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Senator Young. By the way, in your statement you refer to handlers subject to the orders holding long-term contracts. How long are those contracts as a rule?
Mr. BABIONE. They vary from 3 months to a year. They are mostly 6 months. There are very few that last for a year.
6 Senator Young. That is not much of a long-term at all—3 months to a year. You say milk prices have been rising in the past year, even in those market areas not regulated.
Mr. BABIONE. That is correct.
Senator Young. How do we know that milk prices will not fall during the next months? They have risen so much you say. How do you know they won't fall? You can't assume they are going to remain static or go up, can you?
Mr. BABIONE. No, sir, we cannot assume that.
Senator YOUNG. Do we understand that a bill identical with S. 3834 has passed in the House of Representatives?
Mr. BABIONE. Our suggested revision to the bill that was offered to the House subcommittee was reported out.
Senator YOUNG. And if the price of milk, instead of rising as it has in the past year, bad dropped, you don't think the milk people would be coming in and saying they would take a lesser profit and ask for a reduction in their contract, do you?
Mr. BABIONE. Definitely not.
Senator YOUNG. Knowledgeable milk producers and handlers should know the risk they are taking, should they not-risks they take of loss as well as profit?
Mr. BABIONE. Generally speaking, yes. The problem is determining over a long period of time, over a year, what might happen to the supply-demand situation in milk.
Senator YOUNG. Yes, but if you are dealing in milk, you are knowledgeable in that line of work as you should be if you are going to enter into a contract with any Government agency. You also should know something of the pitfalls and the fact that some bureaucrat could make things tough for you. You should take that into consideration, shouldn't you?
Mr. BABIONE. Yes, sir.
Senator Young. I want you to know, sir, that very definitely I am going to oppose this bill. I am going to oppose any part of it, and particularly when you talk about long-term contracts. I believe that that might be 3 years or 5 years—something really long-term. Very few of them are more than a year if any; is that right?
Mr. BABIONE. There are none more than a year.
Senator YOUNG. None more than a year. No other questions, Mr. Chairman.
Chairman RUSSELL. Senator Inouye.
Senator INOUYE. Thank you, Mr. Chairman. Mr. Babione, if this bill ever becomes law, will the Department of Defense be prepared to submit and recommend similar bills to cover other commodities under fixed price contracts?
Mr. BABIONE. I don't think I can answer that question at this time. We are concerned over the possible precedent of this type of legislation over a wide spectrum of commodites and products.
Senator INOUYE. If you are concerned about the precedent, why did you approve this?
Mr. BABIONE. We felt that this situation was unique enough in the equities of the situation that we should grant relief in the cases cited.
Senator INOUYE. Should you grant relief to cases cited by Senator Symington, let's say, if the Senate committee decides to release certain commodities in the stockpile at higher prices?
Mr. BABIONE. I would like to be able to examine the situation in each case before I would ever make a judgment as to whether it represents an abnormal risk or a normal risk. That is the problem in all of these cases.
Senator INOUYE. Over the period of let's say the last 5 years, have these contractors made a profit or a loss in their dealings with the Department?
Mr. BABIONE. We don't know, but my judgment on it would be that it is like the stockmarket. Some have made money, some have lost money. It depends on what their conditions were, and many of the things that went into the cost of producing the product.
Senator INOUYE. What you are telling us is that you are not in favor of this bill because of the precedent-setting possibilities.
Mr. BABIONE. No, sir. I am saying that we are in favor of this bill. You asked me whether we would be prepared to recommend other bills, and I said we are concerned about the precedent of this bill encouraging other bills, and we would have to examine other bills on the merits of each case.
Senator INOUYE. I would think that if you suggest this bill, I can't see how you could deny relief for other contractors dealing in other commodities, if one is thinking of equity and justice. I think we are opening up a Pandora's box. That is my personal view.
Thank you, Mr. Chairman.
Senator SYMINGTON. Mr. Chairman, I would read into the record a paragraph from a letter received from a creamery company. These are mostly small companies we are talking about. What this bill does is try to protect little people who don't have the setups to handle a situation of this character when it develops against them. They just can't carry that kind of overhead.
This letter says:
We are familiar with the fact that throughout Missouri and in particular Southwest Missouri, dairies are being forced to bear an unreasonable burden because they negotiated contracts earlier last spring upon estimated prices that historically were much lower than they are now. Historically, the average profit to a dairy on Defense milk contracts is about two cents a gallon. With recent increases in milk prices, several dairies in Missouri are holding contracts of six to twelve months' duration where they stand to lose five to six cents per gallon. I recognize that milk companies bear reasonable risk when they make estimates of prices, but I doubt in the current situation if anyone could have foreseen the substantial increases that have been forthcoming.
