Re-establishing a Viable Vermont Dairy Industry: Report and Call For BOLD State Policy Change and Action

A number of you have asked for a copy of the Executive Summary of the study(Re-Establishing a Viable Vermont Dairy Industry: Report and Call For BOLD State Policy Change and Action) that was presented to the Vermont House and Senate Agriculture Committees on February 20, 2020, and has also been submitted to the Administration.  It was an in-depth two plus year evaluation of all data, background papers and reports,  existing programs, as well as future trends,  As is so well stated in the Dairy and Water Quality Collaborative Action Plan(a group of 22 Vermonters who came together in the spirit of trying to understand the complexities and inter-relatedness of farm viability and water quality):

The quality of our water, the viability of our farms and associated businesses, and the fabric of our rural communities are all at stake. Immediate, inclusive, effective, and enduring leadership and action are 

needed. That collaborative call to action further states that complex systems need an approach that Integrates economic, environmental, community and regulatory inputs and players.

Our over two year study concludes that BOLD State policies are needed to review or address Vermont’s dairy industry's future.  Without BOLD policy changes or dramatic response to this unchecked national and international market and federal regulatory pattern, the trend to fewer farms, and eventually to less milk production will continue resulting in the loss of economic activity, rural infrastructure and the working landscape that has been so important to the States culture, economy, and history.

We therefore conclude that BOLD State policy action is needed to RENEW and to ADDRESS the future of the Vermont dairy industry.   We conclude that the national market and regulatory pattern beyond the Vermont marketplace, which has tied Vermont raw milk pricing to unsustainable, inadequate and volatile, commodity dairy pricing, is not likely to be altered, and is in fact more likely to accelerate.  Therefore, Vermont MUST plot its own , new and BOLD, State-based course if there is to be a sustainable future for Vermont’s dairy industry and the working landscape it supports.

Re-establishing a Viable Vermont Dairy Industry: 

Report and Call For BOLD State Policy Change and Action

CALL FOR:     Blue Ribbon

Administration/Legislative

Vermont Dairy Industry Task Force

Task Force Charge:  

modernize and revise the State’s market regulatory authority 

to enable implementation of a Bold and Innovative State program of 

milk market regulation and economic development

Submitted to:  Honorable Phil Scott, Governor

     Vermont Legislature  

Honorable Phil Scott, Governor

·      Anson Tebbetts, Secretary, Agency of Agriculture, Food and Markets; 

·      Julie Moore, Secretary, Agency of Natural Resources; 

·      Lindsay Kurrle, Secretary, Agency of Commerce and Community Development 

Vermont Legislature

·      Tim Ashe, Senate President Pro Tempore; 

·      Mitzi Johnson, Speaker of the House

·      Jane Kitchel, Chair, Senate Appropriations Committee; 

·      Kitty Toll, Chair, House Appropriations Committee;  

·      Robert A. Starr, Chair Senate Agriculture Committee;

·      Carolyn Partridge, Chair, House Agriculture Committee; 

·      Christopher Bray, Chair, Senate Natural Resources and Energy Committee; 

·      Amy Sheldon, Chair, House Committee on Natural Resources, Fish and Wildlife;   

·      Michael Sirotkin, Chair, Senate Committee on Econ. Dev., Housing and Gen. Affairs; 

·      Michael Marcotte, Chair, House Committee on Commerce and Economic Development

We are completing a three-year assessment and report on the status and future of the Vermont dairy industry.  We present a working Executive Summary of our Findings and Conclusions.

The Report finds the Vermont dairy industry and the working landscape it supports face the gravest crisis since the Great Depression.  

·      Chronically inadequate pay prices have caused the exit of over two-thirds of Vermont’s conventional dairy farms since 2000. (2000: + /- 1500 farms; 2020: 425 farms)  

o   A combination of market trends, beyond Vermont and unchecked by federal law or regulation, are causing the chronically inadequate pay prices that have led to this hemorrhaging loss of Vermont dairy farms.

