The Northeast Interstate Dairy Compact Ralph M. Chite Specialist in Agricultural Policy Environment and Natural Resources Policy Division Summary The omnibus 1996 farm law contained a provision permitting the New England states to establish a dairy compact if the Secretary of Agriculture found a "compelling public interest" in the Northeast region. The compact would allow New England dairy farmers to receive a higher minimum price than the current federal minimum farm price in the region. Following a public comment period, the Secretary determined in August 1996 that such interest exists, allowing the New England states to begin the implementation process. Supporters of the compact contend that higher minimum prices are needed in the region because the federal minimum farm milk price is below dairy farmers' costs of production. Opponents, which include dairy processors, Upper Midwest producer groups, and some consumer groups, state that the higher farm milk prices in New England will reduce total demand for milk and cause surplus milk production. Background Dairy farm groups in the six New England states have long contended that the current minimum farm milk price dictated by federal policy in their region has been insufficient to cover their cost of producing milk on family-sized farms. Consequently, they state, many New England dairy farmers have been forced out of business. New England dairy farms account for approximately 3 percent of total U.S. production and are generally small operations. (See table below.) However, the New England states fear that the continued loss of dairy farms will have a ripple effect on the regional economy, especially since the rural landscape attracts tourists to the region. The late 1980s and early 1990s was a time of extreme volatility in milk prices for all dairy producers, and included several months when the base price for fluidgrade farm milk fell close to the federal support level. In response to the low prices prevalent at the end of 1990 and into 1991, several of the New England states implemented individual actions to raise farm milk prices in their respective states. However, these measures were quickly rescinded when the courts ruled that the required premiums processors must pay for out-of-state farm milk were a violation ~ of the commerce clause of the Constitution. Following this action, the A CRS CRS Reports are prepared for Members and committees of Congress IIIII I IIIIIIIIIIIIIII!! I! I!~ I!! I I I!!II I
CRS-2 Massachusetts legislature adopted a surcharge in the spring of 1992 on all milk sold in the state, with the proceeds distributed solely to Massachusetts farmers. The Supreme Court ruled' in June 1994 that this order had the effect of taxing out-ofstate producers, since most of the milk sold in Massachusetts comes from other states. Number of New England and U.S. Dairy Farms (1) and Total New England and U.S. Milk Production (thousand lbs.) State Dairy Dairy Change Per- 1995 Farms - Farms- in cent Milk 1978 1992 Number Change Produc- Census Census of Dairy tion Farms ME 1,140 654-486 -42.6% 641 NH 551 291-260 -47.2% 326 VT 3,198 2,194-1,004-31.4% 2,538 CT 643 360-283 -44.0% 526 RI 93 41-52 -55.9% 32.5 MA 814 434-380 -46.7% 448 Total 6,439 3,974-2,465-38.3% 4,511 New England U.S. 168,473 113,412-55,061-32.7% 155,644 Total Change from 1994 Prod. +0.3% +4.1% +3.3% -0.8% +2.8% -1.5% +1.9% +1.3% Sources: Farm Numbers: 1978 Census of Agriculture, 1992 Census of Agriculture; Milk Production: USDA's National Agricultural Statistics Service (1) A dairy farm is defined as a farm that earns more than 50 percent of its farm income from its dairy operations. In order to overcome the constitutional problems associated with the regulation of prices of interstate milk shipments, the New England states decided to work collectively and form an interstate dairy compact. A two-step process is required before a compact can become operational: ratification by the legislatures of the states participating in the compact, followed by the approval of the U.S. Congress. By 1993, all six of the New England state legislatures had ratified the Northeast interstate dairy compact. The compact creates an interstate commission with the power to set a minimum price paid by dairy processors to dairy farmers in the six states, at a level above the minimum price mandated by federal milk marketing orders. (See "The Compact and Federal Milk Marketing Orders" below.) The compact will regulate the farm price of milk used only for fluid consumption in the six-state region, regardless of where the milk originates. The interstate commission will
CRS-3 conduct formal hearings and determine the minimum price level based on farmer costs of production and consumer ability to pay. The 103rd Congress considered legislation (S. 2069 and H.R. 4560) at the committee level that would have given final approval of this compact. S. 2069 was amended and approved by the Senate Judiciary Committee but was not considered on the Senate floor. Hearings were held on H.R. 4560, but the bill was never reported out of the full House Judiciary Committee. Strong opposition from dairy processor groups and other dairy regions of the country contributed to the demise of the legislation in the 103rd Congress. Opponents maintain that the compact artificially encourages the production of milk within the Northeast region at the expense of other parts of the country that have lower production costs and can sell at lower prices. In addition, opponents maintain that the compact sets a precedent for other regions and industries to protect themselves from