go into a 25 region and supply milk for that particular PROFESSIONAL REPORTERS, LTD. 283 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 customer over a period of time. Our farmers have 2 a lot invested, as all farmers do, but with the 3 organic feed and the organic grain and the organic 4 cost of production, they have a great deal 5 invested and if we're not able to return that to 6 them because we've lost a place to market their 7 milk, it deeply hurts them in the pocketbook. 8 And so some longer term contracts 9 allow us to secure that over a period of time and 10 we work with supply forecasting models of the 11 customers, of what they think they're going to 12 need and our contracts actually come ahead of our 13 internal branded sales. 14 MR. MacDONALD: We've talked with 15 the focus group, most of this section, on fluid 16 milk markets. What I'd like to wrap up with is a 17 question on competition and markets for 18 manufactured products, particularly cheese, and I 19 think the question there is, is buyer market 20 power, that is concentration on the buyer's side, 21 a significant issue in pricing -- in manufactured 22 product markets or is the regulated price system 23 what is driving that side of the market? Is 24 competition an important issue on the manufactured 25 product side? Do you want to take a shot? PROFESSIONAL REPORTERS, LTD. 284 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 MR. WILSON: Are you referring to 2 milk sales to manufacturing plants? 3 MR. MacDONALD: Yes. 4 MR. WILSON: Raw milk sales. I 5 guess I feel like competition is alive and well 6 there. I think that prices on manufactured 7 products, not unlike fluid, to be honest with you, 8 it's largely based on local supply and demand and 9 what it costs to get a milk supply there and what 10 the competitive price is in the local market and 11 so I think that one, it seems to work pretty well 12 and we've so -- I guess that's basically my 13 answer. It works pretty well and I think there's 14 plenty of competition there. 15 MS. HEMSTEAD: I would agree, 16 there's competition there and we deal with this 17 seasonal, I've mentioned it a couple of times, 18 it's a huge part of our business, but in the 19 spring then we're contracting also for selling 20 some of our milk conventionally, because it's more 21 than we can use organically and there's some good 22 competition if you're doing some planning ahead. 23 MR. COVINGTON: I'll just give you 24 a personal example. The balancing plant that 25 Southeast Milk has is a filtration plant. It PROFESSIONAL REPORTERS, LTD. 285 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 basically makes liquid MPC for cheese plants. 2 When we market that product, we can find a lot 3 more buyers for that through cheese plants. In 4 fact, we can get some cheese plants bidding on 5 that product than we can for fluid milk. So based 6 upon that, a lot more competition in manufacturing 7 than fluids. 8 MR. MacDONALD: My watch shows us 9 at 3:45, which is the scheduled end of this and 10 the scheduled time for ice cream outside, so I 11 think what I'll do is bring this panel to a close 12 and ask us to give a hand to each of our panelists 13 for their participation. 14 (A short recess is taken) 15 MR. TOBEY: All right. We're going 16 to get started I think on the market transparency 17 panel. And there may be other people that drift 18 in, but the ice cream is a big attraction, so I'm 19 not taking this too personally. Anyway, my name 20 is Mark Tobey, I am the special counsel for 21 agriculture and state relations at the U.S. 22 Justice Department Antitrust Division and this 23 panel is on market transparency. We heard a lot 24 about this subject this morning. 25 We're going to talk about the CME. PROFESSIONAL REPORTERS, LTD. 286 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 So we have a very distinguished panel of experts 2 and people that know about the market by 3 participating in it and I want to start off maybe 4 by introducing each one a little bit and then 5 making some introductory comments to put this 6 topic into some context, because the issue of 7 price discovery and market transparency is an 8 issue that is not unique to milk or to dairy and I 9 want to talk about it a little bit. 10 And I think, you know, one or 11 another of our panelists will also likely talk 12 about it a little bit in terms of how this issue 13 manifests itself in other industries so that we 14 can compare it, or other parts of agriculture. 15 But on our panel today and we'll sort of work from 16 my immediate left to the end, we have a very 17 distinguished group. First we have Tanya Rushing, 18 who is a third generation dairy farmer from 19 Walthall, Mississippi which is the cream -- 20 MS. RUSHING: The cream pitcher. 21 MR. TOBEY: The cream pitcher of 22 Mississippi, and she'll talk a little bit about 23 her farming operation and her views on this issue 24 which is, you know, subject to a lot of experts 25 talking about it, but also as we heard this PROFESSIONAL REPORTERS, LTD. 287 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 morning, has a lot of effects on, you know, 2 average dairy farmers, even small dairy farmers. 3 Next we have Bob Yonkers who is the 4 vice-president and chief economist of the 5 International Dairy Foods Association where he 6 oversees research and analysis about the economic 7 impact of marketing conditions, government 8 regulations and alternative policies on both U.S. 9 and international dairy industries. 10 Next to him is Andy Pauline who is 11 an assistant director with the U.S. Government 12 Accountability Office, the GAO. He's based in 13 Chicago. The GAO as you probably know is a 14 legislative agency that assists Congress in 15 carrying out its legislative and oversight 16 responsibilities. 17 Next we have Dennis Wolff, well, 18 actually the order is flipped here. Dennis Wolff 19 is next to the end there and he is the former 20 agriculture secretary for the state of 21 Pennsylvania and he is currently a partner at 22 Versant Strategies where he represents a group 23 called the Dairy Policy Action Coalition. 24 Next to him on his right we have 25 Steve Obie. Steve is the acting director of the PROFESSIONAL REPORTERS, LTD. 288 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 Division of Enforcement of the U.S. Commodity 2 Future Trading Commission, the CFTC as we've heard 3 described this morning, and this is the second 4 time that we've been graced to have Steve's 5 presence on a panel and he'll talk about the 6 CFTC's activities and doing oversight of these 7 dairy markets, including the CME. 8 And last but certainly not least is 9 Dan Smith, who you may recognize. Yes, it's the 10 same Dan Smith from the last panel, but he is 11 representing a little different role for this 12 panel. In this panel, he is going to talk about 13 some work that he's doing on behalf of the Maine 14 Dairy Industry Association, so thanks to all of 15 our panelists for being here. Let me make my 16 introductory comments which I hope will help to 17 put this topic in a little bit of context. 18 I'll talk a little bit about the -- 19 what we're trying to do here. We're not trying to 20 make a point. We're trying to explore the 21 concerns that we heard about this morning, about 22 the ability of certain dairy industry 23 participants, particularly producers, or the need 24 of those people to get accurate, up to date, i.e., 25 timely and relevant information about prices and I PROFESSIONAL REPORTERS, LTD. 289 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 think that's what the concerns are about potential 2 manipulation of price. 3 And we'll explore what the concerns 4 have been about how elements of the milk price 5 might be manipulated or subject to strategic 6 trading, particularly on the CME. The bigger 7 picture is that agriculture markets of all 8 different types tend to use a reference price and 9 here we're talking maybe the cheese price, the 10 spot cheese price as a reference price in dairy, 11 but it's also true we heard from some hog farmers 12 this morning. 13 In hogs there's a formula price 14 that's used and in that -- in those kinds of 15 contracts where hogs are sold based on a formula 16 contract, there's usually a reference price and 17 that might be say the western corn belt price and 18 that price is actually reported twice a day by the 19 USDA, so that's the way price transparency happens 20 in hogs. In grains, we talked about grains at the 21 Iowa workshop that we did, which was our first 22 one, and there, grain futures, there were concerns 23 expressed about potential speculation or 24 manipulation of grain futures. 25 Our last workshop that we did, we PROFESSIONAL REPORTERS, LTD. 290 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 talked about poultry and in poultry, there was 2 very little need for a discussion about price 3 discovery, because as we've heard and as has been 4 discussed and you all probably know, the poultry 5 industry is largely or completely vertically 6 integrated, so there is basically no open market 7 for the sale of broilers and so the issue of price 8 discovery is not as significant there. 9 In the next workshop that we're 10 going to do which will be at the ends of August in 11 Fort Collins, Colorado, we're going to talk about 12 livestock and in those areas, too, the issue of 13 price transparency and price discovery are 14 important because a lot of cattle are sold by 15 formulas or sold on what's called the grid. So 16 these concerns about market transparency and price 17 discovery are real and they permeate all kinds of 18 agriculture markets. 19 Now, in dairy, the linkage is a 20 little more direct, because this reference price 21 not only is important for contracts between people 22 that manufacture or sell cheese, and it is 23 certainly the CME spot cheese price is used for 24 that. But as we know, this price is also used by 25 USDA as a component for pricing the class I and PROFESSIONAL REPORTERS, LTD. 291 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 class II milk and there is no way -- and there is 2 no price that you can look at as a direct market 3 reference price for fluid milk. 4 So this is how the issue of price 5 discovery or market transparency manifests itself 6 in milk, so that's the subject of the panel. 7 Again, we will endeavor, and I do apologize, I 8 know that people have submitted questions in 9 response to some of the questions or comments in 10 the last panels. We haven't got to them. This is 11 a one-hour panel. I'm going to talk as fast as I 12 can and see if we can get to at least one question 13 and then after this panel, we will go into the 14 public participation session. 15 But let's start at the beginning. 16 Tanya Rushing, would you mind telling us a little 17 bit about your dairy operation down there in 18 Mississippi and then tell us what concerns you may 19 have about how the current system works in terms 20 of fluid milk prices. 21 MS. RUSHING: Certainly. We have 22 approximately a 70-cow dairy. We milk twice a 23 day. We have 200 acres of quality grassland. 24 We've always been grass based. We feed a little 25 bit of feed in the barn for our cows, but overall, PROFESSIONAL REPORTERS, LTD. 292 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 we're very reliant upon the fields and the hay 2 that we produce off those fields. We have two 3 employees and I was told earlier that because I 4 didn't have to bring them with me, I have to 5 mention them and if it weren't for good employees, 6 we would not still be in existence. They spoil 7 our cows just like babies and so we're all one big 8 happy family. 9 Now, when it comes to the 10 difference in price, when I started looking, 11 trying to find the price of my milk at the milk 12 plant, I had some issues. I did call -- we have 13 two milk plants in our area, I did call both of 14 them. I identified myself as a producer that sent 15 milk to their plant. They have lists of these 16 people, they should know exactly who I am. 17 The first plant, basically three or 18 four different people told us that they were not 19 allowed to give out that price that they paid per 20 truckload of milk or per hundred weight, all of us 21 dairy people count everything in 100-pound terms. 22 The second plant gave us a real sweet runaround 23 and sent us from one extension to another, to 24 another department, to another extension and 25 finally, we got an extension that didn't even PROFESSIONAL REPORTERS, LTD. 293 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 exist. 2 Now, lucky for us, we do know a few 3 people in our co-op and we actually found out the 4 price, which it was for last month, because they 5 don't have this month's prices out yet, another 6 fallback to that discovery. Currently, I say, 7 which is May for us, the price that my milk was 8 paid at the bottling plant was $20.65. The price 9 that I got on my check was $15.16. That's $5.49 10 difference. Now, our pay price is contrived from 11 the butter, powder and block cheese markets on the 12 Chicago Mercantile and they also add in a hauling 13 differential and they also have a class I mover in 14 there. 15 My hauling cost is approximately $1 16 per hundred weight, and the way I see it and the 17 way a lot of my fellow local dairy farmers see it 18 is if we have to pay hauling costs for our milk to 19 go from the farm to the plant, then any milk 20 that's shipped in, which is called supplemental 21 milk, to our area, should have to do the same and 22 I'll talk a little more about that in just a few 23 minutes. But that $5.49, that goes to pay for 24 supplemental milk coming into our area, because we 25 are now a deficit area in the southeast. PROFESSIONAL REPORTERS, LTD. 294 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 If even a little bit of that milk, 2 money could have gone back into dairy farmer 3 pockets and even as much as half, it would have 4 kept hundreds of farms in Mississippi from going 5 out of business. It would also have helped out a 6 whole lot with problems that we've all faced since 7 the tragedies of Hurricane Katrina and I can 8 firmly attest that there's still damage on my farm 9 from five years ago from that hurricane that I 10 can't pay to fix. 11 Now, from some of the other panels, 12 I got curious and started figuring in between. 13 That price that they paid to bottling plant is 14 1.36 times more than I get on my farm. If local 15 milk by the gallon, and all of us farmers look at 16 it in the store, runs about $3.59 around our house 17 which figures out to be $41.80 per hundred 18 weight. That is 2.76 times more than I get paid 19 for my milk, so that's a large difference and 20 that, like I said, was something that has kind of 21 been brought up earlier today. 22 Over the last 20 years that I've 23 been involved in dairy, excessive milk production 24 from larger and larger farms has created the 25 world's lowest cost milk. There's been no market PROFESSIONAL REPORTERS, LTD. 295 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 cultivated for this excessive milk production in 2 surplus areas of the country because of current 3 federal price supports. They guarantee a place 4 for it to go. The over supply usually severely 5 depresses the price of butter, powder and cheese 6 on the Chicago Mercantile Exchange. 7 In 1990 when I entered the market, 8 local producers in our area amounted for 85 9 percent of the class I needs in the New Orleans 10 market. Today, we only produce 35 percent of that 11 market. The other 65 percent belongs to 12 supplemental milk, which I mentioned earlier. 13 Most of this milk travels from over 900 miles 14 away, crosses multiple state lines and is placing 15 just a tremendous burden on the local dairy 16 farmers as well as providing an extra carbon 17 footprint on our nation's food supply, and that is 18 also becoming an issue. 19 But for every truckload of milk 20 that enters the southeast, there are a few more 21 dairy farmers that go out and the ones that are 22 left have to pay a larger amount of that hauling 23 charge to get that milk brought into the 24 southeast. Like I said earlier, if we didn't have 25 to pay those hauling charges, then it probably PROFESSIONAL REPORTERS, LTD. 296 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 wouldn't be so tough on us. 2 MR. TOBEY: Thank you very much, 3 Tanya. I think that gives a good basis for us to 4 now turn to Bob Yonkers. Bob is somebody who's 5 studied these markets for decades and now at the 6 International Dairy Foods Association. Can you 7 put Ms. Rushing's concerns into some context for 8 us and can you explain a little bit more than I 9 already did about what economists mean when they 10 talk about market transparency or price 11 discovery? 