[Federal Register Volume 71, Number 177 (Wednesday, September 13, 2006)]
[Proposed Rules]
[Pages 54172-54186]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-7495]
[[Page 54171]]
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Part V
Department of Agriculture
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Agricultural Marketing Service
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7 CFR Part 1033
Milk in the Mideast Marketing Area; Decision on Proposed Amendments to
Marketing Agreement and to Order; Proposed Rule
Federal Register / Vol. 71, No. 177 / Wednesday, September 13, 2006 /
Proposed Rules
[[Page 54172]]
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DEPARTMENT OF AGRICULTURE
Agricultural Marketing Service
7 CFR Part 1033
[Docket No. AO-166-A72; DA-05-01-B]
Milk in the Mideast Marketing Area; Decision on Proposed
Amendments to Marketing Agreement and to Order
AGENCY: Agricultural Marketing Service, USDA.
ACTION: Proposed rule; final decision.
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SUMMARY: This document is the final decision proposing to adopt
amendments to the Mideast order intended to deter the de-pooling of
milk. This final decision is subject to producer approval by
referendum.
FOR FURTHER INFORMATION CONTACT: Gino Tosi, Associate Deputy
Administrator, 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: [email protected].
SUPPLEMENTARY INFORMATION: This final decision adopts amendments that:
(1) Establish a limit on the volume of milk a handler may pool during
the months of April through February to 115 percent of the volume of
milk pooled in the prior month; and (2) Establish a limit on the volume
of milk a handler may pool during the month of March to 120 percent of
the volume of milk pooled in the prior month. The proposed amended
order is subject to producer approval by referendum.
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 proposed herein have been reviewed
under Executive Order 12988, Civil Justice Reform. They are not
intended to have a retroactive effect. The 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
Department'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 Act 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
proposed rule 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.
During March 2005, the month during which the hearing occurred,
there were 9,767 dairy producers pooled on and 36 handlers regulated by
the Mideast order. Approximately 9,212 producers, or 94.3 percent, were
considered small businesses based on the above criteria. Of the 36
handlers regulated by the Mideast during March 2005, 26 handlers, or
72.2 percent, were considered small businesses.
The adopted amendments regarding the pooling standards serve to
revise established criteria that determine those producers, producer
milk, and plants that have a reasonable association with and
consistently serve the fluid needs of the Mideast 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, by doing so, to determine those producers who 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. Therefore, the proposed
amendments will not have a significant economic impact on a substantial
number of small entities.
The Agricultural Marketing Service is committed to complying with
the E-Government Act, to promote the use of the Internet and other
information technologies to provide increased opportunities for citizen
access to Government information and services, and for other purposes.
This action does not require additional information collection that
needs 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.
No other burdens are expected to fall on the dairy industry as a
result of overlapping Federal rules. This rulemaking proceeding does
not duplicate, overlap, or conflict with any existing Federal rules.
Prior documents in this proceeding:
Notice of Hearing: Issued February 14, 2005; published February 17,
2005 (70 FR 8043).
Amended Notice of Hearing: Issued March 1, 2005; published March 3,
2005 (70 FR 10337).
Tentative Partial Decision: Issued July 21, 2005; published July
27, 2005 (70 FR 43335).
Interim Final Rule: Issued September 20, 2005; published September
26, 2005 (70 FR 56111).
Final Partial Decision: Issued January 17, 2006; published January
23, 2006 (71 FR 3435).
Recommended Decision: Issued February 15, 2006; published February
22, 2006 (71 FR 9033).
Final Partial Rule: Issued April 17, 2006; published April 20, 2006
(71 FR 20335).
[[Page 54173]]
Preliminary Statement
A public hearing was held upon proposed amendments to the marketing
agreement and the order regulating the handling of milk in the Mideast
marketing area. The hearing was held, pursuant to the provisions of the
Agricultural Marketing Agreement Act of 1937 (AMAA), 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).
The proposed amendments set forth below are based on the record of
a public hearing held at Wooster, Ohio, on March 7-10, 2005, pursuant
to a notice of hearing issued February 14, 2005, published February 17,
2005, (70 FR 8043) and an amended notice of hearing issued March 1,
2005, and published March 3, 2005 (70 FR 10337).
Upon the basis of the evidence introduced at the hearing and the
record thereof, the Administrator, on February 15, 2006, issued a
Recommended Decision containing notice of the opportunity to file
written exception thereto.
The material issues, findings, conclusions and ruling of the
Recommended Decision, are hereby approved, adopted and are set forth
herein. The material issues on the record of hearing relate to:
1. Pooling standards
A. Establish pooling limits
B. Producer definition
2. Transportation Credits
Findings and Conclusions
This final decision specifically addresses proposals published in
the hearing notice as Proposals 4, 5, 6, 7, and 8 which seek to
establish a limit on the volume of milk that can be pooled on the
order; Proposal 9 which seeks to establish transportations credits; and
features of Proposal 3 intended to clarify the Producer definition by
providing a definition of ``temporary loss of Grade A approval.''
Proposals which sought to change the performance standards of the
order, Proposals 1 and 2, were addressed in a tentative partial
decision published on July 27, 2005 (70 FR 43335). The portion of
Proposal 3 that sought to amend the number of days a producer needs to
deliver milk to a distributing plant before the milk of the producer is
eligible for diversion was abandoned by the proponents at the hearing.
No further reference to that portion of Proposal 3 will be made.
The following findings and conclusions on the material issues are
based on evidence presented at the hearing and the record thereof:
1. Pooling Standards
A. Establishing pooling limits
Preliminary Statement. Federal milk marketing orders rely on the
tools of classified pricing and marketwide pooling to assure an
adequate supply of milk for fluid (Class I) use and to provide for the
equitable sharing of the revenues arising from the classified pricing
of milk. Classified pricing assigns a value to milk according to how
the milk is used. Regulated handlers who buy milk from dairy farmers
are charged class prices according to how they use the farmer's milk.
Dairy farmers are then paid a weighted average or ``blend'' price. The
blend price that dairy farmers are paid for their milk is derived
through the marketwide pooling of all class uses of milk in a marketing
area. Thus each producer receives an equal share of each use class of
milk and is indifferent as to the actual class for which the milk was
used. The Class I price is usually the highest class price for milk.
Historically, the Class I use of milk provides the additional revenue
to a marketing area's total classified use value of milk.
The series of class prices that are applicable for any given month
are not announced simultaneously. The Class I price and the Class II
skim milk price are announced prior to the beginning of the month for
which they will be effective. Class prices for milk in all other uses
are not determined until on or before the 5th day of the following
month. The Class I price is determined by adding a differential value
to the higher of either an advanced Class III or Class IV value. These
values are calculated based on formulas using the National Agricultural
Statistics Service (NASS) survey prices of cheese, butter, and nonfat
dried milk powder for the first two weeks of the prior month. For
example, the Class I price for August is announced in late July and is
based on the higher of the Class III or IV value computed using NASS
commodity price surveys for the first two weeks of July.
The Class III and IV prices for the month are determined and
announced after the end of the month based on the NASS survey prices
for the selected dairy commodities during the month. For example, the
Class III and IV prices for August are based on NASS survey commodity
prices during August. A large increase in the NASS survey price for the
selected dairy commodities from one month to the next can result in the
Class III or IV price exceeding the Class I price. This occurrence is
commonly referred to by the dairy industry as a ``class price
inversion.'' A producer price inversion generally refers to when the
Class III or IV price exceeds the average classified use value, or
blend price, of milk for the month. Price inversions have occurred with
increasing frequency in Federal milk orders since the current pricing
plan was implemented on January 1, 2000, despite efforts made during
Federal Order Reform to reduce such occurrences. Price inversions can
create an incentive for dairy farmers and manufacturing handlers who
voluntarily participate in the marketwide pooling of milk to elect not
to pool their milk on the order. Class I handlers do not have this
option; their participation in the marketwide pool is mandatory.
The producer price differential, or PPD, is the difference between
the Class III price and the weighted average value of all Classes. In
essence, the PPD is the dairy farmer's share of the additional/reduced
revenues associated with the Class I, II, and IV milk pooled in the
market. If the weighted average price of Class I, II, and IV milk in
the pool is greater than the Class III price, then dairy farmers
receive a positive PPD. However, a negative PPD can occur if the value
of the Class III milk in the pool exceeds the value of the remaining
classes of milk in the pool. This can occur as a result of the price
inversions discussed above.
The Mideast Federal order operates a marketwide pool. The Order
contains pooling provisions which specify criteria that, if met, allow
dairy farmers to share in the benefits that arise from classified
pricing through pooling. The equalization of all class prices among
handlers regulated by an order is accomplished through a mechanism
known as the producer settlement fund (PSF). Typically, Class I
handlers pay the difference between the blend price and their use-value
of milk into the PSF. Manufacturing handlers typically receive a draw
from the PSF, usually the difference between the Class II, III or IV
price and the blend price. In this way, all handlers pay the class
value for milk and all dairy farmer suppliers receive at least the
order's blend price.
When manufacturing class prices of milk are high enough to result
in a use-value of milk for a handler that is higher than the blend
price, handlers of manufacturing milk may choose to not pool their milk
receipts. Opting to not pool their milk receipts allows these handlers
to avoid the obligation of paying into the PSF. The choice by a
manufacturing handler to not pool their milk receipts is commonly
referred to in the dairy industry as ``de-pooling.'' When the blend
price rises above the manufacturing class use-values of milk these same
handlers again opt to pool
[[Page 54174]]
their milk receipts. This is often referred to as ``re-pooling.'' The
ability of manufacturing handlers to de-pool and re-pool manufacturing
milk is viewed by some market participants as being inequitable to both
producers and handlers.
