[Federal Register: November 7, 2002 (Volume 67, Number 216)]
[Proposed Rules]
[Page 67905-67947]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07no02-20]
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Part II
Department of Agriculture
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Agriculture Marketing Service
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7 CFR Parts 1000, et al.
Milk in the Northeast and Other Marketing Areas; Decision on Proposed
Amendments to Tentative Marketing Agreement and to Order; Proposed Rule
[[Page 67906]]
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DEPARTMENT OF AGRICULTURE
Agricultural Marketing Service
7 CFR Parts 1000, 1001, 1005, 1006, 1007, 1030, 1032, 1033, 1124,
1126,1131, and 1135
[Docket No. AO-14-A69, et al.: DA-00-03]
Milk in the Northeast and Other Marketing Areas; Decision on
Proposed Amendments to Tentative Marketing Agreement and To Order
AGENCY: Agricultural Marketing Service, USDA.
ACTION: Proposed rule; Final Decision.
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7 CFR part Marketing area AO Nos.
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1001.......................... Northeast........................................ AO-14-A69.
1005.......................... Appalachian...................................... AO-388-A11.
1006.......................... Florida.......................................... AO-356-A34.
1007.......................... Southeast........................................ AO-366-A40.
1030.......................... Upper Midwest.................................... AO-361-A34.
1032.......................... Central.......................................... AO-313-A43.
1033.......................... Mideast.......................................... AO-166-A67.
1124.......................... Pacific Northwest................................ AO-368-A27.
1126.......................... Southwest........................................ AO-231-A65.
1131.......................... Arizona-Las Vegas................................ AO-271-A35.
1135.......................... Western.......................................... AO-380-A17.
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SUMMARY: This decision adopts revised product-price formulas for
establishing Class III and Class IV milk prices. The formulas are
applicable to all Federal milk marketing orders. The orders amended by
this decision require producer approval. Referenda will be conducted in
two markets, and dairy farmer cooperatives will be polled in the other
nine markets to determine whether dairy farmers approve the issuance of
the orders as amended.
This final decision differs from the recommended decision by
modifying the Class III and IV formulas to include farm-to-plant
component losses. Modifications are adopted to the butterfat price
formula, the protein price formula, the other solids price formula, and
the nonfat milk solids price formula. Additionally, this decision
converts the Class III and IV formula divisors to multipliers in order
to simplify and promote consistency with all end-product pricing
formulas.
FOR FURTHER INFORMATION CONTACT: Clifford M. Carman, Associate Deputy
Administrator, USDA/AMS/Dairy Programs, Order Formulation and
Enforcement Branch, Stop 0231, Room 2968, South Building, 1400
Independence Avenue, Washington, DC 20250-0231, (202) 720-6274, e-mail
address clifford.carman@usda.gov.
SUPPLEMENTARY INFORMATION: 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.
These proposed amendments have been reviewed under Executive Order
12988, Civil Justice Reform. This rule is not intended to have a
retroactive effect. If adopted, this proposed rule will 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 Department
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 Department will 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 Analysis
This final decision responds to a Congressional mandate to
reconsider the Class III and Class IV pricing formulas included in the
final rule for the consolidation and reform of Federal milk orders. The
mandate was included in the Consolidated Appropriations Act, 2000 (Pub.
L. 106-113, 115 Stat. 1501).
In accordance with the Regulatory Flexibility Act (RFA) (5 U.S.C.
601 et seq.), the Agricultural Marketing Service (AMS) has considered
the economic impact of this action on small entities and has prepared
this regulatory flexibility analysis. When preparing such analysis an
agency shall address: The reasons, objectives, and legal basis for the
anticipated proposed rule; the kind and number of small entities which
would be affected; the projected recordkeeping, reporting, and other
requirements; and federal rules which may duplicate, overlap, or
conflict with the proposed rule. Finally, any significant alternatives
to the proposal should be addressed. This regulatory flexibility
analysis considers these points and the impact of this proposed
regulation on small entities. The legal basis for this action is
discussed in the preceding section.
The RFA seeks to ensure that, within the statutory authority of a
program, the regulatory and informational
[[Page 67907]]
requirements are tailored to the size and nature of small businesses.
For the purpose of the RFA, 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.
USDA has identified as small businesses approximately 62,240 of the
65,464 dairy producers (farmers) that have their milk pooled under a
Federal order. Thus, small businesses constitute approximately 95
percent of the dairy farmers in the United States. On the processing
side, there are approximately 1,621 plants associated with Federal
orders, and of these plants, approximately 928 qualify as ``small
businesses,'' constituting about 57 percent of the total.
During January 2002, there were approximately 410 fully regulated
handlers (of which 148 were small businesses), 75 partially regulated
handlers (of which 39 were small businesses), and 46 producer-handlers
(of which 24 were considered small businesses) for the purpose of this
regulatory flexibility analysis. In addition, there were ninety-three
exempt handlers with Class I sales of less than 150,000 pounds during
the month.
Producer deliveries of milk used in Class I products (mainly fluid
milk products) totaled 4.085 billion pounds in January 2002,
representing 37.7 percent of total Federal order producer deliveries.
The volume of milk pooled under Federal orders represents 76 percent of
all milk marketed in the U.S. and is estimated at 78 percent of the
milk of bottling quality (Grade A) sold in the country. More than 200
million Americans reside in Federal order marketing areas, representing
approximately 81 percent of the total U.S. population (2001).
In order to accomplish the goal of imposing no additional
regulatory burdens on the industry, a review of the current reporting
requirements was completed pursuant to the Paperwork Reduction Act of
1995 (44 U.S.C. Chapter 35). In light of this review, it was determined
that these proposed amendments would have no impact on reporting,
recordkeeping, or other compliance requirements because these would
remain identical to the current Federal order program. No new forms
have been proposed, and no additional reporting would be necessary.
This proposed rule does not require additional information
collection that requires clearance by the OMB beyond the currently
approved information collection. The primary sources of data used to
complete the 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 upon the dairy industry as a
result of overlapping Federal rules. This proposed rulemaking does not
duplicate, overlap or conflict with any existing Federal rules.
Consideration of Impacts on Small Businesses
To ensure that small businesses are not unduly or
disproportionately burdened based on these proposed amendments,
consideration was given to mitigating negative impacts.
A comment filed in regard to the tentative final decision by the
managing partner of a large dairy farm argued that dairy producers
selling less than 326,000 pounds of milk per month may comprise the
majority of dairy farms, but not the majority of milk sold. The comment
further stated that it is not appropriate to identify one sector and
imply that they are most in need of protection and preservation.
Under the Regulatory Flexibility Act, the definition of a ``small''
dairy farm has been redefined from a business having an annual gross
revenue of less than $500,000 to a business having an annual gross
revenue of less than $750,000. Therefore, the production guideline of
326,000 pounds per month has been increased to 500,000 pounds per month
in identifying ``small'' dairy farms.
The production guideline of 500,000 pounds per month in identifying
``small'' dairy farms is an attempt to relate a measure of size for
which data is available (pounds of production per farm) with the
criteria specified by the Small Business Administration (revenue from
sales), for which data is not readily available to USDA on an
individual farm basis. The Regulatory Flexibility Analysis does not
represent an attempt to create special privileges for farms defined as
small, but to examine the regulations to assure that they do not create
a disproportionate burden or competitive disadvantage for such farms.
As was stated in the RFA in the recommended decision, one of the
principal issues considered at the hearing was the source of price data
that should be used to generate prices for milk components and,
thereby, prices to be paid to producers. The options considered were
the National Agricultural Statistics Service (NASS) surveys of selling
prices of manufactured dairy products, Chicago Mercantile Exchange
(CME) prices, and producer costs of production. The recommended
decision selected the NASS-reported prices as the most appropriate for
use in determining product prices because of the considerably larger
volume of product represented in those price series than in the CME
price data. Producer cost of production was not included in the
calculation of prices because assuring dairy farmers that their costs
of production will be covered addresses only the milk supply side of
the market and ignores factors underlying demand or changes in demand
for milk and milk products.
Various proposals to reduce or increase the levels of the
manufacturing (make) allowances of butter, nonfat dry milk, cheddar
cheese and dry whey were considered. The present method adjusted these
make allowances from the levels adopted under Federal order reform on
the basis of data and testimony contained in the hearing record. Most
of the adjustments are minimal. Primarily, manufacturing cost surveys
performed by USDA's Rural Cooperative Business Service (RBCS) and the
California Department of Food and Agriculture (CDFA) were used to
determine the most appropriate levels of make allowance for the
products used in calculating Federal order class prices.
The only other actual collection of manufacturing cost data for
cheddar cheese and dry whey that was cited in the hearing record was a
survey of cheddar cheese and dry whey manufacturing costs arranged for
by the National Cheese Institute (NCI). This survey was conducted by
persons unfamiliar with the dairy industry among cheese processors who
did not
[[Page 67908]]
testify about the data that they submitted for the survey and was
entered into the hearing record by a witness who had no firsthand
knowledge of the data included. As a result, the NCI survey should be
relied upon to a lesser degree than the two studies used to determine
the cheddar cheese make allowance. In the case of the RBCS study, the
person who gathered the data testified about its collection and what it
represented. In the case of the CDFA-collected data, a manual detailing
the method by which the data was collected and presented was made
available, and several witnesses familiar with the survey testified
about it.
In addition, one nonfat dry milk manufacturer testified to costs of
manufacture that exceeded those of the two studies by a significant
amount, mostly in the areas of return on investment and marketing
costs. The data did not include any information about the pounds of
product manufactured and could not have been weighted with the data
from the two other studies.
Several proposals to change the factor reflecting the yield of
nonfat dry milk from nonfat solids in milk would have increased the
nonfat solids price and the Class IV skim price, but ignored the need
to reflect the generally lower price and higher manufacturing cost of
buttermilk powder that also must be considered in calculating the Class
IV nonfat solids price. Testimony and data in the record were used to
determine a factor more representative of nonfat dry milk yield and the
effect of buttermilk powder price and cost. The alternatives to the
formula adopted either did not include consideration of the price,
cost, and volume of buttermilk powder relative to those of nonfat dry
milk or gave those factors too great an influence.
Proposals were made to reduce the butter and cheese product prices
used in calculating the butterfat price and the Class III component
prices. The record of this proceeding continues to support the use of
the product prices adopted in the final rule in the Federal milk order
reform process as representing accurately the values of these products.
In the case of adjusting the Grade AA butter price to reflect the value
of Grade A butter, the record fails to reveal any source of information
for obtaining current prices for Grade A butter. In the case of
proposals to remove the 3-cent adjustment between the barrel and 40-
pound block cheese prices, there was no testimony about the actual
difference in cost between the two types of packaging that overcame
testimony that 3 cents is the actual cost difference, or any data that
indicates that the customary price difference is not at least 3 cents.
Proposals to reconsider the class price relationships in the orders
were considered, although a proposal to use a weighted average of the
Class III and Class IV prices as a Class I price mover was not noticed
for hearing in this proceeding. The hearing record supports the
continued relationships between the Class IV and Class II prices and
between the higher of the manufacturing class prices and the Class I
price.
A proposal that the Class II differential be changed to negate any
changes in the Class IV price formula that would affect the current
price relationship between nonfat dry milk and Class II failed to
consider that the Class II-Class IV price difference adopted in Federal
order reform is based on the difference in the value of milk used to
make dry milk and the value of milk used to make Class II products.
Proposals that any increases resulting from changes to the Class
III and Class IV price formulas not be allowed to result in increases
in Class I prices did not address the rationale for the current Class I
price differentials above the manufacturing price levels for the
purpose of obtaining an adequate supply of milk for fluid (drinking)
use.
The changes to the Class III and Class IV price formulas included
in the recommended decision would have had no special impact on small
handler entities. All handlers manufacturing dairy products from milk
classified as Class III or Class IV would remain subject to the same
minimum prices regardless of the size of their operations. Such
handlers would also be subject to the same minimum prices to be paid to
producers. These features of minimum pricing are required by the
Agricultural Marketing Agreement Act and should not raise barriers to
the ability of small handlers to compete in the marketplace. It is
similarly expected that small producers would not experience any
particular disadvantage to larger producers as a result of any of the
proposed amendments.
An analysis was performed on the effects of the alternatives
selected and is summarized below.
Final Decision Analysis
In order to assess the impact of changes in Federal order milk
pricing formulas, the Department conducted an economic analysis. While
the primary purpose of this decision is to amend the product pricing
formulas used to price milk regulated under Federal milk marketing
orders and classified as either Class III or Class IV milk, these
product price formulas also affect the prices of regulated milk
classified as Class I and Class II.
The modifications in this decision are analyzed simultaneously as a
change from the set of Court-ordered formulas as implemented in January
2001. This analysis focuses on impacts on milk marketed under Federal
milk marketing orders. Milk marketed in California, milk marketed under
other state regulations, and unregulated milk are treated separately.
Scope of Analysis
Impacts are measured as changes from the model baseline as adapted
from the USDA baseline developed in June 2002 for the mid-session
budget review. The baseline projections are a Departmental consensus on
a long-run scenario for the agricultural sector. Included is a
national, annual projection of the supply-demand-price situation for
milk. The mid-term review reflects the provisions of the Farm Security
and Rural Investment Act of 2002. Baseline assumptions for dairy are:
(1) The price support program will extend through December 31, 2007,
supporting the price of milk (3.67 percent butterfat) at $9.90; (2) the
Dairy Export Incentive Program will continue to be utilized; (3) the
Federal Milk Marketing Order Program will continue as reformed on
January 1, 2000, as modified by the Select, et al. vs. Veneman decision
in January 2001, and (4) the National Dairy Market Loss Program will
make payments to dairy farmers when the Class I price in Boston is less
than $16.94 per cwt.
In the model the U.S. is divided into 14 milk marketing regions, 11
that generally correspond to the Federal order areas, California, other
West, and Alaska-Hawaii. The 11 Federal orders share of the U.S. milk
marketings is about 70 percent. About 83 percent of all fluid milk and
about 65 percent of all manufactured milk is marketed under Federal
order regulations. Given the prominence of Federal order marketings,
prices paid for both fluid and manufactured milk outside of the order
system are generally aligned with prices paid in the Federal order
system. California stands out as the state with the highest production
and has its own set of comprehensive market regulations similar to the
Federal order system. California milk marketings are estimated as a
function of the California pool price. Milk marketed through the
Federal order system is the predominant subset of milk marketings in
the United States. Fluid grade milk prices for the 11 Federal order
regions are estimated as functions of Federal order minimum prices and
dairy product prices. The regional all-milk prices, which are used
[[Page 67909]]
in the regional milk supply responses, are in turn estimated from the
regional fluid grade milk price and the national dairy product prices.
