The 6th meeting of the Interim Joint Committee on Agriculture and Natural Resources was held on Wednesday, November 12, 2008, at 1:00 PM, in Room 149 of the Capitol Annex. Senator Tom Jensen, Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Senator Tom Jensen, Co-Chair; Representatives Jim Gooch Jr., Co-Chair, and Tom McKee, Co-Chair; Senators David E. Boswell, Ernie Harris, Dan Kelly, Bob Leeper, Vernie McGaha, Joey Pendleton, Dorsey Ridley, Brandon Smith, and Damon Thayer; Representatives Royce W. Adams, John A. Arnold Jr., Dwight D. Butler, Mike Cherry, Hubert Collins, James R. Comer Jr., Tim Couch, Mike Denham, Jeff Greer, Keith Hall, Richard Henderson, Jimmy Higdon, Charlie Hoffman, Brad Montell, Fred Nesler, David Osborne, Sannie Overly, Don Pasley, Tanya Pullin, Marie Rader, Rick Rand, Tom Riner, Steven Rudy, Dottie Sims, Jim Stewart III, Greg Stumbo, Tommy Turner, Ken Upchurch, and Robin L. Webb.
Guests: Richard Sparrow, Stephanie Klatha, Dairy Farmers of America; Maury Cox, H.H. Barlow, Willy Campbell, Marcus Wright, Steve Young, Bill Newell, Larry Barley, Billy Right, Denise Jones, Mike Oveson, Kentucky Dairy Development Council; Mike Chandler, Gary Lee, James C. Cowherd, Southern Belle Dairy; Steve Gurley, Danny Jasper, Dean Foods; Mark Flagg, Flavorich; Dave Atchley, Turner Dairy; David Klee, Dairy Products Association; Aaron Johnson, Tony Mayes, U.C. Milk Company; Lori Scott, Morningstar Foods Company, Becky Nash, Nash Jerseys; Stewart Jones, Jack Durbin, Donald Smith, Greg Burton, Eunice Schlappi, Kentucky Department of Agriculture; Joe Bertram, BaCo Dairy; Robert and Christie Adams; Mary P Jones, Joe Pave Mattingly, William Wright; Billy Rowe; Fred Rowe, David Hutchison, Tim Baker, Steve Burton, Byron Embry; Bruce Held; William Johnson, John Sparkman, Maryland and Virginia Milk Producers; Lora Gowins, Kentucky Division for Air Quality; Glenn Smith, Kentucky Nutrition Service; and Allan J. McAllister, University of Kentucky.
LRC Staff: Tanya Monsanto, Kelly Blevins, Biff Baker, Lowell Atchley, and Stefan Kasacavage.
Sen. Jensen noted a quorum was present and asked for a motion to approve the minutes of the October 8th meeting. The minutes were approved. Then, Sen. Jensen recognized Sen. Kelly for introduction of Sen. David Givens who would be named chair of the new Senate Agriculture Committee. Sens. Harris, McGaha and Thayer gave reports of the Natural Resources, Rural Issues and Horse Farming subcommittees, respectively. After a motion and a second, all three subcommittee reports were approved. Then, Sen. Jensen asked for a motion to approve the 2008 interim report of the Interim Joint Committee on Agriculture and Natural Resources. After a motion and a second, the report was approved.
Mr. Richard Sparrow, Dairy Farmers of America, presented an explanation of how milk is priced nationally. He described the 5 commodities that are used in pricing milk: block and barrel cheddar cheese, dry milk powder, whey powder and butter. Each of these commodities is used in a formula to create different Class I-IV milk prices. Federal milk market orders set the price of milk by region and sets 90 to 95 percent of the price to both the processor and the producer. There are other aspects of the federal milk market ordering system such as the over order premium. According to Mr. Sparrow, milk production is down and fluid demand must be met by production outside of Kentucky. With transportation costs up, there is concern that Kentucky needs to grow its production.
Sen. Harris asked if there is a formula for transportation costs. Some out-of-state producers can transport for $0.25 per hundred weight whereas Kentucky producers must pay $0.90-.95. Kentucky should not be at a competitive disadvantage. Mr. Sparrow replied yes. This is the direct farm deducted hauling rate. Some costs associated with transportation are absorbed by the over order premium structure.
Rep. Denham asked who determines the regulated and unregulated areas for milk marketing orders and whether Virginia is regulated. Mr. Sparrow explained that there is a producer referendum, and Virginia is regulated by a state milk commission. They are unregulated in terms of federal milk marketing orders. Some unregulated federal milk marketing areas are regulated by a board or state commission.
Rep. Sims asked how many producers are in Kentucky. She further stated that some farmers in rural areas are giving up dairy due to transportation costs. Mr. Sparrow responded there are around 1,100 producers and hauling rates have been high. All other costs are up too.