competition, an action which critics maintain is anti-consumer and market-distorting. The 1996 Farm Bill: Compact Approval Subject to certain conditions, congressional approval of the Northeast compact for the six New England states was granted by the 104th Congress upon enactment of the Federal Agriculture Improvement and Reform Act of 1996 (P.L. 104-127, the 1996 farm bill).l Conditions placed on congressional approval of the compact by Section 147 of the 1996 farm bill include: the finding by the Secretary of Agriculture of a "compelling public interest" within the Northeast region. (See "USDA Approval Action" below for details.) a limited life. The law requires that compact authority expire at the same time as the adoption of the required consolidation of federal milk marketing orders, which is required by April 1999. a prohibition on the regulation of the farm price of milk used in manufactured dairy products. The compact commission may regulate only the farm price of milk used for fluid consumption. limited membership beyond the six New England states. The law permits six other states to join the Northeast compact -- Delaware, New Jersey, New York, Pennsylvania, Maryland, and Virginia. In order for any of 1 Neither the House- nor the Senate-passed versions of the 1996 farm bill contained approval of the dairy compact. The Senate committee-reported version of the bill did include approval of the compact, but the provision was removed on the Senate floor by a 50-46 vote. This was the only congressional vote specifically on the Northeast compact. However, approval of the compact was included in the conference agreement on the omnibus 1996 farm bill. Section 147 of the farm bill contains congressional approval of the Northeast dairy compact and refers to section l(b) of Senate Joint Resolution 28, which authorizes the compact commission and establishes certain parameters for the operation of the compact.
CRS-4 these states to join, congressional approval is required and the state must be contiguous to a state already participating in the compact. compensation of USDA agencies. If the higher minimum price dictated by the compact commission leads to the overproduction of milk in the compact region, the commission must reimburse USDA for the amount of federal price support purchases it makes as a result of this overproduction. The commission must also compensate USDA for any technical assistance it receives from USDA's Agricultural Marketing Service. certain prohibitions against discrimination of outside milk. The law prohibits the compact commission from limiting in any way the marketing of milk produced in any other area of the U.S. The Commission also may not charge compensatory payments for outside milk as a barrier to the entry of milk into the region, or for any other purpose. USDA Action In accordance with the authority granted to the Secretary of Agriculture by the 1996 farm bill, the Secretary of Agriculture established a comment period (which ended June 3, 1996) to determine if a "compelling public interest" existed for the compact. The Secretary announced on August 8, 1996, that he had found such interest, thus allowing the New England states to implement the compact. In support of his statement, the Secretary noted that the state legislatures had already approved the compact, the Governors of each compact state had signed a resolution supporting the compact, and that Congress had consented to the compact. In a subsequent press release on August 9, the Secretary also expressed certain concerns about the compact. He stated that USDA will monitor closely its implementation, and encouraged Congress to exercise its oversight function as well. The Secretary expects the compact to be administered in a manner that will not restrict the ability of producers in other regions from shipping milk to the Northeast, nor have any adverse effect on dairy farmer income in other regions. He also expects the compact commission to closely monitor the effect of the compact on consumers, especially low-income families, and for the commission to provide assistance to offset any financial burdens the compact might place on these consumers. If the Secretary's concerns are not addressed in the development of the compact or if conditions otherwise warrant, he has indicated that he will revoke the authority to implement this compact. The Compact and Federal Milk Marketing Orders The farm price of approximately three-fourths of the Nation's fluid milk is regulated under 32 federal milk marketing orders, administered by USDA. Some states, California and Maine for example, have their own state milk marketing regulations, either instead of, or in addition to the federal rules. Federal milk marketing orders regulate processors that sell milk or milk products within an order