Demands for fluid milk and manufactured dairy products are
functions of per capita consumption and population. Per capita
consumption for the major milk and dairy products are estimated as
functions of own prices, substitute prices, and income. Retail and
wholesale margins are assumed unchanged from the baseline. The regional
demands for fluid milk and soft manufactured products are satisfied
first by the eligible supply of milk. The milk supply for manufacturing
hard products is the volume of milk marketings remaining after
satisfying the volumes demanded for fluid and soft manufactured
products. Milk is manufactured into cheese or butter/nonfat dry milk
according to returns to manufacturing in each class. Wholesale prices
for cheese, butter, nonfat dry milk, and dry whey reflect national
supply and demand for these products. These prices underlie the Federal
order pricing system.
Summary of Results
The impacts of the changes to the Class III and Class IV formulas
that are adopted in this decision are summarized using annualized five-
year, 2003-2007, average changes from the model baseline. The results
presented for the Federal order system are in the context of the larger
U.S. market. In particular, the Federal order price formulas use
national manufactured dairy product prices.
The formula changes increase the protein prices and reduce the
prices for butterfat and nonfat solids. The results are higher Class
III prices, lower Class IV and Class II prices, and lower Class I
prices. The advanced Class I base price is the higher of the Class III
or Class IV advance pricing factors. The Class I base price is the
Class IV price in all years of the analytical period for the baseline,
while Class III becomes the Class I base price in 2003 through 2005
under this decision. The Class I price falls in 2003, 2006 and 2007.
The resulting increases in Class I and Class II demand for nonfat and
fat solids, sufficiently absorbs production increases to very slightly
increase cheese and butter prices and only slightly decrease nonfat dry
milk prices.
Producers. Over the five-year period, the Federal order minimum
Class price for milk at test increases about $0.06 per hundredweight.
The average fluid grade price for Federal order regions, which includes
premiums, increases by about $0.03 per hundredweight. Federal order
marketings increase by an average 58 million pounds annually due to the
production increase in response to higher producer prices. Federal
order milk cash receipts increase by an average $47.2 million annually
(0.28 percent) from baseline receipts of $16,729 million.
The distribution of the 2003-2007 annual average changes in the
Federal order minimum blend prices across the 11 orders range from (-
)$0.05 to (+)$0.08 per hundredweight, reflecting declines in premiums
associated with Class III milk. Estimates of annual average price and
quantity changes by order are provided in the economic analysis for
this decision.
The five-year annual average U.S. all-milk price increases by $0.03
per hundredweight over the baseline. U.S. milk marketings increase by
an average 73 million pounds annually (0.04 percent), yielding an
average cash receipts increase of $67.2 million annually (0.29 percent)
from average baseline receipts of $23,535 million.
Milk Manufacturers and Processors. Annual Class IV and Class II
skim milk prices decline each year for an average of $0.07 per
hundredweight (1.0 percent) for the 2003-2007 period. This decline
results from changing the conversion factor for nonfat dry milk to
nonfat solids from 1.0 to 0.99. The minimum butterfat prices decline
from baseline levels by an average of 2.1 cents per pound. This decline
is the result of recognizing farm-to-plant losses of milk which reduce
the yield factor from the equivalent of 1.22 pounds of butter per pound
of butterfat to 1.20. The Class IV price at test (about 8.45 percent
butterfat) declines by an average of $0.26 per hundredweight, and the
Class II price at test (7.92 percent butterfat) declines by an average
$0.23 per hundredweight over 2003-2007.
The annual average Class III price increase at test (3.52 percent
butterfat) is about $0.23 over baseline (1.9 percent), increasing
steadily from $0.15 in 2003 to $0.34 in 2007. The increase is the
result of the protein price increase of $0.14 per pound, ranging from
$0.10 to $0.18 per pound. The increase in the protein price is the
result of reducing the impact of the butterfat price on the protein
price. The butterfat price effect is reduced by multiplying the
butterfat price by 0.90, reflecting a 90 percent butterfat retention
rate in the cheese, and replacing the 1.28 factor with 1.17 reflecting
the butterfat to protein ratio of milk standardized at 3.5 percent
butterfat and 2.99 percent protein.
The Class I base price shifts from the Class IV to the Class III
price in 2003-05. The Class I skim milk price increases over baseline
levels on average by nearly $0.04 cents per hundredweight, ranging from
increases of about 18 cents in 2004-05 to declines of about 7 cents in
2006-07. The Class I price at test (about 2 percent butterfat) declines
by an average $0.01 per hundredweight from the baseline, and is similar
to the skim milk price change pattern, ranging from 13-cent increases
to 12-cent declines.
Consumers. The expected $0.01 per hundredweight decrease in the
minimum Class I price for 2003-2007 results in an average $0.001
decrease in the price per gallon of fluid milk for consumers. Annual
consumer costs for fluid milk over 2003-2007 are estimated to decrease
on average by about $3.25 million in the Federal order system and by
$4.1 million in the U.S.
The price for manufactured dairy products are estimated to increase
over baseline by an average $0.004 per pound for butter and $0.001 per
pound of cheese. Average annual consumer expenditures over the five-
year period are estimated to increase over baseline levels by $5.6
million on butter, and by $4.1 million on American cheese.
A complete Economic Analysis for the Final Decision on Class III
and Class IV Price Formulas is available upon request from Howard
McDowell, Senior Economist, USDA/AMS/Dairy Programs, Office of the
Chief Economist, Room 2753, South Building, U.S. Department of
Agriculture, Washington, DC 20250, (202) 720-7091, e-mail address
howard.mcdowell@usda.gov.
Civil Rights Impact Statement
This final decision is based on the record of a public hearing held
May 8-12, 2000, in Alexandria, Virginia, in response to a mandate from
Congress included in the Consolidated Appropriations Act, 2000, that
required the Secretary of Agriculture to conduct a formal rulemaking
proceeding to reconsider the Class III and Class IV milk pricing
formulas included in the final rule for the consolidation and reform of
Federal milk orders. The consolidated orders were implemented on
January 1, 2000. A tentative final decision on the issues considered at
the hearing was issued November 29, 2000 (65 FR 76832), and an interim
final order (65 FR 82832) became effective January 1, 2001. A
preliminary injunction enjoining portions of the interim final order
was granted in the U.S. District Court for the District of Columbia on
January 31, 2001.
Pursuant to Departmental Regulation (DR) 4300-4, a comprehensive
Civil Rights Impact Analysis (CRIA) was
[[Page 67910]]
conducted and published with the final decision on Federal milk order
consolidation and reform. That CRIA included descriptions of (1) the
purpose of performing a CRIA; (2) the civil rights policy of the U.S.
Department of Agriculture; and (3) basics of the Federal milk marketing
order program to provide background information. Also included in that
CRIA was a detailed presentation of the characteristics of the dairy
producer and general populations located within the former and current
marketing areas.
The conclusion of that analysis disclosed no potential for
affecting dairy farmers in protected groups differently than the
general population of dairy farmers. All producers, regardless of race,
national origin, or disability, who choose to deliver milk to handlers
regulated under a Federal order will receive the minimum blend price.
Federal orders provide the same assurance for all producers, without
regard to sex, race, origin, or disability. The value of all milk
delivered to handlers competing for sales within a defined marketing
area is divided equally among all producers delivering milk to those
handlers.
The issues addressed at the May 2000 hearing are issues that were
addressed as part of Federal milk order consolidation and reform.
Establishing representative make allowances in the formulas that price
milk used in Class III and Class IV dairy products is an issue that
affects the obligations of handlers of those products to the Federal
milk order pool, and similarly the pool obligations of Class I and
Class II handlers. The decision should result in no differential
benefits in dividing the pool among all producers delivering milk to
those regulated handlers. Therefore, USDA sees no potential for
affecting dairy farmers in protected groups differently than the
general population of dairy farmers.
Decisions on proposals to amend Federal milk marketing orders must
be based on testimony and evidence presented on the record of the
proceeding. The hearing notice in this proceeding invited interested
persons to address any possible civil rights impact of the proposals
being considered in testimony at the hearing. No such testimony was
received.
Copies of the Civil Rights Impact Analysis done for the final
decision on Federal milk order consolidation and reform can be obtained
from AMS Dairy Programs at (202) 720-4392; any Milk Market
Administrator office; or via the Internet at: http://www.ams.usda.gov/
dairy/.
Prior documents in this proceeding:
Notice of Hearing: Issued April 6, 2000; published April 14, 2000
(65 FR 20094).
Tentative Final Decision: Issued November 29, 2000; published
December 7, 2000 (65 FR 76832).
Interim Final Rule: Issued December 21, 2000; published December
28, 2000 (65 FR 82832).
Recommended Decision: Issued October 19, 2001; published October
25, 2001 (66 FR 54064).
Extension of Time: Issued November 26, 2001; published November 29,
2001 (66 FR 59546).
Preliminary Statement
Notice is hereby given of the filing with the Hearing Clerk of this
final decision with respect to proposed amendments to the tentative
marketing agreements and orders regulating the handling of milk in the
Northeast and other marketing areas. This notice is issued pursuant to
the provisions of the Agricultural Marketing Agreement Act of 1937, as
amended (7 U.S.C. 601 et seq.), and the applicable rules of practice
and procedure governing the formulation of marketing agreements and
marketing orders (7 CFR part 900).
The Hearing Notice specifically invited interested persons to
present evidence concerning the probable regulatory and informational
impact of the proposals on small businesses. To the extent that this
issue was raised, it is considered in the following findings and
conclusions.
This final decision responds to a Congressional mandate to
reconsider the Class III and Class IV pricing formulas included in the
final rule for the consolidation and reform of Federal milk orders. The
mandate was included in the Consolidated Appropriations Act, 2000 (Pub.
L. 106-113, 115 Stat. 1501). The findings and conclusions set forth
below are based on the record of a public hearing to consider proposals
submitted by the industry to change the pricing formulas in the
marketing agreements and the orders regulating the handling of milk in
the Northeast and ten other marketing areas held in Alexandria,
Virginia, on May 8-12, 2000. Notice of such hearing was issued on April
6, 2000, and published on April 14, 2000 (65 FR 20094).
The recommended decision responded to comments received on the
tentative final decision (issued November 29, 2000; 65 FR 76832) on the
above hearing and was consistent with the injunction issued by the U.S.
District Court for the District of Columbia on January 31, 2001. This
final decision responds to comments received on the recommended
decision (issued October 19, 2001; 66 FR 54064).
Material Issues to Class III and IV Formulas
As instructed by the legislation requiring this proceeding, the
Class III and IV pricing formulas and all of the elements of the
formulas were re-considered in developing the tentative final decision,
the recommended decision, and this final decision.
The material issues on the record of the hearing relate to:
1. Role of producer costs of production.
2. Commodity prices (CME vs. NASS).
3. Commodity and component price issues.
a. General approaches on make allowances.
b. Class IV butterfat and nonfat solids prices.
c. Class III butterfat, protein, and other nonfat solids prices.
d. Effects of changes to Class III and Class IV price formulas.
4. Class price relationships.
5. Class I price mover.
6. Miscellaneous and conforming changes.
a. Advance Class I butterfat price.
b. Classification.
c. Distribution of butterfat value to producers.
d. Inclusion of Class I other source butterfat in producer
butterfat price computation.
7. Reopening of hearing or issuance of a final decision.
Summary of Changes to the Interim Amendments
The recommended decision differed from the tentative final decision
in several respects and included summaries of comments submitted on
each of the issues within the discussion of the issue. The key changes
that were made to the interim order amendments in the recommended
decision were as follows:
1. In Issue 3c, changes were made to the formulas for calculating
the protein and other solids prices, and the Class III butterfat price
would be the same as that calculated for Class IV on the basis of
butter.
2. In Issue 3d, the changes made in the Class III component price
formulas would result in different effects on Class III component,
skim, and hundredweight prices.
3. In Issue 6b, the classification of frozen cream, plastic cream
and anhydrous milkfat would be changed back to Class III.
4. In Issue 6c, butterfat values would be pooled for the purpose of
calculating
[[Page 67911]]
producer butterfat prices in the orders in which producers are not paid
on a component basis. In orders under which producers are paid on a
multiple component basis, however, the producer butterfat price would
be the same as that for butterfat used in Classes III and IV.
5. In Issue 6d, the butterfat in other source milk used in Class I
is included in calculating the producer butterfat price in marketwide
pools that do not use multiple component pricing, but would continue to
be included in the producer price differential calculation in multiple
component pricing pools.
6. Issue 7 was changed to explain the reasons for issuing a
recommended decision at this point in this proceeding, instead of a
final decision.
Summary of Changes to the Recommended Decision by This Final Decision
The changes to the recommended decision formulas by this final
decision are primarily the result of incorporating a farm-to-plant
product loss:
1. In issue 3a, an adjustment to the component price formula yield
factors to account for farm-to-plant component losses is added.
2. In issue 3b, changes are made to the yield factor used for
computing both the nonfat solids price and the Class III and Class IV
butterfat price to reflect farm-to-plant component losses. In addition,
the yield factor used for computing the nonfat solids price and the
butterfat price is converted from a divisor to a multiplier.
3. In issue 3c, the yield factors used to compute the protein price
are adjusted to account for farm-to-plant component losses and to
reflect a reevaluation of the quantity of casein retained in the cheese
making process. The other solids yield factor is adjusted to account
for farm-to-plant component losses. In addition, the yield factor used
for computing the other solids price is converted from a divisor to a
multiplier.
Findings and Conclusions
The following findings and conclusions on the material issues are
based on evidence presented at the hearing and the record thereof:
1. Role of Producer Cost of Production
Proposal 29 in the hearing notice proposed that producers' costs of
production be incorporated into the Class III and Class IV pricing
formulas. A number of dairy farmer witnesses testified that, just as
manufacturing processors are assured that their costs of processing
milk products will be covered, dairy farmers should also have some
assurance that they will be able to continue to operate their dairy
farms without losing money. Under the current system, according to the
National Farmers Union (NFU) witness, incorporating a make allowance
for processors but not for producers leaves dairy farmers to bear the
entire burden of changes in supply and demand.
Support for using cost of production in the Class III and IV
pricing formulas was reiterated in the comments received in response to
the tentative final decision issued November 29, 2000, and the
recommended decision of October 25, 2001. The NFU comments expressed
disappointment that no portions of the milk pricing formulas were based
on producer cost of production. The American Raw Milk Producers Pricing
Association suggested that the USDA ignored existing law as written in
the 1937 Agricultural Agreement Act, section 608c(18). Two dairy
farmers also mentioned their concern about the need to follow 608c(18).