·      Increasing direct and indirect federal and state financial support has been provided in the effort to alleviate distressed farm operation, and to cover the “externality” costs of harmful farm impacts also associated with inadequate pay prices.

o   As indicated by the continued hemorrhaging loss of farms, governmental support is not sufficient to keep farms in operation and cover, long-term, externality costs. 

The Report concludes this crisis is a pivotal turning point for the state’s rural economy, along with Vermont’s cultural and historic identity as a “dairy State”.

·       The greater dairy market forces beyond the Vermont marketplace are likely to continue, unchecked by federal law or regulation.

·       Without BOLD governmental policy change and action, by the State of Vermont, to resolve the crisis, farm attrition and distressed operation are likely to persist, and the Vermont dairy industry and the rural economy and working landscape it supports will continue to confront a perilous future.  

We further find that additional, positive, changes have occurred, amidst the crisis.  

·      The Vermont dairy industry has evolved into a multi-sector industry that now includes both a substantial new in-state processing and manufacturing sector along with the historic raw milk production sector.

o   The Vermont dairy industry has become a leader in the high margin, high-valued dairy products segment of the national dairy marketplace.  

·      **The newly developed in-state manufacture of a substantial volume of Vermont raw milk production has re-established the State’s regulatory authority over its dairy marketplace.**

The report is one of optimism, because we conclude these positive changes can support the BOLD State policy action needed to renew the Vermont dairy industry’s future.

·      If harnessed, modernized and innovative exercise by the State of its revitalized regulatory authority over producer pricing, milk production and farm practices, together with a visionary economic development plan, can overcome the outside market and regulatory trends and renew a durable future for the uniquely branded Vermont dairy industry.

·      Innovative State action can also reduce the public cost of supporting a viable Vermont dairy industry.

Summary Findings

Our three-year review has assessed the history and status of the Vermont and national dairy marketplaces, and the history and development of state and federal dairy support and milk market regulatory programs.  We have also reviewed the Legislative Clean Water Act, the Treasurer’s Clean Water Report, and the “Call to action” by the Vermont Dairy and Water Quality Collaborative Working Group.  We have also evaluated the Vermont Milk Commission’s proposed federal supply control program.

Our Report identifies three dislocating changes that are causing the pending crisis.  At the same time, our report also identifies two additional, but positive, transforming changes.  We believe these additional, if less apparent, changes provide the basis for the State to devise an effective response to the three disruptive challenges, and thereby to resolve the crisis and renew the industry’s future. 

We find first that the industry’s historic anchor position as raw milk supplier for the Boston beverage milk market has all but been eliminated.  Second, the regional and national dairy industries have been restructured by radical market consolidation and concentration, unchecked by application of federal antitrust enforcement.  This unchecked and transforming change is the primary cause of depressed producer prices. 

Third, the long-standing federal dairy regulatory program has not been adapted to the marketplace’s reconfiguration to commodity manufactured dairy products and away from beverage milk.  Most critically, the program has been unable to respond to the new national and international market patterns of inadequate and volatile producer pay prices, and the continual production of excess raw milk supply. 

As a result, the Vermont dairy industry is now tied to volatile and inadequate commodity pricing, set by national and world market commodity price patterns having essentially no connection to the Vermont market and over which the Vermont industry has no control.

Many federal and state governmental support programs have been implemented over the years to respond to the chronic financial pressures on the farm.  Among others, these have included direct subsidy payments, the purchase development rights, land use taxation reduction, loan interest reduction, business development assistance, and federal margin protection and insurance payments.  As indicated by the continued, hemorrhaging loss of dairy farms, these programs, while certainly beneficial, have served only to partially alleviate the chronic operating loss.

Our study further finds that cash flow pressure caused by chronically inadequate pay prices is the primary cause of excess, distressed milk production by Vermont dairy farms.  This is a critical finding regarding water pollution and other problematic dairy farming practices, which have intensified and complicated both the crisis facing the industry and its resolution.  

Dairy farms receiving inadequate pay prices often cannot afford to incur the cost of employing farming practices needed to prevent water pollution and other problematic dairy farm impacts.  As unpaid for “externalities”, these problematic impacts have then created need for public financing to correct.  