12 MR. YONKERS: Sure, Mark. In 13 economic terms, the concept of price discovery 14 requires both market participants, you usually 15 think of those as buyers and sellers, and it also 16 requires a marketplace and for many commodities 17 and products, that is an exchange of some kind. 18 The CME group would be one that's been talked 19 about. There's other exchanges where people can 20 go to buy and sell, not necessarily spot markets 21 or cash markets prices, but also in the futures 22 markets where much of that price is discovered for 23 many agricultural commodities. 24 Just because -- obviously, when you 25 have more buyers and sellers in a particular PROFESSIONAL REPORTERS, LTD. 297 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 marketplace, you're going to have a more robust 2 price discovery, more market activity leading to 3 that price discovery, but it's not always an 4 indication of how the price discovery process is 5 working, because if there's only a few buyers or a 6 few sellers of any particular commodity or product 7 that you're looking at and they're all 8 participating in the market, that's a very robust 9 price discovery market and I'd like to talk more 10 about that in a little bit. 11 A lot of the attention in the dairy 12 industry has been focused on the marketplaces or 13 these exchanges where products are made, but one 14 point I'd like to make is in the dairy industry, 15 unlike most other agricultural commodities, we 16 really don't have price discovery for farm milk. 17 We have price discovery for cheddar cheese. We 18 have price discovery for dry whey. We have some 19 for butter and some for non fat dry milk and those 20 are used in the federal milk marketing order and 21 under state milk marketing orders that regulate 22 prices for their price discovery. 23 And they take a weighted average of 24 each of those individual markets, but when you 25 start to segment those marketplaces, there's fewer PROFESSIONAL REPORTERS, LTD. 298 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 buyers and sellers in each of those individual 2 marketplaces than there would be in the 3 marketplace for farm milk overall. And 4 particularly, at the CME group spot market for 5 cheddar cheese, as an example, there really aren't 6 that many buyers on a regular basis that want to 7 buy commodity spec cheddar from an unknown 8 supplier. 9 Most purchasers of cheese types 10 today want it to certain specifications that may 11 be a little different, usually more exacting than 12 that that the CME specifications may have and they 13 want to know which supplier is supplying it, where 14 it is in the country may make a difference also, 15 it's very important and at the CME, it could be 16 sourced out of any region in the country. 17 In addition, there's not that many 18 sellers, because in today's marketplace, most of 19 the sellers and manufacturers of cheddar cheese 20 actually are producing for their regular customers 21 and because this market is not widely traded at 22 the CME, because there's just not that many 23 buyers, there's not that many sellers that want to 24 be producing more cheese than they need to serve 25 their existing customer contracts and, therefore, PROFESSIONAL REPORTERS, LTD. 299 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 have it available to bring. 2 So it may be that all the buyers 3 and sellers who could participate in that market 4 are. I'll let others talk about whether that's 5 true or not, but I mean, that's -- the government 6 regulations on milk prices are really driving us 7 down to that. 8 Now, related to price discovery is 9 the need for transparency in having market 10 information and in dairy markets, we have price 11 data from the CME, you know, in virtually real 12 time. Anyone can access what is traded on the 13 spot market as it's being traded. 14 And in the futures contracts for 15 dairy, you can access those as they trade 16 throughout the day, because they do trade in a 17 much longer period. In addition, USDA collects 18 and publishes data on dairy product prices that 19 represent transactions from across the country, 20 not just those that are localized to the Chicago 21 market area like the CME group specifications 22 require, that they be localized to that. And 23 those are the products that we limit to our price 24 discovery because, again, the federal order 25 regulation is cheddar cheese, dry whey, butter and PROFESSIONAL REPORTERS, LTD. 300 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 non fat dry milk. 2 Some have argued that to improve -- 3 and I know some of the panel will suggest that to 4 improve price discovery, we need more data more 5 frequently on those products in particular, but 6 remember that milk prices, as they are set by the 7 government, only change once a month and we're 8 already publishing that data weekly. I admit 9 there is a time lag that I'd like to see reduced 10 from USDA, also with the NASS data collection, but 11 we only really are changing our regulated farm 12 milk prices monthly. 13 And again, if you were to think 14 about trying to collect more data on other dairy 15 products, we're going to run into the same problem 16 with price discovery in that there's not that many 17 buyers and sellers in those markets for those 18 other dairy products either. We're getting 19 farther and farther away from our more -- most 20 robust numbers of buyers and sellers, which would 21 really be in the market for farm milk similar to 22 the way they are for other commodities. 23 MR. TOBEY: Thank you, Bob. Before 24 we move on, and I will move on next to Andy 25 Pauline from the Government Accountability Office, PROFESSIONAL REPORTERS, LTD. 301 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 but I just want to ask if anybody else on the 2 panel would like to comment or add to what Bob 3 said about sort of classic market transparency or 4 price discovery or price transparency. Well, then 5 we'll move on. 6 Andy Pauline, Andy, you studied the 7 Chicago Mercantile Exchange, the spot cheddar 8 cheese market extensively in connection with a 9 2007 report that the Government Accountability 10 Office published. What did the GAO find regarding 11 whether or not the concerns that Ms. Rushing and a 12 lot of the farmers that we heard from this morning 13 expressed, what did you find with regard to 14 whether those concerns are widely shared and what 15 did you find with regard to regulatory and 16 enforcement oversight of the CME dairy markets? 17 MR. PAULINE: Sure, thanks very 18 much. In 2007, we conducted a report where we 19 were really looking at three issues. One was the 20 structure and operations of the Chicago Mercantile 21 Exchange spot cheese market, in particular as it 22 compared to the kind of prior incarnation of that 23 cheese market at the National Cheese Exchange. 24 Second, as was mentioned, how the market was 25 regulated and efforts to address potential PROFESSIONAL REPORTERS, LTD. 302 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 manipulation, and third was how those CME spot 2 cheese market prices impact milk pricing. 3 The spot cheese markets at the CME 4 came there in 1997 and that was in the context of 5 concerns about potential manipulation of prices at 6 the prior market at the National Cheese Exchange. 7 Factors, you know, that are associated with the 8 potential for price manipulation, a thin market, 9 you know, low trading volume, a small number of 10 traders making the majority of trades existed at 11 the National Cheese Exchange and we found that 12 they still exist at the Chicago Mercantile 13 Exchange spot cheese market. 14 Just to give a few numbers and 15 Robert was making some reference to just how small 16 the sort of trading volume is, between 1997 and 17 2006, there were less than three trades per day of 18 the barrel cheese market. In between 1997 and 19 2007, in terms of sort of majority of buyers, 20 there were two buyers that represented 74 percent 21 of the purchases on the market in that same time 22 frame. I think generally, it's agreed and not 23 particularly argued as a point that it is a thin 24 market. 25 In terms of sort of the extent of PROFESSIONAL REPORTERS, LTD. 303 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 concerns about the potential manipulation, we 2 really heard about a variety of views on that. 3 You know, certainly, there were the fair share of 4 folks who believed that there is potential 5 manipulation occurring there. We also spoke to a 6 number of industry participants who were not 7 really particularly concerned about manipulation 8 in the market. They said that they, you know, 9 sort of have faith in that market. They use the 10 CME spot cheese prices in setting their prices. 11 They've never stopped using those 12 prices out of any concern about manipulation, so 13 there was really a wide variety of views on that. 14 As has been mentioned, you know, the minimum 15 prices for raw milk bought by cheese manufacturers 16 are set using the USDA pricing formula. The most 17 significant component in that formula is the 18 weekly average of cheddar cheese prices. At the 19 University of Wisconsin, they conducted a study 20 where they showed that between 2000 and 2007, 21 upwards of 83 percent of the USDA price of class 22 III milk was coming from that cheese component. 23 We found that the CME spot cheese 24 market prices, as I mentioned, are used by the 25 dairy industry in establishing their prices to set PROFESSIONAL REPORTERS, LTD. 304 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 contracts between market participants. There is, 2 as many of you know, the NASS survey of cheese 3 prices. Generally, what we found is that although 4 that survey was created specifically in the 5 context of attempting to address concerns about 6 potential manipulation at the spot cheese market, 7 there really isn't much of a difference between 8 the NASS survey of cheese price and the CME spot 9 cheese price. 10 Also in a University of Wisconsin 11 study, they found that there was a 98 percent 12 correlation between NASS cheese prices and CME 13 spot cheese prices. The USDA itself conducted an 14 analysis in which they used NASS -- they used, 15 excuse me, CME spot cheese prices instead of NASS 16 survey prices, going back historically into the 17 class III milk pricing and they found that there 18 was, again, a very small difference, they called 19 it a difference of little significance. 20 This was all leading us to conclude 21 that there is not a big difference between these 22 prices, the CME spot cheese price and the NASS 23 survey price and that USDA should give some 24 consideration to alternative proposals, including 25 using CME prices directly, just understanding that PROFESSIONAL REPORTERS, LTD. 305 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 there's not a big difference between those two 2 things. As has been mentioned, future contracts 3 for milk pricing are used in -- that are used in 4 manufacturing cheese are settled at expiration 5 using that same minimum price for milk price. 6 At the time of our report in 2007, 7 CFTC had received several complaints of 8 allegations or allegations from industry 9 participants about potential price manipulation on 10 the market and in the context of our looking at 11 the oversight of the market, we found that CFTC 12 and the Mercantile Exchange itself were providing 13 oversight of the market and that it was a 14 substantial and significant increase of oversight 15 as it related to the oversight that occurred at 16 the National Cheese Exchange. 17 CFTC, and I imagine Steve will be 18 talking about this in a moment, they're interested 19 in the spot cheese market in the context of how 20 those CME spot cheese prices could impact prices 21 in the related futures market. Specifically, I'm 22 just going to sort of share a few findings about 23 what the CFTC oversight and the Mercantile 24 Exchange itself, what their oversight consists of 25 as it relates to this market. PROFESSIONAL REPORTERS, LTD. 306 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 It was interesting in conducting 2 this work, it just seemed as though a lot of folks 3 didn't really appreciate or sort of fully 4 understand the extent to which there is oversight 5 of this market, independent of whether or not 6 manipulation is occurring, just that there is a 7 fair amount of oversight that's ongoing. At CFTC 8 specifically, we found that as of 2007, they had 9 prepared summary documents analyzing the spot 10 cheese market four times, including analysis to 11 participants, volume, price fluctuations. 12 Since 1999, CFTC had done nine 13 special reviews of trading activity at the market 14 in response to specific complaints. None of those 15 reviews resulted in any legal action taken against 16 a market participant. I think most people are 17 familiar with the DFA case, I'll just leave that 18 for Stephen to address, but clearly, CFTC is 19 engaged in overseeing this market. 20 From the CME oversight perspective, 21 they're conducting daily oversight of the market 22 through their market regulation division. They 23 have enforcement rules that prohibit price 24 manipulation. They have a market analyst who 25 daily is monitoring trading, maintaining PROFESSIONAL REPORTERS, LTD. 307 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 familiarity with industry trends, reviewing large 2 price changes and they have market regulation 3 staff who are reviewing traders' positions on the 4 spot cheese market as well as the relationship to 5 the class III futures market to determine if a 6 future -- a trader's future position would benefit 7 from price changes on the spot cheese market. 8 Just in conclusion, broadly, we 9 found that while not guaranteeing, of course, that 10 price manipulation would be detected or prevented 11 in terms of the extent of oversight that is there, 12 that regular and targeted reviews of this market 13 may help to insure the integrity and confidence in 14 the market. We had two recommendations in this 15 report, one, as I believe I mentioned earlier, was 16 for USDA to seriously consider alternatives to the 17 NASS survey as a component to the milk pricing 18 formula, including CME, given that there's not 19 much difference there. 20 We also had a concern that at that 21 time, the NASS survey of cheese prices was not 22 being audited. It's my understanding that USDA 23 has now implemented an auditing program and that 24 that is under way. Those are the comments. 25 MR. TOBEY: I'm trying to PROFESSIONAL REPORTERS, LTD. 308 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 understand this myself and so I've seen this 2 stated repeatedly about the correlation between 3 the NASS survey price and the CME price and I'm 4 trying to figure out what the significance of that 5 is and what I've been able to come up with is that 6 it just shows that the CME price is used in 7 pricing transactions involving cheese and it shows 8 that it is -- that it highly influences the 9 market, but I guess what I'm struck with, looking 10 at all these other markets, is that you need a 11 price, you know. 12 In order to have a functioning 13 market, you need some sort of price, a reference 14 price, and there have been a lot of questions 15 about whether this CME price is in fact a good 16 reflection of supply and demand or other things 17 that Bob talked about in terms of whether it can 18 do the job as a price and maybe we'll get to that 19 later, but is that right, about why that 20 correlation is significant, it shows that people 21 are in fact using the CME price? 22 MR. PAULINE: It was certainly the 23 case that very consistently, we heard from 24 industry participants that they do in fact use the 25 CME price. The difference between CME price and PROFESSIONAL REPORTERS, LTD. 309 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 NASS survey of cheese prices, as we were told, is 2 largely due to sort of discounts or premiums that 3 might be attached to that CME price in the context 4 of individual contracts. 5 There is also a time lag issue, so 6 the NASS survey of cheese prices can be sort of 7 one to two weeks behind the pricing of the CME 8 spot cheese market, but without question, the 9 industry, you know, folks that we spoke to were 10 using the CME price to establish their contract 11 prices in the market. 12 MR. TOBEY: So let me reiterate, I 13 think perhaps it's late enough in the afternoon 14 that we've lost our FFA volunteers, so if people 15 do have questions or comments, you can just bring 16 them up directly to Patrick here and we'll try to 17 work them in. But let's move now to Steve Obie, 18 and Steve, as the acting director of enforcement 19 at the CFTC, what is the CFTC doing to ensure that 20 the dairy markets are free of manipulation? 