Rep. Henderson asked if there are declines in Montgomery country and whether incentives are needed to bring the industry back. Mr. Sparrow said yes. There were 25-30 dairy farms there and we do need incentives.
Then, H.H Barlow, a dairy farmer, spoke next regarding dairy opportunities. He discussed the history of cow herd sizes, production and number of farms in Kentucky. Kentucky is 23rd in dairy herd numbers and 26th in terms of the amount of milk produced. Dairy competes with tobacco and has been a part of Kentucky heritage.
Farm milk price issues and volatility in prices account for the decline in the industry. It is hard for small producers to budget and there are inequities such as freight charges. Kentucky has forage and strong market potential but only one-half of the milk is being produced in Kentucky. He called for expanding and attracting new dairies by establishing a task force to examine tax credits, state environmental and water quality permitting and technical assistance on design, sites, and economic models for dairies.
Rep. Gooch asked if a task force would examine the use of animal waste for energy production. Mr. Barlow stated yes and explained that Alltech is using a methane digester. Rep. Webb asked if state institutions are helping young farmers enter the business. Mr. Barlow stated we need more support at University of Kentucky, regional and state universities to promote young dairymen.
Sen. Jensen asked if there were copies of the presentations so staff can make them available to the members. Mr. Barlow replied yes.
Then, Mike Chandler and Steve Gurley provided comments and described Southern Belle Dairy and Dean Milk respectively. Mr. Chandler explained that Southern Belle is surrounded by states with abundant milk production and there are concerns regarding the formation of a milk commission that would have subpoena power. Mr. Gurley, representing Dean Milk, stated that Kentucky does not need a milk commission. Milk is a competitive business and is already heavily regulated. Changes in regulation can cost Dean Milk its competitive edge. Federal milk orders establish minimum prices and maintain efficiency. Dean milk supports tax breaks and revenue insurance.
Sen. Jensen asked the presenters to provide their statements to staff. Sen. McGaha asked what revenue insurance is. Mr. Gurley stated he did not know and that the corporate office would provide him with an answer. Sen. McGaha asked how much of their manufactured milk comes from Kentucky. Mr. Gurley stated approximately 50 percent at the high point and 38 to 40 percent at the low point. Mr. Chandler stated that Southern Belle Dairy purchases most of its milk from Kentucky. The purchases can be 60-65 percent on average with 90-95 percent in the springtime when milk production in Kentucky is high. One hundred percent of our milk comes from cooperatives.
Sen. Pendleton asked if their companies do business in states that have milk commissions. Mr. Gurley stated that he did not know, and Mr. Chandler stated that Southern Belle does not do business in those states. Sen. Pendleton asked how far milk is transported into Kentucky. Mr. Chandler responded that Southern Belle purchases from local cooperatives and if milk is unavailable then from Illinois. Sen. Pendleton continued that tankers come in from Texas which must cost a lot.
Rep. Denham asked if their industry has engaged with the dairy producers to resolve the problem. Mr. Gurley stated no and Mr. Chandler stated yes. Mr. Chandler continued that Southern Belle does not oppose farmers. We just don’t want to become uncompetitive because of additional regulation.
Sen. Jensen asked if milk is cheaper out-of-state. Mr. Chandler stated that his company would prefer to purchase locally if they could get all the milk here, but production is too low.
Maury Cox, Dairy Development Council, spoke next. He described the organization and the reduction in producer numbers over the past several years. Cow numbers have decreased since 1977 and producer stability is greatest in states where there is protection. Federal market orders are not based on producer costs or downstream pricing and the over order premiums do supplement the haulage. That puts Kentucky dairymen at a disadvantage. He advocated a milk commission to identify problems and advocate solutions to the General Assembly. A milk commission can provide oversight and transparency in a market that is very complex. A commission can seek alternatives such as revenue generating tax incentives, bonding issues for milk check protection, and recommending methods to ensure animal health. Then, Mr. Cox described several states with milk commissions or boards.
Sen. Kelly asked if over order premiums are paid to milk cooperatives. Mr. Cox stated that it is based on contracts between producers and manufacturers. Rep. Denham asked whether differences could be resolved. Mr. Cox stated that some differences yes. Rep. Stumbo asked if there is information from other states to show implementation of a milk commission reverses the production decline trends. Mr. Cox replied that there are two states that have implemented commissions with history to examine. Virginia is one.
Mr. Mark Flagg with Flavorich spoke about problems with past legislation that would create a milk commission such as subpoena power, public release of information, and funding the commission with assessments. It encroaches on business. There are other options such as producer groups to promote larger dairy producers that will generate economies of scale; leveraging existing assets; payment incentives; and establishing college programs in dairy management.
Rep. Webb asked staff to examine the subpoena power issue. Rep. Sims stated that the dairy issue is a very important issue. Then, Sen. Jensen called up a deferred regulation 301 KAR 2:132. There was an amendment offered by the Department of Fish and Wildlife Resources. The regulation as amended was approved without objection.