Inadequate pay prices and resulting distressed milk production may thus also be understood as causing these associated problems and the substantial public financing cost required to pay for remediation. 

This combination of transforming market change, legal and regulatory failure, and external financial pressure has had a severely negative impact on Vermont’s conventional dairy farms.  Today, the hemorrhaging loss and consolidation of dairy farms leaves fewer than 450 conventional dairy farms in operation.  

Unimaginably, St Albans Cooperative, the lead and enduring Vermont dairy cooperative, has merged with Dairy Farmers of America, the dominant national cooperative.  This merger leaves conventional Vermont dairy farmers with but two remaining major cooperative outlets for the sale of their raw milk product.  With the pending merger of DFA and Dean Foods, the two cooperatives operating in Vermont, in turn, could have but one other remaining large-scale beverage milk processor customer in the New England region.

We further find that there is no indication of likely change in these market, legal and regulatory trends at the national level.  To the contrary, all evidence indicates the federal government will not alter course to reinstitute aggressive enforcement of the antitrust laws, and that, in the absence of cooperative initiative, USDA will not institute significant change to the federal milk market regulatory program. 

To challenge this trend, the Vermont Milk Commission has recently called for institution of a national supply management program.  We agree that a national supply management program would directly address the most fundamental defects in the current operation of the nation’s dairy industry, and could go far to resolve the pending crisis.  Our review indicates, however, that implementation of this needed federal program is very unlikely to happen. Most significantly, the leadership group of the nation’s dairy cooperatives is formally opposed.  There is no indication that the federal government will pursue such a policy in the absence of major cooperative support, and every indication that no action will be taken without such support.  In view of this industry position and lack of federal leadership, pursuit of a national supply management program, even if a viable option, cannot be relied upon to sustain the future viability of the Vermont dairy industry.  

Finally, we find that the national cooperative leadership appears to be moving toward greater, entrenched support for the continued allowance of unchecked market-wide consolidation, which now also includes an accelerating trend toward greater scale and size of dairy farm operation.  This latest development involves the establishment of mega-scaled dairy farm operations in other regions of the country that have greater capability to withstand volatile and low commodity pricing.  This recent development is further problematic for the Vermont dairy industry because, even if desirable, both natural and market forces absolutely preclude the establishment of similarly scaled, competitive dairy farm operations in Vermont. 

In sum, our study finds that Vermont dairy farming as we know it is being dismantled by market forces operating beyond the Vermont marketplace, unconstrained by federal law or regulation, which have left the operation of Vermont farms tied to chronically volatile and unsustainably low, commodity-based, pay prices.  

We further find that without change or dramatic response to this unchecked national and international market and federal regulatory pattern, by 2030, the Vermont dairy industry could have fewer than 100 conventional dairy farms and substantially reduced milk production, with associated loss of economic activity, rural infrastructure and working landscape.  

**************************

Fortunately, our review has disclosed that a positive reconfiguration of the Vermont dairy industry has also occurred, amidst all of the dislocating changes identified above.  If less apparent, we find that this positive reconfiguration has resulted in two equally transforming changes that, together, hold great promise for resolving the current crisis.  

First, we find that the Vermont dairy industry has been completely reconfigured into a multi-sector industry that now includes a substantial and diverse new in-state processing and manufacturing sector, along with the long-standing raw milk production sector.  The leading manufacturing companies combine with Booth Brothers to establish a substantial base for thus new manufacturing and processing sector. The sector’s diversity includes the significant leadership position of Vermont dairy farms and companies in the development of USDA certified organic milk and dairy products.  Vermont also leads in the development of innovative farmstead niche operations. 

This evolving and diverse new in-state processing and manufacturing sector combines to utilize more than half of Vermont’s 2.7 billion pounds of raw milk production.  This amounts to a substantial volume of raw milk production, process and manufacture, able to continue to support substantial economic activity, along with the significant, related rural economic infrastructure.  