21 MR. OBIE: Thank you very much, 22 Mark, and I really appreciate the opportunity to 23 be here. I think you've been an incredible 24 audience. You've been very patient and I 25 appreciate that. And I think one of the things to PROFESSIONAL REPORTERS, LTD. 310 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 take away is that federal agencies are cooperating 2 like never before. I mean, the partnership 3 between USDA, DOJ and involving the CFTC in this 4 discussion is very important, because we all have 5 a unique introspective into this marketplace. 6 We conduct very vigorous 7 surveillance of the dairy markets. The CFTC has a 8 very active surveillance program. You heard Andy 9 talk about it. We routinely get information in 10 the spot market. An interesting thing that occurs 11 with this marketplace is that the Commission is in 12 charge of regulating the futures markets. The 13 spot market is something that I have enforcement 14 authority over if there's a manipulation and I 15 think folks could see that we've been taking 16 allegations of misconduct very seriously. 17 We have, obviously, the DFA case 18 that came out. We have any number of active 19 investigations in these marketplaces. You heard 20 from prior panels, though, that the law is very 21 difficult in this area, in order to bring a case, 22 and so while we as an enforcement arm of the CFTC 23 can investigate and make cases, any problems in 24 pricing really are going to come about through a 25 partnership involving USDA, DOJ and coming up with PROFESSIONAL REPORTERS, LTD. 311 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 different pricing measures or improvements into 2 the marketplace. 3 I do want to add a couple things, 4 though. One of the important parts that 5 enforcement can play here, particularly with CFTC, 6 is to have regular dialogue with market 7 participants so that when you see areas of 8 concern, when you see prices that are abnormal, 9 I'd be very grateful if people would give us a 10 call. We have a toll free number, we have 11 investigators that will take your information and 12 it will enable us to continue to vigorously police 13 these markets. 14 Our number is 866-FON-CFTC and we 15 rely to a great extent on leads from local 16 communities, because you have your ears to the 17 ground and your leads enable us to be the cop on 18 the beat. 19 The other point that I think is 20 interesting to note here is that people are really 21 itching for price discovery and real time 22 information, and I note that the CME just started 23 a cheese futures contract that just started 24 trading on Tuesday and maybe that will be able to 25 add additional information into the marketplace. PROFESSIONAL REPORTERS, LTD. 312 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 Obviously, we try to be as vigorous 2 as possible with surveillance, but even if there's 3 a perception that a marketplace is not functioning 4 properly, we want to be alerted to that, because 5 perceptions themselves can really undermine the 6 confidence that is needed by you, the farmers and 7 the public, in the marketplaces that we oversee. 8 This is not a marketplace that is actively 9 traded. We've heard that it's a thinly traded 10 market. 11 And from an enforcement 12 perspective, that concerns me, because it means 13 that it will only take a little bit of nefarious 14 activity to move a marketplace and so, you know, 15 we devote substantial resources into our 16 investigations in order to determine whether that 17 nefarious conduct has occurred. 18 MR. TOBEY: Let me ask you this, is 19 there a distinction between the intensity of the 20 regulation or oversight that you do with future 21 markets and what you can do with the spot cheese 22 market? 23 MR. OBIE: Yes, thank you for 24 bringing that up. In the futures markets, we have 25 very, very strict regulations about the design of PROFESSIONAL REPORTERS, LTD. 313 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 contracts. One of the factors is that they cannot 2 be susceptible to price manipulation, so there are 3 core principles that apply to futures contracts. 4 The Commission does not oversee the trading in the 5 spot marketplace. The enforcement arm, when we 6 get leads, will investigate it, because obviously, 7 the spot marketplace greatly affects the futures 8 prices and so that's how we get involved from an 9 enforcement perspective. 10 And one of the great things about 11 this partnership now between USDA, CFTC and DOJ is 12 that we're getting a much greater understanding of 13 the problems in the area and the weaknesses where 14 nefarious conduct can occur. Last -- I guess this 15 morning, the conference in the House and the 16 Senate came to an agreement for financial reform 17 and that bill, which still now needs to go back to 18 the House and then to the Senate. 19 But it looks like that bill will be 20 passing very shortly, will provide additional 21 enforcement powers for the CFTC and provide 22 extensive rule making powers for the CFTC so that 23 additional oversight and additional efforts can be 24 utilized to insure that the marketplace is free of 25 manipulation and responding properly. PROFESSIONAL REPORTERS, LTD. 314 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 MR. TOBEY: Thank you very much. 2 We're going to talk in a minute about enhanced 3 reporting, which is what Denny Wolff is going to 4 talk about and alternatives, all together, a 5 competitive pay price alternative to the use of a 6 measurer or an indicator like the CME spot cheese 7 price when Dan Smith talks, but let me pause for a 8 minute and just say does anybody want to comment 9 or elaborate on anything that we've talked about 10 so far? Okay. 11 So to Dennis Wolff, Denny, you've 12 thought a lot about price discovery and market 13 transparency, both as the former agriculture 14 commissioner in Pennsylvania and in connection 15 with the work that you're doing with the Dairy 16 Policy Action Coalition. What do you think should 17 be done to improve price discovery and market 18 transparency? 19 MR. WOLFF: Well, Mark I've thought 20 about it for a longer period of time than when I 21 was secretary and now representing DPAC, because 22 my entire adult life I was a dairy farmer and I 23 still am, but it didn't matter during the last six 24 or seven years with the many round table dairy 25 discussions that we held in Pennsylvania, whether PROFESSIONAL REPORTERS, LTD. 315 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 it was when I was at the department or whether it 2 was through the DPAC organization that represents 3 several thousand dairy producers today. 4 Transparency and price discovery 5 easily floated to the top every time we were 6 talking about how we may be able to reform federal 7 dairy policy and federal dairy pricing. We really 8 think it's the cornerstone of any changes that 9 happen going forward in federal policy reform. 10 And we think that you need to do that by diluting 11 the influence of the CME. We need the CME, that's 12 a given with the futures market and also having a 13 place to go and market product. 14 But we think for the small volume 15 of product that is exchanged on the CME, it has 16 way too much impact, and when you look at four- 17 tenths of one percent of the cheese processed in 18 the United States being marketed on the CME or 19 less than two percent of the butter, having that 20 large of an impact on setting the price for a 21 $30 million to $40 billion industry, and that's at 22 farmgate, on milk prices, that is concerning. 23 We do not think that it necessarily 24 reflects current market conditions and we do not 25 think that it necessarily accurately reflects PROFESSIONAL REPORTERS, LTD. 316 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 supply and demand. We think it is often used as a 2 market of last resort and of course, as mentioned, 3 a very small amount of product trading there. We 4 think that in diluting this, there's one specific 5 way that you can do that and that's electronic 6 daily reporting. Congress recognized this when 7 they were writing the last farm bill and they 8 wrote a section in, 1510, that says electronic 9 reporting on a more frequent basis shall be 10 implemented by the Secretary of Agriculture, with 11 the key word, pending funding. 12 So we've been working on that in 13 terms of trying to move that forward. We have 14 circulated letters in both the House and the 15 Senate and sent them to Senator Kohl and 16 Congresswoman DeLauro. They chair the House and 17 the Senate ag appropriations committee, to see 18 that that funding is included in the next 19 appropriations bill for 2011. So why do you need 20 that, and I think the NASS survey is important 21 information and it's good information. 22 But if you take and use a real life 23 example, if yesterday, which was June 24, and I 24 was going to negotiate a price for -- say I'm a 25 cheese manufacturer and I'm going to sell 100 PROFESSIONAL REPORTERS, LTD. 317 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 barrels of cheddar to a customer. The information 2 I have is the CME or NASS survey. If you look at 3 NASS survey, the information for NASS survey that 4 I would have had available yesterday, June 24, 5 would have been from June 7 to the 11th, starting 6 back 17 days ago. 7 So how do you get what the current 8 market of a product is with that kind of lag? 9 Electronic reporting on a daily basis takes that 10 away and much aligns with, as was mentioned 11 earlier, the pork industry, the beef industry have 12 daily electronic reporting and sometimes more than 13 once a day, so that is very important in terms of 14 making sure that we have accurate reporting, 15 timely reporting every day and then to build from 16 that, include more products and include all 17 manufactured products, not just the four products 18 that are currently used in the NASS survey. 19 So I think when you get that, you 20 certainly start to get much closer to having 21 better price discovery and that's what our dairy 22 farmers want. They do not trust the way that it 23 is currently being handled and that goes mainly to 24 how thinly it's traded and as was mentioned 25 earlier, if two buyers have been responsible for PROFESSIONAL REPORTERS, LTD. 318 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 buying 74 percent of the products over the last 10 2 years, you just hope they haven't had coffee 3 together that morning when they go in and make 4 their decisions on what they're buying and what 5 they're paying. 6 I'd just like to read one statement 7 here and then make a few comments on it. The 8 statement goes like this: This reform brings 100 9 percent transparency to the market with real time 10 reporting. There will no longer -- they will no 11 longer be able to make excessive profits by 12 operating in the dark. Exposing these markets to 13 the light of day will put the money where it 14 belongs. Now, I'm not talking about the CME. 15 I'm talking about the first bullet 16 point that was written on a section by section 17 analysis of House Resolution 4173 that passed out 18 of conference committee late last night, which is 19 better known as Restoring America's Financial 20 Stability Act and it's basically reforming Wall 21 Street and the banking industry as it correlates 22 to the derivatives market. 23 So that is -- that is a fundamental 24 rule, you know, that's just not a rule we're 25 talking about here in the dairy industry that the PROFESSIONAL REPORTERS, LTD. 319 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 dairy farmers are concerned about today. It's a 2 fundamental rule in price discovery and it's a 3 fundamental rule in transparency. 4 MR. TOBEY: Thank you very much, 5 Denny. All right. So now -- and now for 6 something completely different. We've asked Dan 7 Smith to join us on this panel. Dan is here 8 subbing at the last minute, and I'm very grateful to 9 him, for our panelist that was going to be on this 10 panel, Paul Christ who had a death in the family this 11 week and our condolences go out to Paul and his 12 family. But Dan, you and Paul have been working 13 with the Maine Dairy Association on a proposal 14 that, among other things, provides for direct 15 price discovery of dairy prices based on actual 16 market transactions in certain geographic areas. 17 I do not know, because I forgot to 18 check, but I think that we at least had every 19 intention of taking some charts and maps that Paul 20 Christ and Dan Smith have developed and copying 21 them and putting them out on the tables outside, 22 but if we haven't done it by now, we'll certainly 23 make them available and you can go to the USDA 24 dairy industry advisory committee website and find 25 the entire presentation that Dan and Paul did that PROFESSIONAL REPORTERS, LTD. 320 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 has these maps. 2 But with that preface, let me ask 3 you, Dan, if you would describe your ideas about 4 how to arrive at a price that can be used for 5 market transparency and price discovery in milk, 6 and maybe since people might be familiar with the 7 old MW price, the old Minnesota Wisconsin price, 8 maybe you could kind of compare it a little bit to 9 that. 10 MR. SMITH: Okay, thank you, Mark. 11 I reiterate what you said, our thoughts are with 12 Paul's family. It's been a real privilege, I 13 think many people in the room are likely familiar 14 with Paul working as long as he did with Land O' 15 Lakes. Paul is really the mechanic of our 16 proposal and I'm sort of the broader architect of 17 it, so you'll get a little bit of the context of 18 where it came from from me and if you'd like, we 19 can have Paul submit something for the record in 20 terms of more of the details of the mechanics. 21 As Mark said, Paul and I made a 22 presentation to Secretary Vilsack's dairy advisory 23 committee a couple weeks ago and you can find more 24 information there. The proposal also has been 25 through one round of AMS hearing and that's PROFESSIONAL REPORTERS, LTD. 321 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 available on their website, Paul's testimony and 2 cross, including did -- Bob, did you cross Paul 3 or -- I can't remember, I guess the attorney for 4 IDFA crossed Paul. But in any event, the proposal 5 has been through one round of hearing process, so 6 there is a fair amount of information available at 7 this point. 8 Just to back up where we started 9 from, really, the essential premise stems from 10 Senator Feingold's comments this morning about 11 trying to find something around which the industry 12 might be able to find consensus. My work with 13 fluid milk market and class I prices and the value 14 of the class I price truly does prove to be quite 15 divisive. 16 This work has been quite 17 different. There is a general consensus 18 throughout the industry that end product pricing, 19 which is used for both class III and IV pricing is 20 not working, not only not working as it was 21 intended with 2000 order reform, but just plain 22 not working and needs to be replaced. In all the 23 years I've been doing this, I've never seen such 24 consensus not only within different groups in the 25 industry, but across groups in the industry, PROFESSIONAL REPORTERS, LTD. 322 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 producers and processors both in general 2 concurrence that end product pricing is not 3 working. 4 And the common refrain is twofold. 5 One, what has been repeated all day is the CME is 6 too thin a market to base a pricing proposal 7 around, and the second is that where the -- to 8 start with you, where the farmer sells his or her 9 milk to a processor, that's what should be priced, 10 not what happens to the milk once the processor 11 takes possession of the milk, turns it into cheese 12 or butter or whatever the processor turns it 13 into. As Bob said, that's not a price discovery 14 mechanism for milk. 15 So doing some initial research into 16 how end product pricing emerged out of the 2000 17 order reform, I discovered that consensus of 18 opinion right at the outset, that if there was an 19 ability to come up with a proposal that would 20 price the transaction between the producer and the 21 processor, rather than the processor and his or 22 her customer downstream, that that would be a 23 proposal for price discovery that the industry 24 might embrace with some consensus. 