The ``De-Pooling'' Proposals. Proponents are in agreement that milk
marketing orders should contain provisions that will tend to limit the
practice of de-pooling. Five proposals intending to limit the de-
pooling of milk were considered in this proceeding. The proposals
offered different degrees of deterrence against de-pooling by
establishing limits on the amount of milk that can be re-pooled. The
proponents of these five proposals are generally of the opinion that
de-pooling erodes equity among producers and handlers, undermines the
orderly marketing of milk and is detrimental to the Federal order
system.
Two different approaches on how to best limit de-pooling are
represented by these five proposals. The first approach, published in
the hearing notice as Proposals 6 and 7, addresses de-pooling by
limiting the volume of milk a handler can pool in a month to a
specified percentage of what the handler pooled in the prior month. The
second approach, published in the hearing notice as Proposals 4, 5 and
8, addresses de-pooling by establishing what is commonly referred to as
a ``dairy farmer for other markets'' provision. These proposals would
require milk of a producer that was de-pooled to not be able to be re-
pooled by that producer for a defined time period. All proponents
agreed that none of the proposals would completely eliminate de-pooling
but would likely deter the practice.
Of the five proposals received that would limit de-pooling, this
final decision adopts Proposal 7, as modified in post-hearing briefs,
offered by Dairy Farmers of America and Michigan Milk Producers
Association (DFA/MMPA). DFA/MMPA are Capper-Volstead cooperatives who
pool milk on the Mideast market. Specifically, adoption of Proposal 7
will limit the volume of milk a handler can pool during the months of
April through February to no more than 115 percent of the volume of
milk pooled in the prior month, and limit the volume of milk a handler
can pool in the month of March to 120 percent of the volume of milk
pooled in the month prior. Milk diverted to nonpool plants in excess of
these limits will not be pooled. Milk shipped to pool distributing
plants and allocated to Class I in excess of the volume allocated to
Class I in the prior month will not be subject to the 115 or 120
percent limitation. Milk pooled on another Federal order during the
previous 3 consecutive months would not be subject to the 115 or 120
percent limitation. The 115 or 120 percent limitation may be waived at
the discretion of the Market Administrator for a new handler on the
order or for an existing handler whose milk supply changes due to
unusual circumstances.
As published in the hearing notice, Proposal 6, offered by Ohio
Dairy Producers (ODP) and Ohio Farmers Union (OFU), was virtually
identical to Proposal 7. ODP is an organization of independent Ohio
dairy farmers and agriculture businesses that work to increase the
productivity and profitability of dairy farmers. OFU is an organization
whose members include dairy farmers pooled on the Mideast order.
Proposal 6 would limit the volume of milk a handler could pool in a
month to 115 percent of the volume of milk pooled in the prior month.
The proposal does not contain a separate pooling standard for the month
of March. Milk shipped to pool distributing plants, or milk pooled on
another Federal order during the preceding 6 months, would not be
subject to the 115 percent standard. The proposal would grant authority
to the Market Administrator to increase or decrease the 115 percent
standard.
As published in the hearing notice, Proposals 4, 5 and 8 address
de-pooling by establishing defined time periods during which de-pooled
milk could not be pooled. Proposal 4, also offered by ODP and OFU,
would require an annual pooling commitment by a handler to the market.
The proposal specified that if the milk of a producer was not pooled
during a month, or any of the preceding 11 months, the equivalent of at
least 10 day's milk production of the dairy farmer would need to be
delivered to a pool distributing plant during the month in order for
all the milk of the dairy farmer for that month to be pooled. Proposal
4 is not adopted.
Proposal 5, offered by Continental Dairy Products (Continental),
would limit the ability to pool the milk of a producer if such milk had
not been pooled during the previous 12 months. Continental is a Capper-
Volstead cooperative whose members milk is pooled on the Mideast order.
Proposal 5 is not adopted.
Proposal 8, offered by Dean Foods Company (Dean), would not permit
re-pooling for a 2 to 7 month period for milk that had been de-pooled.
Dean is a handler that distributes fluid milk products within the
Mideast marketing area. Under Proposal 8, if a producer's milk were de-
pooled in any of the months of February through June, or during any of
the preceding 3 months, or during any of the preceding months of July
through January, the equivalent of at least 10 day's milk production
would need to be physically received at a pool distributing plant in
the order to pool all of the dairy farmer's production for the month.
Additionally, if the milk of a dairy farmer is de-pooled in any of the
months of July through January, or in a preceding month, at least 10
day's milk production of the dairy farmer would need to be delivered to
a pool distributing plant to have all the milk of the dairy farmer
pooled for the month. Proposal 8 is not adopted.
While Proposals 4, 5 or 8 are not adopted, to the extent that these
proposals offered alternative methods to deter the practice of de-
pooling, adoption of Proposals 6 and 7 essentially accomplishes this
objective.
The proponents of Proposals 4, 5, 6, 7 and 8 are all of the opinion
that current inadequate pooling standards enable manufacturing handlers
to de-pool milk and immediately re-pool milk the following month and
are in need of revision. According to the proponents, the Mideast blend
price is lowered when large volumes of higher-valued milk used for
manufacturing is de-pooled as well as when the large volumes of de-
pooled milk returns to the pool. Furthermore, the witnesses argued that
de-pooling handlers do not have to account to the Mideast pool at
classified prices and therefore face different costs than their
similarly situated pooling competitors. While all proponents insisted
that the pooling standards of the order need to be amended to ensure
producer and handler equity, their opinions differed only on how to
best meet this end.
The current Producer milk provision of the Mideast order considers
the milk of a dairy farmer to be producer milk when it has been
received at a pool plant of the order. A producer must deliver 2 day's
milk production to a pool plant during each of the months of August
through November so that all the milk of a producer will be eligible to
be pooled throughout the year. Once the standard has been met, the milk
of a producer is eligible to be diverted to nonpool plants and continue
to be priced under the terms of the order. A pool plant cannot divert
more than 50 percent of its total producer milk receipts to nonpool
plants during each of the months of August through February and 60
percent during each of the months of March through July. Milk that is
subject to inclusion in another marketwide equalization program
operated by another government entity
[[Page 54175]]
is not considered producer milk. The order currently does not limit a
handler's ability to re-pool manufacturing uses of milk.
A witness appearing on behalf of Continental testified in support
of Proposal 5. The witness was of the opinion that pooling provisions
should limit a handler's ability to de-pool their milk receipts at will
and with little consequence. The witness testified that Proposal 5
would prohibit a handler from pooling the milk of a producer that had
been de-pooled during the previous 11 months. The witness characterized
Proposal 5 as an adequate deterrent to handlers de-pooling large
volumes of milk for short term financial gain. The witness added that
adoption of Proposal 5 would provide adequate safeguards for new
producers on the order or producers who may temporarily lose Grade A
status to pool their milk without penalty.
A post-hearing brief submitted on behalf of Continental reiterated
their support for the adoption of Proposal 5. The brief stressed that
de-pooling leads to the inequitable sharing of revenues amongst
producers and therefore should be dealt with in the most stringent
manner. Continental argued that adoption of any proposal that would
allow handlers to continue to de-pool any percentage of their milk
receipts supports the concept that de-pooling is an acceptable
practice. Continental vigorously opposed any level of de-pooling and
insisted that adoption of Proposal 5 was the only appropriate proposal
to re-establish equity in the marketplace.
A witness appearing on behalf of ODP testified in support of
Proposals 4 and 6. According to the witness, over 1.3 billion pounds of
milk was de-pooled during April and May 2004 reducing the value of the
marketwide pool by $21.3 million. The ODP witness insisted that pooling
standards should ensure that producer milk which regularly supplies the
needs of the fluid market does not receive a lower blend price when
manufacturing handlers opt to not pool their milk receipts. The witness
noted that Federal order hearings have been held in the Central and
Upper Midwest markets to address de-pooling. The witness stressed that
if the ability of manufacturing handlers to not pool their milk
receipts is eliminated in the Central and Upper Midwest markets, it may
add to the volume of de-pooled milk in the Mideast market. The witness
was of the opinion that adoption of either Proposal 4 or Proposal 6
would best solve the inequities created from de-pooling.
A witness appearing on behalf of Dean testified in support of
Proposal 4. The witness asserted that the intent of the Federal order
system is to ensure a sufficient supply of milk for fluid use and
provide for uniform payments to producers who stand ready, willing, and
able to serve the fluid market regardless of how the milk of any
individual is utilized. The Dean witness testified that provisions
allowing manufacturing handlers the option to participate or not
participate in the pool causes inequities between handlers.
The Dean witness was of the opinion that de-pooling causes
inequities between handlers and undermines the order's ability to
provide for a stable milk supply to meet Class I demand. The inequity,
the witness said, is that all handlers do not have the same ability to
pool and de-pool; fluid handlers are required to pool their milk
receipts while manufacturing handlers have the option of pooling their
milk receipts. The witness was of the opinion that this difference in
pooling options creates cost inequities between handlers since a fluid
handler must always account to the pool at classified use values while
manufacturing handlers may not.
The Dean witness also explained how de-pooling leads to inequities
between producers. The witness used a hypothetical example of two
cooperatives--Cooperative A that delivers 50 percent of its milk
receipts to distributing plants and Cooperative B who delivers 30
percent of its milk receipts to distributing plants. Cooperative A, the
witness said, is always at a disadvantage when a price inversion occurs
because they can only de-pool 50 percent of their milk receipts because
the milk delivered to distributing plants must be pooled. However, the
witness said, Cooperative B can de-pool 70 percent of their milk
receipts because only 30 percent is delivered to distributing plants.
Therefore, the witness concluded, Cooperative B is able to pay a higher
price to its dairy farmer suppliers since it is able to de-pool an
additional 20 percent of its total milk receipts that Cooperative A
cannot.