Another dairy farmer advocated a producer-influenced supply control/
price control system.
Comments filed by the Maine Dairy Industry Association (MDIA) in
response to the recommended decision joined in supporting cost of
production as a part of the pricing formulas. They expressed the
opinion that cost of production should be included because their
producers' costs are higher than the price received. The MDIA also
voiced the unfairness of processors' being assured some ability to
offset their costs through product make allowances while producers are
not able to receive such adjustment. Comments received from Schreiber
Foods indicated agreement with the recommended decision to not use the
cost of production in setting Class prices.
As explained in both the proposed rule and final decision under
Federal order reform and in the tentative final decision and the
recommended decision in this proceeding, assuring producers that their
costs of production will be covered addresses only the milk supply side
of the market and ignores factors underlying demand or changes in
demand for milk and milk products. As noted by the Dairy Farmers of
America (DFA) witness, although pricing proposals incorporating cost of
production have been noticed and reviewed several times in the last
decade without success, if a sound mechanical concept could be advanced
that overcomes the objections relative to supply and demand, it should
be considered.
The proposals by NFU and National Farmers Organization (NFO) that
advocated adoption of make allowances that would be adjusted for
changes in indexes reflecting dairy farmers' production costs are
discussed under Issue 3a, General Approaches on Make Allowances.
In this final decision, consideration has again been given to cost
of production proposals. As noted by the NFO witness, the current
pricing system uses the interaction of supply and demand for milk
products as an indirect method of meeting the pricing requirements of
the Agricultural Marketing Agreement Act of 1937 (the Act) for milk.
According to the recommended decision, the record contained no new
dairy farmer cost of production data that could be used to reflect both
the supply and demand sides of the market for dairy products. The
recommended decision continued to state that there was no evidence in
the record that either USDA's Economic Research Service or the CDFA
costs of production had ever been used to price milk.
The Act stipulates that the price of feeds, the availability of
feeds, and other economic conditions which affect market supply and
demand for milk and its products be taken into account in the
determination of milk prices. This requirement currently is fulfilled
by the Class III and Class IV component price calculations. If
conditions increase supply costs, the quantity of milk produced would
be reduced due to lower profit margins. As the milk supply declines,
plants buying manufacturing milk would pay a higher price to maintain
an adequate supply of milk to meet their needs. As the resulting farm
profit margins increase, so should the supply of milk. Likewise, the
reverse would occur if economic conditions reduce supply costs. The
price of feed is not directly included in the determination of the
price for milk, but rather is one economic condition which may cause a
situation in which the price of milk may increase or decrease. A change
in feed prices may not necessarily result in a change in milk prices.
For instance, if the price of feed increases but the demand for cheese
declines, the milk price may not increase since milk plants would need
less milk and therefore would not bid the price up in response to lower
milk supplies. Also, other economic conditions could more than offset a
change in feed prices and thus not necessitate a change in milk prices.
The pricing system, according to the recommended decision,
accounted for changes in feed costs, feed supplies, and other economic
conditions, as explained above. The product price formulas adopted in
the recommended decision would reflect accurately the market
[[Page 67912]]
values of the products made from producer milk used in manufacturing.
As supply costs increase with a resulting decline in production,
commodity prices would increase as manufacturers secure additional milk
to meet their needs. Such increases in commodity prices would mean
higher prices for milk. The opposite would be true if supply costs were
declining. Additionally, since Federal order prices are minimum prices,
handlers may increase their pay prices in response to changing supply/
demand conditions even when Federal order prices do not increase.
Additionally, the pricing formulas contained in the recommended
decision and this final decision are applicable to handlers, since
handlers are the regulated parties under Federal milk order regulation.
The formulas are used to establish minimum prices for milk used in
making particular dairy products, not for determining payments to dairy
farmers.
2. Commodity Prices (CME vs. NASS)
As adopted in the interim final rule in this proceeding (published
on December 28, 2000 (65 FR 82832)), commodity prices determined by
surveys conducted by USDA's National Agricultural Statistics Service
(NASS) continue to be used in the component price formulas that
replaced the BFP. The recommended decision proposed no changes in the
source of product price data. Likewise, this final decision adopts no
changes in the source of product price data.
Several proposals (1, 5, 10 and 19) were considered during the
current proceeding that recommended using prices reported by the
Chicago Mercantile Exchange (CME) instead of the NASS surveys to
determine commodity prices. Both the CME and the NASS surveys were
supported by testimony at the hearing and in briefs. Several comments
to the recommended decision supported continuing to use the NASS
surveys.
The CME is a cash market where speculators, producers, and
processors can buy and sell products. It is a mechanism for
establishing prices on which the dairy industry relies. Thus, many
contracts to buy and sell dairy products are based on CME prices. A
USDA witness testified that he is unaware of any other indices used to
price cheese in the U.S. According to several witnesses, cheese and
butter processors generally base their contract sales on CME prices.
The NASS price survey gathers selling prices of cheddar cheese,
Grade AA butter, nonfat dry milk, and dry whey from a number of
manufacturers of these products nationwide. At the time the proposed
rule on Federal order reform was published (January 30, 1998), the NASS
survey included prices for cheddar cheese only. This survey began in
March 1997. In September 1998, before the final decision was published
in April 1999, NASS began surveys of Grade AA butter prices, dry whey
prices, and nonfat dry milk prices. In developing these commodity
surveys, input was obtained from the dairy industry on appropriate
types of products, packaging, and package sizes to be included for the
purpose of obtaining unbiased representative prices. A sale is
considered to occur when a transaction is completed, the product is
shipped out, or title transfer occurs. In addition, all prices are
f.o.b. the processing plant/storage center, with the processor
reporting total volume sold and total dollars received or price per
pound. NASS Dairy Product Prices reports wholesale cheddar cheese
prices for both 500-pound barrels and 40-pound blocks, USDA Grade AA
butter, USDA Extra Grade or USPH Grade A non-fortified dry milk, and
USDA Extra Grade edible non-hygroscopic dry whey. A more detailed
description of the surveys can be found in the final decision of April
2, 1999 (64 FR 16093).
The proponents of proposal 1, Western States Dairy Producers Trade
Association, et al. (WSDPTA), a group of several trade associations and
cooperatives, proposed that the NASS commodity prices for butter,
cheese, and nonfat dry milk that currently are used for computing the
Federal order component prices be replaced with prices determined by
trading on the CME. Dry whey was not included in the proposal because
there is no dry whey cash contract traded on the CME. A witness from
WSDPTA did not oppose the collection and reporting of NASS data, but
expressed the opinion that while it serves an important function as
information, it should not be used to establish prices. The proponents
presented several benefits of using the CME over the NASS survey for
commodity prices.
Proponents explained that by using CME prices in the formulas,
prices would be known immediately rather than a week later when the
NASS prices are published, reflecting more quickly the supply-demand
conditions for dairy products. The one-week delay is caused by the time
necessary to collect data. A witness for NFO noted that interested
persons are able to check the CME value of products on a daily basis
and use the reported prices as a factor in establishing what they will
pay, or what they will be paid, for cheese.
A witness from WSDPTA went on to explain that buyers, sellers, and
speculators trade the CME, trying to obtain a price in their favor,
while the price actually is determined by supply and demand forces. He
described the rules as fair and the results as transparent, with
participants having a number of interests. The witness continued by
noting that the CME price result is instant and results cannot be
altered. In contrast, he stated, NASS prices are reported by sellers
only, who are not disinterested parties. He argued that NASS
respondents can modify their numbers or file an initial report after
calculating the price impact of the latest reports.
The proponents also concluded that the urging by many hearing
participants that the NASS price series include mandatory participation
and be audited proves that the NASS series is not reliable enough to be
used as a price-discovery method.
Finally, the witness from WSDPTA expressed the view that the NASS
price series would feed on itself and result in price setting, not
price discovery. He continued by noting that plants and their buyers
will obtain prices one week and sell the commodity in the following
week at a price derived in large part from the price obtained in the
prior week. The witness compared the NASS survey to the CDFA survey of
powder prices which, he claimed, results in a circular pricing system
that is mathematically incapable of fully reflecting the top of the
market price for powder because so little of the survey volume is
priced off of the spot market. Proponents expressed the belief that
this circularity causes prices to remain lower than they would without
it and that prices would increase more slowly and decrease more rapidly
than would prices on the CME, causing overall lower prices for dairy
farmers.
In the comments filed on the tentative final decision, the
proponents of changing from NASS to CME prices commented only that USDA
should reconsider the use of NASS prices. A partner/manager of a dairy
farm stated that there is little correlation between the NASS and
wholesale prices, and questioned the accuracy of NASS survey numbers.
He also stated that block and barrel cheese is traded only between
manufacturers and that they therefore have an influence on setting the
price, especially if the percentage of the product traded is very low.
He argued that a fair price would reflect retail prices or at least
true wholesale price,
[[Page 67913]]
not the value of the last pound of product produced.
Opponents of changing from NASS to CME prices to compute component
prices included International Dairy Foods Association (IDFA), DFA, and
National Milk Producers Federation (NMPF). Witnesses for these parties
argued that the NASS survey includes pricing based on a significantly
larger volume of product than does the CME. In the case of the nonfat
dry milk market, the table of 1999 monthly CME Cash Markets data from
the 1999 Annual Dairy Market Statistics showed that there were no sales
reported for either extra grade or Grade A in the year 1999.
According to a witness from IDFA, the volume of cheddar cheese in
the NASS survey is equal to 26.4 percent of all cheddar cheese
production in the U.S. for the period September 1998 through February
2000. During the same period, the CME volume of cheddar cheese traded
represented only 1.7 percent of U.S. cheddar cheese production. The
witness stated that for the same 18-month period, the NASS survey
volumes represented 14.4 percent of all U.S. butter production while
CME trading consisted of only 2.6 percent. He also noted that switching
from the NASS survey data to the CME data would result in a change from
a very broad to an extremely thin representation of actual product
transactions.
Opponents to the proposal to use CME prices also pointed out that
prices at the CME are Chicago or Midwest prices based on the delivery
location specification of the contract. Therefore, they argued, the
scope of the reported prices for cheese, butter, and nonfat dry milk
are not national. A witness for Kraft noted that reliance on the CME
alone would exclude the substantial and growing volume of cheese
produced in the western United States (U.S.), particularly California.
A witness for Northwest Dairy Association suggested that a
transportation credit would need to be used with CME prices, at least
in the West, to reduce the value of the CME to a more representative
level. Opponents went on to explain that since the NASS survey contains
data from plants located all over the United States, NASS prices
represent a national scope of the prices of each of the particular
commodities.
Several of the comments filed in response to the tentative final
decision supported use of the NASS price series to determine product
prices. Furthermore, there were several comments filed on the
recommended decision and they all supported using NASS prices. The
Michigan Milk Producers Association (MMPA) comment noted that NASS
``provides the broadest range of price information and is
representative of the product prices realized by the dairy industry.''
In response to the recommended decision, DFA indicated that legislation
enacted subsequent to the recommended decision improved the
reliability, completeness, and integrity of the NASS price surveys. On
November 22, 2000, the Dairy Market Enhancement Act of 2000 was enacted
thereby authorizing mandatory and verifiable price reporting.
According to the testimony in the record and a number of the
briefs, cheese and butter sellers and buyers look to the CME to
identify the most current price levels. As a result, prices move in
response to supply and demand conditions in the marketplace as
reflected at the CME. Since the transaction prices of commodities are
based off of the CME, it is difficult to see how the NASS survey can
cause, or result in, circularity. The NASS prices reflect the CME
prices with a short lag but are based on a much greater volume,
enhancing the stability of the price series. Continued use of the NASS
price survey appears to be the best method of obtaining reliable data
about commodity prices.
As stated in the final decision on Federal order reform, NASS data
traditionally has been collected via a survey with voluntary
participation. The price information, like most NASS data, has not been
audited. NASS, however, applies various statistical techniques and
cross-checking with other sources to provide the most reliable
information available. The issue of mandatory and audited NASS data was
not within the scope of the rulemaking and could not be addressed on
the basis of the hearing record. At the time of the hearing NASS was
not authorized to conduct such activities. As noted above, however, the
Dairy Market Enhancement Act of 2000 authorized mandatory and
verifiable price reporting.
3. Commodity and Component Price Issues
a. General Approaches on Make Allowances
Make Allowances. Changes to the make allowances for each of the
product formulas used in calculating component prices were proposed and
discussed at length during this proceeding. Except in the case of dry
whey, make allowances adopted in the component price formulas in the
recommended decision were calculated using a weighted average of the
most recent California Department of Food and Agriculture (CDFA) study
and the Rural Business Cooperative Service (RBCS) study. A marketing
cost of $0.0015 per pound is added to both the CDFA costs and the RBCS
costs, and the CDFA value for return on investment is used to adjust
the RBCS cost. This is generally the same approach used to determine
the appropriate make allowances under Federal order reform, and results
in values that differ little from the formulas adopted at that time.
For the calculation of the Class III ``other nonfat solids'' price,
neither the CDFA nor RBCS studies included information on the cost of
making dry whey. The tentative final decision determined that the make
allowance for dry whey should remain the same as that for nonfat dry
milk. However, the results of a survey conducted for this proceeding
under the auspices of IDFA were included in the recommended decision to
determine the make allowance for dry whey.
A number of the proposals considered in this proceeding would
change the manufacturing, or make, allowances adopted for the pricing
formulas under Federal order reform. There was considerable testimony
on the appropriate factors to be considered in establishing make
allowances, and several sources of data were cited as the most accurate
to use for such a purpose.
Two surveys of product manufacturing costs that were averaged for
use in calculating make allowances under Federal order reform were the
CDFA study, which is done annually and includes nearly 100 percent of
dairy products manufactured in California, and the RBCS study, which is
conducted annually by USDA as an in-plant benchmark study for
participating cooperative associations. These two surveys had both been
updated since earlier versions had been used in determining the
manufacturing allowances used in the component pricing formulas adopted
under Federal order reform. In addition, the National Cheese Institute
(NCI), an affiliate of International Dairy Foods Association (IDFA),
contracted with a third party to conduct a survey of the costs of
manufacturing cheese and whey powder for use in this proceeding.