25 So at that point, I hooked up with PROFESSIONAL REPORTERS, LTD. 323 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 Paul, because Paul had been working on an 2 alternative which he dubbed a competitive pay 3 price for a number of years and we framed the 4 proposal and submitted it to USDA and went to 5 hearing on the proposal in 2007. Just to back up 6 one step further, in terms of the other important 7 participant in this process is the Maine Dairy 8 Industry Association, which is really the sponsor 9 of this, that Paul and I went to hearing on behalf 10 and this ties into Mark's question about the MW. 11 As I get along, I find virtually no 12 advantages to getting older, other than some 13 experience and hopefully wisdom. I think at my 14 age, wisdom is still -- I'm too not only humble to 15 think that I'm accruing any wisdom, but I haven't 16 seen it yet, so hopefully that comes, but the 17 experience is definitely there and one of the 18 advantages also of the aging of the dairy industry 19 is you work with people who have a lot of 20 experience and wisdom, so the Maine Dairy Industry 21 Association board represents both of those. 22 And the constant refrain about this 23 new end product pricing proposal, pricing formula 24 being non transparent, we batted that around in 25 the boardroom before we developed our proposal and PROFESSIONAL REPORTERS, LTD. 324 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 there was an understanding among the dairymen, 2 mostly dairymen in the room, that 25 and 40 years 3 ago leading to 2000, from 1960 to 2000 with 4 pricing off the MW, you had a manufactured price 5 that tracked off of the surplus price for grade B 6 milk, plus a class I differential blended against 7 the utilization was the farmer's pay price. 8 And that was for the farm community 9 itself transparent, so all of this opaqueness 10 that's involved with end product, downstream 11 product pricing wasn't even in view for the basic 12 understanding that all these guys had grown up 13 with. They knew what their milk price was. They 14 may not have liked the milk price, but they knew 15 what the milk price was and where it came from. 16 So that was built in as really a fundamental 17 point, that if we can get back to pricing the 18 transaction between the farmer and the processor, 19 in addition to focusing on what ought to be 20 focused on, just from sort of a common sense 21 standpoint, that ought to lend further 22 transparency to the pricing structure. Because 23 when Denny sells his milk to his processor, that's 24 what ought to be priced. 25 So those were the two original PROFESSIONAL REPORTERS, LTD. 325 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 starting points. Then when I dug into it a little 2 bit more and thought about it a little bit other, 3 we batted it around a little bit more, come to 4 find out that the volatility in the marketplace 5 that we deal with, everybody deals with in the 6 marketplace in a fluid organized market, because 7 the class I mover tracks off the manufactured 8 price, the volatility that emerges in the class I 9 which has moved anywhere from $11, $9 at the 10 bottom to upwards of $25, I'm mixing, from $13 on 11 a class I price to $25 on the class I price. 12 It's moved $12 and it moved $9 in 13 about nine months. That volatility on fluid 14 market, which generates all the discussion of 15 where is that money going, that bottom is tied to 16 the class I mover. So the volatility in the 17 market can on some level also be attributed to 18 that manufactured price, so if we can deal with 19 consensus, transparency and volatility, we're 20 focused on that end product price and whether 21 there's something that can be done differently. 22 So that's really where we started 23 with. We developed a body of data that was really 24 organized around the Midwest, because there's 25 clearly competition for milk in the manufactured PROFESSIONAL REPORTERS, LTD. 326 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 market here. The question was whether that was 2 enough milk and that's really where the proposal 3 foundered at the hearing, that it was too limited 4 a volume of milk. USDA, quite understandably, 5 said based on that limited volume of milk, it's 6 not really representative enough to build a 7 proposal around. 8 But given the industry's embracing 9 of the idea at the hearing, despite asking a lot 10 of questions, Paul and I and MDIA decided to go 11 forward with the proposal, so we're now basically 12 four years into a fairly extensive discussion 13 around the industry and with USDA about the 14 proposal. As Mark indicated, there are a series 15 of maps that we actually didn't put together, USDA 16 put together through a fairly extensive analysis 17 of milk across the federal order system to answer 18 the question as to whether there is sufficient 19 milk in the system that is being competitively 20 traded that might be used as the basis for the 21 proposal. 22 As Brian in the previous panel 23 talked about, we use the HH -- the Herfindahl 24 Index which measures competition in the industry. 25 We went looking for areas of the country where PROFESSIONAL REPORTERS, LTD. 327 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 competition exists, both using that index and 2 using a threshold of five or six processors 3 bidding for milk and asked USDA to analyze the 4 volume of milk and its distribution 5 geographically, its dis-aggregation in terms of 6 amount of milk and its distribution. 7 What came back was a surprise to 8 Paul, that there was more milk than he thought 9 there would be. Measured against the threshold of 10 numbers of processors, roughly 60 percent of the 11 milk in the country, at least by that measure is 12 competed for. Measured against the Herfindahl 13 Index which roughly represents what the Department 14 of Justice looks into, uses as its benchmark for 15 whether there are competitive problems, that 16 number dropped to 50 percent. 17 So at our second look, roughly half 18 the milk in the country is available to be used as 19 the basis for framing a replacement model for end 20 product pricing, so we're now -- based on that 21 available data, we're developing, further 22 developing our proposal. It would work somewhat 23 like this, we would look for representative zones 24 across that 50 percent of the milk where the 25 transaction between the processor and the farmer PROFESSIONAL REPORTERS, LTD. 328 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 in those zones could be deregulated, removed from 2 the federal order minimum pricing regimen and just 3 based on that competitive transaction, based on 4 those representative numbers. 5 MR. TOBEY: Dan -- 6 MR. SMITH: I'm almost done, if 7 that's where you're getting. Instead of a NASS 8 survey, it would just be a reporting of that 9 pricing across those competitive zones and that's 10 the proposal. 11 MR. TOBEY: And again, I will 12 commend the full presentation of this to 13 interested members of our audience. We want to go 14 ahead and move on to the last public participation 15 phase of the workshop and try to stay a little bit 16 near on time. And we are joined again, as he had 17 promised earlier, by Senator Feingold for this 18 part of the session. 19 MR. SMITH: You should have told me 20 that sooner. 21 MR. TOBEY: You're very far down 22 there, so I couldn't signal too much, but thanks 23 to the members of this panel and we'll -- my 24 colleague Josh Soven and John Ferrell will, as 25 well as the Senator, will now take your comments. PROFESSIONAL REPORTERS, LTD. 329 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 If you have red tickets and would like to line up 2 again, we'll move to that phase of the workshop. 3 Thanks. 4 MR. FERRELL: Well, folks, I think 5 we will go ahead and get started with the other 6 comment period. And same format as before, two 7 minutes, and then bring -- you can go ahead and 8 line up to the microphone as you're doing and 9 we're going to try to get as many people that want 10 to provide comments to be able to talk to us and 11 before we do that, though, I'd like the turn it 12 over to Senator Feingold for any remarks you would 13 like to make. 14 SENATOR FEINGOLD: Thank you, I'll 15 just do two minutes. I wanted to come back 16 because I had asked for these public comment 17 periods and I will have to leave by about 5:45, 18 but I wanted a chance to just hear unfiltered 19 directly from many of you, so I'd like to do that, 20 but I want to first thank all the farmers for 21 taking the time to come today. I know it's a 22 sacrifice for you and you all have a long list of 23 things you could have been doing today in what is 24 essentially a 24-hour a day job. 25 But it is especially important for PROFESSIONAL REPORTERS, LTD. 330 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 agency leaders in Washington to hear from you and 2 even though Secretary Vilsack and Assistant 3 Attorney General Varney are not sitting in the 4 room right now, I'm sure that they'll both hear 5 what you have to say. In fact, in many ways, 6 these senior staffers on stage and in the audience 7 are often the most critical people to hear from 8 you for the agencies so we can really get it at 9 all levels. 10 Finally, I just want to say I've 11 noticed these young men and women in their FFA 12 jackets and know they've been volunteering today. 13 I'm always encouraged to see FFA members and 14 always feel optimistic about the future when I do 15 see them or have a chance to talk with them as I 16 did in Washington this week, so I just wanted to 17 ask if everybody would give a round of applause 18 for them and the rest of the staff. 19 MR. FERRELL: I think we will go 20 ahead and get started and we'll start right over 21 here. 22 AUDIENCE MEMBER: Thank you, good 23 afternoon. I'm Warren Taylor and I'm the owner of 24 Snowville Creamery in southeastern Ohio. We began 25 operation about 30 months ago. We now have a PROFESSIONAL REPORTERS, LTD. 331 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 payroll of half a million dollars per year in 2 Ohio's poorest county. We pay our farmers a 3 30-percent premium over the blend price. Our 4 business has been doubling every year. 5 Unfortunately, there is only one dairy industry in 6 America and it intends to keep it that way. 7 It has spent the last 30 years 8 finding out how cheaply milk can be made and it is 9 fundamentally anticompetitive in not allowing even 10 a discussion of the possibility of differentiated 11 premium drinking milk. In grocery stores, I offer 12 taste samples of our old fashioned, grass grazed, 13 minimally processed fresh milk and hear people say 14 I haven't tasted milk like that since I left 15 home. I didn't know there was bad milk until I 16 came to America. 17 These are people from developing 18 countries like Africa, Central and South America, 19 India, Europe, Russia. And, you know, these kinds 20 of comments galvanize me in what I'm trying to do 21 in making better milk. America's mediocre milk is 22 perpetuated by our USDA's federal milk market 23 order system, based on the obvious lie that all 24 milk is the same and so it's only fair that all 25 dairy farmers are paid the same. There's no PROFESSIONAL REPORTERS, LTD. 332 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 incentive to make better drinking milk since the 2 premium received in the marketplace must be shared 3 with the competitors making the cheapest milk. 4 I write a check for about $5,000 a 5 month right now, equal to our total profits, into 6 the FMMOS. This is not just un-American, it's 7 anticompetitive and it's not functional for 8 smaller dairy farmers who want to make better milk 9 and for consumers who appreciate really good 10 milk. I heard comments today from California that 11 we should institute higher solids standards all 12 over the country like they have in California. 13 Our non fat and low fat milk meets California 14 standards from our cows. It doesn't have to have 15 condensed milk put in it. It's extraordinarily 16 delicious milk. 17 Last year, USDA was requested by 18 National Milk Producers Federation and IDFA to 19 triple the volume that a small plant like ours 20 could process while remaining exempt from having 21 to pay into the FMMOS. In a year of hearings, no 22 one spoke against doing so, but USDA left it at 23 the uneconomically small 150,000 pounds a month it 24 has been at for decades without really explaining 25 why. PROFESSIONAL REPORTERS, LTD. 333 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 Snowville Creamery is trying to 2 help our Secretary of Agriculture, Tom Vilsack, 3 achieve his goals of revitalizing rural America 4 with innovative, entrepreneurial, small local 5 business. But until the exempt plant limit is 6 raised, dairy cannot be part of that better future 7 he envisions. When his time comes to leave 8 Washington, there may still only be one commodity, 9 lowest cost, cheapest milk dairy industry in this 10 country, to the detriment of our children's 11 health. 12 We receive dozens of unendorsed or 13 unsolicited endorsements from parents telling us 14 about children that wouldn't drink milk or drank 15 very little milk who are drinking gobs of our 16 fresh, high quality, extraordinarily delicious 17 milk. If that commodity industry continues to 18 stifle competition and innovation, I'm afraid that 19 America, once a land of diversity, opportunity and 20 continuous improvement driven by the vitality of 21 free and open markets will be gone. Thank you 22 very much. 23 AUDIENCE MEMBER: My name is 24 Charles Knuetz(phonetic). I'm a dairy producer 25 from about 20 miles east of here and my son and I PROFESSIONAL REPORTERS, LTD. 334 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 have a corporate dairy, so we're large and one of 2 those bad ones, that's my son and I. We milk 140 3 cows, do all the work ourselves, manage 800 4 acres. We've had the pleasure of sitting here all 5 day today listening to all the negatives of the 6 dairy industry, what's wrong with it, where it is, 7 what's happening, why are we doing it, but I 8 haven't heard too much about what we can do to 9 change it. 10 And I think one of the biggest 11 things we can do in the dairy industry has worked 12 hard at it for the last six, eight, nine months, 13 and that's put together a system where the dairy 14 industry runs itself. And I think it's time that 15 the producers get together, co-ops, non co-ops, 16 all of them get together and start determining how 17 much milk we actually produce to fill this 18 market. Nobody has complained about the prices of 19 2008 when they were wonderful and we were all 20 making money. It's when it fell apart that we 21 started to complain about it. 22 The reality of it is in 2008, we 23 had good money, everybody expanded to produce more 24 milk. It's a simple equation of supply and 25 demand. We need to control supply and demand at PROFESSIONAL REPORTERS, LTD. 335 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 the producer level in this country before we will 2 be making a genuine profit in the dairy industry. 3 Thank you. 4 AUDIENCE MEMBER: I'm Bill 5 Hobbins(phonetic), I'm not a farmer. I've been 6 here all day and this gentleman said it all. Milk 7 is our best product and we're ruining it with 8 homogenization and it's causing hardening of the 9 arteries, it's causing other diseases and it is 10 not a cause of infections and it should be allowed 11 to be purchased like all other produce from the 12 local farmer without any restraint. 13 I don't question their watermelon 14 as to the irrigation, I don't question their eggs 15 as to the feed to the chickens and I can tell you 16 that milk is so dominant, but you're destroying it 17 with your homogenization. Now, you can pasteurize 18 it if you're worried about it, but it's the 19 dirtiness afterwards that makes it get infected 20 and more importantly, we can use X-ray very 21 simply, a machine developed here at the University 22 in 1937 that will sterilize the milk rapidly with 23 no damage. Now, this man made my day, thank you. 24 AUDIENCE MEMBER: Hello, my name is 25 Charlotte Williams and I work with the Center for PROFESSIONAL REPORTERS, LTD. 336 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 New Community. We're out of Chicago and it's a 2 national organization that works towards equality, 3 building community and justice. I'm the director 4 for their national program that looks at a food 5 justice initiative, so we'll be looking to see 6 what's going on in the U.S. food processing system 7 and looking for the same issues that people have 8 talked about here today. 