Most importantly, the products of the State’s newly configured industry are leading competitors within a strongly differentiated, high-end, segment of the dairy industry.  Ben and Jerry’s Homemade, Inc., Cabot Cheese, and Commonwealth Dairy make high value, high margin ice cream, cheese and yogurt products, and the same can also be said of Vermont organic milk and dairy products, and the niche farmstead products.  The differentiated segment that includes these products is both very profitable and expanding in sales, in marked contrast to the remainder of the commodity manufactured dairy products sector, and indeed in contrast to the performance of the overall dairy industry, as a whole.  

This new multi-sector reconfiguration of the Vermont dairy industry should thus present dynamic market opportunity for all industry participants.  The industry uniquely combines high-valued dairy product offerings, brand strength, prime geographic location, and capacity for growth and expansion.  

This high-value, high-margin industry positioning thereby may, and should, also provide strong potential for restoration and renewal of the long-term sustainability of the Vermont dairy farms that provide the critical raw milk supply, and also for significant improvement across their farming operations.  

The second transforming change that has occurred with the multi-sector reconfiguration of the Vermont dairy industry is the re-establishment of the State’s comprehensive regulatory oversight of the Vermont dairy marketplace.  The new in-state utilization of in-state milk production equates legally to an in-state transaction between purchaser and seller, which establishes state regulatory jurisdiction and control over that transaction.

This is a most dramatic legal change.  Before, when the industry was dominated by the single-sector production of raw milk, Vermont was unable to exercise legal control over the purchase pricing by out-of-state companies, stymied by operation of the Interstate Commerce Clause.  This meant that the farms’ need for, and public interest in, adequate and sustainable pricing was solely dependent on remote federal regulatory oversight.  

Based on the new in-state legal authority, the State is no longer dependent on the exercise of remote, and now ineffectual, federal regulatory authority.  Rather, the State has the regulatory power to address the core financial pricing distress that now confronts Vermont dairy farmers when selling their milk product. The price paid for the substantial volume of milk sold and purchased in-state, along with price fluctuation, is now subject to direct state regulation.  In addition, the amount of that supply and the production practices employed to produce that volume of milk are also now subject to direct state regulation.

Summary Conclusions

We conclude that the national market and regulatory pattern beyond the Vermont marketplace, which has tied Vermont raw milk pricing to unsustainable, inadequate and volatile, commodity dairy pricing, is not likely to be altered, and is in fact more likely to accelerate.  

We further conclude, therefore, that Vermont must plot its own, new and BOLD, State-based course if there is to be a sustainable future for the Vermont’s dairy industry and the working landscape it supports. 

We also conclude that the multi-sector reconfiguration of the Vermont dairy industry presents a realizable opportunity for Vermont to so plot its own course and to overcome the destructive national market and regulatory pattern.  With BOLD State action that first harnesses the State’s revitalized regulatory power and then implements a combined program of innovative regulation and economic development, the industry’s unique and dynamic market positioning can be fully unleased so as restore a vibrant future that is consistent with its storied past.  

We also conclude that this opportunity includes the potential for sustainable operation of Vermont dairy farms of all sizes, along with growing sales of high valued Vermont milk and dairy products. This opportunity can also result in resolution of problematic farm-based water pollution and farming practices caused by distressed farm operation, with reduced reliance on public funding.  

Finally, we conclude that the proposed cross-government task force is the best means to achieve these objectives.  The power to do what is needed already exists.  What is now required is bold leadership by our governmental leaders, to harness that power. 

Background of Report Authors 

Roger Allbee

627 Brookline Rd 

Townshend, VT 05353

roger.allbee@yahoo.com                                                                                    

Former Vt. Secretary of Agriculture; Former State Director of Vt. Farm Service Agency; Former VP and Member of Senior Management Team of Former Farm Credit Banks and Bank for Cooperatives for the Northeast; Served on the Professional Staff of the U.S. House Committee on Agriculture, former appointed member and former Chair of the USDA/USTR Animal and Animal Products Trade Advisory Committee to the U.S. Secretary of Agriculture and U.S. Trade Ambassador, Member of International Market Team of Washington D.C. law firm and participant as NGO in Seattle Round of Multinational Trade Negotiations, Past Chair of the Working Landscape Council of the Vermont Council on Rural Development.

Daniel Smith, Esq.