CRS-5 region by requiring them to pay not less than an established minimum price for the Grade A milk they purchase from dairy producers, depending on how the milk is used. This classified pricing system requires handlers to pay a higher price for milk used for fluid consumption (Class I) than for milk used in manufactured dairy products such as yogurt, ice cream, cheese, butter and nonfat dry milk (Class II, Class III and Class III-A products). Class III prices generally are the same in all orders nationwide. The basic formula price for farm milk used in Class III products is determined monthly and is based on the current price being paid to farmers by dairy product manufacturers in the Upper Midwest. A fixed differential is added to the Class III price to determine Class II prices. However, the highest minimum class price (Class I) varies from area to area. It is determined by adding to the basic formula price a "Class I differential", that generally rises with the geographical distance from the Upper Midwest, traditionally a milk surplus region. The current Class I differentials were legislatively determined and range from $1.20 per hundredweight (cwt.) in the Upper Midwest to $4.18 per cwt. in Southeast Florida. Processors in New England are regulated by the New England market order and must pay a minimum price for Grade A milk, regardless of where the milk is produced. The current Class I differential in the New England order is $3.24 per cwt., which is added to the basic formula price each month to determine the minimum price a New England processor must pay for milk used for fluid consumption. These payments are pooled along with sales of milk used for manufactured products. Each month, milk producers receive a weighted average price, or a blend price for the milk they sell, depending on what proportion of sales went into each class. Although the commission has not yet determined how milk pricing will work under the compact, one likely option is for it to establish a premium over the monthly Class I price in the region. As an example, assume that the commission imposed a $1.00 per cwt. premium for Class I milk, and the basic formula price for the month were $13.50. New England processors would be required to pay a minimum price of $17.74 per cwt. for milk purchased for fluid consumption that month (the $13.50 basic formula price + the $3.24 Class I differential + the $1.00 compact-imposed premium.) Alternatively, the commission might set a minimum fluid milk price, which would serve as a price floor for Class I milk in the region, even if the Federal order Class I price should fall below that minimum. According to the interim compact commission, approximately 97 percent of all beverage milk consumed in New England is processed from bulk milk by New England-based milk plants. The remaining 3 percent is provided in finished, packaged form by processors in the New York-New Jersey order region. Under the compact, the packaged milk sold by New York-New Jersey processors to New England processors would be subject to the compact premium. That is, the premium would be payable to the farmers who supplied the milk, regardless of whether the milk originates in New England or in an outside state.
CRS-6 Compact Policy Issues In their attempt to secure congressional approval for the Northeast dairy compact, supporters faced strong opposition particularly from dairy processors, Upper Midwest milk producer groups, and some consumer groups. Opponents continue their efforts, and are seeking legal remedies to block further implementation of the compact. The following are some of the major issues. Effect on Consumer Prices: Opponents contend that the compact-required premium will be passed on to the consumer in the form of higher retail prices for fluid milk. They are concerned that these higher prices will have the greatest impact on low-income families. If the compact premium were fully conveyed to the consumer, then for every $1 per cwt. of premium, consumer milk prices would rise by 9 cents per gallon. Compact supporters admit that consumer prices might increase in the short term. However, they also contend that there is a sufficient margin between the farm price and retail price of milk, so that dairy processors should be able to absorb a portion of the premium without passing it on to the consumer. They also point out that the compact provides the commission with the discretionary authority to reimburse participants in the Women, Infants and Children (WIC) Special Supplemental Food Program to offset the increase cost of fluid milk caused by the premium. Effect on Farm Milk Prices Outside New England: Some dairy farm groups in other regions fear that the higher minimum price mandated by the compact will have multiple negative effects on the national dairy economy. They contend that the compact premium will cause New England farmers to produce more milk than they otherwise would. On the demand side, they also are concerned that New England consumers will purchase less milk. The combination of these two effects, they say, would displace milk produced in other regions particularly the Upper Midwest, depress milk prices nationally, and reduce dairy farmer income outside the region. In response, compact supporters refer to the farm bill requirement that the commission be responsible for compensating USDA for its purchase of any additional surplus milk caused by the premium. They believe this condition is an adequate incentive for New England dairy farmers not to overproduce. Congressional Delegation of Authority: Opponents claim that the farm bill provision that required the Secretary of Agriculture to find a compelling public interest in the compact region as a condition of congressional approval is a violation of the Nondelegation Doctrine of the U.S. Constitution. They point out that the Constitution vests solely in Congress the power to approve interstate compacts. Furthermore, they say, Congress failed to provide "intelligible principles" to guide the Secretary's discretion. They also contend that the Secretary's finding of compelling public interest was arbitrary and capricious. Supporters of the compact note that Congress did not unconditionally delegate its authority, but instead established certain conditions that must be met as a prerequisite for its approval. A federal district judge heard initial arguments on this case on October 4.