9 As a consumer, as a person from 10 Chicago, I know a lot about injustice, corruption, 11 safety issues on the street, whatever, I mean, 12 that's just what's happening with us, that's what 13 it is. But I also know about being hoodwinked, 14 bamboozled, you can't just pee on us and tell us 15 it's raining. It's just not going to happen. As 16 a consumer, people are getting educated now about 17 what's going on and I can tell you what he said 18 earlier about people being moral and tough, what 19 I've heard from farmers, they some pretty tough 20 people, you know, to be able to deal with what's 21 going on. 22 And the moral fiber, it is out 23 there in consumers. Consumers are being educated 24 through advocacy groups, non-profit organizations 25 to tell them just what's happening here. People PROFESSIONAL REPORTERS, LTD. 337 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 would be pretty pissed if they knew that what they 2 pay at the market and the people that struggle to 3 put those products on the shelves, the disparity 4 in what's going on with what people are getting 5 paid. It's just something people wouldn't 6 tolerate in other industries. 7 And as a consumer, you need to know 8 there are people out there that are out there that 9 are trying to understand this. Yes, it's really 10 hard being in the urban area where, you know, 11 they're shooting people and things like that are 12 happening and the process of life is real 13 stressful, but it's stressful for you all and if 14 we can all get together and understand, somebody 15 is getting the money and it ain't us, then I we 16 got a long way that we can go together. Thank 17 you. 18 AUDIENCE MEMBER: Yeah, my name is 19 Ron Kliebenstein, I farm down by Darlington, 20 Wisconsin. My son Nathan is the fourth generation 21 on our farm. I'm very proud of him for taking up 22 the challenge. I read a statement in a book just 23 recently by a fellow by the name of Felix Rohatyn, 24 he was a financier. I'm not just sure when he was 25 alive, but it goes like this: Market capitalism PROFESSIONAL REPORTERS, LTD. 338 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 is the best economic system ever invented for the 2 creation of wealth, but it must be fair, it must 3 be regulated and it must be ethical. 4 And I think we're a long way from 5 living up to this standard of what this guy just 6 said. Now, the question I have is maybe 7 somewhat -- I don't know, it doesn't 8 necessarily -- it isn't necessarily measured by 9 statistics. I would go like this, something like 10 this, does ownership matter, does ownership of the 11 ability to own resources by which we produce the 12 goods and services that it takes to satisfy the 13 requirements of the human existence, does the 14 ownership of those resources matter. 15 And when you consider this market 16 capitalism that is the basis of our economic 17 system that we have been living since the founding 18 of the Union back in the 1700s and the fact that 19 individuals come to this country and they had the 20 ability to own the resources and through the many 21 years of the American historical experience, they 22 have taken that ability and just done wondrous 23 things with it. 24 Now, I read an article in Hoard's 25 Dairyman a couple month's ago and the author by PROFESSIONAL REPORTERS, LTD. 339 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 the name of Bill Rowell used some numbers in terms 2 of dairy producers in the country just since 3 1970. In 1970, we had 648,000 dairy producers. 4 Today, we have somewhere in the neighborhood of 5 50,000 and he suggested the potential in a 6 given -- he didn't give a specific time frame of 7 having perhaps 800 10,000-cow dairies producing 8 all the milk in this country. 9 Now, my question is, well, the 10 reality is this, just when you go from them 11 648,000 to 50,000, how much of that ownership 12 haven't we already lost? And if we were to go to 13 those 800 large farms, what would the consequences 14 be? In truth, we can't really say for sure what 15 the consequences would be, but we do know one 16 thing, that independent, entrepreneurial system of 17 ownership of dairy farmers in the dairy industry 18 has well served the dairy industry for many years 19 in this country and I would suggest it's a huge 20 mistake to abandon that, but that's exactly what 21 we're doing. 22 And we're doing it by our own free 23 will, and I would totally agree with that 24 gentleman that got up a couple minutes ago and 25 said that we can fix this as producers, because as PROFESSIONAL REPORTERS, LTD. 340 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 long as the producers own the product, they have 2 the ability to come together and fix it and we 3 choose not to do so. For whatever reason, we 4 choose to let our cooperatives represent us and 5 quite frankly, the numbers speak for themselves. 6 They're not representing us. 7 We need to take the bull by the 8 horns as producers and get the job done and I 9 believe it can be done or I wouldn't be here today 10 and I sure would not have allowed my son to dairy 11 farm. Thank you. 12 AUDIENCE MEMBER: My name is Bill 13 Averbeck, I'm a dairy farmer in Fond du Lac, 14 Wisconsin. My family has operated this farm since 15 1848. I'm the fifth generation. I have two sons 16 that will be the sixth generation. I have three 17 grandchildren and if their mothers have anything 18 to say about it, they'll try to keep them on the 19 farm, too. Yesterday when I left, there were four 20 generations of Averbecks working on that farm, my 21 father, who's 83, myself, three of my sons and my 22 grandchildren were there also. 23 I couldn't get them to move 24 concrete, because they were -- the youngest one 25 was three months old, but I think what I'm trying PROFESSIONAL REPORTERS, LTD. 341 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 to get at is that every dairy farmer, every small 2 businessman in this room brings something to the 3 table and in my belief, my personal belief as a 4 member of Dairy Farmers of America is that the 5 dynamic of bringing small businessmen together, 6 albeit being dairymen, is a very important 7 function of cooperatives. It's how we work. 8 Now, democracy is a beautiful 9 thing. It's not perfect. Cooperatives are run 10 democratically. They're not perfect, but we make 11 an attempt as individual businessmen in a 12 cooperative environment to try to make things 13 better for our fellow producers and in the end, 14 make an attempt to make it better for other people 15 in the industry that are producing milk also. 16 There are times when we succeed and there are 17 times when the circumstances overwhelm. 18 I believe those are the times that 19 we're in right now. We have moved in this dairy 20 industry in this country from a domestic dairy 21 industry to an industry, and by design, that 22 talkede about if the industry is going to grow, 23 we're going to have to export. Well, if you look 24 at the numbers, we're exporting almost 10 percent 25 of our milk equivalent a year. That's a position PROFESSIONAL REPORTERS, LTD. 342 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 we weren't in 10 or 12 years ago. So when the 2 economy slowed down, difficult times came for milk 3 producers. When the economy improved, I'm talking 4 about the domestic economy in this country, milk 5 prices improved. 6 Now we're in a world economy. The 7 dynamics have changed and I think we and DFA are 8 trying to recognize that, trying to deal with 9 that. We're working very hard, because we're 10 dairy farmers. It's ludicrous to believe that any 11 dairy co-op, I believe any dairy co-op would work 12 in not in the best interests of their very owners, 13 the people that supply them the milk, the people 14 that have a -- take a part in the selection of 15 management and how the co-op is supposed to 16 proceed. 17 We have a challenge in front of us 18 and I think cooperatives are part of the answer. 19 They're not the whole answer, but I appreciate the 20 fact that the Justice Department and the Secretary 21 was here and I thank you, Senator, for being here, 22 because I think it was very positive. We have 23 varying views out here, as you can see from the 24 testimony, but I think in the end, the solutions 25 are there. It's just a question of whether we can PROFESSIONAL REPORTERS, LTD. 343 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 all get together and find them. Thank you. 2 AUDIENCE MEMBER: Hi there, my name 3 is Sarah Carlson, I'm a consumer and kind of a 4 media maker from Chicago. I wanted to comment to 5 sort of talk about the consumer end of this milk 6 issue and how consumers, obviously, nowadays are 7 really wanting choice and they're wanting a 8 variety in their product and you have a movement 9 in Chicago that's very strong to get local 10 products, high quality products, a variety of 11 products, whether it be produce or milk or 12 whatever. 13 The CSAs in the Chicago area, the 14 Community Supported Agriculture, CSAs, and some of 15 the milk shares have sold out. The demand exceeds 16 the supply. There is a strong demand for high 17 quality alternatives to the dominant market 18 nowadays and so I guess what I'm saying is that 19 the consumer is not a passive consumer anymore. 20 They are taking action to try and get their needs 21 met, whether it's to get healthy food for their 22 children, whether it's to get healthy produce in 23 areas where they don't have access to it. 24 And that leads me to another issue, 25 which is that many of our communities in rural PROFESSIONAL REPORTERS, LTD. 344 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 areas and in urban areas have some of the same 2 issues happening. They have a lack of economic 3 development, a lack of access to fresh and healthy 4 food and communities need to -- we need to work 5 together as consumers and farmers. As many people 6 have mentioned today, consumers and farmers are 7 both getting squeezed. We're paying a lot of 8 money at the store, but we're not getting the 9 products that we want, very often, and farmers are 10 not getting their share of the food dollar. 11 And I'm here to say that I've 12 talked to a lot of consumers and we do care about 13 the farmers. A lot of consumers don't know what's 14 going on with agriculture and how little of the 15 food dollar farmers are actually getting, but when 16 they start to understand that, they care and they 17 want to support farmers with their food choices. 18 And they also want to be able to make food choices 19 that support their families and their belief 20 system. They want to produce in a way that they 21 support and that reaches the workers in a way that 22 they feel is equitable. 23 So I just want to say that I hope 24 that the USDA and Congress and the Attorney 25 General can support consumers in having a choice, PROFESSIONAL REPORTERS, LTD. 345 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 because this system is burgeoning and growing and 2 demand is very ripe, but we have to have support 3 from the laws of this country, because obviously, 4 we live in a world governed by laws. We have to 5 have support from the regulations and laws of this 6 country in order to be able to meet the demand for 7 these alternative supplies, which will naturally 8 balance the monopolization or the consolidation 9 that's happening right now. 10 Consumers want choice and if we 11 support that market, that market of choice, then 12 we can provide a natural balance to the 13 consolidation that's happening in the industry. 14 So I would also suggest that along with everything 15 else that's been suggested today, support the 16 natural flow, the natural demand that's coming 17 from the ground for better products, for more 18 direct sales to farmers or for more diversity in 19 products and for more local products, because 20 that's already happening. 21 You've got support for it. All you 22 have to do is support that and it's not that hard 23 and people really want that. Thank you for 24 hearing me out. 25 AUDIENCE MEMBER: I'm Ken PROFESSIONAL REPORTERS, LTD. 346 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 Burkert(phonetic) from Vinton, Iowa, near Cedar 2 Rapids, family farm milking 300 cows. I have to 3 say I'm a proud member of DFA. It does a lot of 4 things for my milk production. We market our 5 stuff kind of in a local area and we have seven 6 councils that keep the milk that's produced there 7 and marketed by DFA in that local area, but the 8 combination of a larger co-op gives me a lot of 9 opportunities to market on a national and 10 international market on those levels. 11 We represent the average dairyman, 12 because we are the average dairyman. We stretch 13 all the way across the country. It allows us to 14 be very active in government affairs, what's going 15 on in Washington, D.C. and our state capitals. It 16 allows us to be a lot of brand names, we have as 17 our subsidiaries such as Borden, Keller's, and it 18 allows me to market my milk in a fluid market. 19 We are able to provide markets -- 20 production to these larger companies that are 21 spread across the country. I feel like at all 22 times I have a say in the way my co-op is run. 23 I'm very grassroots oriented and I really think I 24 get a fair value out of my milk. 25 The second thing is I'm glad to see PROFESSIONAL REPORTERS, LTD. 347 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 that we're talking a lot about the producer to the 2 retail spread. I believe that the co-ops and the 3 processors are kind of pass through companies and 4 the milk, every bit of milk that's produced every 5 day has to be marketed and somewhere along the 6 line, we are missing out by not being able to get 7 rid of our surplus supplies. 8 It's burdened our markets for a 9 long, long time and we have had low prices for way 10 too long and then the only way we finally do it is 11 when people run out of equity and go out of 12 farming, then we're short, creating volatility. I 13 think we've got to address this and I'll even make 14 the point that today, we talked about volatility 15 being bad. The problem today is we don't have 16 enough volatility to get the market back 17 upstairs. 18 We're down here in the trenches, it 19 seems like, and until somebody says we're short of 20 milk or something happens that we increase our 21 demand, that's what our problem is. So I would 22 say volatility is not all that bad, it's needed 23 right now. Thank you. 24 AUDIENCE MEMBER: Hi, my name is 25 Alice Schneiderman and I'm from Madison, PROFESSIONAL REPORTERS, LTD. 348 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 Wisconsin. Thank you very much for being here. 2 I'm a concerned mother and a concerned consumer. 3 I want to thank -- so I say thank you to Secretary 4 Vilsack, because he asked some really important 5 questions which pertain to my health and to the 6 health of the planet. He asked about, you know, 7 why are we in this contraction situation of dairy 8 farmers, why aren't we in this expansion 9 innovation mode. 10 Second of all, how can we get 11 younger people into farming. Third of all, how 12 can we increase consumption of milk, and fourth of 13 all, how can we create 100,000 new farms. 14 Well, I understand -- all right, I 15 don't understand the dairy industry. It is a very 16 complex, industrial giants, but what I do 17 understand is my relationship to my farmer. And I 18 think that in order to answer these four 19 questions, we need to be able to go to our farmer 20 and have a direct, on farm sale relationship with 21 our farmer because we want access to whole, 22 healthy, natural, real foods. 23 I'm tired of going to the 24 supermarket and not having any choices. I'm tired 25 of reading labels. I'm tired of not trusting PROFESSIONAL REPORTERS, LTD. 349 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 what -- where the food source is coming from. I 2 appreciate that the USDA is asking us to know our 3 farmer, know our food sources. I do know my 4 farmer, but right now, there's a whole room of 5 people and legislation that's standing between me 6 and my farmer to give me foods to feed to my 7 children that I know will bring them health and 8 wholeness and healing. 9 I want to be able to go to my 10 farmer and buy the foods that I want to buy. I'm 11 not saying everybody wants to do that, I'm not 12 saying everybody has to do that, but it's my 13 right. It's my right to have the freedom to 14 choose what foods I feed to myself and to my 15 children. I can smoke cigarettes, I can drink 16 alcohol, I can ride a motorcycle, but yet I can't 17 go and have a relationship with my farmer and buy 18 products from my farmer because of laws that are 19 stopping me and people that are stopping me right 20 here in the State of Wisconsin. Thank you for 21 being here and thank you for listening. 