A witness for National Milk Producers Federation (NMPF) stated that
make allowances should reflect the costs incurred by average plants
manufacturing the particular dairy product used in the component/Class
price formulas: butter, nonfat dry milk, cheese, and dry whey. The
witness went
[[Page 67914]]
on to explain that the procedure used by the Department for determining
the make allowances under Federal order reform, using an average of the
CDFA cost of production studies and the RBCS study, was sound and that
the same procedure should be used as a result of this hearing, using
the updated data from both surveys. In calculating an appropriate make
allowance, the witness supported the addition of a marketing cost of
$0.0015 per pound to both the CDFA costs and the RBCS costs, as under
Federal order reform, and the CDFA value for return on investment used
to adjust the RBCS costs under Federal order reform. The witness
explained that both of these factors should be included as they are
legitimate and necessary costs incurred in operating manufacturing
plants. The witness for IDFA supported inclusion of the CDFA cost
studies in the computation of the make allowance; however, the witness
stated that the appropriate procedure for computing the make allowance
for cheese was to compute a weighted average of the CDFA cost studies
and the NCI survey. The witness explained that the RBCS study does not
include all the necessary costs that must be recovered in the make
allowance and that the NCI survey is needed to determine what the
additional cost values should be. The costs that the IDFA witness
pointed out--those which are not included in the RBCS survey but which
are included in the NCI survey--are general plant administrative costs,
such as the plant manager's salary and corporate overhead, return on
investment or capital costs, and marketing costs.
The IDFA representative testified that the danger inherent in
regulated prices is setting the manufacturing allowance at a level too
low to assure that manufacturers will be able to recover their costs of
manufacturing finished products and to have the money needed to invest
in new plants. The witness pointed out that an inadequate make
allowance would force manufacturers either to move to areas that do not
have regulated pricing or go out of business. At the very least, the
witness explained, the manufacturers would not invest in new plants and
equipment, which in the long run would cause a decline in the
productivity of the dairy industry. A number of briefs filed on the
basis of the hearing transcript emphasized the importance of covering
all handlers' costs of manufacturing and not just average costs.
The IDFA witness explained that if make allowances are established
at too low a level, proprietary plants are placed at a competitive
disadvantage relative to cooperative-owned plants. The witness
explained that since cooperatives do not have to pay their producers
the minimum order price, as proprietary plants are required to do,
cooperative plants can reduce the prices paid to member producers to
make up the difference in cost.
The IDFA witness explained further that the problem with a make
allowance established below the amount needed to cover plant costs
occurs because the plant sells the finished product at the same price
that is used in the formula for establishing the minimum price the
plant must pay for the raw material (milk). The manufacturing
allowances are the only place the plant has the opportunity to cover
its costs, and those allowances are fixed in the formula that
determines the raw material price.
The witness for IDFA asserted that there is very little risk in
setting a make allowance too high. He explained that if the make
allowance is established at a level above plant costs, the additional
revenue stream will be corrected through market forces by requiring the
plant operators to pay competitive over-order premiums to milk
suppliers to obtain an adequate supply of milk.
A witness for WSDPTA explained that the most important part of
determining a manufacturing allowance is to pick a method and stick
with that method. The witness testified that the appropriate method is
to use the results of the RBCS study with adjustments to include
factors for marketing costs and for capital costs. The witness pointed
out that use of the RBCS study is appropriate because the study is
voluntary and represents the costs of making the particular
commodities, and the plants are geographically widely dispersed. The
WSDPTA witness stated that including the results of the CDFA study in
the computation of the make allowance for pricing Federal order milk is
inappropriate since there is no logical reason for considering the
manufacturing costs of plants that do not procure any of the milk that
would be priced using those costs.
Witnesses testifying on behalf of NFU and NFO both supported the
concept of variable make allowances, in which changes in dairy farmer
production cost indexes would be used to adjust handler make
allowances. The NFU proposal would use an average national cost of
production, presumably as published by USDA's Economic Research
Service, and the NFO proposal would use the CDFA milk production cost
index. The witnesses supported such an approach as a means of
addressing the problem of manufacturers being insulated from changes in
supply and demand by their fixed make allowances.
The NFU and NFO witnesses explained that a fixed make allowance, as
contained in the current pricing system, does not vary with market
conditions and creates a situation in which manufacturers will not
respond to market signals since the manufacturers will receive a profit
no matter what the supply and demand is for the finished products. The
witnesses testified that as long as the make allowance allows
manufacturers a sufficient return, the manufacturers will continue to
produce the finished product even if there is limited demand for the
product, thus resulting in a continued low price paid to producers for
their milk. As a result, they argued, producers are left to bear the
burden of changes in supply and demand. The NFO witness characterized a
variable make allowance tied to the cost of producing milk as a market-
oriented system.
The NFU witness described the California milk pricing system, in
which manufacturers' production costs are covered through the make
allowance, as an example of the problems encountered by producers with
the use of product price formulas incorporating make allowances. He
testified that California continues to produce a large quantity of
lower-valued products because the pricing system makes the manufacturer
immune to the supply of and demand for the products. The witness blamed
the California make allowance system for the traditionally low milk
prices in California that, he claimed, result in expansion of dairy
herds to make up for reduced cash flow. The witness predicted that if
the Federal order system follows the same pricing path, the same
production patterns as witnessed in California would follow in the rest
of the United States.
In comments filed in response to the tentative final decision, NFU
stated that producers, as well as processors, will fail if they don't
attain their costs of production. NFU also argued in its comments that
under a variable make allowance, processors can avoid reduced make
allowances by increasing product prices.
The NFU comment overlooks the fact that the make allowances
included in the component price formulas do not cover all of the costs
of all processors, and probably allow for greater costs than are
experienced by some processors. In this sense, the margins experienced
by processors under product price formulas are variable between plants.
Also, it is likely that processors share some of their margin
[[Page 67915]]
with producers in the form of over order prices. The degree to which
this sharing occurs certainly may vary with producers' cost/price
situations, as perceived by processors. Although increased product
prices would have the effect of increasing manufacturing margins, the
ability of processors to increase prices while maintaining sales is
limited by the fact that the marketplace in which they sell their
products is competitive.
There appears to be no logical or economic reason for changing make
allowances for processing plants because of a change in the cost of
producing milk. If milk is to clear the market, plants must be willing
to accept it. Make allowances that decline as a result of increasing
milk production costs would squeeze plant margins, and manufacturers
will have to choose between not receiving milk, refusing to receive
pooled milk, or paying less than order prices to cooperative
associations for milk used in manufactured products. None of these
outcomes would be in the best long-term interests of dairy farmers,
processors, or consumers. Many dairy farmers, facing increased costs of
production, would have to find alternative outlets for their milk.
Decisions on the part of many processors to cease operating, use only
nonpool milk, or buy milk below order prices likely would result in
very disorderly conditions among dairy farmers looking for outlets for
their milk.
Most hearing participants agreed that the make allowance should
cover the cost of converting milk to a finished manufactured dairy
product. However, several participants disagreed with the IDFA
contention that there is very little risk in setting the make allowance
too high. They argued that if the make allowance is set in excess of
the cost to manufacture finished products, the additional revenue would
be kept by the manufacturing plants as higher profits and not
distributed to the producers supplying milk to the plant. They
explained that in many parts of the country there is little if any
competition for the dairy farmers' milk and therefore no incentive for
a plant to pay above the minimum Federal order price. These plants,
according to the witnesses, could be expected to keep the extra make
allowance for themselves. Comments filed by Michigan Milk Producers
Association (MMPA) on the tentative final decision and the recommended
decision continued to urge caution against logic that suggests a low
risk of setting make allowances too high. The cooperative stated that
not all of its 2,700 members might survive a market adjustment period
if make allowances were set too high, even if theoretically greater
premiums might be returned to producers.
Several witnesses opposed the idea of setting make allowances at
levels that guarantee plants a profit, or at least a return on
investment, when the dairy farmers supplying milk to the manufacturing
plants have no similar assurances for covering the costs of producing
milk. These witnesses pointed to the Agricultural Marketing Agreement
Act of 1937, sec. 608c(18), as justification for setting a lower make
allowance for plants, resulting in higher milk prices that would come
closer to covering dairy farmers' costs of producing milk.
As supported by most of the hearing participants, the make
allowances incorporated in the component price formulas under the
Federal milk orders should cover the costs of most of the processing
plants that receive milk pooled under the orders. In part, this
approach is necessary because pooled handlers must be able to compete
with processors whose milk receipts are not priced in regulated
markets. The principal reason for this approach, however, is to assure
that the market is cleared of reserve milk supplies.
In comments on the tentative final decision, IDFA continued to
argue that some legitimate manufacturing costs are excluded from the
RBCS survey and attacked the data gathered as ``inherently suspicious
and unreliable.'' IDFA also stated that the survey is not taken
seriously by some of its participants. Both IDFA and Leprino Foods
Company argued in comments on the tentative final decision that adding
factors for costs excluded in the RBCS study constitutes a less
accurate result than if those costs were included in a comprehensive
study. IDFA also commented that the need to allow for changes in cost
factors that might occur over time (such as recent increases in energy
costs) also supports the need for a make allowance that is too high
rather than one that is too low.
Several comments filed on the recommended decision indicated
opposition to establishing make allowances based on an average of plant
manufacturing costs. Agri-Mark Dairy Cooperative argued that using an
average manufacturing cost in the pricing formulas would result in half
of all handlers having higher manufacturing costs. IDFA noted in their
comments that mechanically adopting a make allowance survey ``would by
definition mean that the one-half of cheese produced in plants with
greater than average costs would be forced out of business.'' Comments
received from Northwest Dairy Association and Westfarm Foods, Inc.,
stated that USDA's use of ``a simple average risks half the industry.''
This final decision finds that continuing to use an average make
allowance of dairy manufacturing plants' costs is appropriate. Reliance
on product-price formulas necessitates the need to reflect and to
offset the manufacturing costs incurred and is supported by the record
even though there is disagreement on exactly how to accomplish this.
Using an average make allowance provides a reasonable measure to
reflect and offset manufacturing costs and is the only reasonable
measure that can be supported by the record evidence.
Although the RBCS survey does not include such costs as general
plant administrative costs, return on investment or capital costs, and
marketing costs, it is a survey that has been done for sixteen years
with the same fundamental methodology and with some continuity of
participants. Because the survey is done for the benefit of the
participating organizations (cooperatives) to help them identify their
costs and compare them with those of their peer group, there is every
reason to believe that the costs provided are as accurate as possible.
In addition, the years of experience with the survey have enabled USDA
to shape the questions to obtain more accurate results.
When the RBCS survey results are adjusted to include the factors
that were mentioned above as not included by using the values for those
factors from the CDFA survey, the two surveys' costs are comparable,
especially considering that the RBCS survey represents manufacturing
plants with a wide distribution around the U.S., while the CDFA survey
includes only California plants. The CDFA survey is also done every
year and is done according to a published procedure manual, with the
costs being audited by personnel employed by the State for that
purpose. Although no CDFA employee was available to respond to
questions about the conduct of the survey, official notice was taken of
the procedure manual and of California publications associated with
manufacturing cost data. In addition, several witnesses who are deeply
involved with the California dairy industry testified regarding the
perceived reliability of the survey results.
The use of manufacturing plant data from California plants that do
not procure any of the milk that would be priced using those costs
should not
[[Page 67916]]
cause concern. The costs of manufacturing dairy products may vary
slightly by region, but adoption of representative make allowances in
product price formulas should not fail to use a well-documented study
that includes a large amount of audited data, such as the CDFA survey.
In contrast to the RBCS and CDFA surveys, the survey of cheese and
whey powder manufacturing costs arranged for by NCI was developed
solely for the purpose of establishing costs to be used in determining
make allowances for this proceeding. The survey was conducted by
persons unfamiliar with the dairy industry among cheese processors who
would benefit from the adoption of overgenerous make allowances. No one
who actually conducted the survey was made available to testify, and
although the IDFA witness stated that survey participants would testify
regarding their responses to the survey later in the hearing, none of
the participating firms' witnesses would respond to questions about
their firms' results.
Although less weight must be given the NCI survey than either the
RBCS or the CDFA surveys for the reasons stated above, the NCI survey's
resulting manufacturing costs for cheese are not considerably different
from a weighted average of the RBCS and the CDFA surveys. In fact,
although the IDFA hearing participants went to great lengths to
discredit the RBCS study for use in identifying an appropriate level of
manufacturing costs, the hearing record reflects that the NCI survey of
cheese and dry whey manufacturing costs used the RBCS 1996 survey
results to identify outliers (plus or minus 10 percent) in the study
commissioned by NCI.
In comments filed regarding the tentative final decision, IDFA
urged that USDA use the NCI and CDFA studies for use in determining
make allowances for cheese and whey powder rather than using the RBCS
and CDFA studies. IDFA stated that the RBCS study was neutral and was
not developed or commissioned for use in this proceeding. Cooperative
associations attending the National Milk Producers Federation annual
meeting were encouraged to participate in the survey so the results
could be used in this proceeding. Since the RBCS study was developed
and has continued for sixteen years for purposes other than
establishing make allowances, and the methodology did not change from
past years for the study used in the hearing, it is unlikely that it
was designed for any purpose other than the one for which it was
developed and has been used for that period. If the comment is intended
to raise concerns that cooperative associations generally favor lower
make allowances, it should be noted that only manufacturing
cooperatives were surveyed. The record contains ample evidence that
many manufacturing cooperatives desire make allowances just as generous
as those favored by proprietary manufacturers.
A comment filed on behalf of the Association of Dairy Cooperatives
in the Northeast (ADCNE), some of which are national in scope, argued
that use of the NCI data would demean the importance of sworn first-
hand testimony that is subject to cross-examination.
As a result of the differences in conduct of the three surveys,
manufacturing costs used to determine appropriate make allowances for
cheddar cheese, butter, and nonfat dry milk in this proceeding are
calculated primarily from a weighted average of the RBCS and CDFA
surveys, with a check against the NCI survey cost of manufacturing
cheddar cheese. Since the record lacks any other data regarding the
cost of making whey powder, the NCI survey results are used for the
make allowance in the other solids formula.
One proposal included in the hearing notice would have eliminated
any marketing allowance from the make allowances, and a number of
witnesses' testimony objected to the inclusion of return on investment.
The American Farm Bureau witness questioned the need for a marketing
allowance since producers already pay a 15-cent assessment for
promotion and research. A brief filed by the proponent of eliminating
the marketing allowance stated that the allowance appears to be an
``adjustment'' or a ``hedge,'' since it is not defined in the final
decision in the Federal order reform process.
