[Federal Register Volume 70, Number 19 (Monday, January 31, 2005)]
[Proposed Rules]
[Pages 4932-4955]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-1410]



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Part III





Department of Agriculture





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Agricultural Marketing Service



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7 CFR Part 1001



Milk in the Northeast Marketing Area; Decision on Proposed Amendments 
to Marketing Agreement and to Order; Proposed Rule

Federal Register / Vol. 70, No. 19 / Monday, January 31, 2005 / 
Proposed Rules

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DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

7 CFR Part 1001

[Docket No. AO-14-A70; DA-02-01]


Milk in the Northeast Marketing Area; Decision on Proposed 
Amendments to Marketing Agreement and to Order

AGENCY: Agricultural Marketing Service, USDA.

ACTION: Proposed rule.

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SUMMARY: This decision proposes to permanently adopt changes in 
provisions of the Northeast marketing area contained in a Recommended 
Decision published in the Federal Register on March 25, 2004, with one 
minor modification. This document is subject to approval by producers 
by referendum.

FOR FURTHER INFORMATION CONTACT: Gino Tosi, Marketing Specialist, Order 
Formulation and Enforcement Branch, USDA/AMS/Dairy Programs, STOP 
0231--Room 2968, 1400 Independence Avenue, SW., Washington, DC 20250-
0231, (202)690-1366, e-mail gino.tosi@usda.gov.

SUPPLEMENTARY INFORMATION: This Final Decision proposes to adopt 
amendments that would establish year-round supply plant performance 
standards, exclude milk received by supply plants from producers not 
eligible to be pooled on the Northeast order from supply plant 
performance standards, remove the ``split-plant'' provision, establish 
a one-day ``touch base'' standard, establish explicit diversion limits 
for pool plants, prohibit the ability to pool the same milk on the 
Federal milk order and a marketwide pool administered by another 
government entity, and grant authority to the Market Administrator to 
adjust the touch-base and diversion limit standards as market 
conditions warrant. Additional amendments that amend reporting and 
payment date provisions, with one minor modification from what was 
proposed in the Recommended Decision, are also adopted.
    This administrative action is governed by the provisions of 
Sections 556 and 557 of Title 5 of the United States Code and, 
therefore, is excluded from the requirements of Executive Order 12866.
    The amendments to the rules adopted herein have been reviewed under 
Executive Order 12988, Civil Justice Reform. They are not intended to 
have a retroactive effect. If adopted, the proposed amendments would 
not preempt any state or local laws, regulations, or policies, unless 
they present an irreconcilable conflict with this rule.
    The Agricultural Marketing Agreement Act of 1937, as amended (7 
U.S.C. 601-674), provides that administrative proceedings must be 
exhausted before parties may file suit in court. Under section 
608c(15)(A) of the Act, any handler subject to an order may request 
modification or exemption from such order by filing with the Secretary 
a petition stating that the order, any provision of the order, or any 
obligation imposed in connection with the order is not in accordance 
with the law. A handler is afforded the opportunity for a hearing on 
the petition. After a hearing, the Secretary would rule on the 
petition. The Act provides that the district court of the United States 
in any district in which the handler is an inhabitant, or has its 
principal place of business, has jurisdiction in equity to review the 
Secretary's ruling on the petition, provided a bill in equity is filed 
not later than 20 days after the date of the entry of the ruling.

Regulatory Flexibility Analysis and Paperwork Reduction Act

    In accordance with the Regulatory Flexibility Act (5 U.S.C. 601 et 
seq.), the Agricultural Marketing Service has considered the economic 
impact of this action on small entities and has certified that this 
final decision will not have a significant economic impact on a 
substantial number of small entities.
    For the purpose of the Regulatory Flexibility Act, a dairy farm is 
considered a ``small business'' if it has an annual gross revenue of 
less than $750,000, and a dairy products manufacturer is a ``small 
business'' if it has fewer than 500 employees. For the purposes of 
determining which dairy farms are ``small businesses,'' the $750,000 
per year criterion was used to establish a production guideline of 
500,000 pounds per month. Although this guideline does not factor in 
additional monies that may be received by dairy producers, it should be 
an inclusive standard for most ``small'' dairy farmers. For purposes of 
determining a handler's size, if the plant is part of a larger company 
operating multiple plants that collectively exceed the 500-employee 
limit, the plant will be considered a large business even if the local 
plant has fewer than 500 employees.
    In September 2002, the time of the hearing, there were 16,715 
producers pooled on and 143 handlers regulated by the Northeast order. 
Of these, 97 percent of the producers and 71 percent of the handlers 
would be considered small businesses. The adoption of the amended 
pooling standards serve to revise and establish criteria that ensure 
the pooling of producers, producer milk, and plants that have a 
reasonable association with, and are consistently serving, the fluid 
milk needs of the Northeast milk marketing area. Criteria for pooling 
milk are established on the basis of performance standards that are 
considered adequate to meet the Class I fluid needs of the market and 
to determine those that are eligible to share in the revenue that 
arises from the classified pricing of milk. Criteria for pooling are 
established without regard to the size of any dairy industry 
organization or entity. The amendments to the reporting and payment 
date provisions serve to streamline and simplify handler payments to 
the market administrator. The criteria established in the amended 
pooling standards and reporting and payment date provisions are applied 
in an equal fashion to both large and small businesses. Therefore, the 
Department has determined that the adopted amendments will not have a 
significant economic impact on a substantial number of small entities.
    A review of reporting requirements was completed under the 
Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35). It was 
determined that these adopted amendments would have no impact on 
reporting, recordkeeping, or other compliance requirements because they 
would remain identical to the current requirements. No new forms are 
proposed and no additional reporting requirements would be necessary.
    This action does not require additional information collection that 
requires clearance by the Office of Management and Budget (OMB) beyond 
currently approved information collection. The primary sources of data 
used to complete the approved forms are routinely used in most business 
transactions. The forms require only a minimal amount of information 
which can be supplied without data processing equipment or a trained 
statistical staff. Thus, the information collection and reporting 
burden is relatively small. Requiring the same reports for all handlers 
does not significantly disadvantage any handler that is smaller than 
the industry average.
    Prior documents in this proceeding:
    Notice of Hearing: Issued July 26, 2002; published August 1, 2002 
(67 FR 49887).
    Supplemental Notice of Hearing: Issued August 14, 2002; published 
August 16, 2002 (67 FR 53522).

[[Page 4933]]

    Recommended Decision: Issued March 17, 2004; published March 25, 
2004 (69 FR 15562)

Preliminary Statement

    A public hearing was held on proposed amendments to the marketing 
agreement and order regulating the handling of milk in the Northeast 
marketing area. The hearing was held, pursuant to the provisions of the 
Agricultural Marketing Agreement Act of 1937, as amended (7 U.S.C. 601-
674), and the applicable rules of practice and procedure governing the 
formulation of marketing agreements and marketing orders (7 CFR part 
900), at Alexandria, Virginia, on September 10-13, 2002, pursuant to a 
Notice of Hearing issued July 26, 2002, and published August 1, 2002 
(67 FR 49887) and a Supplemental Notice of Hearing issued August 14, 
2002, and published August 16, 2002 (67 FR 53522).
    Upon the basis of the evidence introduced at the hearing and the 
record thereof, the Administrator, on March 17, 2004, issued a 
Recommended Decision containing notice of the opportunity to file 
written exceptions thereto.
    The material issues, findings, conclusions, and rulings of the 
Recommended Decision, with one minor modification, are hereby approved 
and adopted and are set forth herein. The material issues on the record 
of the hearing relate to:
    1. Reporting and Payment Dates.
    2. Pooling standards of the marketing order:
    a. Performance standards for supply plants.
    b. Unit pooling standards for distributing plants.
    c. Standards for producer milk.
    3. Marketwide Service Payments.
    4. Conforming changes to the order.

Findings and Conclusions

    The following findings and conclusions on the material issues are 
based on evidence presented at the hearing and the record thereof:

1. Reporting and Payment Dates

    Several changes to the reporting and payment date provisions of the 
Northeast marketing order are adopted, with one minor variation from 
what was proposed in the Recommended Decision. The adopted changes 
include: (1) Changing the submission date of monthly handler reports to 
on or before the 10th day of the month; (2) Announcing the producer 
price differential (PPD) and statistical uniform price on or before the 
14th day of the month, but allowing the market administrator additional 
days if the 14th falls on a Saturday, Sunday, or national holiday; (3) 
Requiring payments to the producer settlement fund (PSF) be received no 
later than two days after the announcement of the PPD; (4) Modifying 
the date which payments from the PSF are to be disbursed to handlers to 
the day after the due date required for payment into the PSF; and (5) 
Requiring final payments to producers be made no later than the day 
after the required date of payment to handlers from the PSF.
    The Recommended Decision would have required partial payments to 
producers be made no later than the last day of the month. Upon 
consideration of an exception received regarding modification of the 
partial payment date, the partial payment to dairy farmers will 
continue to be due on or before the 26th day of the month. This issue 
is discussed later in this decision. The following table summarizes the 
adopted changes:

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                                          Current provision         Adopted changes         Reason for change
----------------------------------------------------------------------------------------------------------------
              PROPOSAL 1
 
Submission of monthly handler reports  Due on or before the     Due on or before the     Allows handlers one
 to Market Administrator.               9th day of the month.    10th day of the month.   more day to submit
                                                                                          reports to Market
                                                                                          Administrator.
Date of PPD and statistical uniform    Announce on or before    Announced on or before   Maintains the time the
 price announcement.                    the 13th day of the      the 14th day of the      Market Administrator
                                        month.                   month, and up to two     has to announce the
                                                                 additional public        PPD and statistical
                                                                 business days            uniform price and if
                                                                 thereafter if the 14th   the 14th falls on a
                                                                 falls on a weekend or    weekend or national
                                                                 national holiday.        holiday allows
                                                                                          additional days.
Handler payments to the PSF..........  Payment must be made no  Payment must be made no  A corresponding change
                                        later than the 15th of   later than two days      made because of
                                        the month, unless the    after the announcement   extending the date for
                                        15th falls on a          of the PPD and           filing Market
                                        weekend or holiday,      statistical uniform      Administrator reports
                                        where the payment can    price, unless the due    and the computation of
                                        be delayed until the     date falls on a          the PPD and
                                        next business day.       weekend or holiday,      statistical uniform
                                                                 then the payment can     price.
                                                                 be delayed until the
                                                                 next business day.
Date when final payments are to be     Payment must be          Payment must be          A corresponding change
 disbursed to producers.                received by each         received the following   that adds flexibility
                                        producer no later than   month by each producer   to the relationship
                                        the day after the 16th   no later than the day    between the date of
                                        day of the following     after the required       payment to handlers
                                        month.                   payment date from the    from the PSF and final
                                                                 PSF unless the day       payment to producers.
                                                                 falls on a weekend or
                                                                 holiday, then the
                                                                 payment can be delayed.
              PROPOSAL 4
 
Date on which payments from the PSF    Market Administrator     Market Administrator     Helps to assure that
 are disbursed to handlers.             must pay each handler    must pay each handler    producers receive full
                                        the amount owed, if      the amount owed, if      payment in the event
                                        any, from the PSF no     any, no later then the   of the late payments
                                        later than the 16th      day after handler        to the PSF.
                                        after the end of each    payments to the PSF
                                        month.                   are received unless
                                                                 the day falls on a
                                                                 weekend or holiday,
                                                                 then the payment can
                                                                 be delayed.
----------------------------------------------------------------------------------------------------------------


[[Page 4934]]

    Currently, a handler's report on milk receipts and utilization is 
due to the Market Administrator on or before the 9th day of the month. 
Submission of this report triggers a sequence of other reporting and 
payment dates. These include: announcement of the PPD and statistical 
uniform price on or before the 13th day of the month; handler 
obligations to the PSF, due no later than the 15th day of the month but 
subject to a delay to the next business day if the day falls on a 
weekend or holiday; disbursement of funds from the PSF to handlers, due 
no later than the 16th day after the end of each month but also delayed 
subject to a weekend or holiday; partial payments from handlers to 
producers and cooperative associations, due on or before the 26th day 
of the month and again delayed due to a weekend or holiday; and final 
payments to producers and cooperative associations, made no later than 
the day after payment to handlers from the PSF.
    A portion of Proposal 1, submitted by New York State Dairy Foods, 
Inc. (NYSDF), Proposal 4, submitted by the Northeast Market 
Administrator, the Association of Dairy Cooperatives in the Northeast 
(ADCNE) and NYSDF, and Proposal 12, submitted by the Northeast market 
administrator, are adopted. All three proposals seek to modify various 
reporting and payment provisions of the order. NYSDF is a trade 
association representing milk handlers and processors in the Northeast 
marketing area. ADCNE represents a number of dairy farmer cooperatives 
whose milk is pooled on the Northeast order. Their members include 
Agri-Mark, Inc. (Agri-Mark), Dairy Farmers of America, Inc. (DFA), 
Dairylea Cooperative Inc. (Dairylea), Land O' Lakes, Inc. (LOL), 
Maryland and Virginia Milk Producers Cooperative, Inc. (MVMP), O-AT-KA 
Cooperative, Inc. (O-AT-KA), St. Albans Cooperative Creamery, Inc. (St. 
Albans), and Upstate Farms Cooperative, Inc. (Upstate). Worcester 
Creameries, Elmhurst Dairy, Mountainside Farms, and Steuben Foods also 
testified in support of Proposal 1.
    Proposal 1 would require monthly handler reports to be received by 
the Market Administrator on or before the 10th day of the month. This, 
in turn, triggers a sequence of other reporting deadline and payment 
date provisions that would be similarly changed. The Recommended 
Decision included a provision that would require partial payments to 
dairy farmers be made on or before the last day of the month. This 
Final Decision, however, will keep the partial payment date as 
currently provided by the order. The adopted changes include: (1) 
Announcement of the PPD and statistical uniform price a day later--from 
the 13th to the 14th day of the month. If the 14th day of the month 
falls on a Saturday, Sunday, or national holiday, the Market 
Administrator would have up to two additional public business days to 
announce the PPD and the statistical uniform price; (2) Handler 
payments to the PSF be made no later than two days after the 
announcement of the PPD unless the due date falls on a weekend or 
holiday, then the payment can be delayed until the next business day; 
and (3) Final payments to producers be received no later than the day 
after the required date of payment from the PSF unless the due date 
falls on a weekend or holiday, then the payment can be delayed until 
the next business day. Proposal 4 would modify the day which payments 
from the PSF are to be disbursed to handlers from the 16th of the month 
to the day after the due date required for payment into the PSF. 
Proposal 12 seeks to make a technical correction to the order provision 
relating to payments to producers and cooperatives, which will make the 
provisions identical to other Federal orders by changing ``pool plant 
operator'' to ``handler'' throughout the provisions of the order.
    A witness appearing on behalf of NYSDF testified in support of 
Proposal 1, stating that its adoption is necessary to correct 
unnecessarily burdensome regulations that have resulted from the 
reporting and payment date provisions adopted as part of Federal order 
reform. According to the witness, the amendments incorporated in 
Proposal 1 would essentially restore the reporting and payment dates 
specified in the former New York-New Jersey milk marketing order. The 
witness indicated that giving an additional day for submitting handler 
reports to the Market Administrator would lessen the difficulties milk 
handlers are currently experiencing in meeting the current reporting 
deadline. The witness explained that milk suppliers have experienced 
considerable difficulties in furnishing milk component and billing data 
in time for meeting the currently established reporting deadline. This 
situation is compounded, the witness explained, when handlers must 
account for the co-mingling of tanker loads of milk between cooperative 
and independent milk producers. Often, the witness stated, reports to 
the Market Administrator contain erroneous and estimated data because 
the reporting handler did not receive the correct data in time.
    The NYSDF witness also cited testimony from the Northeast Market 
Administrator that one third of handler reports are often filed late. 
Moving the reporting date from the 9th to the 10th of the month would 
give milk suppliers and buyers an additional day to complete their 
work, thereby greatly reducing the number of late reports to the Market 
Administrator, the witness concluded.
    The second proposed change in reporting dates contained in Proposal 
1 would maintain the time the Market Administrator has to announce the 
PPD and statistical uniform price, and up to two additional public 
business days thereafter if the 14th falls on a weekend or national 
holiday. According to the NYSDF witness, this portion of the proposal 
is consistent with the proposed one-day extension for submission of 
handler reports to the Market Administrator and would extend to the 
Market Administrator sufficient time to make the necessary price 
computations without undue pressure brought about by weekends or 
holidays. The witness also noted that while this proposal could give 
the Market Administrator up to two additional public business days for 
making the price computations, it would not require that the additional 
time be used. If the Market Administrator finds it feasible, a price 
announcement could come earlier, the witness stated.
    The third change in reporting dates offered by the NYSDF witness 
would require handler payments to the PSF be made no later than two 
days after the announcement of the PPD. According to the witness, this 
portion of the proposal is intended primarily as a conforming change 
made necessary by the one-day proposed extension in the date for filing 
Market Administrator reports and the computation of the PPD and 
statistical uniform price. Currently, handler payments to the PSF must 
be made no later than the 15th of the month, unless the 15th falls on a 
weekend or national holiday where the payment can be delayed until the 
following business day, the witness noted. The witness expressed 
concern that compliance with the current handler payment deadline was 
difficult, and the proposed change would better accommodate the flow of 
money from handlers to the PSF. The witness was of the opinion that 
this portion of the proposal would provide a more consistent time 
interval to gather the Market Administrator classifications on milk 
transfers at pool reporting time, giving handlers a more consistent 
time frame in which to make necessary money transfers, for example, and