22 AUDIENCE MEMBER: I'm Don 23 Reifer(phonetic) from Dodgeville, Wisconsin, just 24 down the street here 40 miles to the west. I farm 25 with my wife Pauline who is at home doing the work PROFESSIONAL REPORTERS, LTD. 350 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 that needs to be done every day. We run about 80 2 cows, and a lot of times the farm runs us. I came 3 here today because I feel that we need to do 4 something in the dairy industry and I thank the 5 workshop committee for putting this together to 6 listen to us. 7 We need a supply management plan 8 because of what comes off in the dairy industry, 9 is that when we get a high price, we produce 10 more. When we get a low price, we produce more 11 and then we got bankers to say that you have to 12 pay for them free stall barns that you couldn't 13 pay for the last free stall barn, because you 14 couldn't pay for last free stall barn that you 15 built before that one, so we would have more and 16 more and more and we keep shooting ourselves in 17 the foot. 18 And what that being said, I'd say 19 that we do need a supply management plan. Here in 20 the Midwest, doesn't think that we need one, but I 21 do think that we need one. I think that we need 22 to develop something that's called a parallel 23 marketing, is the term that I've come up with, 24 where we sell our milk for the same price off the 25 farm as what they do in the marketplace on a PROFESSIONAL REPORTERS, LTD. 351 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 parallel line like a railroad track. 2 We've got questions about Chicago. 3 I think that the first and foremost thing, I'm not 4 sure just how well the co-ops work for us. In my 5 opinion, if it's working so well, I question why 6 we're standing here today with our poor milk 7 prices. Have they been doing the job that they're 8 supposed to have been doing? Farmers need price, 9 but not only do we need price, we need a profit. 10 We bought our place in 1981 from my 11 dad, he moved there in '55. The place has been 12 paid for for 10 years. This last year has been 13 pretty tough, just borrowing from what we've gone 14 through in the past. The industry needs change. 15 The reason it needs change is because when they 16 pull the cheese out of storage when the price 17 rallies, there goes flops the market. You got a 18 problem with Chicago manipulating prices. 19 We got exports not getting the job 20 done, we got imports bringing it in, uninspected 21 bunch of slop, farmers co-ops' boards really don't 22 do what the farmers are supposed to do for the 23 farmers. We all get bled dry until we can't go no 24 more and then just here comes another safety net 25 in to save the ones we all just got squeezed out PROFESSIONAL REPORTERS, LTD. 352 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 and then we've got this real soft topic that 2 nobody wants to touch on in every meeting I go to, 3 but they all agreed with me on the sidelines. 4 We've got an awful lot of illegal 5 labor force milking an awful lot of cows, putting 6 me out of business every day of the week. They 7 don't belong here. The law's already in place and 8 they're putting me out of business every day of 9 the week and I don't care if the rest of the 10 community wants to have them here, that's fine and 11 cool, but don't take me down with you. Thank you. 12 AUDIENCE MEMBER: Hello my name is 13 John Peck, I work with Family Farm Defenders. I 14 also grew up on a farm in central Minnesota, 15 Stearns County, which is one of the top dairy 16 counties in the country and I was there last week 17 working on my folks' farm and there's hardly any 18 dairy farms left around me. I grew up with all 19 sorts of farmers who are dairy farm members, 20 neighbors. Now there's only one left and it's 21 really sad that dairy farmers are in that 22 straight. 23 We have more prisoners than farmers 24 in the United States now and that should not be 25 the future of this country. I think we should PROFESSIONAL REPORTERS, LTD. 353 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 have more farmers, not less, and I've been down to 2 the Chicago Mercantile Exchange many times with 3 dairy farmers to try figure out where their prices 4 are set and it's really disturbing to meet some of 5 the traders there. These are people that are 6 dictating our lives every day, many of them not 7 even been to a dairy farm. 8 And they're deciding prices around 9 the world, not only in the United States, but 10 around the world. They're being set in Chicago 11 and we heard some very good testimony from 12 economists here today. I actually have a degree 13 in economics, that's why I came to UW-Madison. I 14 now teach economics at the technical college 15 here. It's really hard to explain to my students 16 why that's no connection between what farmers get 17 at the farm gate and what consumers pay at the 18 store. 19 That's not what I'm supposed to be 20 teaching in economics. That's not a free market, 21 that's a corporate controlled market. That's what 22 we call an oligopoly or monopoly. That's not a 23 real free market system, and it's really sad that 24 we've heard that less than two percent of that 25 cheese market is wagging the dog, basically, down PROFESSIONAL REPORTERS, LTD. 354 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 in Chicago. That's not a fair market situation at 2 all. It's rife for corruption, speculation, 3 manipulation. 4 And I remember years ago I was 5 first exposed to this as a student here at 6 UW-Madison. I was up at the capital and there was 7 farmers stomping on boxes of Velveeta Cheese in 8 the state capital, some of you here might remember 9 that. That was when the Green Bay Cheese Exchange 10 was still operating. Tommy Thompson said okay, 11 this is enough, but then they just moved it to 12 Chicago. It didn't go away, it just went to a 13 worse scenario, worse -- it's gotten worse since 14 then, in my estimation. 15 So we deserve a fair market, we 16 don't deserve a manipulated market. I mean, we've 17 heard some excellent proposals here today, why is 18 the fluid milk price pegged to cheddar cheese? 19 Why not mozzarella? Mozzarella is the top cheese 20 in the country now, not cheddar. Shouldn't we be 21 talking to the pizza dealers to set the milk 22 price? That's what we ought to do. Why don't we 23 have a direct pricing function? 24 The DOJ and the USDA need to deal 25 with current lawsuits that are pending. We've had PROFESSIONAL REPORTERS, LTD. 355 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 rafts of them waiting to be dealt with, and the 2 $12 million fine against DFA is not enough. 3 That's a slap on the wrist for a very corrupt 4 co-op, which some of my farmer members have to 5 deal with. That's just a slap on the wrist. 6 They'll continue doing -- they have been 7 continuing to do that, what they've done before. 8 We're dealing with a captive supply 9 situation, very similar to poultry or beef, where 10 basically, these companies and these corrupt 11 co-ops are basically saying we own that milk as 12 soon as it hits the bulk tank. We buy it or you 13 dump it. I mean, that's the only choice. That's 14 not a fair market situation at all, not fair at 15 all. 16 And my dad used to tell me whenever 17 you got too big for your britches, there's a 18 problem. These co-ops and these corporations are 19 getting too big for their britches. They're 20 controlling the majority of the market. They've 21 gotten too much power. They need to be reigned 22 in. When you're big, you can be the gorilla in 23 the room. Someone talked about volatility is 24 profitability for these people. They don't want a 25 stable market, they want to watch it bounce. PROFESSIONAL REPORTERS, LTD. 356 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 That's how they make money. That's what they're 2 doing. 3 So I'm really hoping that the DOJ 4 and the USDA at these hearings will listen to the 5 testimony you've heard, listen to the farmers who 6 are here, not just the corporate representatives 7 and co-ops who may or may not be speaking for 8 their members, actually listen to the farmers who 9 are here and the consumers who are here about what 10 needs to be fair in the marketplace. It's 11 absolutely wrong that corporations and corrupt 12 co-ops are paying their farmer -- their CEOs 13 millions of dollars and consumers and farmers are 14 going bankrupt or being price gouged at the 15 store. 16 It's just unfair and, you know, 17 young people going into farming, they should be 18 allowed to make it in farming. I want to 19 encourage people to go into farming, not 20 discourage them, so I'm hoping that you'll listen 21 to the testimony today and take it seriously and 22 that we actually see some action from DOJ. Thank 23 you. 24 AUDIENCE MEMBER: Hi there, I'm 25 Kathy Ozer, I'm the director of the National PROFESSIONAL REPORTERS, LTD. 357 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 Family Farm Coalition and for more than 20 years, 2 I've been working in D.C. on behalf of family 3 farmers, many of whom -- some of their powerful 4 voices, of Joel Greeno and John Peck just said and 5 other farmers are saying, and I would just say 6 that there are many dairy farmers around the 7 country watching very closely what is happening 8 not just today, but what happens in terms of 9 immediate action. 10 They're on their farms working day 11 in and day -- all day, all night, many on 12 conference calls light at night on an almost 13 weekly basis trying to figure out how to survive 14 the current crisis, how to access credit, how to 15 make sure that there is a real change in the 16 system that has to come from the top with real 17 action by DOJ and by USDA. 18 I just want to reiterate the 19 importance of the pending investigation or the 20 investigation that's been under way at the 21 Department of Justice for there to be action on 22 that case. And I know Senator Feingold a couple 23 years ago asked in a senate judiciary committee 24 hearing about that investigation and Professor 25 Carstensen was there in the audience as a witness PROFESSIONAL REPORTERS, LTD. 358 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 and responded to it and I would just say that that 2 senate judiciary committee hearing helped elevate 3 the issues. And today's hearing is a really 4 important step in just it being so clear how 5 important it is for there to be action taken at 6 this level. 7 The one other point I would just 8 make is that it was a really busy week in 9 Washington this past week on many of the issues we 10 work on and both the publication of the Packers 11 and the GIPSA rule that was part of the 2008 farm 12 bill is an important opportunity this next 60 days 13 for there to be public comment, to make sure that 14 we strengthen that rule, that we take the pieces 15 that are really great, that are part of the 16 poultry provisions, we hopefully strengthen some 17 of the livestock provisions and that we have real 18 changes in the law that has not been implemented 19 for many decades. 20 And then the other issue is that 21 the Supreme Court ruled also earlier this week 22 around GE alfalfa and a comment was made earlier 23 on one of the panels and for family farmers and 24 the farmers we work with, while it was a 7 to 1 25 decision, it's really a victory for farmers, for PROFESSIONAL REPORTERS, LTD. 359 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 USDA to have to go through environmental impact 2 statement and really review pending applications 3 for genetically engineered seeds and crops. 4 And so these are all issues that 5 take all of us and consumers who've spoken out 6 joined with us as farmers and everyone else to 7 make a difference in our food supply and a 8 difference from the ground up so that farmers can 9 make a decent living, stay on their farms and 10 consumers can have access to the kinds of quality 11 food that they deserve as well. Thank you. 12 AUDIENCE MEMBER: Russell, thank 13 you for listening. My name is Pete Hardin. I 14 edit and publish the Milkweed newspaper and in 40 15 years as a dairy journalist, I have never seen 16 such an inequitable mess in an economic sense as 17 we've got in dairy. One overview and then three 18 specific suggestions. We're really -- we're not 19 just in the milk business or the cheese business, 20 we're in the protein business. 21 And in my opinion, there's an 22 evolving global scarcity of human quality 23 protein. We see the oceans fished out, we see the 24 U.S. beef cattle herd at its lowest level since 25 1952. Human quality protein is scarcer and PROFESSIONAL REPORTERS, LTD. 360 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 scarcer and I can think of no finer, complete 2 protein than dairy based proteins for those who 3 enjoy dairy products as part of their daily diet, 4 to provide this daily necessity for our bodily and 5 brain function. So we're really in the protein 6 business, let's remember that. 7 Now, three specific suggestions. I 8 think the U.S. Senate and Congress ought to revise 9 the Capper-Volstead Act to include limited 10 exemptions for agricultural co-ops only for the 11 original procurement, transportation and marketing 12 of the raw product. In every other sector of 13 cooperative endeavor, let the co-ops compete on 14 the same basis as the rest of the world, in 15 finance and ideally, financial transparency, et 16 cetera. But I think the 90 year old Capper- 17 Volstead Act needs to be pulled in for an overhaul 18 and that's the bailiwick of the legislators. 19 Secondly, as Dr. Cotterill from 20 U-Conn suggested today, if we track the money in 21 the marketplace as we have been discussing all 22 day, I think we ought to consider a surtax on 23 dairy case profits at the retail level. When I 24 was in Washington last fall, I bought a six-ounce 25 cup of yogurt for $1.59, plain yogurt including PROFESSIONAL REPORTERS, LTD. 361 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 milk protein concentrate as the second leading 2 ingredient. 3 That's $400 per hundred weight farm 4 milk value for a product which only has a little 5 culture added to it. It might have cost them $14 6 a hundred weight in milk cost, but by the time 7 that six-ounce container of yogurt hit the 8 supermarket shelf in the Washington, D.C. area, 9 $400 a hundred weight if you value it back to the 10 farm. That's where the money is, at the 11 supermarket level. 12 And finally, I think as a result of 13 what the DOJ and legislators are hearing, I think 14 the DOJ Antitrust Division needs the financial and 15 personnel resources to establish regional offices 16 staffed with investigators and lawyers so that you 17 can field complaints on a more localized basis 18 where competition issues included in agriculture 19 are of concern. Thank you. 20 AUDIENCE MEMBER: If it's not 21 working, I'll just scream, is that okay? 22 MR. FERRELL: Just talk as loud as 23 you can. 24 AUDIENCE MEMBER: For 25 years, 25 I've been honored to work with Willie Nelson at PROFESSIONAL REPORTERS, LTD. 362 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 Farm Aid and to work under his leadership and 2 number one, we have learned the importance of 3 listening. Willie has led us in the practice of 4 listening and we have listened to family farmers 5 for 25 years and taken their leadership. I want 6 to say that I feel like at times, Farm Aid's 7 hotline, which has been existing every day since 8 the very first Farm Aid in 1985 is the canary in 9 the mine. 10 And about a year and half ago, we 11 realized how bad it was to the dairy farmers and 12 without any question, the urgency of the dairy 13 farmer right now is the greatest urgency of family 14 farmers in this country and I want to speak to the 15 urgency of this moment and the opportunity of this 16 moment also, because we recognized -- yesterday 17 Mr. Heffernan said in one of our workshops that we 18 have an opportunity now that we haven't had for 19 years in Washington and we recognize that and we 20 recognize how important it is to move in this 21 period of time. 22 So I want to say that Farm Aid 23 stands with family farmers. We are here to both 24 listen and we also believe, as Willie believes, 25 that family farmers have the solutions. We PROFESSIONAL REPORTERS, LTD. 363 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 realize that the consequences of a revitalized 2 dairy policy can lead to a revitalized economy. 