16 State Street

Montpelier, VT 05601

(802) 229-6661

dsmith@dairycompact.org

Founding Executive Director of the Northeast Dairy Compact Commission; former Legislative Counsel for Vermont House and Senate Agriculture Committees; legal practitioner in specialized field of state and federal milk market regulation; special counsel for state regulatory action in a number of states across the country.  

Market Manipulation: WHEN THE 1856 BUTTER MARKET IN ST. ALBANS WAS CORNERED FOR FINANCIAL GAIN AND THE SILVER MARKET OF THE 1970’s

A HISTORICAL PERSPECTIVE

The term “cornering the market” means obtaining sufficient control of a particular stock, commodity, or other asset in an attempt to manipulate the market price.  This has been tried a few times over the years. It happened just over one hundred and fifty years ago, in 1856 when St. Albans, Vermont was considered to be the butter capital of the world. In my generation, many of you may be familiar with the Hunt Brothers from Texas in the 1970’s attempting to control the price of silver.

According to records, the greatest growth in Vermont agriculture took place from 1850-1880, with 35,000 farms at the end of that period.  Butter making was the primary commercial agricultural product that dominated the State into the early 20^th Century.  With the advent of railcars with ice, St. Albans become one of the leading providers of butter to Boston, with trains leaving once every Tuesday of the week.  Butter was considered to be Vermont’s signature product of the 19^th Century.  St. Albans was a very active town on these days. “On Tuesday during the spring, summer, and fall, teams of horses with wagons full of butter and cheese would be hitched to every post on Main Street, and hotels and barns would be full.  Butter was King.”  Tuesday was considered to be market day, with up to 300 teams of horses with wagons coming from every direction.  Buyers of what was considered to be some of the best butter would also descend on the town on that day.

By the 1890s the Franklin County Creamery Association had the World’s largest butter factory, turning out 25,000 pounds of butter each day, and some 35 million pounds were being produced in the state each year.   During this period, Vermont butter won two international awards for its quality, one for 1^stplace at the Paris Exposition in 1890, and another at the Columbian Exposition in 1893.  By 1915, there were nearly 300 butter factories in the state. 

St. Albans continued to be the prominent butter production area in the world until the early 1900’s when the demand for fluid milk in the cities increased and Vermont lost its competitive price in the butter market.  

Having what was considered some of the best butter, and a demand for that butter in the Boson Market, set up the conditions at that time for attempts to control the market and thus increase the price to sellers.  One successful attempt by B. F. Rugg to do so took place in 1856. 

Rugg was the prominent dealer in butter in the County and in the State.  He developed a plan to control the supply of butter to the Boston Market.  It is said that he had the brains, energy, confidence, and contacts and financial resources to do so.  His scheme was to buy butter in the spring when prices were low and quietly store it in cellars.  He continued this practice in July and August sending only small supplies to the market each week to avoid detection.  He continued to buy and buy and hold product until the price was at a level where he could make a substantial profit. The demand in the Boston Market was so great that eventually they had to agree to his price.  The profit of Rugg’s adventure in controlling the supply that year amounted to a sum of $18,000, or about $531,670 in today’s dollar value.  It is said that he tried to repeat his scheme again the next year but for many reasons was not successful.