[[Page 4935]]

improve concurrent billings for milk that was transferred or diverted.
    The NYSDF witness testified that Proposal 1 would also require 
final payments to dairy farmers be disbursed no later than the day 
after the required payment date to handlers from the PSF. The primary 
purpose of this portion of the proposal, the witness explained, is to 
have the date of final payment to dairy farmers conform with other 
proposed date changes for the computation of the statistical uniform 
price and with when payments are made into and out of the PSF. The 
witness stressed that no change in the requirement for ``day-earlier'' 
payment to cooperatives was proposed, as currently set forth in the 
provisions of the order, and the final payment to producers would still 
be due the day after payments from the PSF are made by the Market 
Administrator. Accordingly, the witness noted, dates of final payment 
could move a day or two later, but only if the date of payment from the 
PSF were extended by the same number of days. This sequence in the 
relationship of ``date of final payment'' to the ``date of payment from 
the producer settlement fund'' should be continued, the witness said.
    The NYSDF witness testified that the last feature of Proposal 1 
modifies the date that partial payments are received by producers to 
``on or before the last day of the month'', instead of the current 
``26th day of the month''. The witness presented evidence which 
demonstrated that a longer spread in days between partial and final 
payment exists now than prior to Federal order reform. The witness 
testified that making partial payments due ``on or before the last day 
of the month'' would conform more closely with the dates previously set 
in the respective pre-reform orders and create better ``spacing'' 
between required pay dates.
    The NYSDF witness was of the opinion that adoption of Proposal 1 
also would accommodate ``tolled'' bulk milk purchased by milk 
distributors for processing and packaging into Class I products at pool 
distributing plants. The witness described ``tolling'' as a situation 
where a plant is paid to process raw milk, but the processing plant 
does not take ownership of the milk or incur a payment obligation to 
producers. The witness noted that the Northeast order requires that 
tolled milk be purchased on the basis of the PPD and component prices 
rather than on the basis of Class I skim value and butterfat prices. 
Therefore, the Market Administrator must ``credit'' the handler who 
processes cooperative receipts, together with a Market Administrator 
assessment on the tolled milk. The tolling processor must then prepare 
a billing to the distributor of the tolled milk at the difference 
between the Class I cost of the skim and butterfat and also a 
cooperative credit from the Market Administrator, including the 
associated Market Administrator fee, the witness stated. The NYSDF 
witness noted that doing this requires having detailed component values 
as well as knowing the final PPD. The billing involved is made after 
the PPD announcement and the billing by the Market Administrator of the 
handler's pool obligation, the witness said.
    In their post-hearing brief, NYSDF emphasized that Proposal 1 takes 
the existing payment structure and applies it to the date that the 
Market Administrator announces the PPD and statistical uniform price. 
NYSDF asserted that Proposal 1 does not set the payment date to the PSF 
as the 16th of the month. Rather, they noted, handlers could be making 
payment earlier than the 16th of the month if the PPD is announced 
before the 14th day of the month. NYSDF was of the opinion that as a 
whole, Proposal 1 would allow the Market Administrator to receive more 
timely and accurate handler reports and permit earlier price 
announcements and earlier payments to and from the PSF. NYSDF concluded 
that both dairy farmers and handlers would benefit from more accurate 
information that would flow naturally from adoption of Proposal 1.
    NYSDF's post-hearing brief concluded that adoption of Proposal 1 
would still have producers in the Northeast marketing area receiving a 
partial payment for milk 5 days earlier than was the case prior to 
Federal order reform.
    A witness appearing on behalf of Marcus Dairy (Marcus) testified in 
support of Proposal 1. Marcus is a distributing plant which receives 
approximately 60 percent of its milk supply from independent dairy 
farmers, with the remainder supplied by cooperatives. The witness 
indicated support for moving the handler reporting date from the 9th to 
the 10th day of the month, noting that an extra day would help in 
receiving more accurate information from cooperatives and eliminate the 
need to estimate data so that reports can be submitted on time. The 
witness also testified that the proposal should be accompanied by the 
proposed change to the Market Administrator PPD announcement date from 
the 13th to the 14th of the month while providing the flexibility for 
the Market Administrator to make announcements later in the event that 
the 14th falls on a holiday or weekend. These modifications would also 
require a similar change in the date when payment to the PSF is due, 
the witness noted. In light of this, the Marcus witness expressed 
support for requiring that payments to the PSF be made not more than 
two days after the PPD announcement and that final payments to dairy 
farmers be received no later than the day after the required date of 
payment by the Market Administrator. Marcus also supported moving the 
date of partial payment from the ``26th of the month'' to ``on or 
before the 30th of the month.'' The witness was of the opinion that 
adjusting these payment date provisions would improve the cash flow of 
dairy farmers.
    A witness appearing on behalf of ADCNE testified in opposition to 
Proposal 1. The witness said that dairy farmers, and those persons who 
provide services to dairy farmers, are faced with meeting deadlines 
that are sometimes difficult or inconvenient. The witness expressed the 
opinion that businesses that rely on information from other businesses 
do not necessarily have any ability to force those other businesses to 
change just because they provide needed information. Accordingly, the 
witness said, ADCNE does not view the current reporting dates as 
unreasonable or in need of change. Instead, the ADCNE witness suggested 
that those involved work together to resolve producer payment issues 
instead of seeking a regulatory change that would result in delay of 
payments to dairy farmers. Delaying producer payment dates will 
unnecessarily impose financial costs to dairy farmers in the Northeast, 
the ADCNE witness concluded.
    In their post-hearing brief, NYSDF responded to ADCNE's views by 
indicating that no amount of overtime worked by employees of NYSDF can 
create reports when other entities fail to get needed report 
information to handlers in a timely manner. NYSDF's brief also noted 
that many of their members are small businesses subject to Regulatory 
Flexibility Act analysis and relief as necessary and that undertaking 
expensive overtime in order to fill out reports when they do not have 
all the necessary information needed from various entities negates the 
intent of the Regulatory Flexibility Act.
    Exceptions to the Recommended Decision received from ADCNE opposed 
adoption of all portions of Proposal 1. ADCNE was of the opinion that 
Northeast order milk handlers are fully able to file reports on or 
before the 9th of the month, and that moving the reporting date from 
the 9th of the month

[[Page 4936]]

to the 10th of the month is unjustified. ADCNE was of the opinion that 
the proponents of Proposal 1 did not sufficiently demonstrate how the 
lack of timeliness or accuracy of handler reports has affected price 
announcements by the Market Administrator, or caused inaccurate or late 
payments to dairy farmers. ADCNE also described how moving the 
reporting date could possibly delay payments to dairy farmers and have 
a negative effect on their cash flow.
    ADCNE took particular exception to the proposed change in the date 
of partial payment from the 26th day of the month to the last day of 
the month. ADCNE argued that postponing the date of partial payment 
would provide a financial gain for handlers at the expense of dairy 
farmers. ADCNE explained how moving the date of partial payment could 
cause financial hardship by requiring dairy farmers to carry more 
operating capital debt during the four to seven day period that the 
partial payment would be delayed. ADCNE noted that a delayed payment 
could increase the exposure of producers to financial losses in the 
event of a default by a handler. ADCNE also disputed the assertions 
that delaying the partial payment date until the last day of the month 
would create better spacing between payment dates to producers and that 
moving the partial payment back to a date that was previously 
applicable in the pre-reform orders was desirable.
    An exception to the Recommended Decision was also received by 
Cooperative Milk Producers Association (CMPA). CMPA did not take 
exception to a specific proposal but opposed any change in reporting 
and payment deadlines that could delay payments to dairy farmers.
    The Northeast Market Administrator testified in support of Proposal 
4, which seeks to move the date on which payments from the PSF are 
dispersed to handlers from the 16th day after the end of the month to 
no later than the day after handler payments to the PSF are received. 
The Market Administrator explained that a problem arises when late 
payments to the PSF result in insufficient funds to make payments out 
of the PSF when both payments to and from the PSF fall on the same day. 
When this happens, order provisions provide for a pro-rata reduction in 
payments to handlers who can, in turn, reduce payments to dairy 
farmers, the Market Administrator noted. According to the Market 
Administrator, Proposal 4 would allow one extra day for payments from 
the PSF and cause dairy farmers to receive their payments one day later 
three or four times a year. However, dairy farmers would always be 
assured of receiving the full amount owed, the Market Administrator 
added.
    A witness representing ADCNE also testified in support of Proposal 
4. Under current provisions, the ADCNE witness said, the date for 
payments to the PSF, the 16th of the month, can sometimes fall on the 
same day that payments from the PSF are to be made. In their post-
hearing brief, ADCNE asserted the adoption of Proposal 4 was necessary 
for the proper administration of the PSF.
    The Northeast Market Administrator also testified in support of 
Proposal 12. This proposal seeks to make a technical correction to the 
order provisions relating to payments to producers and cooperative 
associations and would make the Northeast order's Payments to producers 
and to cooperative associations provision identical to other Federal 
orders. The Market Administrator explained that the Proposal would 
simply amend references to ``pool plant operator'' as ``handler.''
    Reporting and payment date provisions of the pre-reform New 
England, New York-New Jersey, and Mid-Atlantic orders served the 
different needs and marketing conditions of their respective marketing 
areas. Provisions adopted under Federal order reform established 
reporting and payment dates that were reflective of the three 
consolidated orders, while recognizing the need to establish dates that 
would be conducive to the marketing conditions of the larger 
consolidated Northeast order. The reporting and payment date 
requirements adopted for the consolidated Northeast order were intended 
to reasonably accommodate historical patterns and practices while 
recognizing that fixed dates also needed to be specified. For example, 
handler reports to the Market Administrator were due as soon as the 8th 
of the month, or as late as the 10th of the month. When the three pre-
reform orders were consolidated to form the Northeast order, the new 
handler reporting date was set for the 9th of the month. This was also 
the case for the date for the Market Administrator's announcement of 
the PPD and statistical uniform price. In the pre-reform New England 
and Mid-Atlantic orders, the announcement was on the 13th of the month, 
while in the pre-reform New York/New Jersey order the announcement was 
on the 14th of the month. Current provisions in the consolidated 
Northeast order require the announcement by the 13th of the month.
    This decision maintains a change in the deadline for submitting 
handler reports to the Market Administrator from the 9th of the month 
to the 10th of the month. The exceptions to the Recommended Decision 
submitted by ADCNE regarding handler reporting deadlines are not 
persuasive. Delaying the deadline for handler reports to the Market 
Administrator from the 9th of the month to the 10th of the month is 
supported by the hearing record and should reduce the number of late 
reports and lessen the number of inaccuracies and estimations contained 
therein.
    Changing the handler reporting date deadline by one day will also 
be accompanied by a change in the date the Market Administrator is to 
announce the PPD and statistical uniform price. Also adopted is the 
feature of Proposal 1 which specifies that the Market Administrator can 
make the PPD and statistical uniform price announcement up to two 
public business days later if the 14th falls on a weekend or national 
holiday.
    The portion of Proposal 1 that specifies handler payments to the 
PSF be made no later than two days after the PPD and statistical 
uniform price announcement is also adopted. This portion of Proposal 1 
is a change made necessary by the proposed one-day extension in the 
date for filing handler reports and the computation and announcement of 
the PPD and statistical uniform price. The adoption of this portion of 
Proposal 1 also adds a measure of flexibility to the payment date 
provisions by making the date of handler payments to the PSF dependent 
on the date the Market Administrator announces the PPD and statistical 
uniform price. It also will provide the opportunity for handlers to 
make payments to the PSF earlier than the 16th of the month if the 
Market Administrator announcement of the PPD comes before the 14th of 
the month.
    Payments to handlers from the PSF also necessitates a corresponding 
change as a result of the adopted changes for announcement of the PPD 
and statistical uniform price and dates for payment to the PSF. 
Evidence presented at the hearing demonstrated that sometimes payments 
to and from the PSF can fall on the same day and can lead to reduced 
payments to dairy farmers because payments are pro-rated. Amending the 
date that payments are made from the PSF to handlers from ``the day 
after the 16th day of the month'', to the day after handler payments to 
the PSF are received will better assure handlers of receiving their

[[Page 4937]]

full payment each month from the PSF. Prompt and complete payments to 
dairy farmers are dependant on timely and full payments from the PSF to 
milk handlers. However, final payments to dairy farmers should be made 
no later than the day after the required payment date from the PSF by 
the Market Administrator.
    Exceptions to the Recommended Decision received from ADCNE for not 
changing the date of partial payment to dairy farmers are persuasive. 
The proposed change in the partial payment date is a separate issue 
from the reporting dates issue that affects the timing of the 
calculation and announcement of the producer price differential and 
statistical uniform price. The revised reporting dates, as discussed in 
other parts of this decision, affect the timing of the final payment to 
producers. ADCNE correctly noted in their exceptions that neither the 
Agricultural Marketing Agreement Act nor existing Federal law require 
that the monthly partial and final payments to dairy farmers be made on 
an evenly spaced basis. ADCNE's comments also clearly reveal the 
potential monetary affect on producers of moving the partial payment 
date to the last day of the month. Despite the suggested benefit of 
more even spacing between payment dates and the explanation that the 
later date would be more in line with the pre-order reform date, the 
reasons and supporting arguments for keeping the partial payment date 
as is are valid and sound. This Final Decision will maintain the 
partial payment date as currently specified by the order. The partial 
payment to dairy farmers will continue to be due on or before the 26th 
of the month. The partial payment is based on the lowest announced 
class price for the preceding month. Since that price is already known 
to handlers, there is no need to delay partial payments to dairy 
farmers because of reporting and payment date changes adopted in the 
decision.
    Additionally, ADCNE took exception to the use of the term 
``conforming change'' in the Recommended Decision. Moving the date of 
handler payment to the PSF, the date of partial payment, and the date 
of final payment were referred to in the Recommended Decision as 
``conforming changes'' resulting from adjusting the date which handler 
reports are to be submitted to the Market Administrator. The Department 
would like to clarify that the use of the term ``conforming'' in this 
case was not intended to reference its traditional use of the term 
``conforming change''--a resulting change in order language in one 
section of the order stemming from a change in order language in 
another. The term was intended to clarify the changes in reporting and 
payment dates corresponding to and resulting from moving the due date 
of handler reports.

2. Pooling Standards

    Summaries of testimony regarding the pooling standards of the 
Northeast order are provided individually. The discussion of all 
pooling standards and the decision's findings and conclusions regarding 
pooling standards is presented immediately after testimony summary for 
``c''. below.
a. Performance Standards for Supply Plants
    Certain amendments to the Pool plant provision of the Northeast 
order are adopted. Specifically, the adopted amendments include: (1) 
Establishing a supply plant performance standard of 10 percent of total 
milk receipts for each of the months of January through August and 
December, and 20 percent of total milk receipts for each of the months 
of September through November; (2) Removing the ``split plant'' 
feature; and (3) excluding milk received from producers not eligible to 
be pooled on the Northeast order from the total volume of milk used to 
determine the amount of milk that a supply plant needs to deliver to a 
distributing plant to become pooled. These recommended changes are 
represented in certain features of Proposals 2, 5, and 8.
    Proposal 10, which advocates lowering performance standards, was 
not included for adoption in the Recommended Decision and is not 
adopted in this Final Decision. Furthermore, Proposal 9, which would 
credit route distribution from the plant and transfers in the form of 
packaged fluid milk products against the supply plant performance 
standards, was not included for adoption in the Recommended Decision 
and is not adopted in this Final Decision.
    Currently, supply plants in the Northeast order need to ship at 
least 10 percent of their total milk receipts in the months of August 
and December and 20 percent of their total milk receipts in each of the 
months of September through November to pool distributing plants in 
order to qualify the supply plant and all of its milk receipts for 
pooling. A supply plant which meets the performance standard in each of 
the months of August through December is automatically considered a 
pool plant for each of the months of January through July. Supply 
plants that do not qualify as a pool plant in each of the months of 
August through December need to ship at least 10 percent of their total 
milk receipts to distributing plants during each of the months of 
January through July in order to qualify the supply plant and all of 
its milk receipts for pooling in each of those months.
    The order also currently provides a ``split-plant'' feature to 
accommodate a supply plant that has both pool and nonpool facilities. 
This feature was adopted during Federal order reform to provide for 
more uniform supply plant provisions within the Federal milk order 
system. It was not a feature contained in any of the three pre-reform 
orders consolidated to form the Northeast order.
    Proposal 2, submitted by NYSDF, seeks to amend the Pool plant 
provision of the order by: (1) Increasing the supply plant performance 
standards by 5 percentage points to 15 percent for the months of August 
and December, and by 5 percentage points to 25 percent for each of the 
months of September through November; and (2) Removing the split-plant 
provision. In their post-hearing brief, NYSDF slightly modified the 
months applicable for the proposed increased standards to specify a 
performance standard of 15 percent in the month of August and 25 
percent for each of the months of September through December.
    A witness representing NYSDF testified that after implementation of 
Federal milk order reform, milk supplies pooled on the Northeast order 
during the fall months have decreased. During these months, the NYSDF 
witness said, milk was shipped to areas outside of the order, and it 
was difficult for Northeast order fluid milk handlers to acquire an 
adequate supply of milk to meet the needs of their customers. Although 
there was not as significant a shortage in the first half of 2002 as 
there was in 2000 and 2001, the witness predicted that the situation 
would change substantially beginning in late 2002 and during 2003.
    The NYSDF witness characterized milk shortages in the fall months 
for the Northeast marketing area as a long-term problem that requires 
long-term action. In this regard, the witness stressed, Proposal 2 is 
designed to increase the amount of milk available to fluid milk 
handlers during the fall months. The witness said the proposed increase 
is similar to provisions previously contained in the pre-reform Middle 
Atlantic and New England milk orders and is identical to the 
adjustments made to supply plant performance standards by the Market 
Administrator in 2000 and 2001 for the months of August through 
November.