3 Farm Aid just did a study on the economic stimulus 4 that a family farm economy gives to everyone when 5 you invest in a family farm system of agriculture 6 and we have a report here which I'd love to share 7 with anybody that is interested in it. 8 I asked the Secretary if he was 9 interested when we told him we were doing it a 10 year ago and I think he's very interested in it 11 and I'd like to share it with everybody. So thank 12 you. It's very important that you're all here 13 listening and it's very important that many 14 people -- I want -- of course you know that for 15 the many people here today, so many couldn't be 16 here, especially dairy farmers. Thank you. 17 AUDIENCE MEMBER: My name is Lisa 18 Jacobson, I'm from Milwaukee, Wisconsin and I'm a 19 consumer of unpasturized milk. Senator Feingold, 20 thank you for coming back to listen to us. The 21 reason I'm here is to support my farmer and in 22 being a consumer of raw, unpasturized, healthy 23 milk, I guess I am a criminal because I'm aiding 24 and abetting in a criminal act by purchasing 25 illegally sold milk. PROFESSIONAL REPORTERS, LTD. 364 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 That being said, my hope from this 2 public meeting is it could be instrumental in 3 helping to end or reverse the statewide and 4 federal interference of farms that provide 5 healthy, health minded, conscious citizens with 6 pure, wholesome, healthy, unpasturized milk. It 7 appears blatant to me that prohibiting farms to 8 consumer unpasturized milk sales is an illegal and 9 anticompetitive practice by regulators and big 10 dairy industry, by only allowing dairy processors 11 and plants to obtain raw milk using pasturization 12 as the key to safety and control. 13 I would argue that consumers can 14 also pasturize or heat the milk at 165 degrees for 15 15 seconds, if that's the argument. Big dairies, 16 regulators and lobbyists use mainstream media for 17 smear campaigns that all unpasturized milk is 18 unsafe. Yes, I would agree, factory farm milk, 19 raw milk from cows who suffer from mastitis, their 20 tails are cut off for efficiency and they can't 21 swat flies, they're never allowed to live outside 22 or graze naturally, but instead, fed unnatural 23 grain based diets infused with antibiotics and 24 growth hormones, wallowing in their own feces on 25 concrete, bedded on recycled manure and living in PROFESSIONAL REPORTERS, LTD. 365 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 factory farms or calf huts with manure lagoons 2 replacing pastures, polluting the air with 3 hydrogen sulfide, ammonia for surrounding 4 neighbors and communities and whose milk is then 5 co-mingled into silo milk and shipped across the 6 country, I would agree that might be unsafe raw 7 milk. 8 So if pasturization by conventional 9 dairy industry standards with this type of 10 frightening logic is the answer to sanitizing 11 milk, then I don't want industrial dairy products 12 or want to feed to it my children. All I want and 13 hope for is safe, healthy, wholesome, unpasturized 14 milk from healthy dairy cows grazing on healthy 15 pasture from my small farmer who uses sustainable 16 agricultural practices. 17 And to rephrase a quote by Joel 18 Salatin of Polyface Farms in Virginia, my wish is 19 that a consumer group will grow to advocate 20 legalizing unpasturized milk to be at least as big 21 as the National Rifle Association. And I also 22 wanted to say I went to the hearing for legalizing 23 raw milk in Wisconsin and there was 658 people 24 present that were in support. They went all the 25 way to Eau Claire to support the legalization of PROFESSIONAL REPORTERS, LTD. 366 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 raw milk and there was about 20 people against it 2 at this hearing that represented big dairy 3 regulators. 4 And unfortunately, the lobbyists 5 got to Governor Doyle to veto this when all the 6 assembly or the majority of the assembly and 7 almost unanimously the Senate voted to legalize 8 the raw milk. Thank you. 9 AUDIENCE MEMBER: Good afternoon. 10 My name is Diego Calderon and I'm an immigrant, a 11 veterinarian, a dairy researcher, a dairy 12 consultant. I have been really sad to witness how 13 the farmers and especially the dairy farmers are 14 disappearing little by little from the countryside 15 at such a high pace that they are going to be soon 16 in a high rank in the least of the endangered 17 species close to extinction. If there is going to 18 be a set of laws that are going to allow the 19 farmers to get out of the endangered species list, 20 it has to be a law focused in giving the farmers 21 their independence back. 22 And I mean by independence the 23 freedom to produce and use their own clean and 24 renewable sources of energy, farmers free to buy, 25 plant, grow, harvest their own crops and seeds, PROFESSIONAL REPORTERS, LTD. 367 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 buy their supplies from wherever they want and 2 sell their produce to whomever they want, dairy 3 farmers free to produce and sell their top quality 4 milk in the way they decide to do, raw, 5 pasturized, in the form of cheese or a wide 6 variety of dairy products. 7 On the other hand, for avoiding a 8 crisis in the future, those laws also have to 9 address and take into account two actors in the 10 play, the immigrant workers and the cows. Dairy 11 farmers can't hire an immigrant worker for more 12 than six months right now legally. Animal welfare 13 has to be taken very seriously, because we have 14 seen already if an animal is mistreated, it's not 15 that animal who is going to suffer. It's the 16 whole dairy industry and the dairy farmers. Thank 17 you. 18 AUDIENCE MEMBER: My name is Ken 19 Boyd from McFarland, Wisconsin. I'm here as a 20 consumer and a taxpayer and I first want to 21 comment on a few things I've observed here today. 22 The first one is it would be the object of a 23 cheese buyer at the market to buy the cheese at 24 the absolute lowest price he can get it for. I 25 don't understand how the price of milk can be PROFESSIONAL REPORTERS, LTD. 368 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 based on an absolute lowest possible price of 2 cheddar cheese. 3 Second observation is on the 4 co-ops, if these co-ops claim to be helping these 5 farmers so much, why aren't they all getting 6 together, teaming up, going to these processors 7 and saying this is how much you will pay us for 8 our milk. The processor will then have to go to 9 Wal*Mart and say this is how much you will pay us 10 for our milk. Everybody gets a fair share. 11 I'm here to comment on a severe 12 blow to the -- some small farmers of Wisconsin. 13 There's a huge, rapidly growing interest in going 14 back to the thousands of years tradition of 15 drinking unadulterated, safe, healthy, raw milk. 16 Mr. Doyle's veto of that bill that our 17 legislators, yes, our employees, passed because we 18 the people of this state asked and demanded that 19 they do so. Government works for us, the people. 20 The governor of this state bowed 21 down to pressures from mega corporate farms and 22 their associations and refused to give us, the 23 people, what we demanded. I assume he thinks that 24 we're too stupid as a people to know what is best 25 for the better good. We the people of this PROFESSIONAL REPORTERS, LTD. 369 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 country are rising up against corporations running 2 this government, controlling our politicians and 3 our judges with their campaign donations. 4 Mr. Doyle's veto is forcing many 5 farms out of business, such as Vernon Hershberger 6 farm, most recently attacked, also the Trautman 7 farm and many, many others that are only providing 8 an educated, well informed, hugely growing group 9 of a dairy product that they want to consume and 10 will consume, veto or no veto. I understand that 11 there's a fear that if someone should get sick 12 from raw milk that our dairy image would be 13 tarnished. 14 This is unfounded fear propagated 15 by mega-corporate farm to squash out the fast 16 growing competitor who are selling a product that 17 they cannot provide because of their size and 18 dynamics. Consumption of raw milk is not some new 19 idea that nobody knows the risks of like BGH and 20 growing levels of antibiotics in some products. 21 It has been tested for thousands of years and has 22 been proven to be safe and the fact that raw milk 23 is consumed all over the world still today. 24 Will someone get sick from raw 25 milk? Yes, just the same as no one in this room PROFESSIONAL REPORTERS, LTD. 370 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 can deny people also get sick from pasturized 2 milk. As you in the news have probably -- as you 3 should see on the news, people in this country are 4 getting agitated. We are get sick and tired of 5 corporations running the government. The 6 Constitution of the United States says we, the 7 people, not we, the corporations. We, the people 8 of this state spoke on the raw milk issue. Our 9 legislators listened and agreed. 10 We will continue to fight with 11 more, bigger and conviction than ever before for 12 our right to consume raw milk and to save the 13 countless farmers who have survived by finding 14 this niche market and for the opportunity for 15 young farmers to start up new farms for this 16 demanded product. Thank you. 17 AUDIENCE MEMBER: Hello, my name is 18 Mary Koepke, I'm from Oconomowoc, Wisconsin. I've 19 been here with my husband today and it's been most 20 interesting and I do appreciate your coming from 21 Washington to listen and as you can hear, we have 22 very divergent views on what a farm is, what food 23 should be, what we should get for milk prices and 24 I appreciate your listening to us. 25 I'm one of these families that's a PROFESSIONAL REPORTERS, LTD. 371 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 family corporate farm. It was started by my 2 husband's parents about 60 years ago and it was 3 the typical mom and pop operation with a little 4 over 100 acres of 30, 40 cows, you know, 20 to 5 40. When Al came back from college, he decided 6 after graduating from Madison he wanted to be a 7 farmer and that he could do it. One of his 8 teachers said, you want to be a farmer? What are 9 you doing, you know, with all the other things out 10 there, but this is what he wanted to do. His 11 brother came back five years later, he joined the 12 farm. 13 So this farm changed from, you 14 know, just mom and dad milking the cows to a 15 family farm where there's now the three brothers, 16 a nephew and there's some great nephews coming 17 along so that we hope that they will be a part of 18 the operation, too. We do now milk around 300 19 cows. We do market that through DFA and it's been 20 a challenge to be a good steward of the soil, to 21 be a good corporate member of the community and to 22 be innovative as it comes along. The 23 opportunities are there. 24 AndI think today, there's so many 25 other farmers in the audience I met who do, too. PROFESSIONAL REPORTERS, LTD. 372 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 The family farm in many cases has changed a lot. 2 I sat next to a gentleman from near Sheboygan who 3 I think there was two or three generations going 4 together. There was nine family members who are 5 full-time employees as well as, you know, other 6 employees and in our farm, too, there are four 7 family members, but there's also seven other full- 8 time employees. 9 So the land may be more, there's 10 maybe smaller -- you know, the farm is only one, 11 but it's encompassing a lot of people working 12 together and I do believe in the dairy industry in 13 the United States and Wisconsin. Thank you for 14 listening. 15 AUDIENCE MEMBER: Good afternoon. 16 My name is Tom Kriegl, I'm with the University of 17 Wisconsin Center for Dairy Profitability and first 18 let me thank Senators Feingold, Kohl, Secretary 19 Vilsack, Assistant Attorney General Varney and all 20 the other folks from those agencies that are here 21 today to listen to concerns from people in the 22 dairy industry. 23 I don't do research on market 24 structure, but I do work with dairy farmers on 25 their cost of production and so forth and I'm very PROFESSIONAL REPORTERS, LTD. 373 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 much aware of the intense environment that's been 2 going on the last 18 months all around the country 3 with dairy farms. And I do understand some 4 economic theory and have some empirical evidence 5 that I can talk about and tie in a little bit of 6 my own research as well. 7 Economic theory says that a 8 perfectly competitive market provides the greatest 9 good to the greatest number in the economy and it 10 further says that a perfectly competitive market 11 is one in which there's many buyers and sellers, 12 none of which has more influence than anyone else 13 on setting the price. 14 We do not have a perfectly 15 competitive market anywhere. I don't know that we 16 ever had, but at one time, we were a lot closer to 17 it than we are today, in most of our industries, 18 and that would include the food industry. Too 19 much power concentrated in any single place is bad 20 for the economy and society, and when most people 21 think about too much power concentrated in one 22 place, they think of it being concentrated in 23 government and that can certainly be a problem, 24 but too much power concentrated in a large company 25 can be equally bad. PROFESSIONAL REPORTERS, LTD. 374 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 And those that didn't understand 2 that or forgot that, the great recession that 3 we're still suffering from and the BP oil spill 4 demonstrates what can happen and how costly it can 5 be when perfect competition isn't maintained and 6 when there's too little government regulation of 7 things that go on. I could hear comments earlier 8 today that I think a lot of people associate 9 government regulation in regard to the dairy 10 industry as being supply management. 11 And that can be one form of 12 government regulation, but certainly, the 13 government has an important role in regulating the 14 market, which doesn't necessarily -- it can mean 15 supply management, but it certainly doesn't have 16 to and that's not what I'm talking about here in 17 my testimony. I'm talking about regulating the 18 markets so that there is market transparency, 19 providing good information to everyone and 20 antitrust enforcement, which is one of the focuses 21 of today's hearing. 22 Nobel laureate economist Joe 23 Stiglitz at Columbia University wrote an article 24 about 18 months ago regarding the financial crisis 25 called, "The Five Mistakes of the Capitalist PROFESSIONAL REPORTERS, LTD. 375 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 Fools." And it was quite a lengthy article, but 2 well written and so forth, but he summarized the 3 mistake down to one sentence, which I'll quote 4 it, is the financial crisis or the great recession 5 was caused by, quote, "A belief that markets are 6 self-regulating and that the role of government 7 should be minimized," unquote. 8 Another Nobel laureate economist by 9 the name of Paul Krugman from Princeton University 10 recently put out a chart in which he divided the 11 post World War II period into two periods, so from 12 1947 to 1980 and then from 1980 on. And he showed 13 in his chart that the economic activity, that the 14 performance of the economy was far better from 15 1947 to 1980, a period that is often criticized as 16 a period of over regulation, and of course, since 17 1980, has been a period of much less government 18 regulation. 19 As we heard this afternoon, there 20 is a greater concentration of power, market power 21 and imbalance of market power in many industries 22 in our economy and that would include the food 23 industry. How bad is it? I'm not the expert on 24 that, but I do know that the imbalance is worse 25 than it was say back before 1980. In my memory, I PROFESSIONAL REPORTERS, LTD. 376 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 think the recent antitrust action against the 2 Dean/Foremost sales is the first one I can 3 remember in my memory, not that I followed it that 4 closely, that any kind of a merger of any set of 5 companies has been opposed by the Antitrust 6 Division since 1980. 7 I can remember a lot of mega- 8 mergers in a lot of other industries that have 9 happened that have allowed a lot of concentration 10 of market power. So as an economist and believing 11 in perfect competition, I find it appalling that 12 our antitrust enforcement has not been more 13 vigorous than it has been in the past and I 14 certainly encourage that it become more vigorous 15 again. 