There was general agreement among those testifying that a marketing
allowance should be included in manufacturing costs, but no consensus
about the appropriate number. Some of the costs covered by the
marketing allowance include maintaining and staffing warehouses,
supporting a marketing and sales staff, and transporting product to
market, as well as accounting costs associated with the sale of
products. The NCI survey identified a marketing cost of $0.0011 per
pound of product, while the DFA witness stated that DFA's costs were
approximately $0.0018. The DFA witness testified that because the costs
included in the activities designated as marketing generally fall
within a common department under common management, it is appropriate
to apply the same allowance to each product.
A witness for Northwest Dairy Association (NDA), a cooperative
association in the Pacific Northwest, stated that NDA's marketing costs
are $0.0026 but identified costs associated with the aging of cheese as
included in that number. Since the NASS survey price does not include
cheese intended for aging, the marketing allowance certainly should not
include costs of aging cheese. The Associated Milk Producers, Inc.
(AMPI), witness used a $0.0024 marketing allowance in the calculation
of AMPI's proposed make allowance for nonfat dry milk. The witness for
Agri-Mark, Inc., a large Northeast cooperative association with several
processing plants, stated that Agri-Mark's estimates of marketing costs
ranged from $0.0025 to $0.005 per pound.
The costs identified as those included in a marketing allowance are
necessarily incurred in getting a product to market and are not related
to the consumer education and advertising activities covered by the
National Dairy Board assessment. The recommended decision stated that
since the marketing cost determined by NCI was the only estimate
included in the hearing record that was supported by a survey. It
varies from the $0.0015 rate included in Federal order reform by only 4
one-hundredths of a cent and applies only to cheese and dry whey. The
recommended decision concluded that there was no basis for making any
change to the marketing allowance.
Some producer witnesses objected to the inclusion of any allowance
for return on investment in manufacturing allowances on the basis that
dairy farmers are assured of no such return. The CDFA manufacturing
cost surveys include allowances for depreciation, which is included in
the non-labor processing costs; and for return on investment, which
represents the opportunity cost of the processors' resources invested
in the business. These costs are supported by audited data.
Both the marketing allowance and return on investment factors
should be included in the manufacturing allowances provided in the
component price formulas at the rates supported by the CDFA data. If
processors are not provided enough of a manufacturing allowance to
market the product they process, or to earn any return on investment,
they will not continue to provide processing capacity for producers'
milk. At the same time, the manufacturing allowances incorporated in
the formulas will not provide enough of an allowance to assure that
every processor, no matter how inefficient or
[[Page 67917]]
high-cost, will earn a profit. Allowances set at such a level certainly
could result in the situation warned of by producer groups in which
processors manufacture greater volumes of product than the market
demands because they are guaranteed a profit on all their production.
As a result, the only way to market all of the product would be to
reduce prices, with a profit to processors still locked in through the
make allowance, which would result in decreasing prices paid to
producers. In addition, manufacturers who are assured a profit on all
of their output would have a lesser incentive to make a sufficient
quantity of milk available for fluid use--a basic goal of the Federal
milk order program.
Farm-to-plant losses. One area addressed by several hearing
participants in testimony and in briefs as appropriate to consider in
establishing make allowances or yields was the loss of milk components
during manufacturing processes.
Two cheese manufacturers, IDFA and Land O'Lakes (LOL), continued to
argue in their comments on the tentative final decision that make
allowances should be increased, or yields reduced, to reflect shrinkage
between farms and warehouses.
The tentative final decision and the recommended decision stated
that orders have always provided an allowance for shrinkage and that
inflating costs of production or reducing yield factors to reflect
shrinkage would not properly reflect the value of producers' milk used
in manufactured products. The recommended decision also stated that
processing costs determined by surveys underlie the manufacturing costs
incorporated in the pricing formulas and were expressed in cents per
pound of end product manufactured, not in the cost per hundredweight of
converting milk to manufactured products. The recommended decision went
on to state that the component pricing formulas were based on the
content of those components in the finished products for which a
manufacturing cost per pound had been established. The recommended
decision concluded that both the CDFA and RBCS cost surveys allocated
all plant costs to actual end products and that the yield factors in
the formulas referred to the amount of finished product resulting from
the processing of a given volume of input or to the amount of component
present in the finished product.
Comments on the recommended decision from Kraft Foods, Inc.,
Leprino Foods Company, IDFA, Hilmar Cheese Company, Agri-Mark Dairy
Cooperative, Davisco Foods International, Glanbia Foods, Inc., Winger
Cheese, Inc., and Northwest Dairy Association and WestFarm Foods (NDA)
expressed concern that the Class III and IV milk pricing formulas
offered in the recommended decision do not sufficiently address the
costs incurred in the assembly, transportation, and delivery of milk
and its components. Kraft, Leprino, Hershey, Dairy Farmers of America
(DFA), and Dr. David Barbano of Cornell University testified at the
hearing as to the need to specifically account for the losses in milk
solid components that occur between moving milk from the farm or
diverting plants and the receiving manufacturing plant. The witnesses
and comments provided testimony that these losses are inherent in the
handling of milk and that this issue was inadequately addressed in the
recommended decision. This final decision finds the arguments for
specific consideration of the impact of shrinkage in the product price
formula persuasive.
The hearing testimony as well as comments to the recommended
decision provide sufficient evidence to conclude that the recommended
decision formulas do not properly consider farm-to-plant losses that
occur. Testimony indicates that these losses are 0.25 percent on all
milk solids, and that butterfat solid losses are an additional 0.015
pounds per hundredweight of milk. These losses need to be represented
in the pricing formula, according to these claimants, to account for
the out-of-plant losses that occur prior to processing raw milk into
finished products such as cheese or butter/powder.
Witnesses for Kraft, Leprino, DFA, and Hershey, among others,
testified that the difference between the quantity of milk, including
components, received at the plant should be accounted for in the price
formulas, since the formulas are based on yields attributable to
components received at the plant. Milk unrecoverable in the movement
from farm-to-plant cannot yield finished product.
Comments received from Select Milk Producers, Inc., and Continental
Dairy Products, Inc., supported the Class III and IV pricing formulas
as offered in the recommended decision, offering that including an
adjustment for farm-to-plant loss would cause confusion.
As indicated earlier, Federal orders have always contained
provisions for ``shrinkage.'' Since handlers have to account for all
receipts and utilization, the shrinkage provision allows assigning a
value to milk losses at the lowest priced class, providing explicit
recognition that some milk loss is inevitable in farm-to-plant
movement. If, however, the loss exceeds the allowable level, the excess
shrinkage is priced at Class I. This ``shrinkage,'' as discussed above,
refers to milk losses associated with how the order classifies and
pools milk. Current shrinkage provisions are associated with pool
distributing plants that produce fluid milk products. In this context,
shrinkage provisions also provide fluid milk handlers the ability to
assign milk losses to a lower class use value within certain
parameters.
The loss allowances in the Class III and IV formulas are intended
to reflect actual losses that are beyond the processing handler's
ability to control. In addition, farm-to-plant losses cannot be
assigned to a lower class value since the milk solids unavailable for
processing effectively have no value in the Class III and IV formulas.
The price formulas in the recommended decision included typical
plant losses associated with the conversion of raw milk to the final
dairy product and relied on Federal order reform findings that the
value of Class III and IV milk would be determined from the NASS survey
prices collected on butter, cheese, dry whey, and nonfat dry milk.
Pricing formulas generally include both yield factors and make
allowances which together account for the entire conversion of raw milk
to a final dairy product. Comments received on the recommended decision
indicated that milk solid losses between the farm and the receiving
plant are real, unavoidable, and common.
Prior to Federal order reform, milk pricing for all Federal milk
marketing orders relied on the Grade B Minnesota-Wisconsin (M-W) price
series and later the Basic Formula Price (BFP). These prices were
determined by manufacture milk plant survey reports of Grade B milk
purchases free of government price regulation and represented a
competitive pay price for milk. The competitive pay price factored the
entire cost of processing milk purchased from farms into finished dairy
products. In contrast to the competitive pay prices, Federal order
reform could no longer rely on a competitive pay price and purposefully
chose NASS surveys of end-product prices and sales to establish Class
III and IV prices with product price formulas. Many of the plants
reporting to NASS purchase large quantities of milk from individual
producer cooperatives. The end-product pricing formulas developed under
reform were based in part upon the cost to process raw milk into
finished dairy products.
[[Page 67918]]
After reevaluation of the hearing testimony and comments, this
final decision reverses the recommended decision by including an
adjustment for farm-to-plant losses of butterfat and nonfat solids. It
is necessary to include such an adjustment in using end-product pricing
formulas for determining component prices. Since the handlers receiving
milk from producers pay the producers on the basis of farm weights and
tests, handlers do not receive all of the milk components due to farm-
to-plant losses. An adjustment to the price formulas to account for the
difference in milk components paid for versus components actually
received is appropriate. Based on the hearing record and comments filed
by numerous parties, the farm-to-plant adjustment will reflect a 0.25
percent loss of nonfat solids, including protein and other solids, and
a 0.25 percent loss of butterfat plus a 0.015 pounds loss of butterfat.
These adjustments are reasonable and are reflected in the respective
yield factors used for computing the milk component prices.
These loss allowances are adopted into the Class III and IV pricing
formulas. The farm-to-plant losses are reflected on the end-products
that result from Class III and IV milk, namely, cheese, dry whey,
nonfat dry milk, and butter. They are reflected in this way to ease the
concerns raised by Select Milk and Continental Dairy who indicated that
reflecting farm-to-plant losses on the front-end of the product
formulas (based on farm milk) may cause confusion.
A detailed description of the amendments to each of the respective
pricing formulas is provided below. This final decision incorporates an
adjustment to the respective yield coefficients of each milk component.
The adjustment is based on an overall factor of 0.25 percent loss of
each milk component and an additional 0.015 pounds of butterfat lost
between the farm and the receiving plant.
In-plant losses. Several handlers commented that in-plant losses
should be included in the formulas used for computing the component
prices. In this regard in-plant losses represent milk that cannot be
processed into dairy products due to the handling of milk by the plant.
This final decision does not include an adjustment for in-plant losses
because a manufacturing plant has control over the magnitude of in-
plant losses and therefore should not be compensated for such losses,
unlike the farm-to-plant loss which is outside the control of the plant
operator. This adjustment is reflected by recognizing that the cost of
converting 100 pounds of milk into a finished product is not
significantly affected by the quantity of finished product produced.
For example, if it costs $20 to convert 100 pounds of milk into 10
pounds of cheese assuming absolutely no losses, the make allowance
would be $2 per pound. However, if there is a loss of a half pound of
cheese prior to the final packaging of the cheese, only 9.5 pounds of
cheese is ``produced.'' In this example, the make allowance would be
$2.11 per pound of finished product. Thus the make allowance based on
pounds of product produced does account for at least a portion of in-
plant losses.
Ratemaking. In comments received to the recommended decision,
Kraft, joined by NDA, argued that including make allowances in the
pricing formulas was ``ratemaking.'' Kraft stated that the make
allowances formulated and used in the Class III and Class IV formulas
have not followed the standards needed to comply with ratemaking. Kraft
stated that the make allowances are not constitutionally valid because
they do not ensure that manufacturing costs provide for a reasonable
rate of return for manufacturers.
In seeking to characterize the provisions of make allowances in
Class III and Class IV pricing formulas as ratemaking, the commentors
are ignoring the unique and longstanding treatment of the milk pricing
provisions, including make allowances, in Federal milk marketing order
regulations. The make allowances in the Class III and Class IV pricing
formulas do not constitute ratemaking despite arguments that they do.
The make allowances adopted are used in establishing minimum prices for
milk under the authority and requirements of the Agricultural Marketing
Agreement Act and are different in kind from the ratemaking referred to
by the commentors.
Other issues. A comment filed by Lamers Dairy to the tentative
final decision argued that using make allowances to calculate Class III
and Class IV prices but not Class I and Class II prices constitutes
unequal treatment. The comment disregarded that make allowances in the
Class III and Class IV price calculations are used to determine prices
for milk used in those classes, and that the prices for milk used in
Classes I and II are based on those milk prices. The Class I and II
prices are determined for the purpose of valuing milk in uses that are
alternatives to manufacturing uses. Once the Class III and IV prices
have been established, the Class I and II prices can be calculated
using differentials from the base prices. No further comments on this
issue were received.
b. Class IV Butterfat and Nonfat Solids Prices
Butterfat Price. This final decision continues to use the NASS
price for Grade AA butter in calculating the butterfat price to be used
in Class IV, and uses the current and the recommended decision's make
allowance of $0.115. However, this final decision changes the use of a
0.82 divisor in the price formula to a multiplier of 1.20 in order to
provide consistency to price formulas and to account for farm-to-plant
milk losses.
The recommended decision continued to use the NASS price for Grade
AA butter for calculating the butterfat price to be used in Class IV,
and it continued to change the manufacturing allowance in the butterfat
formula by \1/10\ of a cent per pound of butter from the allowance used
under Federal order reform. The recommended decision also recommended
that the 0.82 divisor in the price formula be unchanged. The make
allowance change is the same as that included in the tentative final
decision, and neither it nor the other factors were affected by the
injunction. However, the injunction resulted in the same butterfat
price formula being used to value both Class III butterfat and Class IV
butterfat.
Several proposals were heard that would reduce butterfat prices,
either by reducing the butter price used in the computation of the
butterfat prices for all classes or by subtracting a fixed amount from
the butterfat price computed for Class IV. Proposals also were made
that would change the make allowance used in calculation of the
butterfat prices. There were no proposals to change the butterfat
divisor of 0.82, although one witness representing a western
cooperative association suggested that it be reconsidered as he felt it
did not include a shrinkage factor.
Product Price (Butter). This final decision continues to use the
NASS price for Grade AA butter in calculating the butterfat price to be
used in Class IV. Several witnesses for proprietary processor
proponents of the proposal to deduct six cents from the butter price
before computing the butterfat price stated that historically the value
of butterfat in the Federal milk orders has been based on the price of
Grade A butter. The witnesses explained that an equivalent price
determination had been issued in 1998 (when the CME discontinued
trading Grade A butter)
[[Page 67919]]
where nine cents would be subtracted from the Grade AA butter price for
use in calculating Federal order butterfat prices. This equivalent
price, according to the witnesses, was found to be ``essential'' to the
continued operation of the Federal milk order program. Further, they
argued that its adoption continued the policy of basing butterfat
pricing under the Federal milk orders on a value below that of Grade AA
butter.