[[Page 4938]]

    The NYSDF witness testified that supply plant performance standards 
applicable in the pre-reform orders consolidated to form the current 
Northeast milk order enabled cooperatives to pool the milk of their 
members separately from the milk of independent producers and small 
cooperatives who also supplied fluid milk plants. After implementation 
of Federal order reform, the witness said, the new pooling provisions 
have allowed cooperatives to pool not only the milk of their members, 
but also the milk of other smaller cooperatives and independent 
producers. The current pooling provisions, the witness emphasized, are 
being used in a way that allows large cooperatives to guarantee 
themselves a higher volume of milk pooled as Class I. In their post-
hearing brief, NYSDF added that this arrangement has resulted in an 
increased market share of total Class I sales by larger cooperatives 
while the total volume of milk available to Class I handlers has 
remained unchanged.
    Data presented by the NYSDF witness showed that cooperatives now 
account for over 80 percent of all milk pooled on the Northeast order. 
The witness noted that cooperatives have guaranteed non-members an 
outlet to pool their milk and, on average, pool in excess of 100 
million pounds of non-member milk each month. The witness concluded 
that because cooperatives pool such a large amount of milk, 
cooperatives should not have difficulty meeting the proposed five 
percentage point performance standard increase for supply plants.
    The NYSDF witness emphasized that their greatest concern regarding 
supply plant performance standards is the issue of ``guaranteed'' 
pooling of non-member milk supplies and the lack of diversion limit 
standards. The witness was of the opinion that this has enabled milk to 
be pooled on the order without bearing any responsibility for serving 
the Class I market or being made available as a reserve supply to the 
market. The witness was of the opinion that inappropriate pooling has 
resulted in the erosion of blend prices paid to producers who do 
regularly supply the Class I needs of the market.
    The NYSDF witness further testified that the split-plant feature 
for supply plants should be removed because the feature does not serve 
the purpose for which it is intended. The witness maintained that the 
split-plant provision was created to allow a supply plant to have 
separate facilities to receive and process Grade B milk. Currently, the 
witness said, no handlers located in the Northeast order are using the 
split-plant feature. However, if a supply plant chooses to rely on the 
feature, it would be able to pool a substantial amount of additional 
milk simply by diverting milk to the non-pool side of the plant during 
those months when no performance standards or diversion limits are 
provided by the order, the witness cautioned.
    In conclusion, the NYSDF witness said, it is the Class I market 
that generates additional revenues which accrue to all producers whose 
milk is pooled on the Northeast marketing area. Accordingly, the 
witness maintained, entities that seek to have their milk pooled on the 
order should bear some responsibility in actually supplying the Class I 
needs of the market. The witness said that Proposal 2 is intended to 
end what NYSDF characterized as ``abusive'' pool-riding methods and to 
ensure that entities benefitting from revenue generated by Class I 
sales have demonstrated service in supplying the Class I market.
    A witness appearing on behalf of Marcus also testified in support 
of Proposal 2. According to the witness, Marcus Dairy experienced milk 
supply shortages during some months since implementation of the 
consolidated Northeast milk order. The witness stated that adoption of 
Proposal 2 would help alleviate supply shortfalls for the Class I 
market during the fall months when the milk is most needed.
    A witness representing the ADCNE testified in opposition to that 
portion of Proposal 2 that would raise the supply plant performance 
standards for the months of August through December. However, the 
witness supported the proposal on the need to remove the split-plant 
feature. The witness was of the opinion that increasing supply plant 
performance standards was unwarranted and could cause disorderly 
marketing conditions in the region because some handlers would be 
forced to depool a portion of the milk of their producers. The witness 
stressed that the Market Administrator already has the authority to 
adjust these standards and that this should continue as the way to make 
future changes as marketing conditions warrant.
    Furthermore, the ADCNE witness emphasized, Proposal 2 does not 
specify some level of performance by supply plants during the ``free-
ride'' months of January through July.\1\ According to the witness, 
Proposal 2 also does not limit the ability of producers located far 
from the Northeast marketing area to be pooled on the order without 
maintaining a reasonable association to the market and does not ensure 
that Class I distributors will receive additional milk when needed.
---------------------------------------------------------------------------

    \1\ The dairy industry term known as a ``free-ride'' period is 
often used to describe those time periods when no performance 
standard is specified.
---------------------------------------------------------------------------

    In their post-hearing brief, ADCNE stressed that no evidence was 
presented at the hearing that would warrant a permanent change in 
performance standards. ADCNE reiterated their opinion that the current 
authority provided to the Market Administrator to make adjustments to 
the performance standards was the most appropriate method for the 
orderly marketing of milk in the Northeast.
    Proposal 5, submitted by ADCNE, also seeks to amend the Pool plant 
provision of the order. Specifically the proposal would: (1) Require 
supply plants to deliver at least 10 percent of their total milk 
receipts to a distributing plant during each of the months of January 
through August and December; (2) Grant authority to the Market 
Administrator to impose additional shipping requirements on handlers 
receiving marketwide service payments; and (3) Eliminate the split-
plant provision.
    The ADCNE witness testified that current order provisions have 
unintentionally provided the opportunity for milk to be pooled and 
priced under the terms of the Northeast order without demonstrating a 
reasonable level of service in supplying the Class I needs of the 
market. Pooling such milk could result in a lower blend price for all 
producers who do regularly supply the fluid needs of the market, the 
witness specified. The witness stressed that Proposal 5 is not meant to 
eliminate the ability to pool the milk of producers located far from 
the Northeast marketing area. Instead, the witness explained, Proposal 
5 would assure that all milk pooled on the Northeast order demonstrate 
a consistent service to supplying distributing plants and consequently 
bear some of the burden of incurring the additional costs of supplying 
the Class I needs of the market. According to the witness, there are 
two aspects of the Pool plant provision of the Northeast marketing 
order that have enabled what the witness described as ``opportunistic 
pooling'': The split-plant feature and the current level of supply 
plant performance standards.
    The ADCNE witness explained that supply plants qualified as split-
plants can engage in opportunistic pooling by receiving milk on the 
pool side of the plant and then diverting the milk to the nonpool side 
of the plant. Under current provisions, during the months of August and 
December a supply plant could divert nine loads of milk to its nonpool 
side for every one load of milk it

[[Page 4939]]

receives on its pool side, the witness explained. In addition, the 
witness continued, during the months of September through November, the 
supply plant could divert eight loads of milk for every two loads it 
receives at the pool side of the plant. According to the witness, once 
the plant meets the performance standards in each of the months of 
August through December, the plant is automatically qualified as a pool 
plant in the months of January through July and can divert an unlimited 
amount of milk.
    Under current supply plant performance standards, the ADCNE witness 
said, a pool plant located far from the marketing area could 
potentially pool all of the milk located near it during the spring 
months by shipping a small amount of its milk supply to a Northeast 
order pool plant during the fall months. The lack of a monthly touch-
base standard, the witness also asserted, has facilitated the pooling 
of milk located far from the marketing area by allowing producers to 
qualify all of their milk for pooling by delivering a minimal amount of 
milk to a Northeast order pool plant. During January through July when 
no performance standards for supply plants are stipulated, the witness 
noted, a plant has the ability to pool all the milk of every producer 
who had delivered to the plant throughout the year. According to the 
witness, theoretically 100 percent of the pool plant's milk receipts 
could be pooled on the Northeast order.
    The ADCNE witness presented data estimating the impact of pooling 
distant milk on the Northeast order blend price. The witness estimated 
that for the period of January 2001 through July 2002, the blend price 
was reduced by an average of 16 cents per hundredweight. The witness 
was of the opinion that if Proposal 5 is adopted, most of the lost 
blend price value would be restored.
    The ADCNE witness testified that the free-ride feature is no longer 
being used for its intended purpose of allowing producers that had been 
historically pooled on the Northeast Order to remain pooled. Instead, 
the witness stated, the free-ride feature has created the ability to 
pool milk on the order that was never intended to be pooled. The 
witness maintained that supply plants that currently meet the 
performance standards in September through November would not be 
disadvantaged with the new year-round monthly performance standards 
because the proposed standards for the months of January through July 
are lower than those specified for the fall months.
    Comments filed by ADCNE supported adoption of all changes to the 
order's pooling standards contained in the Recommended Decision.
    A witness testifying on behalf of NYSDF testified in opposition to 
Proposal 5. While NYSDF agreed that the order's lack of performance 
standards for all months has created opportunities for distant milk to 
be pooled on the order, a free-ride feature is important for 
maintaining orderly marketing conditions. The NYSDF witness said that 
providing for months without performance standards ensures that the 
market's reserves have the ability to be pooled on the order during 
months of abundant supply.
    At the hearing, NYSDF offered a modification to Proposal 5, 
proposing that the performance standard during the months of January 
through July only apply to supply plants located outside of the States 
that comprise the Northeast order. The justification for this 
modification, the witness said, is that during the spring months when 
additional milk is not usually needed by distributing plants, it 
prevents the uneconomic movement of milk by supply plants located 
within the marketing area. The NYSDF modification would make Proposal 5 
similar to amendments recently adopted by the Mideast order, the 
witness noted.
    Comments filed on behalf of NYSDF in response to the Recommended 
Decision supported most of the proposed amendments to the order's 
pooling standards. NYSDF expressed support for the proposed touch-base 
standard and monthly diversion limits, and agreed that the proposed 
changes will better identify the producers that are ready, willing and 
able to serve the fluid market.
    NYSDF took exception to the proposed supply plant shipping 
standards of 10 percent for the months of January through June. It was 
the opinion of NYSDF that this shipping standard would cause 
difficulties for small cooperatives, who currently pay fees to larger 
cooperatives for pooling, who would then have to pay a fee in every 
month of the year to have their milk pooled. NYSDF contended that the 
minimum 10 percent shipping standard should apply only to supply plants 
that are located outside the states that comprise the Northeast 
marketing area. It is the opinion of NYSDF that supply plants from 
``distant'' areas must demonstrate that their producer milk is really 
serving the market in a reserve supply capacity.
    Proposal 8, submitted by Friendship Dairies (Friendship), a 
partially regulated handler on the Northeast order, seeks to amend the 
order's Pool plant provision by excluding milk received by supply 
plants from producers who would not be eligible to be pooled under the 
Northeast order and pre-qualified cooperative producer milk from the 
total volume of milk used to determine the amount of milk a supply 
plant would need to deliver to distributing plants in order to satisfy 
the supply plant performance standards.
    The Producer provision of the Northeast order describes those 
producers who would not be eligible for pooling on the Northeast order. 
They include: an entity that operates their own farm and plant at their 
sole enterprise and risk, commonly referred to as a producer handler; a 
dairy farmer whose milk is received at an exempt plant excluding 
producer milk diverted to the exempt plant; a dairy farmer designated 
as a producer under another Federal order; a dairy farmer whose milk is 
reported as diverted to a plant fully regulated under another Federal 
order that is assigned to Class I; or a ``dairy farmer for other 
markets,'' which is a dairy farmer whose milk during certain months of 
the year is received by a pooling handler and that pooling handler 
caused the milk from such dairy farmer to be delivered to any plant as 
other than producer milk or delivered to any other Federal milk order.
    A witness appearing for Friendship testified that the current 
method used in determining if a supply plant has met a performance 
standard is examining the total amount of milk received at the plant 
and the amount of those receipts shipped to distributing plants. As a 
supply plant procures additional milk to offset the milk it transfers 
or diverts to distributing plants, the additional milk receipts become 
included in the plant's total milk receipts, the witness said. This 
increases the quantity of milk that must be transferred or diverted by 
the supply plant to distributing plants to meet the performance 
standard for pooling purposes, the witness explained. Basing the supply 
plant qualification percentage exclusively on the supply plant's 
producer milk supply, the witness concluded, would reduce the amount of 
milk that Friendship would have to ship every month to pool 
distributing plants in order to be pooled under the terms of the order. 
Friendship testified that they must include milk received from 
cooperatives that has already been qualified for pooling by the 
cooperative in the total receipts used to determine the amount of milk 
they must ship to meet supply plant performance requirements. The 
Friendship witness noted that adoption of Proposal 8 would

[[Page 4940]]

address this by excluding pre-qualified cooperative milk from the 
volume of receipts upon which a supply plant must make shipments in 
order to be designated as a pool supply plant.
    The Friendship witness also noted that excluding milk received from 
producers not eligible to be pooled on the Northeast order from the 
performance standards for supply plants has been adopted in the pooling 
provisions of other Federal orders. The witness clarified that in these 
other Federal orders where a similar provision is present, the supply 
plant performance standard is based on the amount of milk produced by 
dairy farmers that is pooled through association with the supply plant, 
regardless of whether or not it was diverted from the plant.
    A witness appearing for ADCNE expressed opposition to Proposal 8 
noting that it would liberalize supply plant performance standards. 
According to the witness, the intent of supply plant pooling provisions 
are to qualify both the plant and the operator of the plant. It is 
meaningless to qualify a supply plant, the witness noted, in which the 
operator does not control the milk of a group of dairy farmers. A 
cheese plant operator would never incur the costs to ship milk from the 
plant to a distributing plant, the witness offered by example, unless 
the plant intended to pool a group of dairy farmers and draw from the 
pool.
    ADCNE further noted opposition to Proposal 8 in their post-hearing 
brief by emphasizing that the operator of a supply plant has an option 
of whether or not to be pooled. According to ADCNE, the operator of a 
plant can acquire and maintain their own producer milk supply and can 
pool the plant by meeting the pooling standards of the order or choose 
nonpool status and purchase milk supplies from other pool or non-pool 
handlers.
    An exception to the Recommended Decision filed by Bongrain Cheese 
(Bongrain), a cheese manufacturer in Pennsylvania, supported adoption 
of all portions of Proposal 8. Bongrain was of the opinion that the 
second portion of Proposal 8 that would deduct the volume of milk 
received from cooperatives from the total volume of milk used to 
determine the amount of milk a supply plant needs to deliver to 
distributing plants in order to satisfy supply plant performance 
standards should also be adopted. Bongrain was of the opinion that milk 
purchased from cooperatives has already been qualified for pooling, and 
that current standards put undue burden on cheese manufacturers to buy 
additional milk for the sole purpose of meeting performance standards. 
Bongrain noted that excluding pre-qualified cooperative milk from the 
volume of receipts upon which a supply plant must make shipments in 
order to qualify for pooling would minimize unnecessary movements of 
milk.
    A proposal, published in the hearing notice as Proposal 9, also 
submitted by Friendship, seeking to amend the Pool plant provision was 
not recommended for adoption in the Recommended Decision and is not 
adopted in this Final Decision. The proposal would credit route 
distribution from the plant and transfers in the form of packaged fluid 
milk products to distributing plants to the total shipments from a 
supply plant in determining if the supply plant has met the performance 
standard of the order. Currently, route distribution is not credited 
against the total milk receipts in determining if a plant has met the 
supply plant performance standard.
    The Friendship witness stated that Proposal 9 is meant to address 
only Class I products packaged at the Friendship plant and not Class I 
products purchased from other plants, which they subsequently 
distribute. To exclude the possibility of a partially regulated 
distributing plant becoming fully regulated by the adoption of Proposal 
9, the Friendship witness modified their proposal at the hearing to 
only include route distribution and transfers of packaged fluid milk in 
qualifying supply plants whose milk utilization is at least 50 percent 
in Class II, Class III, or Class IV products.
    The Friendship witness testified that their plant has unique 
characteristics--they produce non-fat dry milk (a Class IV product) and 
cultured buttermilk (a Class I product). It is the production of 
buttermilk, the witness noted, that causes their plant to be designated 
as a partially-regulated distributing plant under the consolidated 
Northeast order. The witness testified that their plant could not meet 
the supply plant performance standards if the amount of milk 
distributed on routes in the form of packaged fluid milk products 
counted towards pool qualification.
    The Friendship witness maintained that the Northeast order's 
pooling provisions are unfair because, in their view, buttermilk 
satisfies an established Class I demand, but is still factored into 
determining if a supply plant has met the order's performance standards 
by shipping milk to a distributing plant. The Friendship witness 
asserted that currently the only way to qualify their plant is to 
fulfill someone else's need for Class I milk without receiving any 
credit for its own contribution to the Class I market.
    The witness stressed that Proposal 9 is not intended to qualify 
previously partially-regulated distributing plants which are not 
currently fully regulated on the Northeast order. The witness saw the 
potential for a distributing plant who also manufactures products other 
than Class I to meet the supply plant performance standards under a 
liberal reading of Proposal 9. To address this unintended occurrence, 
the witness modified Proposal 9 to apply only to supply plants that 
process at least 50 percent of their total physical milk receipts into 
products other than Class I. With this modification, the witness noted, 
the possibility of distributing plants becoming pooled as supply plants 
is eliminated.
    A witness appearing on behalf of ADCNE testified in opposition to 
Proposal 9. The witness said that the proposal does not specify that 
the plant's route distribution be located within the Northeast 
marketing area and could have the possible unintended consequence of 
pooling partially regulated distributing plants on the order with route 
distribution greater than the supply plant performance standard of 10 
or 20 percent. Additionally, the ADCNE witness testified that purchases 
and transfers of Class I products into and out of manufacturing plants 
could occur, which would only serve to circumvent the intent of the 
Federal order provisions of requiring a supply plant to actually supply 
the Class I market as a condition for pooling its milk supply. The 
ADCNE witness was of the opinion that Proposal 9 combines the 
characteristics of two different pooling provisions for the benefit of 
a few supply plants that may have Class I sales and only serves to 
confuse the pooling provisions of the order.
    Additionally, ADCNE noted in their post-hearing brief that such a 
change could allow nonpool manufacturing plants, currently without 
their own producer supply, a means of ``gaming'' the system by 
transferring packaged product into and then back out of the plant for 
the sole purpose of meeting the supply plant performance standard. Such 
a change would be de-stabilizing to the market, lead to disorderly 
marketing conditions, and make procurement efforts by Class I 
processors more difficult and costly, noted ADCNE.
    Proposal 10, also submitted by Friendship, proposed to lower the 
supply plant performance standards by 5 percentage points to a new 
standard of 5 percent in each of the months of