Some dairies in my State are going bankrupt as a result of this directive from the Department of Agriculture. Naturally they didn't
. have any idea it was coming when they made their contract.
So far as you know, assuming the figures are correct, this states the problem, does it not?
Mr. BABIONE. Yes, sir.
Senator SYMINGTON. Thank you.
Senator Cannon. I am sorry to belabor this point. Mr. Chairman under this provision, there are some milk suppliers that on occasion bid a Defense contract at a loss, in order to take care of the surplus milk that is generated by their producers, the people that sell to them. In that type of situation, let's assume that the particular contractor provides for a contract at a loss to himself. This would increase his loss because of the milk marketing order. Now under that type of situation, would he be entitled to any relief under this provision? In other words, the contractor already was suffering a loss. He was bidding it in below his actual cost to take care of his surplus producers.
Mr. BABIONE. He would be granted relief to the extent he could demonstrate that his loss was increased by the action of the Department of Agriculture.
Senator CANNON. Thank you, Mr. Chairman.
Chairman RUSSELL. Anything further? If not, we thank you gentlemen for your testimony. There will be inserted in the record at this point a joint statement of Senator Allott and Senator Dominick and also a statement of the National Milk Producers Federation.
JOINT STATEMENT OF SENATORS GORDON ALLOTT AND PETER DOMINICK IN
SUPPORT OF S. 3834 Mr. Chairman, we appreciate this opportunity to make this statement in support of our bill, s. 3834.
A situation has developed with respect to Defense Department contracts for the furnishing of fluid milk. A particular case in Colorado has brought the situation to our attention, however, we are informed that similar situations exist in other states. This particular dairy in Colorado happened to be a dairy which qualified for a Small Business set-aside under the Small Business Act of 1958, however, its contract is not a set-aside contract, as the dairy was low bidder.
As members of the Committee know, the Secretary of Agriculture, through milk marketing orders, has promulgated new milk support prices which have resulted in a price increase for bulk milk of seventy-five cents per hundredweight over the bulk price in February of this year. This amounts to more than a 13% increase in less than seven months. For example, in the eastern Colorado milk marketing order area, the bulk price for Class I milk for February was $5.55 per hundredweight; in March it was $5.68 per hundredweight; in April it was $5.78 per hundredweight; for the period July 1 through July 4, the price was $5.92 per hundredweight; for the period July 5 through July 31, the price was $6.10 per hundredweight; for the month of August the price was $6.15 per hundredweight; and, the present price (for September) is $6.33 per hundredweight.
It is significant to note that the average price for 1965 was $5.356 per hundredweight and while the price fluctuates some during the year, the price was $5.39 for December of 1964, as compared with $5.49 for December of 1965—merely a ten cent per hundredweight increase.
We would agree that price fluctuations attributable to the free interplay of the forces of supply and demand in the market place would be an ordinary risk of doing business; but, we believe that requiring a contractor to foresee and anticipate administrative orders by the Secretary of Agriculture is not ordinary but is extraordinary, and would require a quality of foresight that is far beyond what the Government might reasonably expect of its contractors.
An extreme hardship has been worked upon some of the dairies contracting with the Department of Defense. The small dairy in Colorado indicates that it is now losing in excess of $15,000 per month under its contract, which was negotiated in November of 1965 and upon which performance began in January of 1966 to continue until January of 1967. The contract contains no renegotiation clause.
To deal with this problem and to help alleviate the hardship brought upon such contractors we introduced our bill, S. 3834. We are informed that a companion measure, H.R. 17483, is presently pending in the House of Representatives.
We appreciate the Committee's expeditious action in calling hearings on this measure so late in the session; however, we feel that the circumstances are extraordinary and in light of the losses being incurred by the contractors, we fear that to defer action may seriously jeopardize their ability to survive. In the long run, the non-survival of such small contractors would be to the detriment of the Government, since it is recognized that they are instrumental in keeping costs down through competition.
Again, we wish to thank the Committee for its early consideration of this matter and for this opportunity to express our views.
STATEMENT OF THE NATIONAL MILK PRODUCERS FEDERATION The National Milk Producers Federation is a national farm organization. It represents dairy farmers and the dairy cooperative associations which they own and operate. Through these associations, farmers act together to process and market for themselves, on a cost basis, the milk and butterfat produced on their farms.
The Federation was organized in 1916 and is celebrating its 50th anniversary
Practically every form of dairy product made in the United States in any substantial volume is processed and marketed by dairy farmers in their own dairy cooperative plants.
Dairy cooperatives acting as bargaining agents for their farmer members supply the major portion of raw milk used by the dairy processing plants in the United States.
Many dairy cooperatives represented through the Federation supply substantial quantities of milk and dairy products to establishments operated by the Department of Defense. They also supply raw milk to dairy processing plants bidding on contracts to supply such establishments.