The witnesses complained that under Federal order reform the
butterfat value is determined by using the NASS Grade AA price of
butter, which effectively increases the butterfat value under Federal
milk orders. According to proponents' calculations, the increase does
not amount to a full nine cents but is tempered by the use of the NASS
Grade AA price, which has averaged approximately three cents below the
CME Grade AA price, in the butterfat pricing formula. Therefore, they
stated, the actual increase in the butter price used to calculate
butterfat prices is approximately six cents. According to the
witnesses, subtraction of six cents from the NASS butter price would
return the relationship between the butterfat value under the orders
and the selling price of butter to the relationship that existed prior
to Federal order reform.
Several witnesses explained that when handlers must pay for
butterfat on the basis of the Grade AA butter market they cannot then
sell cream or finished products at a price that would allow them to
recover their costs. They testified that cream is sold at a price that
is termed a ``multiple'' of the butter price, and that the multiples
used when the butterfat price was calculated from the Grade A butter
price have not adjusted to the new pricing formula using Grade AA
butter.
The IDFA witness pointed out that the IDFA proposal to subtract six
cents from the NASS Grade AA butter price would apply not only to the
butterfat formula for Class II, Class III, and Class IV but would apply
to the advance butterfat formula used for computing the Class I
butterfat price. The witness testified that by applying the same
formula to all classes of butterfat, the current relationship between
the class prices would be maintained. The witness contended that there
is no justification for changing the relationships between the class
prices, particularly if the adjustment would widen the class price
spreads or, in effect, increase the Class I and Class II differentials.
Witnesses for NMPF and several large cooperative associations
testified in support of NMPF's proposal to reduce the calculated
butterfat price by six cents, with the reduction applied to Class IV
butterfat only. Under this proposal, the computation of the butterfat
prices for other classes would not contain the six-cent adjustment.
Several witnesses representing cooperative associations that process
butter explained that butter manufacturers incur additional costs when
procuring cream used for manufacturing butter as opposed to the cost of
converting producer milk to butter. The witnesses explained that these
additional costs include transportation, additional handling, and
additional pasteurization. The witness for LOL testified that the
additional costs amounted to 4.57 cents per pound of butterfat for
transportation and 0.4 cents per pound for receiving, storing, and
repasteurization. A witness for Agri-Mark stated that Agri-Mark's
transportation costs are slightly less than LOL's, probably due to the
proximity of the Agri-Mark plant to the sources of cream, but that the
other additional costs are slightly higher than the LOL costs, at 0.5
cents per pound of butterfat.
The proponents of reducing the Class IV butterfat value also
referred to the computation of the California Class 4a butterfat price,
which involves a subtraction of 4.5 cents per pound from the CME Grade
AA butter price to adjust for the costs of moving butter from the west
coast to the Midwest.
Those parties who favored reducing the butter price before using
the butterfat price formula to calculate any of the butterfat prices
disagreed vehemently with the proposal to reduce only the Class IV
butterfat price. They argued that such a reduction would distort the
relationship between the Class II and Class IV prices, resulting in a
greatly-increased price for Class II butterfat in relation to Class IV
butterfat. Specifically, the projected increase in the Class II-Class
IV butterfat price difference was cited as 6.7 cents per pound (from
the current difference of 0.7 cents). These parties argued that
butterfat values would most appropriately be reduced by the same degree
in all classes.
The price to be used for butterfat in Class III and Class IV should
be computed by subtracting a make allowance of 0.115 dollars per pound
from the monthly average NASS Grade AA butter price and dividing the
result by 0.82 since 1.2213 pounds of butter can be made from 1 pound
of butterfat. The Class II butterfat price should continue to be the
Class IV butterfat price plus 0.007 cents, while the Class I butterfat
price will be the advance butterfat price plus the applicable Class I
differential.
Contrary to the belief stated by some witnesses, the use of the
Grade AA butter price for computing the butterfat price under Federal
order reform was not an ``oversight.'' Trading of Grade A butter on the
CME ended June 26, 1998 (not by USDA, as implied in one brief, but by
the CME) because the volume of Grade A butter traded was not great
enough to warrant maintaining a trading venue. One brief argued that
the Grade A butter price represents a minimum price, and that there is
no need for concern that there will not be an available market for
Grade A and Grade B butter. However, with the end of trading in Grade A
butter on the CME, there is no published (or any other known) source
for obtaining a price for Grade A butter.
The use of the Grade AA butter price for establishing butterfat
prices is appropriate since that is the only grade of butter that has
significant enough trading volume to warrant a publicly-reported price.
Grade AA butter prices are the only butter prices regularly available
and represent the vast majority (about 95 percent) of the butter sold.
Although the ``multiples'' of the butter price apparently had not
adjusted to the use of the Grade AA price during the first 4 months of
experience under the revised orders and probably should not be expected
to adjust during the period in which this proceeding is under
consideration, the marketplace should, in time, make the needed
adjustments.
Various witnesses estimated that Grade A and Grade B butter
combined make up 3-7 percent of the butter in the U.S. Although a
witness noted that the Minnesota-Wisconsin (M-W) price for non-Grade A
milk continued to be surveyed even after the percentage of milk
eligible for the survey had fallen below a 5 percent level, it was
widely recognized for some time that a pricing alternative to the M-W
must be found because the M-W eventually would no longer provide a
representative price for a large volume of unregulated milk. Similarly,
with the decline of Grade A butter (and the unavailability of prices
for that product), the only alternative available for determining price
is Grade AA butter. A finding in the equivalent price determination
that a Grade A butter price was ``essential'' to continued operation of
the orders referred solely to the fact that the Grade A price was
specified in all of the orders at that time, not that the butterfat
value under Federal milk orders could never be based on any other
price.
Making an adjustment to a clearly valid price series to approximate
a price
[[Page 67920]]
series that has been discontinued for several years due to insufficient
volume for trading is inappropriate. Comments to the tentative final
decision from IDFA and Schreiber Foods continued to encourage the use
of an estimate of the discontinued Grade A price series for the current
formulas. Since it has been about four years since a publicly-traded
price for Grade A butter has been available, it is impossible to
determine what the current difference between these prices would be
because there are no reports of the Grade A price available. The vast
majority of butter made and sold in the U.S. is Grade AA, and that is
the appropriate product to which to base a value of butterfat used in
producing butter.
The 3-cent average difference between the CME and NASS butter
prices makes up \2/3\ of the 4.5-cent adjustment made by CDFA in
calculating the value of butterfat used in butter. An additional 6
cents deducted from the butterfat price calculated from the NASS price
would much more than make up the remaining 1.5-cent difference. Also,
the 4.5-cent CDFA adjustment is made for the purpose of reflecting the
cost of moving butter from California to Chicago. The butterfat price
calculated under the Federal order program is not intended to apply to
only one state. The NASS price is a nationwide survey and likely
includes a significant representation of California butter prices. If
there are additional costs involved in making butter, they would more
appropriately be included in the make allowance for butter.
Make Allowance (Butter). This final decision continues to use the
current and the recommended decision's make allowance of $0.115. The
make allowance factor in the butterfat price formula should be derived
from a combination of the manufacturing costs determined by CDFA and by
RBCS, as they were in the tentative final and recommended decision. The
CDFA cost data is divided into two groups representing high cost and
low cost butter plants, with the four plants in the high cost group
manufacturing, on average, about the same average number of pounds of
butter as the seven plants in the RBCS study. Use of the data for the
CDFA high-cost group of butter plants is more appropriate than use of
the weighted average cost for all of the California plants because it
is more likely that the high-cost plants, like the plants in the RBCS
survey, serve a predominately balancing function.
When the RBCS data is adjusted for packaging cost, general and
administrative costs, and return on investment with the CDFA data for
the high cost group, and with a marketing allowance of $0.0015 added to
both sets of data, the weighted average of the two data sets is $0.115.
This butter manufacturing allowance was very close to the Federal order
reform allowance of $0.114. As adopted in the tentative final decision,
the make allowance of $0.115 continues to represent the costs of making
butter in plants that serve a balancing function.
The increased costs of making butter, not including transportation,
cited by the proponents of reducing the butterfat price are expected to
be included in this manufacturing allowance, which exceeds the low cost
group in the CDFA survey by 3 cents per pound. The only class of use
for which adjustments for transportation have regularly been included
under Federal order regulation is Class I. Assuring that the order
provides an allowance for moving milk used in manufactured products
would interfere with provisions designed to assure an adequate supply
of milk for fluid use.
Comments to the recommended decision from IDFA again encouraged
lowering the Grade AA butter price by subtracting six cents from the
NASS Grade AA butter price before computing the Class III and Class IV
butterfat prices. IDFA added that if the Grade AA butter price was not
reduced then the make allowance should be increased by 4.5 cents.
For the same reasons as stated above in response to comments on the
tentative final decision and the recommended decision, this final
decision will continue to use the NASS Grade AA butter price to compute
the ClassIII and Class IV butterfat price.
Yield (Butter). As discussed above, this final decision provides an
allowance for butterfat lost in moving milk from the farm to the
processing plant. In response to the recommended decision, numerous
Class III and IV processors provided comments expressing concern that
the Class III and IV milk pricing formulas did not allow for general
and common losses associated with the assembly, transportation, and
delivery of milk and its components. The record supports concluding
that the Class III and IV butterfat losses from the farm-to-the plant
be computed as follows:
Class III & IV Fat Loss = (Fat Pounds x 0.0025) + 0.015
The loss allowance for butterfat will be reflected by adjusting the
0.82 divisor in the butterfat price formula. Testimony and comments
indicate that farm-to-plant losses on all milk solids is 0.25 percent
(0.0025) with butterfat incurring an additional loss of 0.015 per 100
pounds of milk. The butterfat price formula is determined as follows:
[sbull] For every pound of butterfat, 0.0025 pounds is lost in the
farm-to-plant transfer (1.000-0.0025 = 0.9975).
[sbull] In addition, for every pound of butterfat, there is an
additional 0.0150 farm-to-plant loss on butterfat solids (0.9975-0.0150
= 0.9825 pounds of butterfat).
[sbull] Dividing 0.9825 by 0.82 results in a butterfat factor of
1.20 (0.9825/0.82 = 1.20).
[sbull] Therefore, the Class III and IV butterfat value per pound
is computed as follows:
(NASS butter price -0.115) x 1.20
This final decision chooses to multiply the NASS butter price by
1.20 instead of dividing the NASS butter price by 0.82. This change in
the formula from division to multiplication is made to simplify and
provide consistency in the pricing formulas used for all milk
components and includes an allowance for farm-to-plant losses.
Although one witness suggested that the divisor in the butter price
formula that reflects the butterfat content of butter be reconsidered,
he did not indicate any number more appropriate than the 0.82 divisor
used in the current formula. There was no other testimony in the record
questioning the butter content factor. In fact, the only data in the
record applicable to the issue was a CDFA report on butter and powder
yields at California plants in 1996 that was included in an exhibit.
This report shows a 1.2213 weighted average butter yield (1 pound of
butterfat results in 1.2213 pounds of butter), which corresponds to the
use of the 0.82 divisor.
The record does not support adoption of a Class IV butterfat price
that is not reflected directly in the Class II butterfat price. There
was testimony from several witnesses that the current Class IV-Class II
price relationship is rational and appropriate, and an adjustment to
the Class IV butterfat price that is not reflected in the Class II
butterfat price would disrupt the current relationship. In addition, it
would seem reasonable that some of the extra costs claimed by butter
manufacturers, such as transportation costs for supplemental cream
supplies, butterfat standardization of outside cream sources, and
additional pasteurization would be as applicable for Class II
manufacturers of high-fat products using surplus cream as for butter
makers. Accordingly, reduction of the Class IV butterfat price only is
not considered appropriate.
[[Page 67921]]
This final decision modifies the Class III and IV butterfat price
formula as follows:
(NASS AA Butter Price -0.115) x 1.20
Class IV Nonfat Solids Price. This final decision maintains the use
of the NASS survey price reported for nonfat dry milk and maintains the
make allowance of 14 cents per pound of nonfat dry milk as indicated in
the previous decisions issued in this proceeding. This final decision
also changes the divisor from 1 to 0.99 in order to account for farm-
to-plant losses of nonfat solids and to simplify and provide
consistency to price formulas. Nonfat milk solids in buttermilk are
removed from the computation of the Class IV nonfat solids price.
The tentative final decision eliminated the 1.02 divisor in the
nonfat solids price formula to reflect the incorporation of dry
buttermilk (with a lower product price and higher make allowance).
Six proposals to change some part of the nonfat solids price
formula were considered at the hearing. Three of the proposals dealt
with the manufacturing allowance for nonfat dry milk (NFDM), with two
of the proposals advocating use of the RBCS survey results and one
proposal supporting an increase in the make allowance. The other three
proposals supported changes in the yield factor of the nonfat solids
price formula that would reflect greater powder yield from a pound of
nonfat solids. Two of the proposals to change yield factors included
using CME NFDM prices instead of the NASS survey. As discussed in the
recommended decision, the product prices used in the component pricing
formulas will continue to be obtained from the NASS survey.
Product Price (Nonfat dry milk). This final decision maintains the
use of the NASS survey price reported for nonfat dry milk. No proposals
were considered that would have changed the product price used in the
nonfat solids price formula, and the record contains no basis for
making any change in this formula factor.
Make Allowance (Nonfat dry milk). This final decision maintains the
make allowance of $0.140 per pound of nonfat dry milk as indicated in
the previous decisions issued in this proceeding. At the time the
hearing notice was issued, the most recent RBCS data were not
available, and those costs were not specified in the proposals. By the
time the hearing was held, however, the RBCS data had been released and
were included in the information introduced at the hearing. NMPF
supported continued use of a weighted average of the CDFA and the RBCS
manufacturing cost surveys, with inclusion of a marketing allowance and
the CDFA factor for return on investment. NMPF proposed that the NFDM
make allowance be $0.140 per pound.
Southeast Dairy Farmers Association also proposed that the RBCS
survey be used to determine a make allowance for NFDM, but did not
propose that a marketing allowance be included. The necessity of
including a marketing allowance was discussed in the recommended
decision.
Associated Milk Producers, Inc. (AMPI), proposed that the NFDM
manufacturing allowance be increased from $0.137 to $0.1563 per pound,
a rate based on AMPI's cost of making NFDM at its own three plants in
the Upper Midwest over a 5-year period. The AMPI witness stated that in
addition to a processing and packaging cost of $0.1254, the make
allowance should include a marketing allowance of $0.0024 and return on
investment of $0.026, for a total allowance of $0.1538 per pound,
modified from the level proposed in the hearing notice. The witness
testified that the three AMPI plants operate at approximately 80
percent of capacity.