[[Page 4941]]

August and December and by 10 percentage points to a new level of 10 
percent in each of the months of September through November. Proposal 
10 was not recommended for adoption in the Recommended Decision and is 
not adopted in this Final Decision.
    According to the Friendship witness, the objective of the Federal 
milk marketing order program is the equitable sharing of Class I 
revenue amongst all producers who supply the marketing area. This 
objective is defeated, the witness said, when performance standards 
result in the exclusion of some producers from the order's marketwide 
pool. According to the witness, producers without access to a Class I 
outlet have to ``buy'' market access from those producers who dominate 
the market's Class I milk supply or move milk not needed for Class I 
use over long distances for the sole purpose of meeting a performance 
standard. This situation, said the witness, only results in the 
displacement of milk supplying other Class I plants and in unwarranted 
additional transportation costs to those producers seeking to pool 
their milk on the order.
    The Friendship witness also testified that the current supply plant 
performance standard of 10 percent in the months of August and December 
and 20 percent in each of the months of September through November were 
chosen in an arbitrary manner to create a ``performance hurdle'' that a 
plant must leap in order to participate as a pool supply plant on the 
Northeast order. Reducing these performance standards by 5 percentage 
points to 5 percent for each of the months of August and December and 
by 10 percentage points to 10 percent in each of the months of 
September through November would assure sufficient performance in 
supplying the Class I market without causing unnecessary milk shipments 
solely to meet the pooling standards of the order, the witness said.
b. Unit Pooling Standards for Distributing Plants
    A proposal, published in the supplemental hearing notice as 
Proposal 14, was recommended for adoption in the Recommended Decision 
and is included for adoption in this Final Decision. Specifically, 
Proposal 14 amends the Pool plant unit pooling feature by specifying 
that a plant of the pool plant unit which is not a distributing plant 
must process at least 60 percent of its total producer milk receipts 
(including milk received from cooperative handlers) into Class I or 
Class II products and that the plant be physically located in the 
Northeast marketing area. Accordingly, the non-distributing plant of 
the pooling unit would be permitted to process up to 40 percent of its 
total producer milk receipts into Class III or IV products. Proposal 14 
was offered by NYSDF. A witness representing the H.P. Hood Company 
(H.P. Hood), a fully regulated milk handler who pools milk on the 
Northeast order, testified on behalf of NYSDF.
    The unit pooling provision of the Northeast order currently allows 
for two or more plants located in the marketing area and operated by 
the same handler to qualify for pooling as a ``unit'' by meeting the 
total and in-area route disposition standard as if they were a single 
distributing plant. To qualify as a pooling unit, at least one plant of 
the unit must qualify as a pool distributing plant on its own standing, 
and the other plant(s) of the unit must process only Class I or II milk 
products. The pooling unit must also meet the total route distribution 
standard of 25 percent, and 25 percent of its route distribution must 
be within the marketing area.
    The NYSDF witness testified that adoption of Proposal 14 would 
allow H.P. Hood and other similarly situated unit-pool handlers greater 
flexibility in how they pool their milk on the Northeast order. 
According to the witness, present unit pooling standards unduly 
restrict milk use at the non-distributing plant(s) of the unit to Class 
I or II products. The witness indicated that adoption of Proposal 14 
would also aid cooperatives and other plants in how they pool milk 
because a pooling unit would be expanded to include milk balancing 
operations that produce Class III and Class IV milk products to be the 
non-distributing plant(s) of the pooling unit. The disparity in current 
provisions, the NYSDF witness stressed, is that the primary plant of a 
pooling unit can still produce a limited amount of Class III or IV 
products, while the non-distributing plant(s) in the unit cannot. 
According to the NYSDF witness, Proposal 14 adds flexibility to current 
provisions by allowing the non-distributing plant(s) in the unit to 
process up to 40 percent of total producer receipts into Class III or 
IV milk products.
    Comments submitted by NYSDF supported amending the unit pooling 
provision of the order. NYSDF noted adoption of the proposal would make 
the unit pooling provision more equitable between handlers.
    No testimony was received in opposition to the adoption of Proposal 
14.
c. Standards for Producer Milk
    Several amendments to the Producer milk provision of the Northeast 
order, contained in certain features of both Proposals 3 and 6, were 
included for adoption in the Recommended Decision and are adopted in 
this Final Decision. Specifically, the following changes to the 
Producer milk provision are adopted: (1) Establishing an explicit 
standard that one day's milk production of a dairy farmer be received 
at a pool plant before the milk of the dairy farmer is eligible for 
diversion to non-pool plants; (2) Clarifying that a producer may touch-
base anytime during the month; (3) Eliminating the ability to 
simultaneously pool the same milk on the Northeast order and on a 
marketwide equalization pool operated by another government entity; (4) 
Establishing an explicit diversion limit standard for producer milk of 
90 percent in each of the months of January through August and December 
and of 80 percent in each of the months of September through November 
(Milk in excess of the diversion limits will not be considered as 
producer milk, and the pool plant must designate to the Market 
Administrator which deliveries are to be de-pooled. Furthermore, milk 
diverted in excess of the diversion limit standards will not result in 
a loss of producer status under the order.); and (5) Granting authority 
to the Market Administrator to adjust the touch-base standard and the 
diversion limit standard as market conditions warrant.
    The current Producer milk provision of the Northeast order 
considers milk of a dairy farmer to be producer milk when the dairy 
farmer has delivered milk to a pool plant. This event is commonly 
referred to as ``touching-base.'' Once an initial delivery is made, all 
the milk of a producer is eligible to be diverted to nonpool plants and 
continues to be priced under the terms of the order. While there are no 
specific year-round diversion limits for distributing plants, a 
diversion limit for supply plants is functionally set at 100 percent 
minus the applicable performance standard specified for supply plants. 
Therefore, in the months of August and December, a supply plant can 
divert no more than 90 percent of its total milk receipts to nonpool 
plants. During each of the months of September through November, a 
supply plant can currently divert no more than 80 percent of its total 
milk receipts to nonpool plants. During each of the months of January 
through July, no diversion limits for supply plants are specified. 
Additionally, the Northeast order currently does not limit the ability 
to

[[Page 4942]]

simultaneously pool the same milk of a producer on the order and on a 
marketwide equalization pool operated by another government entity.
    Proposal 3, offered by NYSDF, seeks to modify the Producer milk 
provision of the order by: (1) Establishing a two-day touch-base 
standard in each of the months of August through December; (2) Setting 
an explicit limit on the amount of producer milk that can be diverted 
from any type of pool plant to nonpool plants at 60 percent of total 
receipts in each of the months of August through December, and 75 
percent in each of the months of January through July; (3) Clarifying 
that any milk diverted in excess of the diversion limits will not be 
considered producer milk; and (4) Providing authority to the Market 
Administrator to adjust diversion limit standards.
    A witness appearing on behalf of NYSDF was of the opinion that 
current pooling provisions of the Northeast order are inadequate and 
have resulted in milk being pooled on the order that does not 
demonstrate regular and consistent performance in supplying the Class I 
needs of the market. The witness explained that after a pool plant 
receives the milk of a producer, the plant can then divert unlimited 
quantities of that producer's milk. The diverted milk need never again 
be physically received at a pool plant and need not ever be made 
available for satisfying the market's Class I needs, the witness said, 
yet such milk would continue to be pooled and receive the blend price 
of the Northeast order. Consequently, the witness stated, Northeast 
order producers are receiving an otherwise lower blend price because of 
the increased quantity of milk being pooled at lower valued uses. The 
witness characterized pooling milk in this way as ``artificial 
pooling.''
    NYSDF offered a modification to Proposal 3 in their post-hearing 
brief. The NYSDF modification proposed that diversion limit standards 
for supply plants should be 100 percent minus the proposed supply plant 
performance standards. Therefore, NYSDF wrote, the diversion limit in 
August would be 85 percent, 75 percent in each of the months of 
September through November, and 90 percent in the month of December.
    The NYSDF witness testified that milk in excess of the proposed 
diversion limit standards should not be pooled because the order would 
be pooling the excess reserves of another market to the detriment of 
those pooled producers whose milk regularly and consistently serves the 
Northeast Class I market. According to the witness, during some months 
when milk production is plentiful, total pool milk receipts from as 
many as 800 producers located far from the marketing area have exceeded 
100 million pounds. The NYSDF witness was of the opinion that the milk 
of these producers was not only unneeded to supply the Northeast order 
fluid needs but a vast majority of the distant milk was never 
physically received on a regular or consistent basis at a Northeast 
pool plant.
    The NYSDF witness testified that milk diverted in excess of the 
specified diversion limits should not be considered as producer milk 
and therefore should not be pooled on the order. The witness also 
emphasized that the Market Administrator should be given the authority 
to adjust diversion limits and the touch-base standard as market 
conditions warrant.
    The NYSDF witness was of the opinion that the two-day touch-base 
standard offered in Proposal 3 is reasonable and would eliminate the 
ability to artificially pool milk on the order by requiring a producer 
to deliver at least two days' milk production to a pool plant in each 
of the pool-qualifying months before the milk of that producer would be 
eligible for diversion to nonpool plants. The higher touch-base 
standard in the months of August through December would also more fully 
assure fluid handlers an adequate supply of milk to meet the needs of 
their customers when milk supplies are less abundant, the witness 
added.
    A witness appearing on behalf of ADCNE testified in opposition to 
Proposal 3. The witness said that implementation of a two-day touch-
base standard would result in disorderly market conditions because the 
cost to producers in meeting this pooling standard could increase 
significantly. The witness presented testimony describing the vast 
geographic area and other characteristics of the Northeast order that 
would give rise to increased costs to producers. The witness explained 
that because most Northeast order producers are not located near a 
Class I handler, a higher touch-base standard would result in the 
uneconomic movement of milk and in higher overall transportation costs. 
The witness also suggested that higher transportation costs could 
prevent some producers from being able to pool their milk on the order.
    The ADCNE witness also expressed opposition to the portion of 
Proposal 3 that would lower diversion limit standards. The witness did 
agree that the current lack of specific diversion limits could cause 
harm in the orderly marketing of milk. In ADCNE's opinion, the proposed 
diversion limits for the months of August through December are too 
restrictive and could result in disorderly marketing conditions. 
Rather, ADCNE was of the opinion that establishing performance 
standards for supply plants in each of the months of January through 
July was a more appropriate alternative than making restrictive changes 
to the order's diversion limit standards.
    Proposal 6, offered by ADCNE, also seeks to amend the Producer milk 
definition of the Northeast order. Specifically, the proposal seeks to: 
(1) Establish year-round diversion limit standards of 80 percent in 
each of the months of September through November, and 90 percent in 
each of the months of January through August and December; (2) Clarify 
that a producer can touch-base anytime during the month to make their 
milk eligible for diversion to nonpool plants; (3) Clarify that over-
diverted milk will not result in a dairy farmer losing producer status 
on the order; (4) Eliminate the ability to simultaneously pool the same 
milk on the Northeast order and on a marketwide equalization pool 
operated by another government entity; and (5) Provide authority to the 
Market Administrator to adjust diversion limit standards applicable to 
those handlers who receive marketwide service payments when warranted.
    A witness appearing on behalf of ADCNE testified that the pooling 
provisions of the Northeast order need to be considered on an emergency 
basis to correct loopholes that could lead to further erosion of blend 
prices and disorderly market conditions. The witness also testified 
that the lack of specific year-round diversion limit standards for 
distributing plants needs to be corrected because the absence of such 
standards currently allows distributing plants the ability to pool 
large quantities of milk during the spring months when milk supplies 
are plentiful through the diversion process. According to the witness, 
the only functional restrictions on diversions from a distributing 
plant during those months are economic considerations and the amount of 
milk that a distributing plant can physically receive. Theoretically, 
the witness explained, a single distributing plant could pool all of 
the milk in the Northeast Order because no diversion limit is 
specified. The witness stressed that if diversion limit standards are 
not established for every month, an increase in the amount of milk 
pooled on the order could result in significantly lower blend prices 
paid to producers.

[[Page 4943]]

    The ADCNE witness also explained that a producer should not lose 
producer status under the dairy farmer for other markets provision of 
the Northeast order in the event that a handler over-diverts the milk 
of a producer. In this regard, the witness explained that Proposal 6 
would allow for pooling the milk of producers in the following month in 
the event that milk of a dairy farmer is over-diverted in the current 
month.
    The ADCNE witness also testified that while no entities are 
currently engaging in the practice of simultaneously pooling the same 
milk on the Northeast order and on a marketwide equalization pool 
operated by another government entity (commonly referred to as 
``double-dipping''), the opportunity for it exists, especially with the 
Western New York State Milk Marketing Order that shares a common 
milkshed with the Northeast order marketing area. The ADCNE witness 
stipulated that eliminating the ability to double-dip would have no 
effect on milk priced by State-operated programs that provide for 
marketwide pooling of milk pricing premiums such as the Pennsylvania 
Milk Marketing Board, the Maine Milk Commission, or the Virginia Milk 
Commission.
    The pooling standards of all milk marketing orders, including the 
Northeast order, are intended to ensure that an adequate supply of milk 
is supplied to meet the Class I needs of the market and to provide the 
criteria for identifying those who are reasonably associated with the 
market as a condition for receiving the order's blend price. The 
pooling standards of the Northeast order are represented in the Pool 
Plant, Producer, and the Producer milk provisions of the order. Taken 
as a whole, these provisions are intended to ensure that an adequate 
supply of milk is supplied to meet the Class I needs of the market. In 
addition, these provisions provide the criteria for identifying those 
producers and plants whose milk is reasonably associated with the 
market by supplying the Class I needs and thereby sharing in the 
marketwide distribution of proceeds arising primarily from Class I 
sales. Pooling standards of the Northeast order are based on 
performance, specifying standards that, if met, qualify a producer, the 
milk of a producer, or a plant to share in the benefits arising from 
the classified pricing of milk.
    Pooling standards that are performance-based provide the only 
viable method for determining those eligible to share in the marketwide 
pool. This is because it is the additional revenue from the Class I use 
of milk that adds additional income, and it is reasonable to expect 
that only those producers who consistently bear the costs of supplying 
the market's fluid needs should be the ones to share in the 
distribution of pool proceeds. Pool plant standards therefore are 
needed to identify the milk of those producers who are providing 
service in meeting the Class I needs of the market. This is important 
because producers whose milk is pooled receive the market's blend 
price. If the pooling provisions do not reasonably accomplish these 
aims, the proceeds that accrue to the marketwide pool from fluid milk 
sales are not properly shared with the appropriate producers and can 
result in an unwarranted lowering of returns to those producers who 
actually incur the costs of supplying the fluid needs of the market.
    Similarly, pooling standards for distributing and supply plants 
should also provide for those features and accommodations that reflect 
the needs of proprietary handlers and cooperatives in providing the 
market with fluid milk and dairy products. When a pooling feature can 
result in pooling milk which would not reasonably demonstrate serving 
the fluid needs of the market, it is appropriate to re-examine the need 
for continuing to provide that feature as a necessary component of the 
pooling standards of the order. The pooling standards of an order serve 
to ensure an adequate supply of fluid milk for the market and the 
proper identification of those producers whose milk does serve the 
fluid needs of the market. A feature which can diminish these aims 
should be considered unnecessary.
    The record provides sufficient evidence to conclude that features 
of the Pool plant provision are not appropriate given the prevailing 
marketing conditions of the Northeast order. The hearing record reveals 
that both the lack of supply plant performance standards in every month 
and the lack of explicit diversion limit standards for all pool plants 
in every month of the year have allowed producers from areas located 
far from the marketing area to participate in the distribution of 
proceeds from the marketwide pooling of milk without demonstration of a 
reasonable level of consistent and regular service in meeting the Class 
I needs of the market. Current performance standards have allowed these 
producers to receive the Northeast order's blend price by simply making 
a one-time delivery of milk to a pool plant and thereafter divert 
unlimited quantities of milk to nonpool plants located nearer their 
farms and far from the marketing area. Such milk pooled by diversion 
cannot reasonably be considered a reserve supply for the marketing 
order area because it is never again physically received by pool plants 
regulated by the Northeast order. Furthermore, such milk pooled by way 
of diversion is not consistently demonstrating performance to serving 
the market's Class I needs. The pooling of milk through the diversion 
process evidenced by the record increases the total amount of milk 
pooled on the order and lowers the blend prices paid to all producers, 
especially to those producers who consistently deliver milk to the 
order's pool plants.
    The record provides evidence to conclude that performance standards 
for supply plants should be specified for every month. The performance 
standards proposed by the ADCNE are reasonable in light of the 
prevailing marketing conditions reflected in the Northeast marketing 
area. The concerns of NYSDF, who represented the interests of the many 
distributing plants regulated under the terms of the order, make clear 
that since the Northeast milk marketing area was created and 
implemented as part of Federal milk order reform in January 2000, the 
need arose at least twice for the Market Administrator to raise the 
performance standards for supply plants. This was done so that 
distributing plant bottlers would be assured of sufficient milk 
supplies to meet fluid demands.
    In this regard, this decision can only conclude that authority 
provided to the Market Administrator to make the needed adjustments to 
the performance standards as marketing conditions warrant functions 
well and as intended. The temporary increase in supply plant 
performance standards brought forth the milk supply needed to satisfy 
the needs of distributing plants. Accordingly, this Final Decision sees 
no compelling reason to adopt the higher supply plant performance 
standards offered by NYSDF. To the extent that the needs of 
distributing plants have necessitated the need to increase the 
availability of supply to meet fluid needs, the order provisions have 
done so. It is reasonable to conclude, therefore, that the order will 
continue to react as needed to changing marketing conditions into the 
future.
    Handlers and producers are better served by eliminating the ability 
of a supply plant to automatically be a pool plant if the supply plant 
had been a pool plant in some prior period as the order currently 
provides. The granting of automatic pool plant status to a plant does 
not provide the certainty needed by distributing plants for the order 
to assure them an adequate supply of milk