Manipulating the silver market in the 1970’s was much more complicated than cornering the butter market in St. Albans in 1856. According to the history of the time, the Hunt Brothers did not trust the U.S. Government or the reliance on the value of the US dollar. Like their Dad before them, the Texas brothers made their tremendous fortune in oil and were considered among the richest people in the world in the 1970’s. They believed that inflation would eat away at their tremendous wealth and the collapse of the dollar was inevitable.  The only alternative in their minds was to turn to tangible assets like gold and silver…they chose silver.  Determined to protect their wealth, it is said that they “erected one of the greatest bubbles in the history of financial markets”, pushing silver prices from six dollars an ounce in 1979 to just around fifty dollars an ounce in early January 1980, an increase of 713%. They owned $6.6 billion of silver at the top of the market. They saw silver as a safe haven for their tremendous oil fortune and invested very heavily into silver bars and silver future contracts, borrowing to do so, not depending on their cash or financial resources.   At the height of their leveraged investment, they controlled 69% of all silver futures traded on the Commodity Mercantile Exchange in New York, and 1/3 of all silver not held by the federal government.  It is said that they even chartered jets to fly their silver, under armed guard in the middle of the night, to Switzerland for safekeeping.  This financial position they had could not be held when the new Chairman of the Federal Reserve, Paul Volker, took actions to keep inflation under control by limiting speculative lending by banks.  In addition, the Commodity Exchanges took action to limit the investment in silver futures and also restricted the holding of silver.   On March 27^th, 1980, called “Silver Thursday”, the Hunt’s attempt to control the silver market came to an end with prices falling by one-half.  The Hunt Brothers could not make the $135 million margin call on the future contracts they had purchased at a higher price.  As a result of this failed attempt, the Hunt Brothers spent decades settling lawsuits, and in 1988 they filed the biggest personal bankruptcy in Texas history with Nelson Hunt agreeing to give up his prized collection of 500 horses.  It has been written “that this is a nice look at how a couple of extremely wealthy men got their asses handed to them by trying to manipulate the market.”

Summary:  While the actions to control the butter market for that one year in 1856 succeeded, the attempt by the Hunt Brothers to control the silver market in the 1970’s did not.  Of course, financial and commodity trading regulations over the period of time from 1856 to the 1970’s,  even to today, have dramatically changed.  Due to concerns and the possible impact of market manipulation activities, Congress has provided a number of federal agencies with enforcement powers to prevent manipulation of prices in the market.  These include the Securities and Exchange Commission (SEC), the Commodities Futures Trading Commission (CFTC), The Federal Energy Regulatory Commission (FERC), and the Federal Trade Commission (FTC).  The U.S. Department of Justice and the FTC have anti-trust authority.

Blogger Comments: While I was not schooled on the issues at the time, I had just been hired in 1979 by then Congressman Jim Jeffords of Vermont as his professional staff member on the US House Committee on Agriculture.  The House Committee on Agriculture has jurisdictional authority over the Federal Commodity Futures Trading Commission (CFTC) and due to this the Hunt Brother’s were asked to testify before the Committee.  I remember sitting as a staff member in the packed committee room listening as the two brothers tried to defend their silver scheme, the greatest attempt at the time to control a price of a commodity.  Unlike Mr. Rugg in St. Albans in 1856, they did not succeed.

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References for this blog:

·      “Butter is King”, by R.R. Sherman, Origin of St. Albans Butter Market in 1872, in Vermont Historical Society, Freedom and Unity, Industrialized Vermont, Cheese, Butter then Milk.

·      Life in 1864: Industry and Retail, September 3, 2014 in the St. Albans Raid, by Michelle Monroe, St. Albans Messenger Staff Writer

·      Heller: The Best Butter in the World, by Paul Heller, for the Weekend Magazine, The Rutland Herald, September 14, 2019

·      The Origin of the St. Albans Butter Market, A Paper read before the Vermont Board of Agriculture at its meeting at St. Albans, March 6 & 7, 1872, by Dr. R.R. Sherman of St. Albans

·      Origins and Progress of the St. Albans Butter Market, St. Albans Weekly Messenger, March 22, 1872

·      When Vermont was the butter and cheese capital, by Roger Allbee, in Vtdigger Commentary, August 26, 2018

·      Silver and Thursday: How Two Wealthy Traders Cornered the Market, in www.investopedia.com

·      Bunker Hunt: Attraction to Silver: A History of Cornering the Silver Market, in Silver Monthly, Tuesday Feb. 11, 2020

·      A Silver Tale or How the Hunt Brothers Lost It All, in Daily KOS, Tuesday Oct. 30, 2018

·      Hunt Brothers trying to corner silver market, in www.businessinsider.com, May 17, 2016

·      The Intersection of Market Manipulation Law and Monopolization Under the Sherman Act: Does It Make Economic Sense, by Ledgerwood, Keyte, Verlinda, & Ben-Ishai in Energy Bar Association, 4/23/19