No comments were filed that specifically addressed the adopted make
allowance for use in the nonfat solids price.
On the basis of the data and testimony included in the hearing
record, the manufacturing cost level that appears to be most
appropriate for use in the pricing formula for nonfat solids is $0.14
per pound. This value is calculated by using a weighted average of the
RBCS survey and the two less-cost California groups of plants, adding
the CDFA General and Administrative costs and Return on Investment
expenses for those two groups to the RBCS numbers, and adding a $0.0015
marketing allowance to both sets of data. The basis for using the two
lower-cost groups of California plants is that the mid-cost group is of
a similar average size as the group included in the RBCS survey, and
that the lowest-cost California group has a very similar total cost to
the mid-cost group. These three groups of plants (the RBCS plants and
the two California groups) are similar enough in size and cost to
consider as fairly representative, and should encompass those plants
that perform a market balancing function. The highest-cost California
group should not be included since its average cost is more than ten
cents per pound of NFDM above the RBCS group or either of the other two
California groups.
The AMPI cost numbers cannot be included in the weighted average
since the number of pounds of NFDM associated with those costs is not
available. When the AMPI marketing allowance and return on investment
estimates are replaced with the more moderate numbers used in the make
allowance calculation, the AMPI manufacturing costs do not differ much
from the other two sources. This is true despite the wide discrepancy
in the capacity utilization percentage estimates for the two data sets
(80 percent for the AMPI plants versus less than 50 percent for the
plants in the RBCS survey). Inclusion of the AMPI costs in the RBCS
survey would have included a larger representation of NFDM manufactured
outside California. However, the record indicates that a high
percentage of the NFDM manufactured in the U.S. comes from California
and the proportion of cost data representing California in the
manufacturing allowance is reasonable.
``Yield'' (Nonfat solids). This final decision adopts changes to
the Class IV nonfat solids formula in order to account for farm-to-
plant losses, more accurately reflect the value of the nonfat milk
solids in nonfat dry milk and buttermilk powder, and provide
simplification and consistency to the milk price formulas.
The tentative and recommended decisions included buttermilk solids
in the value of nonfat milk solids. However, a reevaluation of the
Class IV nonfat solids pricing formula finds that recognizing a minimum
value for buttermilk powder does not materially affect the Class IV
skim milk price. Record evidence indicates that the price of buttermilk
powder can be a low of 70 percent of the nonfat dry milk price for the
same period. In addition, according to the record, the make allowance
of buttermilk powder is an additional 2 cents per pound higher than the
nonfat dry milk make allowance. Official notice of weekly Dairy Product
Prices published by the National Agricultural Statistics Service for
January 2000 through May 2002 is hereby taken. Copies of Dairy Product
Prices can be located at the Web site: http://
www.usda.mannlib.cornell.edu/reports/nassr/price/dairy/.
Using the 2-cent higher make allowance for buttermilk and prices
for nonfat dry milk and buttermilk powder for the period of January
2000 through May 2002 it was determined that the effect of including
buttermilk powder in the nonfat solids price and the Class IV skim milk
price was negligible. Therefore, this decision eliminates the
[[Page 67922]]
consideration of nonfat solids that end up in buttermilk powder from
the Class IV nonfat solids pricing formula.
According to the Economic Research Services publication Weights,
Measures, and Conversion Factors for Agricultural Commodities and Their
Products, nonfat milk solids in dry buttermilk are 0.0479 pounds per
pound of nonfat milk solids and are calculated as follows:
[sbull] For every pound of dry buttermilk there are 0.919 pounds of
nonfat milk solids.
[sbull] Assuming a dry buttermilk yield of 0.0521, the nonfat milk
solids that end up in dry buttermilk are 0.0479 pounds per pound of
nonfat dry milk solids (0.919 x 0.0521 = 0.0479).
The Class IV nonfat milk solids price can therefore be calculated
as follows:
[sbull] For every pound of nonfat milk solids (nfms), 0.0025 pounds
is lost in the farm-to-plant transfer.
[sbull] One pound of nfms minus the farm-to-plant loss of 0.0025
equals 0.9975 pounds of nfms at the plant.
[sbull] For every pound of nfms, 0.0479 pounds of these solids end
up in dry buttermilk powder.
[sbull] 0.9975 pounds of nfms minus the 0.0479 pounds of solids in
dry buttermilk equals 0.9496 pounds of nfms in the form of nonfat dry
milk.
[sbull] Since each pound of nonfat dry milk contains 96.2 percent
nfms (3.8 percent moisture) then, 0.9496/0.962 = 0.9871 (rounded to
0.99)
Therefore, the Class IV nonfat milk solids price per pound is
computed as follows:
(NASS nonfat dry milk price--0.14) x 0.99
A considerable portion of the testimony dealing with the nonfat
solids pricing formula pertained to the 1.02 divisor. The divisor is
not strictly a yield factor but is intended to reflect the amount of
nonfat solids in NFDM, with an adjustment for the small amount of
buttermilk powder that is made in conjunction with the manufacture of
butter and NFDM. Testimony by a number of witnesses asserted that the
product price minus the make allowance should be either multiplied by a
number greater than 1 (such as 1.02) or divided by a number smaller
than 1 (such as 0.99 or 0.975) to reflect the fact that more than 1
pound of NFDM can be expected to be manufactured from 1 pound of nonfat
solids due to the moisture content of NFDM.
Many of the hearing participants supported the 1.02 divisor,
adopted under Federal order reform, and expressed understanding of the
approach of adjusting the ``yield'' of NFDM to compensate for the fact
that some of the powdered product made from Class IV milk is buttermilk
powder (BMP). Although 1.03 to 1.05 pounds of NFDM generally can be
obtained per pound of nonfat solids, the formula also recognizes a
lower value and higher manufacturing cost for BMP.
Several witnesses correctly assessed an alternate solution to the
dilemma of calculating a component price from two commodities with
different prices and different make allowances as one requiring
addition of dry buttermilk as another component price in the Federal
milk order pricing system. As described by at least one witness, such
an undertaking would require adding dry buttermilk to the NASS price
survey, determining a separate make allowance, and calculating a yield
factor. This procedure would be a burdensome undertaking for very
little benefit, since dry buttermilk represents only about 5 percent of
the dry products resulting from the manufacture of butter and nonfat
dry milk. The issue that remains is how best to reflect the value of
nonfat solids used in both NFDM and BMP in the same component pricing
formula.
The IDFA witness testified that for the 19-month period beginning
with September 1998, the Central States' dry buttermilk price had
averaged $0.798 per pound, while the Central States' ``mostly'' price
for NFDM averaged $1.043. The LOL witness similarly testified that the
1999 Northeast ``mostly'' price for NFDM averaged $1.0389, while the
BMP price was $0.7686 per pound. On the basis of these numbers, it
would appear that the price of BMP is roughly 75 percent that of NFDM.
However, comparison of BMP and NFDM prices for the years of 1996
through 1999 and into 2000 reflects a more complex relationship between
these prices than the hearing testimony would indicate. The BMP price
as a percentage of the nonfat dry milk price (using Western prices) was
100.9 percent in 1996, 94.5 percent in 1997, 88 percent in 1998, and 71
percent in 1999. During the first third of 2000, BMP prices generally
averaged less than 70 percent of NFDM prices. As the year 2000
progressed, however, the percentage increased, being at levels up to
100 percent in late July and remaining above 85 percent for the second
half of the year in all areas.
The witness representing Agri-Mark stated that Agri-Mark employees
engaged in manufacturing operations had estimated that the costs of
producing BMP range from 1 to 3 cents more per pound than those of
producing NFDM. Given that the manufacturing costs estimated by the
Agri-Mark witness for other products were somewhat higher than those
supported by the bulk of the hearing record, it is reasonable to
consider the extra cost of manufacturing BMP to be generally not more
than 2 cents in excess of the cost of manufacturing NFDM. In addition,
it is difficult to justify increasing the powder make allowance for all
of the powdered product represented in the make allowance since the
RBCS witness testified that manufacturing costs of BMP manufactured at
the plants included in the RBCS survey are included in the powder costs
reported by RBCS.
Testimony regarding actual yields of NFDM and BMP were provided by
only one witness representing a manufacturing plant operator. The
numbers provided, while not complete enough for an exact accounting of
the ultimate disposition of the plant's receipts of producer milk,
indicate strongly that the approximate loss of nonfat solids used in
the manufacture of NFDM at the specific plant was 3 percent, with 16
percent lost in the manufacture of BMP, for a combined weighted average
loss of more than 3.5 percent of nonfat solids. In comparison, data
published by the State of California showed a weighted average loss of
solids not fat of 2.13 percent in the manufacture of butter and
powdered products.
The California data indicate a weighted average powder yield of
1.0252 pounds of NFDM and BMP from 1 pound of nonfat solids. One
witness discounted this data by observing that the ``high'' California
yield was reported as 1.0406, which would represent a higher-than-
allowable moisture content. This number may be influenced by the
``high'' reported BMP yield of 0.0749.
As noted above, the general impression conveyed by testimony in the
hearing record, that BMP is worth considerably less than NFDM and that
the cost of processing it is significantly greater than that of
processing NFDM, is misleading. The average BMP price over the period
1996-July 2000 is approximately 87 percent of the NFDM price, and the
cost of manufacturing BMP is, on the basis of the information
available, no more than 2 or 3 cents in excess of the $0.14 recommended
as the NFDM make allowance.
The following information from the hearing record was used to
determine a multiplier or divisor for the total nonfat solids pricing
formula that would result in a minimum price for nonfat solids while
incorporating the data and testimony in the record about the
manufacture of NFDM and BMP. To assure that the result represents a
[[Page 67923]]
minimum price, the low or high areas of ranges of numbers related to
the manufacture of these two products were used. The CDFA report on
butter and powder yield in California plants in 1996 was used in making
some of the calculations regarding this factor.
a. The price of BMP represents roughly 80 percent of the price of
NFDM (80 percent is less than the average historical relationship of
these prices over the past 5 years).
b. The cost of manufacturing BMP is not more than 2 cents greater
than the make allowance for manufacturing NFDM.
c. Using a theoretical yield of 1.03 pounds of powder containing 3
percent moisture made from milk containing 8.62 percent nonfat solids
would result in 0.054 pounds of BMP and 0.976 pounds of NFDM.
d. Adjusting the theoretical yield of 1.03 pounds to the minimal
yield of 1.01 pounds (the ``low'' yield in the CDFA report) and
prorating the BMP and NFDM to 1.01 pounds instead of to 1.03 pounds,
the amount of BMP manufactured from a pound of nonfat solids used in
butter/powder is approximately 0.053 pounds. When the NFDM yield is
prorated, the resulting minimum yield is 0.957 pounds.
Using a NFDM price of $1.03 per pound, a make allowance of $0.14
cents per pound of NFDM, and a divisor of 1, the resulting calculation
is: $1.03 - $0.14 = $0.89 per pound of nonfat solids. The same result
is achieved through a more complicated calculation using both product
prices and make allowances, as follows:
Buttermilk powder:
($1.03 x 0.80) - $0.16 = $0.664
$0.664 x 0.053 = $0.03519 + Nonfat dry milk:
$1.03 - $0.014 = $0.89
$ 0.89 x 0.957 = $0.85173
$0.88692 (Rounded to $0.89)
On the basis of this analysis, no multiplier or divisor would be
necessary in this formula (same as a multiplier or divisor of 1).
A number of comments were filed in response to this aspect of the
tentative final decision, with some supporting the use of a divisor of
``1,'' two comments suggesting that a divisor of 1.01 would be more
appropriate (but one determining that such a change would not be
possible on the record of this proceeding), and several insisting that
the above analysis is flawed by use of incorrect or inappropriate data
and that the divisor should be returned to the 1.02 level in effect
before January 1, 2001.
The IDFA comments stated that, in the interest of establishing
minimum pricing, no more than 70 percent of the NFDM value should be
assumed for the BMP price and that 3 cents should be added to the BMP
make allowance instead of 2. IDFA also indicated that the formula
should include shrinkage. NDA and LOL criticized the use of the
California yield data in determining the comparative yields of NFDM and
BMP, both because some of the data reflected information that included
powder with higher-than-allowable moisture and because no witnesses who
had participated in the survey were present to testify about it. LOL
criticized USDA's use of Western prices rather than the Northeast and
Central prices quoted by witnesses who discussed the relative values of
NFDM and BMP.
Comments filed by Agri-Mark protested elimination of the 1.02
divisor, arguing that USDA relied on a casual remark about the
difference between the cost of manufacturing BMP and NFDM rather than
on detailed cost information as in the other make allowances. Agri-Mark
also stated that the role of Class IV in balancing surplus cream from
Class I use increases the ratio of BMP to NFDM over that calculated
from an assumption about uses of the nonfat solids in producer milk.
Criticism of use of the Western BMP and NFDM price series to
analyze the relative values of BMP and NFDM in the tentative final
decision did not consider the fact that the Western price (mostly)
series is the only one with an uninterrupted data series for the five
years considered. In addition, the percentage of the NFDM price
represented by the BMP price for the Western region was lower during
each of the years 1996-2000 than for the Central region; and very
similar, with some years averaging higher and some lower, to the
Northeast region. Criticism of the CDFA yield data ignores the fact
that the yield factors used in the initial analysis for the tentative
final decision adjusted the relative ``weighted average'' yields of BMP
and NFDM to the ``low'' yield.
The hearing record contains enough information on the issue of the
relative weights, values, and costs of manufacturing NFDM and BMP to
support the conclusion reached in the tentative final decision about
the appropriate divisor in the nonfat solids price formula. The 0.96
divisor considered in the proposed rule on Federal order reform
represented the pounds of nonfat solids in NFDM rather than the yield
of nonfat dry milk from nonfat solids. Use of the divisor of 1
recommended in the tentative final decision accounted for all of the
nonfat solids used in Class IV and resulted in 3-4 cents less per pound
of nonfat solids (over a NFDM price range of $0.86-$1.10) than the
value that would be calculated if the formula attributed all of the
Class IV skim value to NFDM.
The Agri-Mark comment emphasized that the ratio of BMP to NFDM milk
considered in the nonfat solids price calculation should be calculated
on the basis of the butterfat content in Class IV because butterfat
surplus to Class I use is used in butter. The Agri-Mark comment
observed that the butterfat percentage of milk used in Class IV in the
Northeast over a 3-month period averaged 5.67 percent.