[[Page 4944]]

for Class I uses. Together with other pooling standard inadequacies, it 
provides an avenue through which more milk can be pooled on the 
Northeast order than can be considered as part of the legitimate milk 
supply of the pool plant where automatic pool plant status has been 
granted. The opportunity to pool milk in this way only serves to 
increase the volume of milk pooled (at lowered valued uses) without 
that milk either being committed to, or demonstrating, serving the 
Class I needs of the market as a condition for receiving the order's 
blend price. Therefore, the supply plant performance standards should 
be amended to specify performance to the market in every month of the 
year. The performance standards of 10 percent in each of the months of 
January through August and December and 20 percent in each of the 
months of September through November are adopted. Accordingly, 
exceptions filed by NYSDF regarding the adoption of year round supply 
plant performance standards previously referenced in this decision 
offer no persuasive justification in demonstrating how the order's 
supply plant performance standards could not be changed by the Market 
Administrator when marketing conditions warrant their increase or 
decrease.
    The pool plant feature contained in the Northeast order for split-
plants should be removed. No similar provision was contained in the 
three pre-reform orders consolidated to form the Northeast order. The 
split-plant provision was included in the consolidated Northeast order 
in an effort to provide for the uniformity of provisions throughout the 
reformed Federal milk order system. The provision was established with 
the intent to allow handlers the ability to process Grade A milk in the 
pool side of the plant and process Grade B milk in the nonpool side of 
the plant.
    It is clear from the record that handlers in the Northeast 
marketing area are not utilizing this feature of the pool plant 
provision, and no milk is being pooled on the order in this manner. 
However, if utilized, the feature could be used as a mechanism for 
pooling milk on the order that would not need to demonstrate a 
consistent service to the Class I market. This feature could be used as 
a loophole through which deliveries of milk to the pool side of a 
split-plant can then be diverted to the nonpool side of the plant. The 
diverted milk would never then need to serve the market's Class I 
needs. The split-plant feature could unintentionally provide the 
opportunity for milk to become pooled on the Northeast order without 
that milk demonstrating a reasonable level of service in meeting the 
market's fluid needs but would share in the revenue generated from 
Class I sales.
    The removal of the split-plant feature is broadly supported by the 
hearing participants. Since the split-plant feature is not currently 
utilized by any Northeast handler, no producers currently serving the 
Northeast market would be adversely affected by its removal from the 
terms of the order.
    The hearing record supports the adoption of certain features of 
Proposal 8 offered by Friendship. In simple terms, the proposal calls 
for excluding milk received by a supply plant from two sources--milk 
received from sources not eligible for pooling (for example, milk 
received from a producer handler or from a dairy farmer for other 
markets) and from a cooperative association--from the total volume of 
milk receipts at the supply plant. By excluding such milk receipts from 
the total actual receipts, the proposal essentially lowers the intended 
performance standards for supply plants.
    As discussed above, the record reveals concern by distributing 
plants that the pooling standards of the Northeast order need to 
specify higher performance standards for supply plants and the need for 
explicit diversion limits and touch-base standards for producer milk. 
While the higher performance standards called for in the NYSDF proposal 
are not recommended for adoption, the adoption of certain features of 
Proposal 8 would essentially reduce the amount of milk that supply 
plants ship to distributing plants so that the Class I needs of the 
market can be satisfied. The current performance standards for supply 
plants are sufficiently liberal, especially in light of the more than 
40 percent Class I use of milk in the Northeast marketing area.
    The part of Proposal 8 that excludes milk received from producers 
not eligible for pooling is adopted in this Final Decision since that 
milk is not eligible to be pooled on the Northeast order. It is 
reasonable to exclude such receipts for the purposes of determining if 
the supply plant has met the intended performance standards because 
milk not eligible for pooling should not be used as a factor for 
qualification.
    The portion of Proposal 8 that is not adopted in this Final 
Decision specifically excludes supply plant milk receipts from 
cooperatives as a factor for qualification. Exceptions received from 
Bongrain Cheese, discussed earlier in this decision, noted support for 
adoption of this portion of Proposal 8, and are not persuasive. This 
feature is not adopted because it is viewed as having more to do with a 
supply plant's ability to draw money from the PSF than it does with 
demonstrating a reasonable standard of performance in supplying the 
Class I needs of the market as a condition for participation in the 
marketwide pool.
    As discussed above, the hearing record supports concluding that the 
Northeast order is not adequately identifying the milk of those 
producers that are actually supplying the Class I needs of the market 
on a regular and consistent basis. In this regard, certain changes to 
the Producer milk provision are adopted in this Final Decision.
    The current touch-base standard of the Northeast order does not 
provide detail sufficient to specify the quantity of milk a producer 
must deliver to pool plants. Currently the order only indicates that if 
a producer delivers milk to a Northeast order pool plant, the milk of 
that producer becomes eligible for diversion to nonpool plants. 
Generally, milk marketing orders that exhibit lower fluid demands 
require fewer physical deliveries to a pool plant, while markets with 
higher fluid demands typically specify more frequent deliveries. A 
touch-base standard that is too high can result in higher 
transportation costs to producers and cause uneconomic shipments of 
milk for the sole purpose of meeting a pooling standard. If the 
standard is too low, fluid handlers may be less assured of an adequate 
supply of fluid milk to meet the demands of the Class I market.
    The hearing record supports concluding that the touch-base standard 
of the Producer milk provision, together with generally inadequate 
diversion limit standards for all pool plants, contributes to the 
pooling of milk on the order which does not demonstrate a reasonable 
level of service in supplying the Class I needs of the market. There 
are competing proposals and views on how the order should rely on both 
the touch-base standard and diversion limit standards so that, together 
with the performance standards, the Class I needs of the market are 
satisfied and the order has appropriately identified the milk of those 
producers whose milk actually demonstrates service in meeting the Class 
I needs of the market.
    The ADCNE proposals place much more weight on the need for explicit 
diversion limit standards in each and every month that are applicable 
to both supply and distributing plants than on a two-day touch-base 
standard proposed by NYSDF. The ADCNE and NYSDF both acknowledge the 
need for explicit diversion limit standards for all pool

[[Page 4945]]

plants, although their respective positions of what those standards 
should be differ only as to what are the most appropriate levels for 
the Northeast order.
    This Final Decision adopts a one-day touch-base standard in the 
initial pool qualifying month. A touch-base standard that would require 
more frequent deliveries is not warranted because it would result in 
higher transportation costs to producers and cause uneconomic shipments 
of milk for the sole purpose of meeting a pooling standard. A one-day 
touch-base standard, together with other adopted changes contained in 
this Final Decision, should adequately contribute in identifying the 
milk of those producers who regularly supply the market's Class I needs 
and therefore can be pooled under the terms of the order. The position 
of the ADCNE that the milk of a producer could touch-base anytime 
during the initial qualifying month is reasonable and is adopted for 
the purpose of clarifying when meeting this standard should occur.
    Granting authority to the Market Administrator to adjust the touch-
base standard is also adopted as a key component of the adopted one-day 
touch base standard. While this feature of the touch-base standard was 
not included in those proposals amending the Producer milk provision of 
the Northeast order, the record is specific that this was intended. It 
is also consistent with the authority already granted to the Market 
Administrator to adjust the performance standards of the order for 
supply plants.
    Providing for the diversion of milk is a desirable and needed 
feature of an order because it facilitates the orderly and efficient 
disposition of milk not needed for fluid use. When producer milk is not 
needed for Class I use, some provision should be made for milk to be 
diverted to nonpool plants for use in manufactured products. However, 
it is essential that limits be established to safeguard against 
excessive milk supplies becoming associated with the market through the 
diversion process.
    In the context of this proceeding, milk diverted by distributing 
and supply plants is milk not physically received at the plants. While 
diverted milk is not physically received, it is nevertheless an 
integral part of the milk supply of the diverting plant. If such milk 
is not part of the integral supply of the diverting plant, then that 
milk should not be associated with the diverting plant and should not 
be pooled. Associating more milk than is actually part of the 
legitimate reserve supply of the diverting plant can unnecessarily 
reduce the blend price paid to dairy farmers who service the market's 
Class I needs.
    Without reasonable diversion limits, the order's ability to provide 
for effective performance standards and orderly marketing is weakened. 
Diversion limits that are set too high can open the door for pooling 
much more milk on the market than can be reasonably associated with the 
reserve supply for the market. The record reveals that unlimited 
diversion limits for distributing plants in the Northeast order could 
have contributed to the pooling of large volumes of milk that have not 
demonstrated performance to the Class I market. The same is also 
revealed in the record by the lack of explicit diversion limit 
standards for supply plants in every month.
    This Final Decision adopts diversion limit standards for all pool 
plants as proposed by ADCNE. Specifically, a diversion limit standard 
of 90 percent in each of the months of January through August and 
December and 80 percent in each of the months of September through 
November is adopted. Milk diverted in excess of the standards will not 
be considered producer milk and the pool plant must designate to the 
Market Administrator which deliveries will be depooled. If the pool 
plant fails to make a designation, the Market Administrator can depool 
all of that month's diversions to nonpool plants. As also proposed by 
ADCNE, this decision can find no reason to cause the loss of producer 
status under the order in the event a producer's milk is caused to be 
over diverted. Accordingly, the proviso that a producer will not lose 
producer status under the order in the event that the milk of a 
producer is over diverted is adopted.
    To the extent that these diversion limits may warrant future 
adjustments, this Final Decision adopts explicit authority to the 
Market Administrator to adjust the diversion limit standards when 
needed. In practice, such authority has already been given to the 
Market Administrator in that current supply plant diversion limits are 
functionally set at 100 percent minus the applicable performance 
standard. In past actions undertaken by the Market Administrator to 
change supply plant performance standards, the applicable diversion 
limit was also functionally changed as higher performance standards 
adopted temporarily also changed supply plant diversion limits. 
Therefore, providing authority to change the order's diversion limit 
standards in the way presented in this Final Decision merely serves to 
clarify an authority already granted to the Market Administrator.
    Since the 1960s, the Federal milk order program has recognized the 
harm and disorder that results to both producers and handlers when the 
same milk of a producer is simultaneously pooled on more than one 
Federal order, commonly referred to as ``double-dipping.'' In the past, 
this situation caused disparate prices between producers while handlers 
were not assured of uniform prices, which gave rise to competitive 
equity issues.
    The need to prevent ``double-dipping'' became critically important 
as distribution areas expanded and orders merged. The issue of 
``double-dipping'' on a marketwide equalization pool operated by 
another government entity and a Federal order can, for all intents and 
purposes, have the same undesirable outcomes that Federal orders once 
experienced and subsequently corrected. While ``double-dipping'' is not 
presently occurring in the Northeast order, it is clear that the 
Northeast order should be amended to prevent the ability to pool the 
same milk on both a Federal order and a marketwide equalization pool 
operated by another government entity. This action is consistent with 
other recent Federal order amendatory actions regarding simultaneous 
pooling on a Federal order and on another government operated program.
    The hearing record does not support the adoption of Proposal 9, 
which seeks to exclude a supply plant's route distribution of packaged 
fluid milk products from the total volume of milk that it would need to 
deliver to a distributing plant for the purpose of meeting the order's 
performance standards. As implied in the name, a supply plant is a 
supplier of bulk milk to distributing plants. Supply plant performance 
standards are intended, in part, to ensure that distributing plants are 
supplied with enough fluid milk to meet their needs. A plant's route 
sales in the marketing area are used to determine the pool status of 
fully or partially regulated distributing plants, not of supply plants.
    The hearing record supports the adoption of Proposal 14 because it 
serves to provide milk processors in the Northeast with the more 
orderly marketing of unit-pooled milk without compromising the order's 
intent to ensure that the Class I needs of the marketing area are 
satisfied. Unit pooling serves to provide a degree of regulatory 
flexibility for handlers by recognizing specialization of plant 
operations and to minimize the uneconomical and inefficient movement

[[Page 4946]]

of milk for the sole purpose of meeting or retaining pool status.
    If a plant has combined Class I and II receipts of 60 percent or 
more, including milk received from cooperative handlers and milk 
diverted from the plant, and is physically located in the Northeast 
marketing area, it is reasonable to conclude that the unit's plant does 
contribute in making milk available on a regular and consistent basis 
for meeting the fluid needs of the order. Therefore, its adoption is 
included in this Final Decision provided all other standards and 
conditions for unit pooling are met. This should provide for greater 
flexibility in the types of products a pooling unit may produce, such 
as Class III or Class IV dairy products, in a unit pooled plant. 
Additionally, providing for the secondary unit-pooled facility to be 
located within the Northeast marketing area, as well as being primarily 
involved in producing Class I or Class II milk products, retains 
safeguards that would prevent the pooling of milk that may be located 
far from the marketing area which would not demonstrate the standards 
of performance in servicing the Class I needs of the market.
    A proposal published in the hearing notice as Proposal 11, seeking 
to amend the dairy farmer for other markets feature of the Producer 
provision, was withdrawn at the hearing by the proponent. No further 
reference to this proposal will be made.

3. Marketwide Service Payments

    A proposal, published in the hearing notice as Proposal 7, seeking 
to establish a 6-cent per hundredweight (cwt) marketwide service 
payment in the form of a market ``balancing'' credit to handlers was 
not included for adoption in the Recommended Decision is not adopted in 
this Final Decision. As proposed, a balancing credit would be provided 
if the handler pools at least a million pounds of milk per month, 
provided less than 65 percent of such pooled milk is shipped to 
distributing plants for Class I use or represents at least three 
percent of the total volume of milk pooled on the Northeast order.
    In the context of this proceeding, ``balancing'' refers to those 
actions performed by handlers that add or remove milk from their supply 
to accommodate the fluctuating needs of Class I. The Northeast order 
does not currently contain a marketwide service payment provision.
    Proposal 7 was offered by ADCNE and has received additional support 
or endorsement in writing from the National Milk Producers Federation 
(NMPF) and the New York State Farm Bureau Federation.
    A form of a marketwide service payment was available to certain 
cooperative handlers in the pre-reform New York-New Jersey milk 
marketing order. That order was combined with the Middle Atlantic and 
New England orders to form the consolidated Northeast order. The 
service payment of the New York-New Jersey order consisted of two 
components: a cooperative service payment and a balancing payment. The 
balancing component was far smaller than the proposed six cents per cwt 
credit under consideration in this proceeding. The cooperative service 
payment could total up to three cents per cwt. An additional ``up to'' 
one cent was provided for balancing. By comparison, the marketwide 
service payment proposal considered in this proceeding is dedicated 
entirely to compensating eligible handlers for balancing functions.
    The ADCNE's rationale for balancing payments rests on the argument 
that the Northeast order has a large number of independent milk 
producers (dairy farmers who are not members of a cooperative) who 
avoid incurring the costs of operating and maintaining facilities that 
provide outlets for milk when not needed for fluid use. In this regard, 
they assert that the independent producers essentially receive a higher 
blend price for their milk because they avoid the costs of balancing 
which are largely absorbed by dairy farmer cooperatives that own 
manufacturing plants. As a matter of equity, ADCNE is of the opinion 
that the entire market, rather than only cooperatives, should share in 
bearing the costs that arise from providing these market balancing 
operations and facilities.
    In post hearing briefs, support for Proposal 7 was completely 
withdrawn by Agrimark, a major participant and member of ADCNE who 
provided testimony at the hearing in favor of adopting a marketwide 
service payment for balancing. In addition, LOL, also a member of 
ADCNE, indicated their change to a neutral and uncommitted position for 
the adoption of a balancing credit.\2\
    Testimony advancing the adoption of Proposal 7 was provided by 
representatives of three members of ADCNE. The majority of their 
testimony relied on research conducted by USDA's Rural Cooperative 
Business Service (RCBS), which examined market balancing activities in 
the Northeast milk marketing area. The research was performed at the 
request of ADCNE.
    An RCBS witness, who participated in conducting the market 
balancing research, provided testimony concerning the study's 
methodology, underlying assumptions, and findings. The witness 
emphasized that the research performed and testimony given was offered 
as a service to the industry and interested parties and was not in 
support of, or opposition to, any proposal under consideration in the 
proceeding.
---------------------------------------------------------------------------