The Dean witness stressed that hearings have been held in other
Federal orders to consider proposals seeking to deter de-pooling and
urged the Department to adopt provisions to prevent milk from
opportunistically pooling on the Mideast order. In the opinion of the
Dean witness, Proposal 4 is the most appropriate solution to deter the
de-pooling of milk because it creates large and long-term consequences
to handlers who opt to de-pool. The Dean witness believed that should
the Department determine that Proposal 4 is not appropriate, Proposal 8
would be the best alternative.
A post-hearing brief submitted on behalf of Dean reiterated support
for the adoption of Proposal 4 with a modification. Dean proposed
granting the Market Administrator the ability to waive a producer's de-
pooled status if the producer was de-pooled after informing its pooling
handler that it intended to deliver its milk to another handler. The
brief stressed that the intention of Proposal 4 is not to prevent a
producer from being pooled because of circumstances out of their
control and believed their modification would remedy this potential
situation. Dean's brief reiterated that de-pooling results in
inequities between both handlers and producers. The brief noted that a
provision similar to Proposal 4 is in place in the Northeast order and
asserted that it has been very effective in limiting de-pooling.
Comments filed on behalf of Dean in response to the Recommended
Decision supported the Department's decision to deter the practice of
de-pooling. However, Dean expressed reservations that adoption of
Proposal 7 would be sufficient to adequately deter the practice of de-
pooling in the Mideast marketing area. Dean also commented that the re-
pooling standard for the month of February should be modified to 110
percent to account for additional days in January much like the re-
pooling standard for the month of March was modified to account for the
fewer days in February.
A witness appearing on behalf of Superior Dairy (Superior)
testified in support of Proposal 4. Superior is a pool distributing
plant regulated by the Mideast order. The witness said that Proposal 4
should be adopted because the de-pooling actions of some handlers are
reducing the blend price paid to producers who regularly and
consistently service the needs of the Class I market.
A witness appearing on behalf of OFU testified in support of
Proposal 6. The witness said that current regulations allow handlers to
take advantage of the Federal order program and not share income
generated in the market with pooled producers. The witness supported
adoption of Proposal 6 and stressed that adoption of the proposal would
discourage manufacturing handlers from not pooling their milk receipts
when it is to their financial advantage.
A second witness appearing on behalf of Dean testified in support
of Proposals 4, 6, 7, and 8. The witness testified that Proposal 4
would encourage handlers to
[[Page 54176]]
pool their milk receipts in times of a price inversion since the
decision to de-pool would result in a 12-month penalty. The witness
said that adoption of Proposal 4 would also ensure that the de-pooled
producer provided service to the Class I market by making substantial
and consistent service to fluid distributing plants.
The second Dean witness characterized Proposal 8 as a less
desirable alternative to Proposal 4. The difference in the two
proposals, the witness said, is the number of months a producer must
meet the 10-day touch base standard to be re-pooled--it is fewer under
Proposal 8 and varies depending on the month in which the milk was de-
pooled. In general, emphasized the witness, the effects of both
proposals would be the same except that if Proposal 8 were adopted, the
cost to a de-pooling handler and the benefit to continuously pooled
producers would be less.
The second Dean witness testified that Proposal 7 and Proposal 6
are less desirable options to Proposals 4 and 8. According to the
witness, if a 115 percent re-pooling standard were adopted it would
take a handler who opted to de-pool 90 percent of its milk 17 months to
re-pool all the handler's milk receipts. If a handler opted to de-pool
30 percent of its milk receipts, the witness added, it would only take
3 months to again pool all of its milk receipts. The witness emphasized
that the larger the volume of milk a handler opted to de-pool, the
longer the length of time a handler would need to requalify all its
milk receipts and the more money it would cost the de-pooling handler.
The witness concluded that Proposals 6 and 7 offered a different method
for limiting de-pooling that would not be as effective as the method
contained in Proposals 4 and 8.
A dairy farmer whose milk is pooled on the Mideast order testified
in support of Proposals 4, 5, and 6. The witness testified that in
April 2004 their farm lost $9,000 because of the reduced PPD that
resulted from de-pooling. The witness urged the Department to adopt
either Proposal 4, 5, or 6 to remedy de-pooling and to do so on an
emergency basis.
A witness appearing on behalf of DFA/MMPA testified in support of
Proposal 7. The witness said that Proposal 7 was designed to limit de-
pooling by creating financial consequences for manufacturing handlers
who de-pool their milk receipts. The witness testified that members of
DFA/MMPA currently de-pool milk when it is to their advantage but
emphasized that de-pooling causes market disorder and should be
prohibited.
The DFA/MMPA witness said that de-pooling is not a new occurrence;
however, the volatility of milk prices in recent years has caused more
frequent price inversions and subsequent opportunities to de-pool. The
witness referenced data presented at a similar proceeding held in the
Central order that during the 84 month period from 1993 to 1999, there
were 16 months with negative PPD's, 6 of which were in excess of a
negative 50 cents per cwt. However, the witness noted that during the
60 month period from January 2000 through December 2004 the opportunity
to de-pool had occurred 51 times.
The DFA/MMPA witness contended that de-pooling causes inequities
because similarly situated handlers face different costs in procuring a
milk supply. Class I milk is required to be pooled, the witness said,
and distributing plants always have to share the additional value of
their Class I milk sales with all pooled producers. However, the
witness said, a manufacturing handler is not required to account to the
pool at classified prices and can therefore retain the revenue
generated from not pooling milk when price inversions occur. The
witness asserted that manufacturing handlers use the additional revenue
generated from de-pooling to pay a higher price to their producers
while fluid handlers must use money from their profit margins to pay a
competitive price. In this regard, the witness said, Class I handlers
are at a disadvantage in competing with manufacturing handlers for a
producer milk supply.
Relying on Market Administrator statistics, the DFA/MMPA witness
illustrated that in April 2004 manufacturing handlers that may have
chosen to not pool their milk receipts were able to keep $3.78 more per
hundredweight than a fluid handler on all their de-pooled milk and
could use the proceeds to pay dairy farmers. The witness showed how a
supplying handler that delivered one load of milk a day for a month to
a Class I plant, would have received $56,700 less than a manufacturing
handler who could opt to de-pool their milk receipts. Relying on Market
Administrator statistics, the witness testified that 649.3 million
pounds of milk was de-pooled in April 2004. According to the witness,
if that milk had been pooled the PPD paid to all producers would have
been $1.66 per cwt higher.
The DFA/MMPA witness testified that Proposal 7 would limit the
amount of milk a handler could pool to 115 percent of the handler's
prior month pooled milk volume. The witness insisted that the 115
percent standard would create the economic incentive necessary to keep
an adequate reserve supply of milk pooled on the order while
accommodating reasonable levels of growth in a handler's month-to-month
production and other seasonal production fluctuations. The witness
noted that the Market Administrator should be given the discretion to
disqualify de-pooled milk from pooling if the Market Administrator
believes that the handler was trying to circumvent the pooling
standards.
The DFA/MMPA witness testified that emergency marketing conditions
exist without a deterrent to de-pooling that warrant the omission of a
recommended decision. The witness was of the opinion that the volatile
dairy product markets that gave rise to rapid price increases and price
inversions will continue and therefore, should be addressed in an
expedited manner.
A post-hearing brief submitted on behalf of DFA/MMPA reiterated
their support of Proposal 7. The brief stressed that adoption of
Proposal 7, while not completely eliminating a handler's ability to de-
pool, would reduce the total volume of de-pooled milk. DFA/MMPA
suggested a modification to Proposal 7 in their post-hearing brief to
establish a limit on the volume of milk a handler could pool in March
to 120 percent of the their total volume of milk pooled during the
prior month. DFA/MMPA believed that this modification would better
accommodate and account for the fewer number of days in the month of
February.
The DFA/MMPA brief argued that Proposals 4 and 5 are not
appropriate for the Mideast order because they call for stringent and
unnecessary changes in the order's pooling provisions. The brief
stressed that the intention of Proposal 7 was to improve the pooling
standards of the order but not in a manner that would necessitate a
change to a handler's business operations.
Comments filed on behalf of DFA/MMPA; Dairylea; National Farmers
Organization, Inc.; and Land O'Lakes, hereinafter referred to as DFA,
et al., expressed their support of the proposed re-pooling standards.
DFA, et al., clarified that the intent of Proposal 7 was to constrain
the practice of de-pooling while still encouraging additional milk
shipments for Class I use. DFA, et al., proposed that the re-pooling
standard be amended to exempt milk delivered to distributing plants in
excess of the previous month's pooled volume instead of the proposed
standard that exempts milk delivered to distributing plants in excess
of the
[[Page 54177]]
volume classified as Class I in the prior month. A witness appearing on
behalf of Ohio Farm Bureau Federation testified in support of Proposal
7. The witness was of the opinion that if the current pooling
provisions are not amended to deter the practice of de-pooling, prices
received by farmers who reliably service the Class I market would
decrease. The witness claimed that handlers who de-pool milk do not
share the revenues generated from de-pooling with all pooled producers
which lowers returns to producers who are consistently serving the
Class I market. The witness added that Federal order hearings
concerning de-pooling have been held in other Federal orders. The
witness claimed that if de-pooling is not addressed in the Mideast
order, milk from other Federal orders may seek to be pooled on the
Mideast order. In this regard, the witness said that adoption of
Proposal 7 is necessary to ensure that blend prices received by
producers who are consistently pooled are not further eroded.
A witness appearing on behalf of Prairie Farms Dairy (Prairie
Farms) testified in support of Proposal 7. Prairie Farms is a member
owned Capper-Volstead cooperative that pools milk on the Mideast order.
The witness testified that since Prairie Farms is required to pool all
milk utilized at their distributing plants, all revenues generated from
their Class I sales are shared with all pooled producers. The witness
noted that Prairie Farms does de-pool its manufacturing milk when it is
advantageous but emphasized that this practice is detrimental to
producers who are consistently serving the Class I market. The witness
urged adoption of Proposal 7 but also offered support for Proposal 6.