These contracts run for periods usually ranging from three months to a year and call for fixed prices for the full term of the contract.
The price of raw milk to the farmers is a primary cost factor in practically all of the items supplied under the contracts.
Bidding under the contracts is very close, and the bidders assume the risk of market price fluctuations and also the risk of changes in labor costs.
In addition, under the present system, there is a possibility, generally unpredictable, of changes in the cost of raw milk brought about by government action.
During the current year, a very sharp downturn in the total production of milk in the United States made it necessary for the government to take emergency action to increase by substantial amounts the price of milk to dairy farmers.
Whether this action will be sufficient to avert a threatened shortage still remains to be seen.
It may be necessary to take additional action to stem the sales of dairy herds that are still taking place.
The price increases ordered this year have caused severe hardships to bidders on government contracts. This has served to bring home to all of us the need for price adjustments in government contracts to relieve hardships caused by price increases ordered by the government itself.
The bidders have no control over these prices, and the amount of the increases ordered this year could not reasonably have been anticipated in the bidding.
The price of milk to dairy farmers is supported at not less than 75 nor more than 90 percent of parity under the Agricultural Act of 1949 (7 U.S.C. Sec. 1446). The support price at the farm is obtained by government purchases of butter, nonfat dry milk solids, and cheese at price levels designed to return to farmers the desired support level for milk used for dairy products. Fluid milk prices ordinarily are higher. While they are not supported directly under the 1949 Act, they are supported in fact because the fluid milk prices tend to adjust to the basic support price.
On April 1, 1966, the Secretary of Agriculture increased the support level for milk to farmers from $3.24 to $3.50 per hundredweight.
This failed to stop the downward trend in production, and on July 1, 1966, the support level was further increased by action of the Secretary from $3.50 to $4.00 per hundredweight.
Prices for milk at the farm level are also controlled in Federal milk marketing orders under the Agricultural Marketing Agreement Act of 1937 (7 U.S.C. Sec. 608c (5)). Under this Act, minimum prices to farmers are prescribed for milk in
the designated marketing areas. A classified pricing system is used, with a higher price set for milk used for beverage purposes and a lower price set for milk used to make manufactured dairy products such as butter and cheese.
Prices in the Federal order markets are set by the Secretary of Agriculture after public hearings at which interested parties may appear and present statements. Here again, once the order prices are announced, the bidder has no control over them.
During the current year, the Secretary of Agriculture made sweeping decisions on three occasions to increase milk prices, or prevent scheduled decreases, throughout the system of Federal milk marketing orders. These changes affected substantially the farm price for milk, particularly that used for beverage purpose and including milk supplied under government contracts.
In addition to these increases in the order prices, the support price increases made April 1 and July 1 were reflected in the Federal order markets through the operation of pricing formulas based in varying degree on the price for manufacturing milk.
There is another area in which the cost of raw milk may be changed because of Government action. Where an increase in price support levels announced by the Secretary of Agriculture has caused an increase in class prices, including class prices administered by a state agency, for milk under contract to Federal installations, then a price adjustment should be made. Such an adjustment should be made, however, only where it can be demonstrated that the increase in price is passed through the handler to the producer supplying the milk.
In any of these cases, the only contract adjustment which would be made would be one justified by the fact that the increased cost of milk at the farm level was the result of governmental action, either state or Federal, prompted by considerations of general welfare and made in the public interest. And in the case of Federal price increases, the government would simply be adjusting its supply contracts to reflect milk cost increases which it had itself ordered.
The proposed legislation over the long run may well result in a net benefit to the government, because bidding can be closer if the risk of price change by government action is relieved by an appropriate escalation clause.
We believe the request for such a clause, plus relief for bidders caught by the government price increases made this year, is reasonable and fair, and we urge you to report legislation to accomplish these objectives.
(Subsequently, in executive session, the committee voted to report S. 3834 with amendment as covered by S. Rept. No. 1668.)
Chairman RUSSELL. The next bill is H.R. 16646, which would authorize the Secretary of Labor to issue exemplary rehabilitation certificates to persons who earlier had received military discharges that are other than honorable, if the persons could show that their postservice conduct and character have been good.
(The bill referred to follows:)
(H.R. 16646, 89th Cong., 2d sess.)
AN ACT To amend title 10, United States Code, to authorize the award of Exemplary Rehabilitation
Certificates to certain individuals after considering their character and conduct in civilian life after discharge or dismissal from the armed forces, and for other purposes
Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That part II of subtitle A of title 10, United States Code, is amended by inserting immediately after chapter 79 thereof the following new chapter:
"Chapter 80.—EXEMPLARY REHABILITATION CERTIFICATES
"1571. Establishment of Exemplary Rehabilitation Certificates.