    \2\ After the deadline for submitting post-hearing briefs and 
the publication of the Recommended Decision, LOL, in correspondence 
to the Department, iterated that the Final Decision should be based 
on the record of the proceeding.
---------------------------------------------------------------------------

    The RCBS witness testified that the study provided a framework that 
can be used to estimate the costs associated with balancing the Class I 
needs of the Northeast marketing area by examining the costs associated 
with unused milk manufacturing capacity at butter-powder plants located 
within the marketing area. According to the witness, unused milk 
manufacturing capacity results from increases or decreases in the 
demand for fluid milk by Class I handlers given the available milk 
supply associated with the marketing area. The witness explained that 
the study also estimated changes in costs associated with different 
hypothetical levels of idled butter-powder plant capacity when 
subjected to seasonal variations in milk supplies that caused 
fluctuations in the amount of milk manufactured at butter-powder 
plants. The witness indicated that the plant capacity data originated 
from cooperatives that operated butter-powder plants in the pre-reform 
orders consolidated to form the Northeast marketing area.
    The RCBS witness explained that the study results are theoretical 
and do not represent actual or existing conditions in the Northeast 
marketing area. According to the witness, the balancing study employed 
a comparative static methodology. For the purposes of the study, the 
witness explained, the research defined the necessary reserve milk 
supply requirements of the market as the amount of milk required to 
meet daily operating fluctuations among distributing plants (operating 
reserves) and seasonal fluctuations (seasonal reserves). According to 
the witness, during periods of abundant milk supply in the Northeast 
marketing area, such reserve milk is used for Class IV manufacturing 
purposes, specifically for the manufacture of nonfat dry milk (NFDM).
    According to the RCBS witness, the study suggests that seasonal 
variations in the demand for fluid milk cause variations in the supply 
of milk that

[[Page 4947]]

would otherwise be used in manufacturing. As a result, milk available 
for the manufacturing of NFDM fluctuates inversely with the milk 
supplies needed to meet fluid milk demand, the witness noted. The 
witness said that as demand for milk for fluid use increases, supplies 
of milk for manufacturing tend to decline. According to the witness, 
changes in Class I (fluid) demand change the amount of unused butter-
powder plant capacity and such unused capacity has associated costs.
    The RCBS witness explained that the balancing study was conducted 
using two different scenarios. The witness said the first scenario 
assumes an operating reserve of milk needed to balance the regions' 
needs at 10 percent of total fluid demand. The second scenario assumes, 
according to the witness, an operating reserve of 20 percent. The 
witness testified that operating costs were compared under these two 
differing scenarios while other factors were held constant. The witness 
noted that while the study focuses on estimating costs and changes in 
estimated costs, the study did not address methods by which to recover 
or offset costs typically associated with balancing services and 
operations. The witness indicated that cost recovery methods might 
include some form of marketwide service payments formalized under the 
term of a milk marketing order, ``give-up'' charges (a charge by a 
supplier for making milk available, for example, to a distributing 
plant), balancing or diversion fees (a charge for accepting milk at a 
balancing facility when not needed by a Class I bottler), ``over-
order'' premiums (a price charged for milk above those minimum prices 
set under the terms of a milk marketing order), or by pricing formulae 
included in the classified prices established under a milk marketing 
order.
    A witness from Dairylea, a farmer-owned agricultural marketing and 
service organization, appeared on behalf of the ADCNE and testified in 
support of Proposal 7. The witness described the Northeast marketing 
area as a milk ``megamarket'' characterized by high population and milk 
production density that requires marketwide service payments for 
balancing the market's fluid needs. The witness asserted that the Class 
I needs of the Northeast market are so large and unique among Federal 
milk orders that without compensation for the costs incurred for 
balancing, such activities might not otherwise be provided. The witness 
asserted that there is no other viable market mechanism through which 
excess milk supplies can be adequately disposed of other than through 
the butter-powder balancing facilities of the region's six largest 
cooperative handlers. The witness did note, however, that all 
manufacturing handlers operating in the Northeast marketing area also 
perform balancing functions by simply procuring milk from the area's 
producers.
    The Dairylea witness characterized the Northeast as a unique milk-
producing region because nearly 25 percent of farmers supplying the 
market are independent producers and not members of cooperatives. The 
witness characterized the Northeast's independent producers as largely 
serving the needs of Class I handlers and as generally not involved in 
providing balancing facilities and services for the market. 
Additionally, the witness testified that the marketing area contains 
nearly 40 percent of all dairy farmer cooperatives in the United 
States. In comparing outlets for milk, the witness testified that the 
Northeast marketing area is represented by 32 proprietary handlers and 
259 milk plants.
    The witness for Dairylea was of the opinion that the unique 
characteristics and size of the marketing area together with the sheer 
volume of milk required to supply the fluid needs of the marketing area 
make it imperative that marketwide service payments be provided to 
compensate the largest cooperative handlers for the costs that they 
incur for balancing the market. According to the witness, without 
cooperatives performing this service, some milk production in the 
marketing area would not clear the market. The witness did note that 
some milk produced within the boundaries of the Northeast marketing 
area is not pooled on the order because it is delivered south to other 
marketing areas where it receives a higher blend price. The witness 
similarly acknowledged that milk produced west of the marketing area is 
delivered to the Northeast marketing area butter-powder plants because 
being pooled on the Northeast order often commands a higher blend 
price.
    The Dairylea witness also acknowledged that other plants located 
within the Northeast marketing area (some 184 nonpool plants, many of 
which are proprietary) also perform significant balancing functions. 
The witness was of the opinion that no single nonpool plant could 
individually provide significant market balancing services, however, 
taken as a whole, these plants do provide and perform balancing 
functions.
    The Dairylea witness testified that the members of ADCNE had 
advanced a conceptually similar marketwide service payment proposal for 
balancing during the Federal milk order reform effort. The witness 
testified that Federal order reform provided public debate and analysis 
on the need for a marketwide service payment for balancing. The witness 
explained that USDA rejected the marketwide service payment proposal in 
the Federal milk order reform Recommended Decision of 1998 and the 
Final Decision of 1999 because the proposed balancing credit level 
sought had not been adequately explained.
    A witness from Agrimark, also appearing on behalf of ADCNE, 
testified that the Food Security Act of 1985 (commonly referred to as 
the 1985 Farm Bill) provided authority for Federal milk marketing 
orders to allow handlers to collect for services rendered that are of 
benefit to all the market's participants. The witness asserted that the 
disposal of surplus milk (milk not needed for fluid use) and the 
procurement of supplemental milk supplies for fluid handlers are 
specifically identified in the provisions of the 1985 Farm Bill as 
being of marketwide benefit. The witness also asserted that payments 
for reimbursing handlers who provide services of marketwide benefit may 
be made from the total sums payable by all handlers for milk--the costs 
of which are paid from the total value of milk pooled before the 
computation of the blend price.
    In the opinion of the Agrimark witness, such payments would be made 
on a uniform basis by all pool participants and thereby all would 
equitably share in the cost associated with balancing. According to the 
witness, because independent producers do not operate balancing 
facilities or perform balancing functions, they have avoided the burden 
of incurring balancing costs while receiving the benefit of the blend 
price.
    Testimony of the Agrimark witness reinforced the opinion of the 
Dairylea witness that cooperatives perform the bulk of market balancing 
functions in the Northeast marketing area throughout the year. As an 
example, the witness cited data originating from the Market 
Administrator's office illustrating that during 2001, cooperative-
supplied milk satisfied market shortfalls during those months when milk 
production was at its lowest in the region. In addition, the witness 
noted that cooperatives accommodated surplus milk diversions from the 
Class I market when milk production in the area was higher. The witness 
stressed that the volume of

[[Page 4948]]

deliveries to Class I bottlers by cooperatives varied inversely with 
the delivery volumes by independent milk producers.
    According to the Agrimark witness, during November 2001, receipts 
by Class I handlers from cooperative suppliers were more than double 
the level of receipts from independent producers. In contrast, the 
witness testified that receipts by Class I handlers from cooperative 
suppliers reached their low point during July 2001, a period of the 
year when overall milk production in the Northeast was highest. 
According to the witness, milk deliveries by cooperatives during 
November to the Class I market were 29 percent above those for July. 
This data clearly shows, the witness asserted, that milk supplied by 
cooperatives provided a larger share of market balancing than did 
independent producer milk.
    Relying on data supplied by the Market Administrator, the Agrimark 
witness testified there are approximately 4,000 independent producers 
who pool their milk on the Northeast order. The witness indicated that 
these producers account for approximately 6 billion pounds of milk per 
year pooled on the order. Of this milk volume, the witness asserted, 
some 80 percent is supplied for fluid uses in a market whose total 
Class I use is only 45 percent of the total volume of milk pooled. The 
witness testified that while independent producer milk is not refused 
by distributing plants from their producers during slack demand months 
of the year, cooperative-producer milk is sometimes diverted from Class 
I use by distributing plants for use in manufacturing. According to the 
witness, this further demonstrates that it is cooperatives who own 
manufacturing plants that provide the majority of balancing services 
for the market.
    The witness was of the opinion that cooperative producers are 
receiving a lower price because cooperatives have absorbed the costs 
associated with market balancing, and as such, balancing costs are not 
equitably shared among all the market's producers. In addition, the 
witness expressed the opinion that milk supplied by cooperatives is 
more likely to be the milk that is diverted away from Class I use than 
is milk supplied by independent producers. Diversions tend to be made, 
according to the witness, to cooperatives that operate butter-powder 
plants. The witness testified that all costs and risks of operating 
such balancing plants accrue only to the cooperatives while such costs 
and risks are essentially avoided by independent producers.
    The Agrimark witness testified that excess manufacturing plant 
capacity occurring during high fluid demand months causes losses for 
large cooperative handlers that operate balancing plants. According to 
the witness, Agrimark may be reaching a point where it can no longer 
operate their balancing plants because of excessive operating costs 
arising from idled plant processing capacity. High operating costs 
occur, according to the witness, because there is insufficient milk 
volume for the plants to operate profitably at certain times of the 
year.
    The Agrimark witness testified that revenue from the manufacture 
and distribution of Class IV products and sales of Class I and II 
products essentially subsidize the balancing operations and activities 
of cooperatives. In the opinion of the witness, these subsidies are 
required because the balancing costs they incur are not recoverable 
from the marketplace. The witness also provided information relating to 
one of their specific plants for comparison with the RCBS study in 
order to validate the RCBS study cost estimates. For example, the 
witness indicated that a butter-powder plant, owned and operated by 
Agrimark, was built in 1919 and has been refurbished on a number of 
occasions. The witness indicated that while their plant costs and the 
cost estimates in the RCBS study differ on a number of factors, the 
RCBS study nevertheless can be relied upon in its totality as an 
accurate reflection of Agrimark's own plant costs.
    A witness from LOL, also appearing on behalf of ADCNE, testified 
that marketwide service payments are needed for the Northeast milk 
order to keep balancing plants operating, thus benefitting all market 
participants. According to the LOL witness, only cooperatives incur the 
brunt of balancing costs and bear the burden of receiving lower blend 
prices than would be the case if balancing costs were more equitably 
shared by all producers who pool milk on the Northeast order. Members 
of cooperatives are therefore at a disadvantage in the marketplace as 
compared to independent producers who do not pay for balancing through 
cooperative membership dues or reduced revenues, the witness concluded.
    The LOL witness testified that ADCNE cooperatives provided 
balancing services for as much as 21.8 million pounds of milk per day 
during peak milk production months during 2001. The witness testified 
that this evidence was based on a survey that LOL conducted using data 
received from ADCNE member butter-powder plants for the months of May 
and November of that year. In addition, the witness noted, as did the 
Agrimark witness, data presented by the Market Administrator indicated 
that 80 percent of independent producer milk is delivered directly to 
distributing plants for Class I use even though milk supplied by 
cooperatives represented the bulk of reserve milk pooled on the 
Northeast order.
    Relying on Market Administrator data and the methodology for 
estimating balancing costs from the RCBS study, the witness asserted 
that to properly balance the Northeast marketing area, the cooperatives 
operating butter-powder plants must operate with a 20 percent operating 
reserve of milk during all seasons. According to the witness, during 
months of high fluid milk demand, draws on milk supplies from butter-
powder plants for delivery to the Class I market resulted in unused 
butter-powder capacity of as much as 11.5 million pounds in a single 
month. Accordingly, the witness asserted, the cooperative's butter-
powder plants should receive compensation for the cost of maintaining 
this available but unused processing capacity. According to the 
witness, the existence of such capacity benefits all producers and 
handlers participating in the Northeast marketing area and provides a 
needed alternative outlet for milk.
    The LOL witness noted that the balancing cost estimation developed 
in the RCBS study suggests that four modern, efficient, optimally 
located, three-million pounds per day butter-powder plants would 
efficiently balance the Northeast market even though there are seven 
actual plants located in the marketing area. Nevertheless, the witness 
was of the opinion that the RCBS study of four theoretical 
manufacturing plants is an appropriate proxy for all butter-powder 
plants currently operating in the Northeast region. The witness 
asserted that LOL's own data and analysis validates the RCBS study's 
methodology. According to the witness, because the theory so accurately 
reflects actual marketing conditions, the operators of the seven 
butter-powder plants have a sound basis to justify a marketwide service 
payment for unrecovered costs incurred by balancing the market.
    Testimony offered in opposition to the marketwide service payment 
proposal and the need in general for a balancing credit was advanced by 
representatives of NYSDF, representatives from the International Dairy 
Foods Association (IDFA), several proprietary handlers including

[[Page 4949]]

Friendship Dairy, Queensboro Farms, Marcus Dairy, and Worcester 
Creameries, Dean Foods, H.P. Hood, and two independent dairy farmers. 
Representatives for the proprietary handlers testified and all 
maintained that if a balancing credit feature were adopted, they would 
not be eligible to receive the proposed marketwide service payments 
even though they too incur costs for performing market balancing 
functions. These witnesses also testified that if Proposal 7 were 
adopted, they would be placed at a competitive disadvantage in 
procuring milk when compared to large cooperative handlers because they 
would need to pay a higher effective price for milk. In this regard, 
the witnesses indicated that as small businesses they would be treated 
unfairly. Each of the proprietary handlers pointedly observed that the 
benefit of marketwide service payments would accrue only to the large-
scale butter-powder processors located in the Northeast marketing area.
    A witness for Queensboro Farms testified that as an operator of a 
supply plant, the company provides balancing services for the market 
that are similar to those performed by large-scale NFDM plants and 
accordingly should receive compensation for providing balancing 
services if a balancing credit for the order is adopted. However, the 
witness emphasized and asserted that the proposal unfairly excludes 
proprietary handlers on the basis of the milk volume eligibility 
criteria. The witness said that as a matter of fairness and competitive 
equity, no handler should receive a balancing credit if it is made 
available only to the largest handlers.
    Witnesses appearing on behalf of Marcus Dairy and Worcester 
Creameries provided testimony supporting the Queensboro Farms witness. 
The witness for Marcus Dairy noted that the company's cost of sourcing 
milk would be higher, thus the prices paid to farmers by them would be 
lower than prices paid by the largest cooperative handlers who would be 
eligible to receive a marketwide service payment. However, because 
Marcus Dairy is a small business entity, it would not be eligible for 
receiving a payment. Similarly, witnesses for Worcester Creameries and 
Friendship Dairy, both proprietary handlers and small businesses, 
provided supporting testimony concluding that adoption of a balancing 
credit, limited to criteria that only a large cooperative could meet, 
would needlessly harm them by increasing their milk procurement costs.
    A witness testifying on behalf of NYSDF noted that every handler in 
the Northeast marketing area performs some market balancing functions 
and therefore should be eligible to receive a credit if the decision is 
to adopt a balancing credit feature for the Northeast milk order. The 
witness asserted that if the largest handlers received marketwide 
service payments, then smaller handlers would face relatively higher 
costs and would therefore be placed at a competitive disadvantage in 
the price they pay for a supply of milk.
    A consultant witness for NYSDF testified that adoption of Proposal 
7 would serve to unduly enhance the power of larger cooperatives at the 
expense of smaller cooperatives. The witness asserted that smaller 
cooperatives pooling milk on the Northeast order whose monthly milk 
receipts are not sufficient to meet the proposed criteria for receiving 
a balancing credit might be forced to affiliate with a larger 
cooperative eligible to receive marketwide balancing credits. The 
witness speculated that although smaller cooperatives might receive 
partial benefit from the credits through affiliation, they also might 
be absorbed into a larger cooperative's milk marketing operations as 
the price for receiving this benefit. This witness was also of the 
opinion that the members of ADCNE have failed to reveal or consider 
that handlers are charged over-order premiums, give-up fees, or other 
variously named charges that are essentially already compensating for 
balancing costs.
    A witness appearing on behalf of Dean Foods testified that surplus 
milk from the Northeast marketing area could at times be shipped to the 
fluid milk deficit markets of the Southeast and Florida marketing 
areas. According to the witness, satisfying the demand for fluid milk 
of the southern marketing areas could serve the same balancing function 
for the Northeast market's producers seeking compensation to recover 
costs arising from operating butter-powder plants.
    Two independent dairy farmers, one from western New York State and 
another from Pennsylvania, testified that dairy farmers already pay for 
balancing as part of the expenses deducted from their milk checks by 
handlers. The dairy farmers testified that while no specific fee is 
explicitly itemized as a market balancing charge, they viewed the 
deduction as a cost they pay for balancing. They testified that they 
and other producers have been informed by their cooperative handlers, 
who market their milk, that the cost of balancing is a component of the 
handling charges that are deducted from their milk checks.
    A witness representing IDFA testified in opposition to Proposal 7. 
The witness noted that the costs of balancing the Northeast milk market 
are already recovered through revenues received in over-order premiums 
charged for milk diverted from Class IV to Class I use. In addition, 
the witness pointed out that the Class IV product pricing formula make 
allowance factors include balancing costs in determining the Class IV 
milk price. In this regard, the IDFA witness viewed Proposal 7 as 
requiring handlers to essentially pay anew for a function already 
accounted for in market prices.
    In addition, the IDFA witness expressed the opinion that 
consideration of a marketwide service payment proposal to compensate 
certain handlers for market balancing services should be heard on a 
national basis instead of on a limited basis for only the Northeast 
milk order. The IDFA witness stated that adopting Proposal 7 would have 
multi-regional impacts and perhaps national impacts.
    The IDFA witness noted that USDA had previously rejected proposals 
for marketwide service payments for balancing advanced by ADCNE 
cooperatives for the Northeast order as part of Federal milk order 
reform. According to the IDFA witness, USDA rejected these proposals, 
in part because the make allowances for Class IV products already 
included a factor for balancing cost recovery and that the resulting 
Class IV prices would be at market-clearing levels. The witness 
concluded that this negates the need for additional compensation for 
costs already compensated.
    Exceptions to the Recommended Decision from ADCNE argued that the 
Department did not accept the fundamental reasoning behind the 
marketwide service payment proposal--that Class I balancing should be 
paid for by all market participants. ADCNE took specific exception to 
five separate issues raised by the Recommended Decision.
    ADCNE first suggested that the Recommended Decision emphasized non-
record evidence more so than record testimony. Specifically, it was the 
opinion of ADCNE that the Recommended Decision put more weight on 
Agrimark and LOL's change of position after the close of the hearing 
than it did on record testimony and evidence received at the hearing.
    ADCNE also argued that balancing costs of ADCNE cooperatives were 
sufficiently documented at the hearing. ADCNE was of the opinion that 
the Dairylea, Agrimark and LOL witnesses