Seven dairy farmers whose milk is pooled on the Mideast order
testified in support of Proposal 7. The dairy farmers testified that
the purpose of the Federal order system is to ensure that pooled
producers receive an equitable share of the revenue generated from all
classes of milk. The witnesses were of the opinion that the practice of
de-pooling caused them to lose a substantial amount of potential
income. These witnesses stressed that if manufacturing handlers choose
to pool their milk receipts in months when the PPD is positive, it is
only equitable for them to pool their milk receipts when the PPD is
negative. The witnesses believed that de-pooling results in producers
who consistently service the Class I needs of the market receiving a
lower blend price than they otherwise would have if all milk had been
pooled. The witnesses maintained that because de-pooling erodes
revenues received by pooled producers, the Department should address
de-pooling on an emergency basis.
Another dairy farmer witness whose milk is pooled on the Mideast
order testified in support of limiting de-pooling but did not offer
support for any specific proposal. The witness said that as a result of
de-pooling in the months of April and May 2004, their farm lost over
$6,000. The witness was of the opinion that the Department should act
on an emergency basis since the ability for manufacturing handlers to
de-pool milk will continue to lower the proceeds received by producers
that service the needs of the Class I market.
A witness appearing on behalf of Smith Dairy Products Company
testified in support of proposals limiting de-pooling. Smith operates
two distributing plants located in the Mideast marketing area. The
witness said that the practice of de-pooling manipulates the intent of
the Federal milk order system and results in the lowering of the blend
prices paid to producers that service the needs of the Class I market.
The witness did not offer support for a specific proposal but urged the
Department to eliminate the ability to de-pool milk on the Mideast
order on an emergency basis.
A witness appearing on behalf of Continental testified in
opposition to Proposals 4, 6, 7, and 8. The witness opposed adoption of
these proposals because they would allow milk delivered to a
distributing plant to be immediately re-pooled and maintained that
Proposal 5 would be a better option for the marketing area.
A witness appearing on behalf of White Eagle Cooperative Federation
(White Eagle) testified neither in support of or opposition to Proposal
7. White Eagle is a federation of cooperatives and independent
producers that markets approximately 150 million pounds of milk per
month on the Mideast order. The witness asserted that adoption of the
115 percent pooling standard could limit smaller cooperatives from
increasing their dairy farmer membership. The witness testified that
adoption of Proposal 7 would allow for an increase in the volume of
milk pooled above 115 percent if a producer who was pooled on another
Federal order sought to become pooled on the Mideast order but would
not make the same exception for a producer continually pooled on the
Mideast order who increases production. The witness said that if de-
pooling were limited on the Mideast order, de-pooled milk would seek to
be pooled on other Federal orders where there are no de-pooling
restrictions. The witness was of the opinion that the de-pooling issue
should be handled on a national basis and with a recommended decision
where the public could submit comments. These positions were reiterated
in their post-hearing brief filed on behalf of White Eagle, Superior
Dairy, United Dairy, Guggisberg Cheese, Brewster Dairy, and Dairy
Support, Inc.
A post-hearing reply brief submitted on behalf of Dean expressed
opposition to Proposal 5. Dean argued that Proposal 5 was too
restrictive because it contained no provision to enable de-pooled milk
to become immediately re-pooled if it was truly needed to service the
fluid market later in the month.
Comments filed on behalf of Foremost Farms USA Cooperative
(Foremost) and Alto Dairy Cooperative (Alto), hereinafter, referred to
as ``Foremost, et al.'', took exception to the Recommended Decision.
Foremost, et al., are member owned Capper-Volstead cooperatives that
market milk and supply distributing plants in the Mideast marketing
area. Foremost, et al., took exception to the proposed regulations that
would require a producer to be continuously pooled on another Federal
order for the previous 3 months to be exempted from the re-pooling
standards. Their exception asserted that a producer should be allowed
to have some de-pooled milk receipts during the previous 3 months and
still be exempted from the re-pooling standards of the Mideast order.
Comments filed on behalf of Family Dairies USA took exception with
amendments proposed in the Recommended Decision. Family Dairies is a
member owned Capper-Volstead cooperative whose milk is pooled on the
Mideast order. Family Dairies wrote that the Recommended Decision did
not address the cause of negative PPD's--class price inversions--and
therefore opposed the adoption of the proposed amendments.
Comments were filed on behalf of Associated Milk Producers, Inc.;
Bongards' Creameries; Ellsworth Cooperative Creamery; Family Dairies
USA; First District Association; Davisco Foods; Valley Queen Cheese
Company; and Wisconsin Cheese Makers Association, hereinafter referred
to as the ``AMPI Group.'' The AMPI Group took exception to the re-
pooling standard proposed by the Department and asserted that the
proposed standard did not solve the underlying cause of de-pooling. The
AMPI Group asserted that the Department arbitrarily refused to consider
proposals that would end the time lag in classified price announcements
as a remedy to de-pooling and did not consider alternative
[[Page 54178]]
proposals that would be less burdensome to handlers or requests to
address the practice of de-pooling on a national basis.
The AMPI Group commented that provisions which allow the Market
Administrator to waive the re-pooling standard for handlers that
experience a significant change in their milk supply due to unusual
circumstances should be more specific as to what constitutes an unusual
circumstance. The AMPI Group argued that small manufacturers may
experience a growth in their milk supply that would not be considered
an unusual circumstance and that such a situation should not cause a
handler to be penalized under the re-pooling standard. The AMPI Group
also cited various legal issues as reasons why the Department should
not adopt the re-pooling standards. All Federal milk marketing orders
require the pooling of milk received at pooled distributing plants--
which is predominately Class I milk--and all pooled producers and
handlers on an order share in the additional revenue arising from
higher valued Class I sales. Manufacturing handlers and cooperatives of
Class II, III and IV uses of milk who meet the pooling and performance
standards make all of their milk receipts eligible to be pooled and
usually find it advantageous. Manufacturing handlers and cooperatives
who supply a portion of their total milk receipts to Class I
distributing plants receive the difference between their use-value of
milk and the order's blend price. Federal milk orders, including the
Mideast order, establish limits on the volume of milk eligible to be
pooled that is not for fluid uses primarily through diversion limit
standards. However, manufacturing handlers and cooperatives are not
required, as are Class I handlers, to pool all their eligible milk
receipts.
According to the record, manufacturing handlers and cooperatives
have opted to not pool their milk receipts when the manufacturing class
prices of milk are higher than the order's blend price--commonly
referred to as being ``inverted.'' During such months, manufacturing
handlers and cooperatives have elected to not pool all of their
eligible milk receipts because doing so would require them to pay into
the PSF of the order, the mechanism through which handler and producer
prices are equalized. When prices are not inverted, these handlers
would pool all of their eligible receipts and receive a payment or draw
from the PSF. In receiving a draw from the PSF, such handlers have
sufficient money to pay at least the order's blend price to their
supplying dairy farmers.
When manufacturing handlers and cooperatives opt to not pool all of
their eligible milk receipts in a month, they are essentially avoiding
a payment to the PSF. This, in turn, enables them to avoid the
marketwide sharing of the additional value of milk that accrues in the
higher-valued uses of milk other than Class I. When the Class I price
again becomes the highest valued use of milk, or when other class-price
relationships become favorable, the record reveals that these same
handlers opt to again pool their eligible milk receipts and draw money
from the PSF. It is the ability of manufacturing handlers and
cooperatives opting to not pool milk and thereby avoid the marketwide
sharing of the revenue accruing from non-Class I milk sales that is
viewed by proponents as giving rise to disorderly marketing conditions.
According to proponents, producers and handlers who cannot escape being
pooled and priced under the order are not assured of equitable prices.
The record reveals that since the implementation of Federal milk
marketing order reform in January 2000, and especially in more recent
years, large and rapid increases in manufactured product prices during
certain months have provided the economic incentives for manufacturing
handlers to opt not to pool eligible milk on the Mideast order. For
example, during the 3-month period of February to April 2004, the Class
III price increased over 65 percent from $11.89 cwt to $19.66 cwt.
During the same time period, total producer milk pooled on the Mideast
order decreased by nearly 40 percent from 1.4 billion pounds to 873
million pounds. When milk volumes of this magnitude are not pooled the
impacts on producer blend prices are significant. Producers who incur
the additional costs of consistently servicing the Class I needs of the
market receive a lower return than would otherwise have been received
if they did not continue to service the Class I market. Prices received
by dairy farmers who supplied the other milk needs of the market are
not known. However, it is reasonable to conclude that prices received
by dairy farmers were not equitable or uniform.
The record reveals that ``inverted'' prices of milk are generally
the result of the timing of Class price announcements. Despite changes
made as part of Federal milk order reform to shorten the time period of
setting and announcing Class I milk prices and basing the Class I price
on the higher of the Class III or Class IV price to avoid price
inversions, large month-to-month price increases in Class III and Class
IV product prices sometimes trumped the intent of better assuring that
the Class I price for the month would be the highest-valued use of
milk. In all orders, the Class I price (and the Class II skim price) is
announced prior to or in advance of the month for which it will apply.
The Class I price is calculated by using the National Agricultural
Statistics Service (NASS) surveyed cheese, butter, nonfat dry milk and
dry whey prices for the two most current weeks prior to the 24th day of
the preceding month and then adding a differential value to the higher
of either the advanced Class III or Class IV price.
Historically, the advance pricing of Class I milk has been used in
all Federal orders because Class I handlers cannot avoid regulation and
since they are required to pool all of their Class I milk receipts they
should know their product costs in advance of notifying their customers
of price changes. However, milk receipts for Class III and IV uses are
not required to be pooled; thus, Class III and IV product prices (and
the Class II butterfat value) are not announced in advance. These
prices are announced on or before the 5th of the following month. Of
importance here is that manufacturing plant operators and cooperatives
have the benefit of knowing all the classified prices of milk before
making a decision to pool or not pool eligible receipts.
