Letter to The Honorable Mike Johanns, Secretary, United States Department of Agriculture and The Honorable Phyllis K. Fong, Inspector General

Letter

August 1, 2007

The Honorable Mike Johanns The Honorable Phyllis K. Fong
Secretary Inspector General
United States Department of Agriculture United States Department of
1400 Independence Ave., SW Agriculture
Washington, DC 20250 1400 Independence Ave., SW
Washington, DC 20250

Dear Secretary Johanns and Inspector General Fong:

We are disappointed that we have not yet received a response from the Department of Agriculture to our May 9, 2007 letter on the issue of misreported nonfat dry milk (NDM) sales. While we still request a response to the issues raised in that letter, we would like to expand that request to cover the recent reports from the National Agricultural Statistics Service (NASS) and the Agricultural Marketing Service (AMS). These reports provide a better understanding of the direct impacts of the misreported NDM sales over the past year. The reports specifically show that while some dairy farmers were impacted to a greater extent than others, all producers under federal orders were hurt by the almost $50 million in underpayments. While we are encouraged that the long overdue rules and auditing procedures for the dairy price reporting program have finally been proposed, we remain concerned that the financial burden continues to be completely borne by dairy farmers who are not responsible for the erroneous data. Therefore, even with improved protections for the future, critical questions remain regarding responsibility for the misreporting and corrective actions.

We were concerned to learn that the misreporting of NDM was so significant and long-lasting. In the recent NASS and AMS reports, there was not a single weekly report that did not require correction and for the most part the corrections were significant. Forty-six weeks out of the past year had misreporting of over one million pounds of NDM, with one week's discrepancy at over 13 million pounds. The misreported volume averaged over 22 percent of the originally reported volume and in one week exceeded 40 percent. With such a major and sustained problem, it is disappointing that USDA did not provide a better, more public explanation and instead quietly posted the technical reports on two separate USDA divisions' websites with no press release or press conference. After more than two months of investigation, American dairy farmers deserve a more complete explanation from USDA.

The reports also illustrate the direct impacts of misreported prices on dairy farmers through underpayments for class II and IV milk totaling about $50 million. The amount of underpayment per farmer varies both by milk production and by milk marketing order due to different utilization rates, but the underpayments ranged between several hundred dollars for a small farmer in a low NDM production region to tens of thousands of dollars for a larger farmer in a high NDM production region. The AMS report also notes that some substitution may have occurred between classes of milk due to the artificially low class II and IV prices caused by the NDM misreporting. Is there any effort underway to estimate these indirect effects, which may have also weighed down class I and class III milk prices? We realize this could be a difficult undertaking given the complexity of dairy economics. However, even a rough estimate would provide a better sense of whether the actual loss to dairy farmers was significantly more than the estimated $50 million in direct effects.

We were pleased that the long overdue regulations to provide auditing of dairy price reports were also proposed late last month. But while these new regulations may prevent such significant and long-lasting misreporting in the future, it is also important to better account for the previous error. Given the magnitude of misreporting over the past year and the understandable lack of confidence among dairy farmers in USDA, an independent review of the revised data and USDA's response may be appropriate. What plans, if any does the USDA have for an independent review? At the very least, it seems appropriate that the USDA Inspector General should undertake such a review.

Several important questions remain unanswered following the release of the recent reports. First, at the April Senate staff briefing, only one plant was confirmed to have misreported prices to NASS. We understand that additional firms were identified in the investigation, but USDA has made no information available regarding the identity of and degree to which firms were responsible. When and how were firms instructed about which transaction to exclude from the price reporting? Second, at the April briefing, it was indicated that firms were visited once or more per year at which point these rules were explained. We would like to receive more information on the content of these sessions. Third, it appears that this misreporting involved long term fixed price contracts during a period of rapid increases in NDM prices that in turn resulted in higher input prices for the NDM producers through higher milk prices. There seems to have been a potential financial motive to misreport the relatively low NDM prices of the fixed price contracts and therefore lessen the increases in input costs for the NDM producers. Is the USDA or Inspector General investigating this possibility? Is there any evidence of deliberate misreporting? What recourse is available to USDA to recover the underpayments or take punitive action in such a case?

Regardless of possible ongoing or additional inquiries into the cause and extent of the underpayments to dairy farmers, USDA has shown that dairy farmers were underpaid by at least $50 million. Besides noting in one report that the milk marketing orders are unable to provide compensation for this underpayment, USDA has not indicated whether compensation from other funds is being contemplated. With dairy farmers bearing the entire burden of the misreported prices, are there plans to compensate dairy farmers for the underpayments?

We look forward to your response in a timely fashion.

Sincerely,

Russ Feingold (D-WI)
Herb Kohl (D-WI)
Bernie Sanders (I-VT)
Hillary Rodham Clinton (D-NY)
Patty Murray (D-WA)
Arlen Specter (R-PA)
Larry Craig (R-ID)
Joe Biden (D-DE)
Chuck Schumer (D-NY)