16 Dr. Ron Cotterill from U-Conn who 17 was on the panel this afternoon made several 18 recommendations that I won't try to repeat, but 19 they were excellent suggestions that I would 20 encourage the Department to pursue. I'd like to 21 make one or two more comments before I finish 22 here. We heard on our panel -- we had a panel 23 that ranged in size from 48 cows from Kendall, 24 Wisconsin to 14,000 cows from Las Cruces, New 25 Mexico, I think, and all of the farmers that were PROFESSIONAL REPORTERS, LTD. 377 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 in front of us indicated that they were bleeding. 2 And so if economies of scale is the 3 answer in production agriculture, how much bigger 4 than 14,000 cows does one have to get to support a 5 family? Actually, my own research indicates that 6 the economies of scale in the production side 7 occurs at a much smaller level than most people 8 think. 9 So I guess in summary, I'd 10 certainly encourage that USDA and the Department 11 of Justice take seriously their roles in creating 12 a level playing field in the food industry so that 13 our smaller players are not disadvantaged as they 14 often have been in the past. Thank you. 15 AUDIENCE MEMBER: Hello, my name is 16 Steve Horstman from west central Wisconsin. I 17 would like to thank everybody who took their time 18 from Washington to come out and show their 19 interest in the dairy and the food industry, 20 especially to Senator Feingold for taking the time 21 to come back to listen to us. I would comment on 22 a few things that I've heard here today. First, 23 to Professor Carstensen, the main reason I chose 24 my co-op, which is DFA, by the way, was for their 25 transparency of governance and for their policy on PROFESSIONAL REPORTERS, LTD. 378 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 milk pricing and their attempt to return more 2 dollars to the farmers. 3 My second point to those of you who 4 claim that your dairy co-op doesn't care, go to 5 your local meeting. Speak up, change it. If you 6 don't like it, pick a different one. Find one 7 that will work for you and your philosophy on 8 dairy production and marketing. To Mr. Peperzak, 9 when you went to your milk marketer, why did you 10 think they were going to give you a list of 11 producers with which you were going to use against 12 them? No other company, no matter what structure 13 they're under, whether it's sole proprietorship, 14 corporation, cooperative, is going to give you the 15 bullets to put in the gun to use against them. 16 And the people who have brought 17 their fight for raw milk to a venue that wasn't 18 listed as a fight for raw milk, you've had your 19 shot. I consume raw milk. I've done so for over 20 45 years. My family still does, but I also had a 21 family friend whose son visited me and stayed with 22 our family for an overnight to spend some time 23 with my son. 24 He became very sick. Are you ready 25 to do that to your children or to your friend's PROFESSIONAL REPORTERS, LTD. 379 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 children? I don't see why you would. It is a 2 very simple and it is a healthy process to take 3 care of this milk and to eliminate those 4 unnecessary risks. I graze my cows. I use 5 antibiotics on very limited, as-needed basis. I 6 ensure that there's no antibiotics going back into 7 my -- into the milk supply chain and I strive to 8 replicate an environment when they're not on grass 9 that simulates a day on the beach under an 10 umbrella with an all you can eat buffet. 11 I take care of my cows. There is 12 not a single dairy farmer out there in all the 13 videos that you can find on You-Tube, there's not 14 a single owner of a cow abusing his cattle. Those 15 are employees who don't care. They're 16 unsupervised, they're there for the check. I 17 believe very much that the dairy farmers in this 18 country care for their cattle. They care for the 19 consumers and they care for the American people. 20 Thank you. 21 AUDIENCE MEMBER: I guess you saved 22 the best for last, at least I hope I am. Doug 23 Tate, Winnebago County, Wisconsin. My wife Debbie 24 and I farm 120 acres. We milk 40 cows. We're 25 small by all standards. We started 40 years ago PROFESSIONAL REPORTERS, LTD. 380 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 almost. I don't feel that old, but I guess I'm 2 getting there. My knees are shot. I thought by 3 now I'd be able to start to wind it down and think 4 about retirement. 5 The last couple of years have been 6 really difficult for us. We did manage to get our 7 farm paid for. We still have a lot of debt in 8 personal machinery and cattle yet. Like I said, 9 my knees are shot. I belonged to a number of 10 co-ops over the years. I'm a dyed and blue co-op 11 member. They've been there for us many times 12 through the thick and the thin. I started out 13 with a local co-op to ship my milk to, then went 14 to a regional co-op and now I'm with a national 15 co-op and that national co-op has helped me 16 realize a little better pay price. 17 We've had trouble in the past with 18 some events. My co-op now and I'm proud to say 19 about it is DFA. We've had some problems, but we 20 are a very transparent co-op. When I leave the 21 farm to go to anything that involves the co-op, 22 I'm also working. I'm not just there for fun. I 23 work for the co-op, I come back and I report to my 24 members that I represent. I'm on the resolutions 25 committee for DFA on the corporate level and I do PROFESSIONAL REPORTERS, LTD. 381 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 not mind it. 2 Some of the farmers in our 3 organization don't want anything to do with the 4 management of the co-op or they're too busy on 5 their farms working for it. I like it. I like to 6 know what's going on in our co-op. I like to know 7 how we manage it. In the future, I'm going to 8 stay more involved with the co-op, because like I 9 say, I'm proud of them. 10 And then in the future, I'm 11 thinking that what we need to do is not just 12 address DOJ issues to realize a better pay price 13 for members. We need to start to think about 14 revising the federal orders, because I think 15 they're the things that are stymieing us, in a 16 way. They're archaic, they're old and it just 17 doesn't -- like you heard, two percent of the milk 18 gets the -- determines part of our pay price, we 19 need to look at that real seriously. And again, 20 I'm a proud member of DFA. Thank you. 21 AUDIENCE MEMBER: Thank you, I'm 22 also proud to be a member of DFA. However, my 23 concern today is this raw milk issue. My wife and 24 I have raised six daughters, four sons, two foster 25 sons, they all got raw milk out of the tank as we PROFESSIONAL REPORTERS, LTD. 382 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 did, you know, for years. I have -- about 10 2 years ago, I discovered I had a high cholesterol 3 count, very high, and I subsequently decided I 4 should drink -- or the doctor decided I should 5 drink skim milk. 6 We even tried getting the little 7 gallon jug with a spigot on the side and we would 8 drink the skim milk and feed the cream to the 9 dogs. It didn't work, there was nothing under two 10 percent. So I started buying my skim milk from 11 the store, it happened to be pasturized, about 12 seven years ago. I have not had a sore throat 13 since. That's what I'll say about raw milk. It's 14 not worth the risk. Thank you. 15 AUDIENCE MEMBER: Hello, my name is 16 Randy Kohler. I'm from western Wisconsin and I 17 believe in co-ops, used to sell my milk to AMPI 18 years ago, became a member of DFA -- well, at 19 MidAmerican Dairies, now DFA, 15, 20 years ago, 20 and I couldn't be happier with the leadership of 21 DFA. I believe they're very transparent these 22 days and they give us a lot of knowledge that we 23 can use. We come to things like this, we're 24 encouraged to go to things like this, be active, 25 grass roots. PROFESSIONAL REPORTERS, LTD. 383 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 I go back home and I have neighbors 2 that sell to other co-ops, I have neighbors that 3 sell to the local, family owned cheese plant that 4 is 10 miles from my place and they ask me what's 5 going on, what did you learn at that meeting you 6 went to, and I tell them and they say, yeah, we'd 7 find that stuff out, but it would be a month later 8 and, you know, I wish more people would come to 9 things like this. I think this has been a great 10 day. 11 I thank everybody from the 12 government that came and listened and put this on, 13 and hopefully we can get something done to raise 14 the milk price for farmers. I'm not going to make 15 a suggestion, because you've heard about every 16 suggestion there is today, so thank you. 17 AUDIENCE MEMBER: I'm going to 18 watch that green light up there, because I'm from 19 Ohio and I know two minutes is pretty quick. I'll 20 try to do it in one. On the raw issue, on raw 21 milk, my wife's first cousin, very good friend, 15 22 years ago helped us on the farm for a while. I 23 have tons of friends that have been to the house 24 that's drank my whole milk out of the tank. I 25 milk about 130 cows. PROFESSIONAL REPORTERS, LTD. 384 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 She got deathly sick heading to New 2 York for her summer job, spent three or four days 3 in the hospital and they out of the blue, did you 4 drink any raw milk products. It was a disaster. 5 She was really sick. 10 years later, my oldest 6 son's sister-in-law, the same exact thing. She 7 was 14, a little younger. They're not used to the 8 pathogens in the milk and all I'll say is she got 9 deathly sick for about a day. If you drink raw 10 milk, and my kids -- I'm -- almost every farmer, 11 ever, Amish, there's tons of Amish that do it to 12 all their families, but you're at risk. 13 And I think the DOJ and our 14 government has -- we should have standards to live 15 by. I won't let my granddaughter start drinking 16 my milk yet. She's four years old, because 17 it's -- I mean, I've had 100 people drink it and 18 one or two instances, but it's not worth the risk, 19 ladies and gentlemen. 20 MR. FERRELL: Is there anyone else 21 who would like to make a comment? Well, with 22 that -- 23 AUDIENCE MEMBER: My name is Joan 24 Diers(phonetic) and I'm a resident of Madison. 25 I've had many jobs in my life and one of the worst PROFESSIONAL REPORTERS, LTD. 385 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 jobs I've ever had is working in a supermarket in 2 Madison, Wisconsin. That supermarket was 3 originally founded by Senator Kohl's family and 4 back in the day, it may have been a reputable 5 institution that treated all of its workers well. 6 That supermarket was sold to the A&P, right? My 7 paychecks came from Montville, New Jersey. 8 I saw the shrink, I saw the waste, 9 I saw workers not being cared for and I saw all of 10 your products being stretched to the max and it 11 was very easy for me to see why you don't get the 12 dollar that you deserve. My request is that every 13 milk product served to the U.S. military or any 14 soldier serving in the U.S. military in any form, 15 be it milk powder or whatever, that you work to 16 make sure that these folks get their dollar, that 17 any contractor to the U.S. military for food, you 18 can do it that way, you can stipulate that they 19 buy their milk from people who give these farmers 20 their dollar. 21 AUDIENCE MEMBER: My name is Kevin 22 Coles(phonetic) and I grew up on a dairy farm in 23 southwest Wisconsin, Crawford County, and recently 24 after 70 years of dairy farming, my sister milking 25 35 to 40 cows a few months ago sold at the bottom PROFESSIONAL REPORTERS, LTD. 386 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 of the market. She should have gotten out of it 2 quite some time ago, because not only was there no 3 profit to be made, it was not even break even. It 4 was just working and basically borrowing money and 5 cutting the timber off it. 6 So the thing is, now, what does she 7 do, and she's only one of many. So here, you 8 cannot not do something, because there is a 9 socioeconomic cost to all this. We can talk about 10 economics until the Gulf of Mexico freezes over, 11 but it's a socioeconomic problem that's out there 12 and there needs to be policies designed to assist 13 people who want to get into organic farming. The 14 transition is way too difficult. 15 And maybe there's a place here for 16 14,000-cow herds and 48-cow herds, but one thing 17 after 70 years in my family and so many other 18 community families, they drank the milk raw and we 19 had no problem, so if we can't drink raw milk now 20 from some of these herds, then there must be 21 something wrong. 22 But anyway, the issue is, one is 23 rural economic development in this country. Now, 24 I invite a lot of people to go out and take a look 25 at rural Wisconsin and other rural places and see PROFESSIONAL REPORTERS, LTD. 387 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 what it's like. Thank you. 2 AUDIENCE MEMBER: I'd just like to 3 add that smoking, there are risks to that, too, 4 but it's legal. This is about anticompetition. 5 These raw milk farmers have a product that is in 6 demand. People want it. It's our right to have 7 it, so they should not be squashed out of 8 competing for that market. There are risks just 9 like smoking, yes. 10 MR. FERRELL: Well, I want to thank 11 everybody for coming here today and I think this 12 workshop has been very informative and I think 13 we've learned a lot and it will help us with our 14 work that we do each and every day and I think I 15 can probably speak for the Department of Justice 16 in saying that as well. 17 I want to thank the University of 18 Wisconsin-Madison for helping us make this 19 workshop possible, especially Chancellor Martin 20 for helping, for putting everything together. 21 I want to thank Senator Feingold 22 and Kohl for attending and Senator Feingold for 23 coming back and listening for additional 24 comments. I also want to thank Congresswoman 25 Baldwin for attending, Governor Doyle, the PROFESSIONAL REPORTERS, LTD. 388 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 Wisconsin Secretary of Agriculture who also 2 attended. 3 I want to thank all the panelists 4 who took the time out of their busy schedules to 5 be here today with us and I want to thank all of 6 you who came to the microphone and provided 7 comments and we really appreciate you doing that. 8 I want to thank the FFA members who 9 took time today to volunteer, and lastly, I'd just 10 like to say that this concludes our third 11 competition workshop and our next workshop will be 12 held on August 27 in Fort Collins, Colorado and I 13 will turn it over to Mark Tobey for any remarks he 14 would like to make. 15 MR. TOBEY: Sure, I underscore 16 everything that John Ferrell just said. I think 17 we've been going on for more than eight hours 18 today. We had a terrific and extremely well -- 19 okay, I'm over my time. So with that, let me just 20 simply say this is an ongoing process and please 21 understand that we are still asking people to 22 submit comments, if you would like to do so at our 23 website at agriculturalworkshops@usdoj.gov, that 24 our poor overworked, I can't believe she's typed 25 this long court reporter will produce a transcript PROFESSIONAL REPORTERS, LTD. 389 TRANSCRIPT OF PROCEEDINGS 6/25/2010 1 of this entire workshop. 2 And we also have video of 3 everything that's gone on today and we will put a 4 video transcript, make it available over the web 5 in a few weeks as part of the record. We are 6 making a record and we will use that record to do 7 an evaluation of what we need to do in the future 8 to address the many problems that people have been 9 so patient and eloquent in bringing to us today. 10 And with that, I'd like to say thank you and have 11 a nice evening. 12 MR. FERRELL: Thank you. 13 MR. SOVEN: Thank you. 14 (6:30 p.m.) 15 16 17 18 19 20 21 22 23 24 25 PROFESSIONAL REPORTERS, LTD. 390 1 UNITED STATES DEPARTMENT OF JUSTICE 2 UNITED STATES DEPARTMENT OF AGRICULTURE 3 = = = = = = = = = = = = = = = = = = = = = = = = = = = = = 4 Public Workshops Exploring 5 Competition Issues in Agriculture 6 DAIRY WORKSHOP 7 A Dialogue on Competition Issues Facing Farmers in 8 Today's Agricultural Marketplace 9 University of Wisconsin-Madison 10 Union Theater 11 = = = = = = = = = = = = = = = = = = = = = = = = = = = = = 12 13 C E R T I F I C A T E 14 I, NANCY L. DELANEY, hereby certify that as 15 the duly-appointed shorthand reporter, I took in 16 shorthand the proceedings had in the above-entitled 17 matter on June 25, 2010 commencing at 8:45 o'clock a.m., 18 and that the attached is a transcription of the 19 proceedings so taken. 20 21 Dated at Madison, Wisconsin this 30th day of 22 June, 2010. 23 24 25 PROFESSIONAL REPORTERS, LTD.