The record reveals that the decision of manufacturing handlers or
cooperatives to pool or not pool milk is made on a month-to-month basis
and is generally independent of past pooling decisions. Manufacturing
handlers and cooperatives that elected to not pool their milk receipts
did so to avoid making payments to the PSF and they anticipated that
all other manufacturing handlers and cooperatives would do the same.
However, the record indicates that normally pooled manufacturing
handlers and cooperatives met the pooling standards of the order to
ensure that the Class I market was adequately supplied and that they
established eligibility to pool their physical receipts including
diversions to nonpool plants. Opponents to proposals to deter de-
pooling are of the view that meeting the pooling standards of the order
and deciding how much milk to pool are unrelated events. Proponents
took the view that participation in the marketwide pool should be based
on a long-term commitment to supply the market because in the long-term
it is the sales of higher priced Class I milk that adds additional
revenue to the pool.
[[Page 54179]]
The producer price differential, or PPD, is the difference between
the Class III price and the weighted average value of all Class I, II
and IV milk pooled. In essence, the PPD is the residual revenue
remaining after all butterfat, protein and other solids values are paid
to producers. If the pooled value of Class I, II and IV milk is greater
than the Class III value, dairy farmers receive a positive PPD. While
the PPD is usually positive, a negative PPD can occur when class prices
rise rapidly during the 6-week period between the time the Class I
price is announced and the time the Class II butterfat and III and IV
milk prices are announced. When manufacturing prices fall, this same
lag in the announcement of class prices yields a positive PPD.
As revealed by the record, when manufacturing plants and
cooperatives opted to not pool milk because of inverted price
relationships, PPD's were much more negative. When this milk is not
pooled, a larger percentage of the milk remaining pooled will be the
``lower'' priced Class I milk. When manufacturing milk is not pooled
the weighted average value of milk decreases relative to the Class II,
III or IV value making the PPD more negative. For example, record
evidence demonstrated that in April 2004, a month when a sizeable
volume of milk was not pooled, the PPD was a negative $3.78 per cwt. If
all eligible milk had been pooled, the PPD would have been $1.66 per
cwt higher or a negative $2.12 per cwt. This $1.66 per cwt represents
the additional burden borne by those producers who remain pooled.
The record reveals that when manufacturing handlers and
cooperatives opt to not pool milk, unequal pay prices may result to
similarly located dairy farmers. For example, Dean noted that when a
cooperative delivers a high percentage of their milk receipts to a
distributing plant, it lessens their ability to not pool milk and makes
them less competitive in the marketplace relative to other producers
and handlers. Other evidence in the record supports conclusions
identical to Dean that when a dairy farmer or cooperative is able to
receive increased returns from shipping milk to a manufacturing handler
during times of price inversions, other dairy farmers or cooperatives
who may have shipped more milk to a pool distributing plant are
competitively disadvantaged.
The record of this proceeding reveals that the ability of
manufacturing handlers and cooperatives to not pool all of their
eligible milk receipts gives rise to disorderly marketing conditions
and warrants the establishment of additional pooling standards to
safeguard marketwide pooling. Current pooling provisions do not require
or prohibit handlers and cooperatives from pooling all eligible milk
receipts. However, the record reveals that when handlers and
cooperatives opt to not pool milk, inequities arise among producers and
handlers that are contrary to the intent of the Federal milk marketing
order program--maintaining orderly marketing conditions.
The record contains extensive testimony regarding the effects on
the milk order program resulting from advance pricing and the priority
the milk order program has placed on the Class I price being the
highest valued use of milk. It remains true that the Class I use of
milk is still the highest valued use of milk notwithstanding those
occasional months when milk used in usually lower-valued classes may be
higher. This has been demonstrated by an analysis of the effective
Class I differential values--the difference in the Class I price at the
base zone of Cuyahoga County, Ohio, and the higher of the Class III or
Class IV price--for the 65-month period of January 2000 through May
2005 performed by USDA.\1\ These computations reveal that the effective
monthly Class I differential averaged $1.97 per cwt. Accordingly, it
can only be concluded that if the longer-term Class I sales continue to
be the source of additional revenue accruing to the pool even when, in
some months, the effective differential is negative.
---------------------------------------------------------------------------
\1\ Official notice is taken of data and information published
in Market Administrator Bulletins, as posted on individual Market
Administrator Web sites.
---------------------------------------------------------------------------
Price inversions occur when the wholesale price for manufactured
products rises rapidly indicating a tightening of milk supplies to
produce those products. It is for this reason that the Department chose
the higher of the Class III or Class IV prices as the mover of the
Class I price. Distributing plants must have a price high enough to
attract milk away from manufacturing uses to meet Class I demands. As
revealed by the record, this method has not been sufficient to provide
the appropriate price signals to assure an adequate supply of milk for
the Class I market. Accordingly, additional measures are needed as a
means of assuring that milk remains pooled and thus available to the
Class I market. Adoption of Proposal 7 is a reasonable measure to meet
the objectives of orderly marketing.
This final decision does find that disorderly marketing conditions
are present when producers do not receive uniform prices. Handlers and
cooperatives opting to not pool milk do not account to the pool at the
classified use value of those milk receipts. They do not share in all
the additional costs and burdens with those producers who are pooled
and who are incurring the costs of servicing the Class I needs of the
market. This is not a desired or reasonable outcome especially when the
same handlers and cooperatives will again pool all of their eligible
receipts when class-price relationships change in a subsequent month.
These inequities borne by the market's producers are contrary to the
intent of the Federal order program's reliance on marketwide pooling--
ensuring that all producers supplying the market are paid uniform
prices for their milk regardless of how the milk of any single producer
is used.
Exceptions filed by the AMPI Group and Foremost, et al., asserting
that the re-pooling standards do not address the cause of de-pooling--
price inversions--are unpersuasive. It is reasonable that the order
contain pooling provisions intended to deter the disorderly conditions
that arise when de-pooling occurs. Such provisions maintain and enhance
orderly marketing. Accordingly, this final decision finds it reasonable
to adopt provisions that limit the volume of milk a handler or
cooperative may pool during the months of April through February to 115
percent of the total volume pooled by the handler or cooperative in the
prior month and to 120 percent of the prior month's pooled volume
during March. Adoption of this standard will not prevent manufacturing
handlers or cooperatives from electing to not pool milk. However, it
should serve to maintain and enhance orderly marketing by encouraging
participation in the marketwide pooling of all classified uses of milk.
A modification proposed by Dean in their exceptions to the
Recommended Decision to lower the re-pooling standard in February to
110 percent is denied. This modification was not discussed at the
hearing. The 115 percent re-pooling standard should adequately deter
excessive de-pooling. However, should de-pooling abuses continue under
the new re-pooling standards the Department can be petitioned to adjust
the standards.
Despite exceptions filed by the AMPI Group, this decision continues
to adopt provisions that grant authority to the Market Administrator to
waive the re-pooling standard for a bloc of milk due to unusual
circumstances. This discretion has been previously granted to the
Market Administrator to amend or waive other pooling standards and it
is
[[Page 54180]]
reasonable to make a similar accommodation here. Consideration was
given on whether de-pooling should be considered at a national hearing
with other, broader national issues of milk marketing. However, each
marketing area has unique marketing conditions and characteristics that
have area-specific pooling provisions to address those specific
conditions. Because of this, pooling issues are considered unique to
each order. Historically, pooling issues have been addressed on an
order by order basis and, despite exceptions filed by the AMPI Group,
this final decision continues to find that it would be unreasonable to
address pooling issues, including de-pooling, on a national basis.
Other objections by the AMPI Group that the Department should take into
account a manufacturers cost of production are irrelevant in regards to
the pooling standards of the order. The record does not support finding
that manufacturers de-pool milk to recoup manufacturing costs that they
otherwise cannot. The record clearly establishes that manufacturers de-
pool their milk supply to avoid making a payment into the order's PSF.
Nevertheless, manufacturing allowances, which are uniform in all
Federal orders, are currently being addressed by the Department on a
national basis (71 FR 545).
Some manufacturing handlers and cooperatives argued at the hearing
and noted in exceptions to the Recommended Decision that their milk did
perform in meeting the Class I needs during the month and this occurred
before making their pooling decisions. They argue that the Class I
market is therefore not harmed and that the intents and goals of the
order program are satisfied. In response to these arguments, this
decision finds that the practice of de-pooling undermines the intent of
the Federal order program to assure producers uniform prices across all
uses of milk normally associated with the market as a critical
indicator of orderly marketing conditions.
Exceptions filed by Foremost, et al., arguing that a producer
should be allowed to de-pool some milk in each month and still be
allowed to utilize the exception for producers or blocs of producers
moving between orders is contrary to the goal of the re-pooling
provision. If a producer were allowed to de-pool milk in one Federal
order and subsequently re-pool in a second Federal order without
limitation, the re-pooling standard would be severely undermined. As a
matter of clarification, a producer can be de-pooled in one order and
re-pooled in the Mideast order as part of the 115 percent re-pooling
limitation, but no further exemption from the limitation would apply to
this producer.
Handlers and cooperatives who de-pool purposefully do so to gain a
momentary financial benefit (by avoiding making payments to the PSF)
which would otherwise be equitably shared among all market
participants. While the order's performance standards tend to assure
that distributing plants are adequately supplied with fresh, fluid
milk, the goals of marketwide pooling are undermined by the practice of
de-pooling. Producers and handlers who regularly and consistently bear
the costs of serving the Class I needs of the market will not equitably
share in the additional value arising momentarily from non-fluid uses
of milk. These same producers and handlers will, in turn, be required
to share the additional revenue arising from higher-valued Class I
sales in a subsequent month when class-price relationships change.