[[Page 4950]]

appearing on their behalf sufficiently proved that the costs of 
operating balancing plants in the Northeast were far greater than the 
lowest cost figures contained in the RCBS study, but were ignored since 
the Recommended Decision failed to acknowledge the study as a lowest 
cost Class I balancing model. ADCNE emphasized that their member 
cooperatives lose money by providing balancing services to the 
Northeast market, and the equity positions of cooperative members is 
put at risk in doing so. ADCNE inferred that since the costs of owning 
and operating butter powder manufacturing facilities reduce the 
proceeds to ADCNE cooperative members, the milk of ADCNE cooperatives 
and cooperative members should receive preferential treatment over milk 
shipped to proprietary plants.
    ADCNE took exception to the consideration of plant revenues and 
profitability in the Recommended Decision. ADCNE was of the opinion 
that profitability should not be used to determine the need for a 
marketwide service payment.
    ADCNE also argued that the make allowance factor in the formula 
used to compute the price for milk used in Class IV is not a substitute 
for a marketwide service payment, and that the Class III/IV Interim 
Decision was not specific as to the intended definition of 
``balancing''.
    The Agricultural Marketing Agreement Act of 1937 (AMAA), as 
amended, provides authority for milk marketing orders to contain 
provisions for marketwide service payments. In this context, a 
marketwide service payment is a charge to all producers of milk, 
irrespective of the use classification of such milk, that is deducted 
before computing the order's statistical uniform price. The AMAA 
specifically identifies the types of services that may be of marketwide 
benefit. They include, but are not limited to: (1) Providing facilities 
to furnish additional supplies of milk needed by handlers and to handle 
and dispose of milk supplies in excess of quantities needed by 
handlers; (2) handling on specific days quantities of milk that exceed 
quantities needed by handlers; and (3) transporting milk from one 
location to another for the purpose of fulfilling requirements for milk 
of a higher use classification or for providing a market outlet for 
milk of any use classification.
    A current example of Federal milk marketing orders that provides 
for marketwide service payments is the transportation funds for 
qualified handlers in the Southeast and Appalachian milk marketing 
orders. In these marketing orders, handlers pay an assessment on 
producer milk assigned to Class I each month into separate 
transportation credit balancing funds maintained and operated by the 
Market Administrator for each order. These funds, originally 
established in four pre-reform milk orders, were carried into these two 
consolidated milk marketing orders as a result of the need to import 
milk into the southeastern regions of the country from other areas 
during certain times of the year. The provisions provide payments from 
the funds to handlers who import supplemental milk for fluid use during 
the generally low milk production months of July through December. The 
provisions restrict the payments to milk received from other plants or 
farms located outside of the marketing areas.
    Another example of a marketwide service payment provision includes 
the transportation credits and assembly credits employed in the Upper 
Midwest milk marketing order. Unlike the marketwide service payments of 
the Appalachian and Southeast orders, the Upper Midwest order's 
marketwide service payment provides credits to handlers for their total 
class use value before the blend price is calculated. Because the 
credits reduce the total dollar value of the pool, it results in a 
lower blend price to all producers.
    In the pre-reform New York-New Jersey milk marketing order, a 
payment was available to certain cooperative handlers in the form of a 
cooperative service payment and a balancing payment. These provisions 
predate the AMAA's amendment by the 1985 Farm Bill. Under the pre-
reform New York-New Jersey order, qualified cooperatives could receive 
up to three cents per cwt on the amount of milk pooled on the order in 
the form of a cooperative service payment. Plus, there was a component 
for a balancing payment that could have been up to one cent per cwt 
provided a cooperative association operated a manufacturing facility. 
By comparison, the marketwide service payment proposal considered in 
this proceeding is dedicated entirely to compensating eligible handlers 
for balancing functions and the rate of compensation at six cents per 
cwt is much higher.
    In testimony offered by proponents and opponents, as well as in the 
data supplied for the record by the Market Administrator, it is evident 
that the Northeast order has certain unique characteristics and 
marketing conditions. The Northeast marketing area is the single 
largest marketing area for Class I milk. Approximately 75 percent of 
the milk pooled on the order is from members of cooperatives with the 
remainder supplied by independent producers. In this regard, the 
Northeast marketing area has the largest base of independent producers 
that pool milk on the order relative to the other 9 Federal milk 
marketing orders. The marketing area's independent producers tend to be 
the predominant suppliers of the Class I needs of the marketing area as 
revealed by evidence showing that some 80 percent of independent milk 
supplies are pooled by a Class I handler in comparison to cooperative 
milk supplies. Cooperative milk supplies for the Northeast marketing 
area supply the vast majority of the marketing area's milk used in 
Class III and Class IV dairy products.
    The Northeast's market structure also is unique given the large use 
of milk for Class II products such as ice cream, sour cream, yogurt, 
and cottage cheese. The marketing area can also be characterized as 
unique by the relatively large number of proprietary handlers, many of 
whom are manufacturing entities. These handlers provide dairy farmers 
with alternative outlets for their milk. None of the handlers 
individually provide balancing services on the scale offered at the 
plants owned and operated by the large cooperative members of the 
ADCNE. However, taken as a whole, these plants do provide real and 
important balancing services that are similar to those provided by the 
member cooperatives of ADCNE.
    As noted in the Recommended Decision, the basis of the argument 
advanced by the proponents of Proposal 7 is that without marketwide 
service payments, balancing functions are unprofitable and cost 
recovery is not otherwise supported by market forces. The underpinning 
of identifying costs relies on the theoretical results of a RCBS study 
that examined the costs of balancing incurred by cooperatives that 
operate butter-powder plants in the Northeast by placing a value on 
unused plant processing capacity. The optimal cost structure for 
balancing the Northeast marketing area is presented by the proponents 
as an accurate reflection of the existing structure of the regional 
milk market. However, actual costs, together with the profitability or 
lack of profitability of these butter-powder plants, are never 
adequately addressed. Profitability is important to the issue as it can 
speak directly to whether or not a marketwide service payment can be 
justified. This is important because it is the position of the 
proponents that balancing activities might not otherwise be provided to 
the marketplace and because there are no

[[Page 4951]]

other viable market mechanisms through which excess milk supplies can 
be adequately disposed of other than through the butter-powder 
balancing facilities of the region's six largest cooperative handlers.
    Typically, a review of the profitability would include a 
presentation and discussion of actual costs and revenues. In this 
proceeding, neither actual costs nor actual revenues generated from the 
sale of Class IV products or other methods used to generate revenue are 
addressed. The record does not contain information regarding revenues 
for Class IV products generated by the butter-powder operations or 
related joint-product production processes from some plants that 
produce NFDM.
    Regarding costs, the proponents preferred to rely on a theoretical 
cost estimating framework rather than on actual costs incurred in 
performing balancing services. Without actual revenues and costs 
available for review, it is impossible to credibly assess whether 
balancing costs are inequitably shared. Similarly, without historical 
cost and revenue data series, it is not possible to reasonably consider 
how the profitability of these operations has changed over time under 
prevailing and/or changing marketing conditions. It is therefore not 
possible on the basis of the record to determine if there is a credible 
need to compensate cooperatives for balancing the market through the 
use of marketwide service payments.
    The record does not support adoption of a marketwide service 
payment provision for balancing services for the Northeast milk 
marketing order. As noted in the Recommended Decision, arguments 
contained in the record in support of Proposal 7 have focused on the 
need to share the costs that are not recoverable from the marketplace 
for balancing the Class I needs of the Northeast marketing area more 
equitably with all producers who pool their milk on the order. Costs 
have been explained primarily by attempting to place a value on unused 
butter-powder manufacturing plant capacity where unused plant capacity 
is caused by seasonal fluctuations in the relative demands for fluid 
milk given available milk supplies. Proponents have relied primarily on 
a theoretical framework developed in an RCBS study, and to a much more 
limited extent, actual plant replacement cost data to estimate the 
costs they incur for balancing the market. A balancing cost estimate is 
derived in the RCBS study from an analysis of competing milk uses that 
cause butter-powder plants to be operated at less than full capacity 
which, in turn, is caused by seasonal fluctuations in the demand for 
Class I milk.
    ADCNE commented that the Recommended Decision overlooked the RCBS 
study as a lowest-cost model. This argument is not persuasive. The RCBS 
study provided an excellent model of market balancing activities in the 
Northeast on the basis of unused plant capacity. As previously 
mentioned, the RCBS study is theoretical and does not represent actual 
or existing costs and conditions in the Northeast marketing area. 
Therefore, the RCBS study could not be relied upon as the underpinning 
of the ADCNE's proposal alone, or as a basis to explain how the 
requested rate of six cents per cwt is derived. It is clear that the 
RCBS study focused on manufacturing facilities that produce butter and 
powder, which cost far less to produce than cheese. Denial of the 
marketwide service payment proposal is explained in the Recommended 
Decision and in this Final Decision.
    For all intents and purposes, butter-powder plants operated in the 
Northeast milk marketing area are owned and operated by members of 
ADCNE and provide balancing services. The ADCNE member proponents argue 
that a significant share of independent producers (dairy farmers who 
are not members of cooperatives), do not bear the cost burdens that 
cooperative members (producers) bear by operating and maintaining 
butter-powder plants. ADCNE insists that these butter-powder plants 
provide a market outlet for cooperatives and independent milk when not 
needed for the fluid market and that such outlets provide a service 
that is of marketwide benefit. Proponents for adoption of Proposal 7 
maintain that the blend price received by independent producers is 
higher than it would otherwise be if independent producers had the 
burden of maintaining and providing services that balance the market.
    The central discussion of the proposal to establish a marketwide 
service payment by proponents is long on articulating costs associated 
with balancing. However, the discussion of the role and adequacy of 
revenues generated from providing balancing related activities or 
revenue generated in the marketplace from the sale of Class IV products 
is nearly absent. For example, proponent testimony is nearly silent 
concerning the roles of over-order premiums, give-up charges, make 
allowances already a part of the pricing formulae of the order, and 
other charges that generate revenue to offset costs incurred and 
characterized as associated with providing balancing functions. 
Nevertheless, it is clear from the testimony that producers and 
proprietary handlers pay charges and fees for either a supplemental 
supply of milk or for the removal of milk when not needed for fluid 
use. Producers and proprietary handlers have had it explained, in 
varying ways, that such charges and fees are due to costs associated 
with balancing--that is--supplying additional milk to meet fluid demand 
or the removal of milk for surplus disposal when not needed by 
distributing plants.
    In their exceptions to the Recommended Decision, ADCNE again 
suggested that their members are operating at a loss from the operation 
and maintenance of their balancing plants. This argument is not 
persuasive. As already noted, no record evidence adequately 
demonstrates that ADCNE cooperatives are operating at a loss as a 
result of owning and operating balancing facilities. A balancing 
facility does not necessarily need to experience losses to warrant a 
marketwide service payment. However, some measure of the revenues and 
costs associated with the procurement, production and sale of all milk 
associated with the plant, at the minimum, is necessary if for no other 
reason to explain or justify the proposed rate of six cents per cwt.
    Opponents, including proprietary handlers and independent dairy 
farmers, also argue that balancing costs have already been recouped by 
the large cooperatives in various ways. The record reveals that 
proprietary handlers pay give-up charges and over order premiums to 
cooperative suppliers to obtain milk for Class I use when needed. Costs 
also are recouped by the imposition of variously-named charges and fees 
incurred by Class I handlers diverting some of their independent milk 
supply to a butter-powder plant when not needed for fluid use and in 
fees deducted from independent producer milk checks that have been 
explained in various ways to be fees charged for balancing.
    Opponents correctly note that the costs of balancing have already 
been considered and are accounted for in the Class IV product-price 
formula make allowance used in all Federal milk marketing orders for 
establishing the Class IV milk price. ADCNE, however, commented that 
the make allowance in the Class IV product price formula does not 
adequately cover balancing costs. The Class III/IV pricing formulae 
adopted in the Class III/IV Interim Decision (65 FR 768832, published 
December 7, 2002) included a factor to offset the cost of balancing 
performed by butter-powder manufacturing plants. Official notice is 
hereby taken of the

[[Page 4952]]

Class III/IV Final Decision (67 FR 67906, published November 7, 2002). 
The Class III/IV Final Decision that adopted product price formulas for 
all Federal milk marketing orders, including the Northeast order, gave 
specific recognition to costs associated with balancing in the make 
allowance factor in setting the Class III and Class IV milk price. 
ADCNE's exception is not persuasive. As already stated, the Class III/
IV pricing formulae include a factor to offset the cost of balancing 
performed by butter-powder manufacturing plants. The Class III/IV 
pricing formulae, together with factors discussed herein all speak to 
the issue of the inadequacy of cost and revenue evidence that would 
tend to explain a requested marketwide service payment rate of six 
cents per cwt.
    Proprietary handlers also stress their opposition to adoption of 
Proposal 7 on the basis that they would be excluded from receiving a 
balancing credit, not because they do not provide balancing services 
but because of their size. These plants provide balancing services 
through the production of Class II and III products. ADCNE's proposal 
would provide a balancing payment to plants that pool over a million 
pounds per month, thus eliminating all but the large ADCNE member 
butter-powder plants from receiving any money. The exclusion of small 
businesses creates inequity among handlers in the price they pay for 
their milk supply. Small handlers should not need to pay higher prices 
for milk relative to large cooperative handlers who would be eligible 
to receive a balancing credit. Independent of the other reasons 
discussed for not adopting a marketwide service payment for balancing, 
neither the Recommended Decision nor this Final Decision can find 
record evidence that adequately addresses why business size should have 
a bearing on the exclusion of small handlers who clearly perform 
balancing functions or are charged for balancing services but would not 
be eligible for a balancing credit.
    None of the witnesses appearing on behalf of ADCNE would provide 
information for the record concerning fees charged to distributing 
plants and other commercial customers from whom cooperative handlers 
receive payments to compensate for, or to offset, balancing costs. But 
the record is clear, however, that such fees are charged in various 
ways and forms. Because balancing costs are recoverable and, in fact, 
are recovered in various ways, the record cannot support the notion 
that whatever cost burden is being borne by any financially interested 
business entity is so inequitable that it necessitates having the 
Federal government establish a provision to supervise the transfer of 
funds from one set of business entities to another.
    Conversely, the record contains evidence that investments by the 
large cooperatives in balancing facilities have taken place. For 
example, testimony by the LOL witness for ADCNE reveals that balancing 
services and plant expansion for balancing operations took place 
repeatedly at their Carlisle, PA, facility over the period of 1984-
2000, a time span during which no marketwide service payment was 
provided under the terms of then Middle Atlantic milk marketing order. 
Testimony by the Agrimark witness appearing on behalf of the ADCNE 
similarly reveals repeated investment in their butter-powder plant at 
Springfield, MA, at a time when no marketwide service payment was 
provided under the terms of the New England milk marketing order.
    In post hearing briefs and comments, support for Proposal 7 was 
completely withdrawn by Agrimark, one of the cooperatives comprising 
ADCNE. In addition, LOL, another cooperative member of the ADCNE, 
changed their position from support to a neutral position. After the 
deadline for submission of post-hearing briefs and publication of the 
Recommended Decision, LOL submitted a letter changing their support 
from a neutral position to asking that the Final Decision be based on 
the record of the proceeding.
    ADCNE commented that the Recommended Decision relied more on non-
record positions than on evidence received at the hearing. This claim 
is unfounded. The Recommended Decision indicated that two major hearing 
participants appearing on behalf of the ADCNE, who are also 
representatives of three ADCNE member cooperatives, had changed their 
individual positions on the marketwide service payment proposal. The 
Recommended Decision made note of the change in position by Agrimark 
and LOL as factual information as does this Final Decision. With regard 
to LOL's plea that the Department rely on the record of this 
proceeding, it is the record of this proceeding alone that provides the 
basis for not adopting the marketwide service payment provision.
    As noted in the Recommended Decision, the record contains no 
persuasive argument or compelling evidence to find that there are cost 
inequities between cooperative dairy farmers and independent dairy 
farmers that would warrant adoption of a provision providing payments 
from one group of producers to another. The applicable Class III and 
Class IV pricing formulae and other free market transactions charged by 
the large cooperatives with balancing facilities sufficiently offset 
balancing costs and are adequate to sustain existing balancing 
facilities and operations. Additionally, the Northeast order Class I 
price is sufficiently high to ensure that a sufficient supply of milk 
for fluid use, together with the Class IV price as established under 
the order, will provide for the orderly disposal of milk when not 
needed for fluid use. The Northeast order already provides for cost 
equity in the minimum pricing mechanisms and the marketplace is 
providing the ability for transactions outside the terms of the order 
that currently do not exhibit the need for additional regulation.
    The record also does not support adoption of Proposal 7 on the 
basis of strictly theoretical costs. Offsetting costs by providing a 
balancing payment must be based on evidence of actual costs incurred 
for two reasons. First, an estimate of actual costs serves to provide 
and define a reasonable basis from which to determine a total value of 
the service being provided and corresponding rate at which 
reimbursement should be made. Secondly, it is real dollars that will be 
transferred from one group of producers to another. Accordingly, it is 
reasonable to suppose that those who will have their blend price 
reduced have an adequate and supportable explanation why, in the 
interest of producer and handler equity, their revenue should be 
reduced. In this regard, the record does not provide any indication, 
other than proponent assertions, that the revenues generated are 
insufficient to offset inequitably borne costs. Because actual costs 
are not provided, a finding cannot be made to determine whether or not 
the proposed balancing credit rate of six cents per cwt is reasonable.
    There is no evidence to suggest that milk of producers pooled on 
the Northeast order will be unable to find markets without the 
establishment of a balancing credit. The record is clear in 
demonstrating that balancing functions and services are performed by 
large cooperatives and they are able to recover costs from those they 
serviced without government intervention. The record does not reveal or 
contain evidence demonstrating disorderly marketing conditions 
occurring because balancing facilities and services are not 
sufficiently recovering their costs.
    This decision concludes that the qualification criteria of Proposal 
7 for receipt of a balancing credit would