The five proposals considered in this proceeding to deter the
practice of de-pooling in the Mideast order have differences. They all
seek to address market disorder arising from the practice of de-
pooling. However, this final decision does not find adoption of the
three ``dairy farmer for other market'' proposals--Proposals 4, 5 and
8--reasonable because they would make it needlessly difficult for milk
to be re-pooled and because their adoption may disrupt prevailing
marketing channels or cause the inefficient movement of milk. Likewise,
Proposal 6, which suggests restricting pooling in a month to 115
percent of the prior month's volume pooled by the handler, is not
adopted. Adoption of this proposal would disrupt current marketing
conditions beyond what the record justifies.
A request submitted by DFA, et al., in their exceptions to the
Recommended Decision to exempt all milk delivered to distributing
plants in excess of the previous month's pooled volume regardless of
its allocation is denied. Such a provision could result in the
uneconomical movement of milk to circumvent the re-pooling standard.
Therefore, this final decision adopts Proposal 7 to limit the
pooling of milk by a handler during the months of April through
February to 115 percent of the total milk receipts the handler pooled
in the prior month and to 120 percent of the prior month's pooled
volume during March because it provides the most reasonable measure to
deter the practice of de-pooling.
B. Producer Definition
A proposal published in the hearing notice as Proposal 3, seeking
to specify the length of time a dairy farmer may lose Grade A status
before losing producer status on the order, is not adopted. Proposal 3,
offered by Dean, seeks to amend the Producer milk definition by
explicitly stating that a dairy farmer may lose Grade A status for up
to 21 calendar days per year before needing to requalify as a producer
on the order. The Mideast order does not specify the length of time a
dairy farmer may lose Grade A status before needing to requalify as a
producer on the order.
Two witnesses appearing on behalf of Dean testified in support of
Proposal 3. The Dean witnesses supported adoption of Proposal 3 to
provide for 21 days in a year that a producer could lose Grade A
approval before needing to reassociate with the Mideast order by making
a delivery to a Mideast pool plant. By providing for an exact number of
days, the witnesses emphasized, a loss of Grade A status could not be
used as a method to de-pool or to circumvent the pooling standards. The
witnesses believed that the Market Administrator should be granted the
authority to extend the length of time a producer could lose Grade A
status before they would have to requalify if the loss of status was
due to circumstances beyond the producers control. A post-hearing brief
submitted on behalf of Dean reiterated their belief that this change
was necessary to ensure that the re-pooling standards would not be
circumvented.
Comments filed on behalf of Dean took exception to the Department's
denial of Proposal 3 to define the term ``temporary'' in the producer
milk definition. Dean maintained that a producer should bear the burden
of establishing that their temporary loss of Grade A approval was not
designed to avoid the new re-pooling standards.
The Producer definition of the Mideast order currently does not
define the length of time a producer may lose Grade A status before
needing to requalify for producer status on the order. The issue of
qualifying for producer status is important since it determines which
producers and which producer milk is entitled to share in the revenues
arising from the marketwide pooling of milk on the Mideast order.
The definition of ``temporary'' used by the Market Administrator
has accommodated the Mideast market by giving producers a reasonable
amount of time to regain Grade A status without burdening the market
with excessive touch-base shipments or recordkeeping
[[Page 54181]]
requirements. Limiting the time period a producer can lose Grade A
status would require handlers and the Market Administrator to track the
producer's loss of Grade A status throughout the year to determine when
the 21 day limit is reached.
Despite exceptions filed by Dean requesting an exact definition of
``temporary'', this decision continues to find that the additional
touch-base shipments that would be required for a dairy farmer to
requalify for producer status on the order would cause uneconomic
shipments of milk. Additionally, the increased recordkeeping
requirements would burden not only the handlers but also the Market
Administrator's office without contributing to the goals and
application of the proposed amendments to the pooling standards
contained in this decision. Other amendments adopted in this decision
that grant the Market Administrator authority to disqualify milk for
pooling if it is found that the handler attempted to circumvent the re-
pooling standards provide an adequate safeguard against pooling abuses.
Accordingly, Proposal 3 is not adopted.
2. Transportation Credits
A proposal offered by DFA, published in the hearing notice as
Proposal 9 and modified at the hearing, seeking to establish a
transportation credit provision is not adopted. Proposal 9 seeks to
establish a year-round transportation credit on shipments of milk from
farms to distributing plants at a rate of $0.0031 per cwt per mile. A
separate rate of $0.0024 per cwt per mile for eligible milk movements
in the State of Michigan was offered as a modification by MMPA. The
credit would not be applicable on the first 75 miles of movement and
would be limited to 350 miles. The Mideast order does not currently
provide for transportation credits.
A witness appearing on behalf of DFA/MMPA testified that the
establishment of a transportation credit in the Mideast order is
warranted because the cost of supplying the Class I market is not being
equitably borne by all pooled producers. The witness testified that all
producers benefit from Class I sales because the revenue generated is
distributed through the marketwide pool. In particular, the witness
said that all pooled producers were not equitably sharing in the costs
of transporting supplemental supplies to meet Class I demand. The
witness was of the opinion that Federal order prices should reimburse
producers for the cost of transporting milk supplies to Class I plants
when needed. The witness emphasized that Proposal 9 is designed to
equitably distribute some of the cost of transporting those Class I
milk supplies with all pooled producers.
The DFA/MMPA witness explained that the proposed exemption of the
first 75 miles of eligible milk movement recognizes the producer's
responsibility to deliver their milk to the market. The 75 mile
exclusion was appropriate, the witness contended, because in the two
northern reserve supply regions of Michigan and northern Ohio, the
average distance milk travels to a distributing plant is 71 and 74
miles, respectively. The witness also said that a maximum applicable
milk movement of 350 miles is a reasonable safeguard to prevent milk
from traveling great distances solely to receive the transportation
credit. The DFA/MMPA witness also noted that the Market Administrator
should be given the discretion to adjust the transportation credit rate
if market conditions warrant. The witness asserted that the market's
blend price would be reduced by approximately $0.0297 per cwt per month
if Proposal 9 was adopted. The witness maintained that a small
reduction in the blend price received by farmers to cover a
transportation credit was justified because of the benefit they would
receive from having Class I plants fully supplied.
The DFA/MMPA witness contended that the northern region of the
Mideast marketing area is a milk surplus region while the southern
portion of the marketing area is usually a milk deficit region. The
witness said that often surplus milk from the northern region of the
marketing area must be transported long distances to supply the
southern region for Class I use. Before Federal order reform, the
witness asserted, the pricing structure of the Federal order program
provided location adjustments that encouraged milk to move to Class I
plants because the difference in the Class I differentials between the
surplus and deficit areas provided producers sufficient reimbursement
for the transportation costs incurred. However, the witness stressed,
the Mideast order's current Class I differential values between surplus
and deficit areas do not provide sufficient incentive to encourage this
north to south movement of milk.
According to the DFA/MMPA witness, the cost to move a load of milk
within the Mideast marketing area from a $1.80 Class I differential
zone to a $2.20 Class I differential zone is $0.66 per cwt. However,
the order's Class I differential's only provided a $0.40 per cwt
incentive to transport that milk. The result, said the witness, is that
Class I handlers have to pay additional money to fulfill their Class I
needs although all pooled producers benefit from the higher returns
generated from those Class I sales. The witness maintained that Federal
order prices should cover all transportation costs for supplemental
milk supplies and stressed that the proposed transportation credit only
seeks to recoup 66 percent of that cost.
The DFA/MMPA witness provided over-order premium and cost
information experienced by DFA when delivering supplemental milk
supplies. The witness said that the average over-order premium charged
for supplemental milk in 2004 was $1.72 per cwt. The witness explained
that after subtracting out various customer credits, transportation
costs, zone adjustments and give up charges, the net return, on
average, was $0.71 per cwt to pay producers and cover the operating
costs of the cooperative. The witness discussed the marketing decisions
of DFA for October 2004, a month when supplemental supplies are
historically needed. The witness said that in October 2004 DFA
purchased over 21 million pounds of supplemental milk for delivery to
distributing plants in the Mideast marketing area. After subtracting
costs from the over-order premium, there was an average of $0.45 per
cwt to pay producers and cover operating costs. The witness estimated
that if Proposal 9 had been in place during October 2004, DFA would
have received an $0.08 per cwt transportation credit on its
supplemental supplies of Class I milk.
A post-hearing brief submitted on behalf of DFA/MMPA reiterated
their position that transportation credits for the Mideast order are
appropriate to ensure that all pooled producers will more equitably
bear some costs in servicing the Class I market. The brief also argued
that Proposal 9, as modified at the hearing, contained appropriate
mileage limits to safeguard against handlers seeking to pool milk on
the order solely for the purpose of receiving the credit.
The DFA/MMPA brief contended that the Mideast marketing area lacks
sufficient supplemental supplies within the marketing area to service
the Class I needs of the market. The brief reiterated that DFA/MMPA
members are currently bearing a disproportionate share of the cost of
supplying the Class I market because they have to transport milk long
distances but are not reimbursed for the additional transportation
costs incurred. The brief reiterated that while there are reserve
supplies of milk in northern regions of
[[Page 54182]]
the marketing area that could be delivered to the deficit southern
regions, the Class I differential does not sufficiently reimburse the
additional transportation cost.
Comments filed on behalf of DFA, et al., took exception to the
Department's denial of establishing transportation credits in the
Mideast order. DFA, et al., argued that record evidence demonstrates
that the Mideast order has clear deficit and surplus milk supply
regions and asserted that despite only submitting data for October
2004, the testimony given at the hearing shows that the supplemental
milk supplies are needed year-round in the Mideast marketing area. DFA,
et al., took exception to the assertion that cooperatives should be
able to recoup their additional transportation costs in the
marketplace. DFA, et al., concluded that the record is replete with
data demonstrating that producers supplying distant Class I plants do
not receive uniform prices and requested that the Department establish
a transportation credit provision to remedy this disorderly marketing
condition.