[[Page 4953]]

unduly disadvantage handlers who perform a balancing function for the 
market, but for no reason other than their size renders them ineligible 
to recover balancing costs by receipt of a credit. These handlers would 
suffer adverse business consequences from the higher effective prices 
they would need to pay to procure a supply of milk. The record does not 
reveal any justification that explains why other handlers should be 
denied a credit for performing a similar service. Accordingly, this 
decision concludes that the eligibility criteria of Proposal 7 would 
have an adverse impact on these businesses in the Northeast marketing 
area.

Rulings on Proposed Findings and Conclusions

    Briefs and proposed findings and conclusions were filed on behalf 
of certain interested parties. These briefs, proposed findings and 
conclusions, and the evidence in the record were considered in making 
the findings and conclusions set forth above. To the extent that the 
suggested findings and conclusions filed by interested parties are 
inconsistent with the findings and conclusions set forth herein, the 
requests to make such findings or reach such conclusions are denied for 
the reasons previously stated in this decision.

General Findings

    The findings and determinations hereinafter set forth supplement 
those that were made when the Northeast order was first issued and when 
it was amended. The previous findings and determinations are hereby 
ratified and confirmed, except where they may conflict with those set 
forth herein.
    (a) The tentative marketing agreement and the order, as hereby 
proposed to be amended, and all of the terms and conditions thereof, 
will tend to effectuate the declared policy of the Act;
    (b) The parity prices of milk as determined pursuant to section 2 
of the Act are not reasonable in view of the price of feeds, available 
supplies of feeds, and other economic conditions which affect market 
supply and demand for milk in the marketing area, and the minimum 
prices specified in the tentative marketing agreement and the order, as 
hereby proposed to be amended, are such prices as will reflect the 
aforesaid factors, insure a sufficient quantity of pure and wholesome 
milk, and be in the public interest; and
    (c) The tentative marketing agreement and the order, as hereby 
proposed to be amended, will regulate the handling of milk in the same 
manner as, and will be applicable only to persons in the respective 
classes of industrial and commercial activity specified in, the 
marketing agreement upon which a hearing has been held.

Rulings on Exceptions

    In arriving at the findings and conclusions, and the regulatory 
provisions of this decision, each of the exceptions received was 
carefully and fully considered in conjunction with the record evidence. 
To the extent that the findings and conclusions and the regulatory 
provisions of this decision are at variance with any of the exceptions, 
such exceptions are hereby overruled for the reasons previously stated 
in this decision.

Marketing Agreement and Order

    Annexed hereto and made a part hereof are two documents, a 
Marketing Agreement regulating the handling of milk, and an Order 
amending the order regulating the handling of milk in the Northeast 
marketing area, which has been decided upon as the detailed and 
appropriate means of effectuating the foregoing conclusions.
    It is hereby ordered that this entire decision and the two 
documents annexed hereto be published in the Federal Register.

Referendum Order To Determine Producer Approval; Determination of 
Representative Period; and Designation of Referendum Agent

    It is hereby directed that a referendum be conducted and completed 
on or before the 30th day from the date this decision is published in 
the Federal Register, in accordance with the procedure for the conduct 
of referenda [7 CFR 900.300-311], to determine whether the issuance of 
the order as amended and hereby proposed to be amended, regulating the 
handling of milk in the Northeast marketing area is approved or favored 
by producers, as defined under the terms of the order, as amended and 
as hereby proposed to be amended, who during such representative period 
were engaged in the production of milk for sale within the aforesaid 
marketing area.
    The representative period for the conduct of such referendum is 
hereby determined to be July 2004.
    The agent of the Secretary to conduct such referendum is hereby 
designated to be Erik Rasmussen, the Northeast Market Administrator.

List of Subjects in 7 CFR Part 1001

    Milk marketing orders.

    Dated: January 14, 2005.
A. J. Yates,
Administrator, Agricultural Marketing Service.

Order Amending the Order Regulating the Handling of Milk in the 
Northeast Marketing Area

    (This order shall not become effective unless and until the 
requirements of Sec.  900.14 of the rules of practice and procedure 
governing proceedings to formulate marketing agreements and marketing 
orders have been met.)

Findings and Determinations

    The findings and determinations hereinafter set forth supplement 
those that were made when the order was first issued and when it was 
amended. The previous findings and determinations are hereby ratified 
and confirmed, except where they may conflict with those set forth 
herein.
    (a) Findings. A public hearing was held upon certain proposed 
amendments to the tentative marketing agreement and to the order 
regulating the handling of milk in the Northeast marketing area. The 
hearing was held pursuant to the provisions of the Agricultural 
Marketing Agreement Act of 1937, as amended (7 U.S.C. 601-674), and the 
applicable rules of practice and procedure (7 CFR Part 900).
    Upon the basis of the evidence introduced at such hearing and the 
record thereof, it is found that:
    (1) The said order as hereby amended, and all of the terms and 
conditions thereof, will tend to effectuate the declared policy of the 
Act;
    (2) The parity prices of milk, as determined pursuant to Section 2 
of the Act, are not reasonable in view of the price of feeds, available 
supplies of feeds, and other economic conditions which affect market 
supply and demand for milk in the aforesaid marketing area. The minimum 
prices specified in the order as hereby amended are such prices as will 
reflect the aforesaid factors, insure a sufficient quantity of pure and 
wholesome milk, and be in the public interest; and
    (3) The said order as hereby amended regulates the handling of milk 
in the same manner as, and is applicable only to persons in the 
respective classes of industrial or commercial activity specified in, a 
marketing agreement upon which a hearing has been held.

Order Relative to Handling

    It is therefore ordered, that on and after the effective date 
hereof, the handling of milk in the Northeast marketing area shall be 
in conformity to and in compliance with the terms and

[[Page 4954]]

conditions of the order, as amended, and as hereby amended, as follows:
    The provisions of the order amending the order contained in the 
Recommended Decision issued by the Administrator, Agricultural 
Marketing Service, on March 17, 2004, and published in the Federal 
Register on March 25, 2004 (69 FR 15562), are adopted with one minor 
change and shall be the terms and provisions of this order. The revised 
order follows.

    Authority: 7 U.S.C. 601-674.

PART 1001--MILK IN THE NORTHEAST MARKETING AREA

    1. The authority citation for 7 CFR part 1001 continues to read as 
follows:

    Authority: 7 U.S.C. 601-674.

    2. Section 1001.7 is amended by:
    a. Revising paragraphs (c)(1) and (c)(2);
    b. Removing paragraph (c)(3);
    c. Redesignating paragraphs (c)(4) and (c)(5) as (c)(3) and (c)(4);
    d. Revising paragraphs (e)(1) and (e)(2); and
    e. Removing paragraph (h)(7).
    The revisions read as follows:


Sec.  1001.7  Pool plant.

* * * * *
    (c) * * *
    (1) In each of the months of January through August and December, 
such shipments and transfers to distributing plants must not equal less 
than 10 percent of the total quantity of milk (except the milk of a 
producer described in Sec.  1001.12(b)) that is received at the plant 
or diverted from it pursuant to Sec.  1001.13 during the month.
    (2) In each of the months of September through November, such 
shipments and transfers to distributing plants must equal not less than 
20 percent of the total quantity of milk (except the milk of a producer 
described in Sec.  1001.12(b)) that is received at the plant or 
diverted from it pursuant to Sec.  1001.13 during the month.
* * * * *
    (e) * * *
    (1) At least one of the plants in the unit qualifies as a pool 
distributing plant pursuant to paragraph (a) of this section;
    (2) Other plants in the unit must process at least 60 percent of 
monthly receipts of producer milk, including cooperative 9(c) milk, 
only as Class I or Class II products and must be located in the 
Northeast marketing area, as defined in Sec.  1001.2, in a pricing zone 
providing the same or a lower Class I price than the price applicable 
at the distributing plant(s) included in the unit; and
* * * * *
    3. Section 1001.13 is amended by:
    a. Revising paragraph (d)(1);
    b. Redesignating paragraph (d)(2) as paragraph (d)(3); and
    c. Adding paragraphs (d)(2), (d)(4), (d)(5) and (e).
    The revision and additions read as follows:


Sec.  1001.13  Producer milk.

* * * * *
    (d) * * *
    (1) Milk of a dairy farmer shall not be eligible for diversion 
unless one day's milk production of such dairy farmer was physically 
received as producer milk and the dairy farmer has continuously 
retained producer status since that time. If a dairy farmer loses 
producer status under the order in this part (except as a result of a 
temporary loss of Grade A approval), the dairy farmer's milk shall not 
be eligible for diversion unless milk of the dairy farmer has been 
physically received as producer milk at a pool plant during the month;
    (2) Of the total quantity of producer milk received during the 
month (including diversion but excluding the quantity of producer milk 
received from a handler described in Sec.  1000.9(c) or which is 
diverted to another pool plant), the handler diverted to nonpool plants 
not more than 80 percent during each of the months of September through 
November and 90 percent during each of the months of January through 
August and December. In the event that a handler causes the milk of a 
producer to be over diverted, a dairy farmer will not lose producer 
status;
    (3) * * *
    (4) Any milk diverted in excess of the limits set forth in 
paragraph (d)(2) of this section shall not be producer milk. The 
diverting handler shall designate the dairy farmer deliveries that 
shall not be producer milk. If the handler fails to designate the dairy 
farmer deliveries which are ineligible, producer milk status shall be 
forfeited with respect to all milk diverted to nonpool plants by such 
handler; and
    (5) The delivery day requirement and the diversion percentages in 
paragraphs (d)(1) and (d)(2) of this section may be increased of 
decreased by the Market Administrator if the Market Administrator finds 
that such revision is necessary to assure orderly marketing and 
efficient handling of milk in the marketing area. Before making such a 
finding, the Market Administrator shall investigate the need for the 
revision either on the Market Administrator's own initiative or at the 
request of interested persons if the request is made in writing at 
least 15 days prior to the month for which the requested revision is 
desired to be effective. If the investigation shows that a revision 
might be appropriate, the Market Administrator shall issue a notice 
stating that the revision is being considered and inviting written 
data, views, and arguments. Any decision to revise an applicable 
percentage or delivery day requirement must be issued in writing at 
least one day before the effective date.
    (e) Producer milk shall not include milk of a producer that is 
subject to inclusion and participation in a marketwide equalization 
pool under a milk classification and pricing program imposed under the 
authority of another government entity.
    4. Section 1001.30 is amended by revising the introductory text to 
read as follows:


Sec.  1001.30  Reports of receipts and utilization.

    Each handler shall report monthly so that the Market 
Administrator's office receives the report on or before the 10th day 
after the end of the month, in the detail and on prescribed forms, as 
follows:
* * * * *
    5. Section 1001.62 is amended by:
    a. Revising introductory text; and
    b. Adding paragraph (h).
    The revision and addition reads as follows:


Sec.  1001.62  Announcement of producer prices.

    On of before the 14th day after the end of the month, the Market 
Administrator shall announce the following prices and information:
* * * * *
    (h) If the 14th falls on a Saturday, Sunday, or national holiday, 
the Market Administrator may have up to two additional business days to 
announce the producer price differential and the statistical uniform 
price.
    6. Section 1001.71 is amended by revising the introductory text to 
read as follows:


Sec.  1001.71  Payments to the producer-settlement fund.

    Each handler shall make payment to the producer-settlement fund in 
a manner that provides receipt of the funds by the Market Administrator 
no later than two days after the announcement of the producer price 
differential and the statistical uniform price pursuant to Sec.  
1001.62 (except as provided for in Sec.  1000.90). Payment shall be the 
amount, if any, by which the amount specified in paragraph (a) of this 
section exceeds the amount

[[Page 4955]]

specified in paragraph (b) of this section:
* * * * *
    7. Section 1001.72 is revised to read as follows:


Sec.  1001.72  Payments from the producer-settlement fund.

    No later than the day after the due date required for payment to 
the Market Administrator pursuant to Sec.  1001.71 (except as provided 
in Sec.  1001.90), the Market Administrator shall pay to each handler 
the amount, if any, by which the amount computed pursuant to Sec.  
1001.71(b) exceeds the amount computed pursuant to Sec.  1001.71(a). 
If, at such time, the balance in the producer-settlement fund is 
insufficient to make all payments pursuant to this section, the Market 
Administrator shall reduce uniformly such payments and shall complete 
the payments as soon as the funds are available.
    8. Section 1001.73 is amended by revising paragraphs (a)(2) and (e) 
introductory text to read as follows:


Sec.  1001.73  Payments to producers and to cooperative associations.

* * * * *
    (a) * * *
    (2) Final payment. For milk received during the month, payment 
shall be made during the following month so it is received by each 
producer no later than the day after the required date of payment by 
the Market Administrator, pursuant to Sec.  1001.72, in an amount 
computed as follows:
* * * * *
    (e) In making payments to producers pursuant to this section, each 
handler shall furnish each producer (except for a producer whose milk 
was received from a cooperative association handler described in Sec.  
1000.9(a) or 9(c)), a supporting statement in such form that it may be 
retained by the recipient which shall show:
* * * * *

Marketing Agreement Regulating the Handling of Milk in the Northeast 
Marketing Area

    The parties hereto, in order to effectuate the declared policy 
of the Act, and in accordance with the rules of practice and 
procedure effective thereunder (7 CFR part 900), desire to enter 
into this marketing agreement and do hereby agree that the 
provisions referred to in paragraph I hereof as augmented by the 
provisions specified in paragraph II hereof, shall be and are the 
provisions of this marketing agreement as if set out in full herein.
    I. The findings and determinations, order relative to handling, 
and the provisions of Sec. Sec.  1001.1 to 1001.86 all inclusive, of 
the order regulating the handling of milk in the Northeast marketing 
area (7 CFR 1001 which is annexed hereto); and
    II. The following provisions: Record of milk handled and 
authorization to correct typographical errors.
    (a) Record of milk handled. The undersigned certifies that he/
she handled during the month of July, 2004, ---- hundredweight of 
milk covered by this marketing agreement.
    (b) Authorization to correct typographical errors. The 
undersigned hereby authorizes the Deputy Administrator, or Acting 
Deputy Administrator, Dairy Programs, Agricultural Marketing 
Service, to correct any typographical errors which may have been 
made in this marketing agreement.
    Effective date. This marketing agreement shall become effective 
upon the execution of a counterpart hereof by the Department in 
accordance with Section 900.14(a) of the aforesaid rules of practice 
and procedure.
    In witness whereof, the contracting handlers, acting under the 
provisions of the Act, for the purposes and subject to the 
limitations herein contained and not otherwise, have hereunto set 
their respective hands and seals.

Signature
 By (Name)-------------------------------------------------------------
 (Title)---------------------------------------------------------------
 (Address)-------------------------------------------------------------

(Seal)
Attest

[FR Doc. 05-1410 Filed 1-28-05; 8:45 am]
BILLING CODE 3410-02-P