A witness appearing on behalf of Foremost, et al., was of the
opinion that a transportation credit on producer milk delivered to
distributing plants was warranted because of the high cost of servicing
Class I plants in the Mideast marketing area. The witness explained
that on average, the distance from farms to distributing plants in the
Mideast marketing area is longer than the distance between farms and
manufacturing plants. Therefore, the witness was of the opinion that
since producers pay the transportation cost for their milk, a producer
delivering to a distributing plant will always receive a lower price
for their milk because their transportation costs will be greater.
The Foremost, et al., witness also offered a modification to
Proposal 9 that the proposed transportation credit should apply to milk
transfers from pool supply plants to pool distributing plants. The
witness testified that from 2002 through 2004, Foremost delivered
approximately 20 million pounds of milk from their pool supply plants
to pool distributing plants during the months of August through
November. However, the witness said, under the provision as proposed by
DFA/MMPA, these milk transfers would not have received the
transportation credit. The witness noted that the Upper Midwest order
provides for transportation and assembly credits for milk transferred
from supply plants to distributing plants and that a transportation
credit provision for the Mideast order should also be applicable for
plant-to-plant milk movements.
The Foremost, et al., witness explained that the Mideast Milk
Marketing Agency (MEMMA), of which Foremost is a member, markets the
milk of its members and charges Class I handlers an over-order premium
for milk delivered to their plants. The premium charges are negotiated
between MEMMA and the individual distributing plants, the witness
explained. The witness was of the opinion that to remain competitive
with other suppliers and for their customers to remain competitive in
the market, MEMMA cannot increase their over-order premiums to a rate
that would compensate the costs of moving milk as would a
transportation credit.
A post-hearing brief submitted on behalf of Foremost, et al.,
maintained their support of Proposal 9 with their modification to
include plant-to-plant milk movements as eligible for a transportation
credit. The brief contended including credits for plant-to-plant
transfers is appropriate because, in their opinion, all Class I milk
shipments to distributing plants should be eligible for a
transportation credit.
A witness appearing on behalf of Michigan Milk Producers
Association (MMPA) testified in support of establishing a
transportation credit for Class I milk with a modification. The witness
proposed that a lower rate be applicable for milk movements within the
State of Michigan.
According to the MMPA witness, trucks used to haul milk within the
State of Michigan are often larger because of higher gross weight
limits allowed by the State. Typically, a trailer that can hold up to
90,000 pounds of milk, results in transportation costs of approximately
$0.0036 per loaded mile, the witness noted. However, in keeping with
testimony offered by DFA/MMPA for partial reimbursement of
transportation cost, the witness said, Michigan distributing plants
receiving milk from Michigan farms should receive a lower credit rate
of $0.0024 per loaded mile. Otherwise, the witness said, Michigan
handlers would recoup more than 67 percent of their actual
transportation cost. The witness was of the opinion that the gain to
producers from having all Class I needs satisfied outweighed the small
reduction that a transportation credit would have on the blend price.
The MMPA witness testified that the Producer Equalization Committee
(PEC), which was identified as the over-order pricing agency in
Michigan, charges an over-order premium for Class I and II milk.
According to the witness, these premiums over the previous 2 years have
ranged from $1.40 to $1.65 per cwt. The witness explained that PEC
pools its over-order revenue and equitably distributes it among
participating producers. According to the witness, individual producers
who incurred higher transportation costs for shipping milk a long
distance will sometimes receive a larger share of the over-order
revenue.
The MMPA witness testified in opposition to the Foremost, et al.,
modification to provide transportation credits on plant-to-plant milk
movements. The witness argued that transportation credits should be
used to promote efficient movements of milk and that shipping milk
directly from farms to distributing plants in the Mideast marketing
area is the most efficient movement. The witness was of the opinion
that data provided by the Market Administrator demonstrated that there
are adequate reserve supplies located within reasonable distances for
farm-to-distributing plant deliveries. The witness asserted that
providing a transportation credit on milk transfers between plants
would encourage milk to be pooled from plant locations far from the
marketing area and would inappropriately qualify producers--who would
not be reliable suppliers of milk for the Class I needs of the Mideast
market--to be pooled on the order. A post-hearing brief submitted on
behalf of MMPA reiterated their support for establishing a
transportation credit for Class I milk as they modified it during the
hearing and opposition to including milk delivered from pool supply
plants to pool distributing plants.
A brief submitted on behalf of Dean expressed support for adopting
a transportation credit provision with a modification. The brief said
that providing a transportation credit to reimburse the cost of
supplying the Class I market is appropriate, but expressed concern with
exempting the proposed first 75 miles of milk movement from receiving
the credit. Dean believed that such an exemption discriminates against
local farmers that supply Class I plants.
The Dean brief also asserted that if producer milk receives a
transportation credit for supplying the Class I market, milk from that
same farm should not be permitted to divert to a plant that is located
outside the Mideast marketing area. The brief explained that milk
diverted to plants outside the marketing area should be viewed as
``dairy farmer for other markets'' milk. While Dean acknowledged that
such treatment of out-of-area diverted milk is a major change to
Proposal 9, their brief
[[Page 54183]]
nevertheless proposed that for milk diverted to out-of-area plants from
the same farm that milk receives a transportation credit, such milk
should not count as shipments for the purpose of meeting the order's
touch-base standard.
Seven dairy farmers whose milk is pooled on the Mideast order
testified in support of establishing a transportation credit for Class
I milk. Five of the dairy farmers were members of cooperatives and two
were independent dairy farmers. The dairy farmers were of the opinion
that the entire market should bear the costs associated with serving
the Mideast Class I market, not solely the cooperatives that provide
supplemental supplies to the order's distributing plants.
A witness appearing on behalf of OFU testified in opposition to
adopting transportation credits. The witness said that a transportation
credit would discourage the use of local milk to supply Mideast order
pool plants.
A witness appearing on behalf of Prairie Farms testified in
opposition to adopting transportation credits for Class I milk. The
witness said that the modified transportation credit proposals would
provide no benefit to Prairie Farms members who supply distributing
plants because most of their producers are located less than 75 miles
from the plant. The witness contended that transportation credits in
the Mideast order would lead to inefficient milk movements for the sole
purpose of receiving a credit.
A witness appearing on behalf of Smith Dairies testified in
opposition to adopting transportation credits for Class I milk. The
witness was of the opinion that providing a transportation credit would
reduce the blend price paid to pooled producers who consistently supply
distributing plants. The witness stressed that handlers who have supply
agreements with distributing plants should account for their
transportation costs of supplemental supplies and not ask the
government for regulatory relief. The witness also asserted that the
handler's business model should account for all transportation costs of
milk from the farm to the retail customer. The witness was of the
opinion that transportation credits could give a competitive advantage
to those handlers that receive the credit. The witness said that when
Smith Dairies purchases supplemental supplies, the price negotiated for
the supplemental supplies does cover transportation costs and a
transportation credit would be additional reimbursement.
A brief submitted on behalf of Continental expressed opposition to
the transportation credit provision. Continental believed that adopting
Proposal 9 would only benefit the proponents of the proposal and would
reduce the blend price paid to close-in producers who supply a
distributing plant. The brief stated that Continental's major concern
was that the credit would be paid by the handlers with no guarantee
that the credit would be transferred to a non-cooperative producer who
incurred hauling costs. Continental was of the opinion that adoption of
the proposal could pressure non-members into joining a cooperative and
thereby limit producer choices as to where they can market their milk.
The Agricultural Marketing Agreement Act of 1937 (AMAA), as
amended, provides authority for milk marketing orders to contain
provisions for making payments to handlers for performing services that
are of marketwide benefit. In this context, a marketwide service
payment is a charge to all producers whose milk is pooled on the order,
regardless of the use classification of such milk. The payment, in the
form of a credit, is deducted from the total value of all milk pooled
before computing the order's blend price. The AMAA identifies services
that may be of marketwide benefit to 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.
Proposal 9, as proposed and modified by DFA/MMPA seeks to establish
a transportation credit as a marketwide service payment for milk
shipped directly from dairy farms to distributing plants. The credit
would only be applicable to milk classified as Class I and would be
paid at a rate of $0.0031 per cwt per mile. The credit would not apply
to the first 75 miles of applicable milk movements because this is the
typical distance milk moves from farm to distributing plants in the
marketing area. Receipt of the credit would be limited to not more than
350 miles because the Class I needs of the marketing area are satisfied
without the need to reach further for a supply. In light of testimony
that higher gross vehicle weight limits are provided in the State of
Michigan, MMPA proposed a modification to establish a separate and
lower transportation credit rate of $0.0024 per cwt per mile for intra-
state milk movements from farms to distributing plants in the State of
Michigan. Foremost, et al., sought to expand the adoption of
transportation credits for milk transfers between supply plants and
distributing plants because milk transferred from supply plants, like
direct-shipped milk, also serves the Class I market and should
therefore be eligible for a transportation credit. This modification
was not supported by DFA or MMPA, the proponents of Proposal 9.
An example of a Federal milk marketing order that currently
provides for a marketwide service payment is the transportation and
assembly credits employed in the Upper Midwest milk marketing order.
The transportation and assembly credit provisions of the Chicago
Regional order were carried into the provisions of the current Upper
Midwest order as part of Federal order reform. The transportation
credit feature of the provision provides transporting handlers with a
credit of $0.028 per cwt per mile for milk transfers from pool supply
plants to pool distributing plants. The credit is deducted from the
total value of all milk pooled on the order. Because the transportation
credit reduces the total dollar value of the milk pooled, it results in
a lower blend price paid to all producers.
These provisions were first implemented in 1987 to ensure that the
costs of serving the Class I market of the Chicago Regional marketing
area were more equitably shared among all market participants that
benefited from the additional revenue generated from Class I sales.
Because of the very liberal pooling standards of the Upper Midwest
order, much of the milk is pooled through the diversion process by
having delivered 1 day's production to a pool plant. Since such milk is
then pooled on a continuing basis, it is considered equitable that such
milk bears some of the cost of supplying the Class I market on a
continual basis. The credit was maintained in the larger consolidated
Upper Midwest order for the same reasons. The transportation credit, as
proposed and modified by proponents in this proceeding, differs from
the transportation credit provision of the Upper Midwest order. The
principal difference is that as proposed, the credit would be paid to
the receiving handler for milk delivered direct from farms to
distributing plants.
The dairy-farmer cooperative proponents argue that in their
capacity as producers they are bearing an
[[Page 54184]]
inequitable share of the cost of supplying the supplemental needs of
the marketing area's Class I market. In this regard, they assert that
while all pooled producers are benefiting from Class I sales in the
market, cooperative member producers supply a greater percentage of
supplemental milk to Class I plants, and thus conclude that they are
inequitably bearing the cost of providing supplemental supplies during
certain times of the year.
The cooperative witnesses contend that when independently supplied
distributing plants need supplemental supplies, such supplemental
supplies are acquired from cooperatives. However, the cooperatives
over-order premiums have been determined well before the start of the
months when supplemental milk supplies are needed without adjusting for
the generally farther distance any given particular load of milk must
be transported. Even though proponents seek transportation credits
year-round, the evidence reveals that it is the additional cost burden
they bear providing supplemental milk supplies in the fall months,
using October 2004 as a representative month, which Proposal 9 seeks to
address. The basis of the argument advanced by the proponents was that
without a transportation credit, meaningful cost recovery is not
otherwise obtainable from receiving handlers. The record evidence does
not support concluding that this burden is experienced in every month
of the year.
The proponent cooperatives also asserted that the Class I
differentials of the Mideast marketing area do not offer sufficient
incentive to attract Class I milk to distributing plants in certain
portions of the Mideast area. This failure, the proponent cooperatives
say, places them as Class I suppliers at a competitive disadvantage
relative to other Class I suppliers who are not supplying supplemental
needs. The cooperatives proposed the establishment of a transportation
credit provision as a means of offsetting a portion of the total
additional cost of supplying Class I plants that the Class I
differentials do not adequately compensate.
The proponents noted that the structure of the Mideast market,
namely plant consolidation, diminished milk supplies in certain areas
and transportation costs have increased since the Class I differentials
were implemented in 2000. Amending the Class I differentials to more
equitably reimburse Class I suppliers for transportation costs was
another option considered but rejected by the proponents. They were of
the opinion that changing the Class I price surface would have been
very difficult and concluded that providing for transportation credits
would be a satisfactory alternative to pricing problems. Proponents
estimated that the impact of the proposed transportation credit on the
Mideast order blend price per month, if adopted, would be a reduction
of approximately $0.0297 per cwt.
Despite exceptions filed by DFA, et al., this final decision
continues to find that the record of this proceeding does not support
the adoption of a transportation credit provision in the Mideast
marketing area. The proponents requested a year-round transportation
credit for Class I milk deliveries but did not offer sufficient
evidence to justify establishment of the credit. Evidence presented at
the hearing for the volume and cost of milk deliveries was limited to
the fall month of October 2004. Testimony offered in support of the
establishment of a transportation credit spoke primarily of the need
for partial cost recovery for the transportation of supplemental
supplies in the fall months. Because the record contains no data for
other months it is difficult to determine to what extent distant milk
is moving to the Mideast market as supplemental supplies. Additionally,
it is not possible to determine what portion of the distant supplies
revealed in the October data are displacing local milk at distributing
plants for producer qualification purposes only.
The proponents did provide average cost and revenue data regarding
supplemental milk supplies for 2004. The DFA witness testimony compared
average milk procurement costs for October 2004 with average annual
procurement costs. The two largest changes in procurement costs during
the month of October, when compared to the annual average, were for
``give-up charges'' and for ``supplemental hauling costs.'' If the
annual average procurement costs are adjusted to remove the impact of
supplemental procurement costs calculated for August through November,
it is estimated that supplemental hauling costs increased $0.27 and
give-up charges increased $0.22 on average in the fall when compared to
the average cost as extrapolated for the remainder of the year. This
analysis concludes that the give-up charges are a major portion of the
costs associated with the supplemental supply. This may indicate that
the performance standards for the order are too low. It should be noted
that the diversion limits were reduced and the supply plant shipping
standards were increased on an interim emergency basis as a result of
this proceeding.
Due to the lack of data detailing the total cost of procuring
supplemental supplies of milk and an estimate of the annual revenue
generated by the transportation credit, no finding can be made that
Proposal 9 should be adopted. Of particular concern is the possibility
that the credit could be applicable to current and customary supply
arrangements. This would result in a producer financed hauling subsidy
on a year-round basis that is not related to any supplemental supplies
or marketwide services.
Additionally, it is unclear why government intervention is needed
to essentially require producers to supplement the milk procurement
costs of handlers located in milk deficit sections of the marketing
area. Such a transportation credit would disadvantage handlers located
in non-deficit regions of the marketing area that wish to distribute
packaged milk products in the deficit regions. The full cost of
transporting packaged Class I milk into the deficit regions would be
borne by the distributing handler but the cost of transporting bulk
milk into the deficit region for subsequent processing would be
partially funded by all producers through the transportation credit.
The proponents' testimony throughout the proceeding stressed that they
are unable to recoup their transportation costs from the marketplace.
However, the evidence does not support these assertions. Both DFA and
MMPA witnesses revealed that they are able to charge Class I handlers
adequate over-order premiums to cover their transportation costs. The
proponents asserted that these transportation costs should instead be
recouped through marketwide pooling so that they can return a greater
portion of the over-order premium to their members. The additional
transportation cost of supplemental milk supplies is recovered from
handlers who benefit by having such milk made available to satisfy
demands.
Cooperatives who deliver supplemental supplies to distributing
plants are providing those handlers with the benefit of a supply to
meet their demands. However, in return the cooperative receives the
benefit of an over-order premium to cover any additional costs it may
incur and, if possible, return a higher price to its members. The
cooperative also benefits in that these supplemental deliveries are
used to satisfy the cooperative's long-term performance standards. It
is not reasonable to lower the blend prices received by all dairy
farmers when
[[Page 54185]]
transportation costs are adequately recovered from the Class I handler
who needs the milk to meet demands.
This final decision continues to find that government intervention
through the adoption of the proposed year-round transportation credit
provision is not warranted. The record of this proceeding does reveal
that additional costs can be recouped in the marketplace without such
intervention.
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 Mideast 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 Mideast
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 procedures 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 Mideast 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 March 2006.
The agent of the Secretary to conduct such referendum is hereby
designated to be David Z. Walker, Mideast Market Administrator.
List of Subjects in 7 CFR Part 1033
Milk marketing orders.
Dated: September 1, 2006.
Lloyd C. Day,
Administrator, Agricultural Marketing Service.
Order Amending the Order Regulating the Handling of Milk in the Mideast
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 Mideast 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 Mideast marketing area shall be in
conformity to and in compliance with the terms and
[[Page 54186]]
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 February 15, 2006, and published in the Federal
Register on February 22, 2006 (71 FR 9033), are adopted without change
and shall be the terms and provisions of this order. The order follows.
PART 1033--MILK IN THE MIDEAST MARKETING AREA
1. The authority citation for 7 CFR part 1033 is amended to read as
follows:
Authority: 7 U.S.C. 601-674, and 7253.
2. Section 1033.13 is amended by adding a new paragraph (f), to
read as follows:
Sec. 1033.13 Producer milk.
* * * * *
(f) Producer milk of a handler shall not exceed the limits as
established in Sec. 1033.13(f)(1) through Sec. 1033.13(f)(3).
(1) Producer milk for the months of April through February may not
exceed 115 percent of the producer milk receipts of the prior month.
Producer milk for March may not exceed 120 percent of producer receipts
of the prior month; plus
(2) Milk shipped to and physically received at pool distributing
plants and allocated to Class I use in excess of the volume allocated
to Class I in the prior month; plus
(3) If a producer did not have any milk delivered to any plant as
other than producer milk as defined under the order in this part or any
other Federal milk order for the preceding three months; and the
producer had milk qualified as producer milk on any other Federal order
in the previous month, add the lesser of the following:
(i) Any positive difference of the volume of milk qualified as
producer milk on any other Federal order in the previous month, less
the volume of milk qualified as producer milk on any other Federal
order in the current month, or
(ii) Any positive difference of the volume of milk qualified as
producer milk under the order in this part in the current month, less
the volume of milk qualified as producer milk under the order in this
part in the previous month.
(4) Milk received at pool plants in excess of these limits shall be
classified pursuant to Sec. 1000.44(a)(3)(v) and Sec. 1000.44(b).
Milk diverted to nonpool plants reported in excess of this limit shall
not be producer milk. The handler must designate, by producer pick-up,
which milk shall not be producer milk. If the handler fails to provide
this information the provisions of Sec. 1033.13(d)(6) shall apply.
(5) The market administrator may waive these limitations:
(i) For a new handler on the order, subject to the provisions of
Sec. 1033.13(f)(6), or
(ii) For an existing handler with significantly changed milk supply
conditions due to unusual circumstances;
(6) Milk may not be considered producer milk if the market
administrator determines that handlers altered the reporting of such
milk for the purpose of evading the provisions of this paragraph.
Marketing Agreement Regulating the Handling of Milk in the Mideast
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. 1033.1 to 1033.86 all inclusive, of
the order regulating the handling of milk in the Mideast marketing
area (7 CFR Part 1033 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 March 2006,----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. 06-7495 Filed 9-6-06; 8:45 am]
BILLING CODE 3410-02-P