Even if the national average of butterfat in Class IV (6.4 percent)
is used to determine the breakdown between nonfat solids used in BMP
and nonfat solids used in NFDM, less than 0.8 pounds of nonfat solids
out of the 8.4 contained in a hundredweight of Class IV milk at 6.4
percent butterfat should be attributed to use in BMP. In effect, the
price of each of the 8.4 pounds would be reduced by 3-4 cents. Such a
calculation results in 25.2-33.6 cents per hundredweight of milk
containing 6.4 percent butterfat to cover the additional costs of
making 0.8 pounds of BMP and the lower value of 0.8 pounds of BMP
compared to the NFMP manufacturing cost and price. A 3-cent additional
cost per pound of manufacturing 0.8 pounds of BMP would equal 2.4
cents, and a 25-percent reduction of the BMP value from that of NFDM
would equal approximately 20 cents. These calculations would still
leave 2.8-11.2 cents per hundredweight to cover any additional costs of
making and selling BMP over those of NFDM.
The recommended decision noted that the additional 3 cents per
pound cost of making BMP is on the high end of the information in the
hearing record, and that the 25 percent reduction in value of BMP
compared to NFDM is on the low end. It was also noted that over the
past 5 years, only during the period cited by witnesses testifying
about the relative values of BMP and NFDM and during the first 4 months
of 2000 had the BMP price as a percentage of the NFDM price fallen
below eighty percent. It was also mentioned in the recommended decision
that calculations assumed that all of the nonfat solids not used in
NFDM were used in BMP, whereas some are used in whole milk powder,
which has a higher value than either NFDM or BMP.
In considering all of the above discussion, the record supports the
finding that this final decision's incorporation of a Class IV nonfat
dry
[[Page 67924]]
milk yield factor of 0.99 is appropriate. The formula is as follows:
((NASS nonfat milk solids price-0.14) x 0.99
c. Class III Butterfat, Protein, and Other Nonfat Solids Prices
In a change from the orders promulgated under the Federal order
reform process, the tentative final decision calculated a Class III
butterfat price from the value of butterfat in cheese rather than using
the butterfat price calculated from the value of butter for both
Classes III and IV. The Class III butterfat price in the tentative
final decision was calculated to represent the value of the component
in the NASS cheddar cheese price, as was a revised protein price
formula.
Before the interim final rule became effective on January 1, 2001,
several petitions were filed requesting the Secretary to delay
implementation because industry participants objected to the effects of
the separate Class III butterfat price.
Implementation could not be stayed because of the Congressional
deadline on the rulemaking procedure, and partial implementation was
not possible because the interim final rule had been approved by
producers in its entirety. Before the separate Class III and Class IV
butterfat prices could become effective, implementation of the separate
butterfat prices was enjoined in the Federal District Court for the
District of Columbia at the urging of organizations representing most
of the interests in the dairy industry. The Court's order returned the
price formulas for the Class III components to their earlier forms,
with the new make allowances and cheese moisture adjustment
incorporated.
By the end of the comment period on the tentative final decision,
comments representing nearly 100 interested parties from most segments
of the industry were received that objected to separating the Class III
and Class IV butterfat prices and reducing the level of the protein
price. The comments urged USDA to continue to calculate the Class III
butterfat price on the basis of the value of butterfat in butter, and
return to the Class III price formula formats in use before
effectuation of the interim final rule.
Several reasons were given for rejecting the change to Class III
component prices based on the contribution of butterfat and protein to
cheese yield. Numerous commenters cited the negative effects of a
marked increase in the cost of milk for use in high-fat cheeses and the
incentive created for handlers to substitute lower-valued Class IV
forms of butterfat for use in cheese-making. Others stressed the
difficulties created by the decision in marketing cream. Several
commenters argued that the shift in value from protein to butterfat
caused by the decision did not make sense in light of the importance of
protein in cheese-making, and that the reduced protein price would send
incorrect economic signals to dairy farmers. One particular concern was
the potential significant reduction in the Class I skim value if the
Class III price at 3.5 percent butterfat became the mover for the Class
I price.
Based on comments received, this final decision determines that the
Class III butterfat price be the same as the Class IV butterfat price,
calculated from the value of butterfat in butter. In addition, the
portion of the protein price formula that adjusts the protein price to
accommodate the differential value of butterfat in cheese, as opposed
to butter, will continue to be incorporated into the protein price
formula. The technical corrections to the protein price formula made in
the recommended decision to make the protein price correlate somewhat
more closely with the cheese price are adopted in this final decision.
The tentative final decision made only one modification to the
specifications of the cheese price, currently a weighted average of the
prices of cheese sold in 40-pound blocks and 500-pound barrels (with a
3-cent addition to the barrel price). That change, to adjust the price
of 500-pound barrels to 38 percent moisture instead of the 39 percent
moisture price currently reported by NASS, is continued in this final
decision. Also, as in the tentative final and recommended decisions,
this final decision reduces the make allowance for cheese from $0.1702
to $0.165 per pound.
As proposed in the recommended decision, the other nonfat solids
price adopted in this final decision will continue to be calculated by
subtracting the make allowance from the NASS-reported price for dry
whey. However, the result will now be multiplied by 1.03 instead of
dividing by 0.968. In addition, the recommended make allowance of 15.9
cents per pound of dry whey is also adopted.
Class III Product Price (Cheese). As proposed in the recommended
decision, this final decision continues to utilize the NASS cheese
price survey as a basis for determining a value for protein in
computing a Class III milk price. The NASS 40-pound block price will
continue as presently used. In addition, the NASS 500-pound barrel
price will continue to be used as previously recommended at 38 percent
moisture and a 3-cent addition to the barrel price.
Several proposals included in the hearing notice would, if adopted,
have changed the NASS cheese price used in the Class III pricing
formulas. One proposal would limit the cheese prices included to 40-
pound blocks reported by the CME, while another would add 640-pound
blocks to the prices surveyed by NASS for inclusion in the cheddar
cheese price. A third proposal would replace the current 3-cent price
adjustment between 500-pound barrel prices and 40-pound block prices to
a value that reflects the actual differential industry cost of making
40-pound blocks over 500-pound barrels. Still another proposal would
adjust 40-pound block cheese prices for moisture, as 500-pound barrel
prices are adjusted.
As discussed above in Issue 2, CME commodity prices should not be
used as the basis for calculating component prices. Eliminating 500-
pound barrels, which represent approximately two-thirds of the cheese
represented in the NASS survey, from calculation of the market value of
cheddar cheese would reduce greatly the degree to which the current
product prices represent U.S. cheddar cheese prices. The record of this
hearing provides no support for relying solely on prices for 40-pound
blocks to identify a market price of cheddar cheese.
Several parties testified that the NASS weighted average cheese
price should include the value of 640-pound block cheese in the cheese
price computation. They contended that such inclusion would improve the
reliability of the average cheese price by adding a substantial
quantity of cheese to the price survey. Witnesses' estimates of the
percentage of U.S. cheddar cheese production represented by 640-pound
blocks ranged from 20 to 27 percent. Witnesses testified that the
increased volume would better reflect the true value of cheese and
additionally would reduce the potential for price distorting
manipulation by individual handlers.
In comments filed on the tentative final decision, IDFA stated that
USDA had erred by excluding 640-pound blocks. IDFA reiterated the
argument that 640-pound blocks represent as much as 27 percent of total
cheddar cheese production. Furthermore, the comment noted that past
data-collection problems are irrelevant because ``all participation in
NASS surveys regarding data used to calculate federal order minimum
prices is now mandatory.'' IDFA concluded that the argument that 640-
pound blocks should not be used due to their being made on a custom
basis to customers' specifications is not
[[Page 67925]]
valid because adjustments can be made, as they are for moisture in
barrel cheese.
Opponents to inclusion of the 640's in the cheese price computation
explained that the vast majority of 640's are made on a custom basis to
customers' specifications and therefore are not sufficiently uniform to
have a standard identity. One witness noted that much of the commerce
in 640's is made on a long-term contractual basis and as such would
rarely be reflective of changing market conditions.
The Association of Dairy Cooperatives in the Northeast (ADCNE)
comments on the tentative final decision reiterated USDA's position,
stating that ``the market in 640-pound blocks of cheddar cheese does
not involve sufficient buyers and sellers in arms-length transactions
to provide good data to establish the Class III price for producer milk
in all federal milk orders.'' As stated in the tentative final
decision, standardized pricing cannot be developed without a standard
identity for the product, which 640-pound blocks lack. In addition,
there appears to be an insufficient volume of 640-pound block cheese
transactions to warrant inclusion. At the beginning of the NASS survey,
price data for 640-pound blocks was collected but was discontinued due
to lack of volume and too few participants to allow disclosure of data.
Even earlier (1995-96), the former National Cheese Exchange attempted
to include trading in 640-pound blocks but discontinued doing so
because of lack of interest. Testimony from witnesses representing
organizations that manufacture cheese in 640-pound blocks, and who
favored inclusion of such product in the NASS survey, stated that the
640-pound blocks manufactured by their organizations are used
internally, making that cheese ineligible for inclusion. Therefore,
even though price reporting is now mandatory, 640-pound blocks of
cheese do not meet the criteria necessary for the prices of these
products to be eligible for inclusion in the NASS survey.
Elimination or reduction to one cent of the three-cent adjustment
that is added to the barrel price for computing the weighted average
cheese price was advocated in testimony at the hearing, comments
contained in post-hearing briefs, and comments responding to the
tentative final decision. The witnesses argued that since the barrel
cheese price is adjusted to 39 percent moisture and block cheese is
approximately 38 percent moisture, at least 2 cents of the observed
difference in price between 40-pound blocks and 500-pound barrels is
due to moisture and has nothing to do with actual differences in costs.
In fact, they argued that there is no difference in packaging costs
between block and barrel cheese.
The witness for DFA, a cooperative that manufactures cheese
packaged in both 40-pound blocks and 500-pound barrels, testified that
three cents is an acceptable and reasonable spread between blocks and
barrels and that there is no compelling reason to change the three-cent
addition to the barrel price. The witness for LOL testified that the
three cents is an appropriate difference between blocks and barrels and
that adding three cents to the barrel price when computing the weighted
cheese price is an appropriate adjustment. DFA and ADCNE argued, in a
brief filed on behalf of both parties, that the record supports a
conclusion that the 3-cent adjustment of the barrel price is
attributable to volume utility and cost differences in packaging and
handling.
The National Cheese Institute, which proposed reducing or
eliminating the 3-cent adjustment, argued that the adjustment should
include only the actual cost differences involved in manufacturing and
packaging the two sizes of cheese. Although a number of witnesses
representing cheese manufacturers testified in favor of reducing or
eliminating the adjustment, including one whose employer makes both
sizes of cheddar, none of them addressed the actual cost differences of
packaging and manufacturing 40-pound blocks and 500-pound barrels.
Instead, the only testimony that was offered involved attributing a 2-
cent difference to the moisture-adjusted value of the two sizes of
cheese packages. In comments responding to the tentative final
decision, ADCNE argued that the 3-cent adjustment is representative of
the historical difference in market value between barrel cheese and
block cheese after adjustments for moisture.
If the difference between the block and barrel prices were due to
the difference in moisture, the difference between the prices should
widen as the cheese price increases since the moisture adjustment is
based on the price and moisture of the cheese. An analysis of
historical cheese prices indicates that the difference between the
block cheese and barrel cheese prices does not change with changes in
price level. In fact, three of the largest differences between the
block and barrel prices occurred at approximately the 40-month NASS
weighted average monthly prices.
In comments filed by Leprino Foods Company (Leprino) on the
tentative final decision, Leprino argued that comparisons of the block
and barrel cheese prices from May 1995 through December 1999 are not
valid because of artificial market distortions. Leprino stated that
valid relative price data is available only for calendar year 2000,
during which the average spread is 1.54 cents. Leprino continued, in
its comment, that the price spread between blocks and barrels does not
move in lock-step because it is affected by many factors, and will
continue to be driven by current market forces.
In comments to the recommended decision, Kraft reiterated their
position that at equal moisture tests of 38 percent, the appropriate
value to add to the barrel price is 1-cent. In comments to the
recommended decision, Glanbia stated that the difference in cost of
production between blocks and barrels is $0.008 per pound of cheese at
their plant. In comments received to the recommended decision, DFA and
Select indicated that the 3-cent adjustment is the correct adjustment
to the barrel price.
The record contains no basis for concluding that the actual cost of
manufacturing and packaging the two sizes of cheese is not the
historical 3-cent price spread. In fact, during the period September
1998 through June 2000 the difference between the block and barrel
prices has been 4.4 cents per pound. The record supports maintaining
the 3-cent addition to the barrel cheese price.
An expert witness, and several other witnesses, testified that the
moisture content of the cheese used for determining the NASS cheese
prices and the moisture content used in the Van Slyke cheese yield
formula used for computing the ``yield'' coefficients in the protein
formula should be the same. The witnesses explained that failure to
align the formula and the moisture content represented by the cheese
price survey would result in overstating or understating the formula
coefficients.
The expert witness explained that the barrel cheese price is
reported at 39 percent moisture after being adjusted from the actual
moisture, while the block cheese price is reported at an unknown
moisture level. The only testimony dealing with the actual moisture
level of block cheese indicates that it averages about 38 percent.
The coefficients originally used for determining the Class III
protein price and the Class III butterfat price and used in the
formulas in the recommended decision were derived from using the Van
Slyke cheese yield formula at 38 percent moisture. Therefore, it is
appropriate to use cheese prices that reflect cheese containing 38
percent moisture. The current practice of using
[[Page 67926]]
the 40-pound block cheese price unadjusted for moisture and the 500-lb
barrel price adjusted for moisture should be continued, but with the
barrel price adjusted to 38 percent moisture instead of 39.
In several comments on the tentative final decision, commenters
stated that the 38-percent moisture adjustment to the barrel price
requires an adjustment to 1 cent and not 3 cents for the price spread
between 500-pound barrels and 40-pound blocks. Other interested persons
filed comments supporting both adjustments. DFA argued in its comment
that eliminating either adjustment should result in use of only 40-
pound block cheese prices.
The hearing record provides no basis for altering the composition
of cheese prices surveyed for use in the Class III pricing formulas or
for changing the calculation of the NASS weighted average cheese price,
other than the moisture adjustment to 38 percent for 500-pound barrels.
Several witnesses testified that types of cheeses other than
cheddar should be included in the NASS price survey as a more
comprehensive basis for identifying a cheese price, although such a
proposal was not included in the hearing notice. The cheddar cheese
included in the NASS survey meets certain standard criteria that makes
prices for the reported cheese sales comparable. If the survey included
other descriptions of cheddar and other types of cheese, such as
mozzarella, it would not be possible to consider the reported price as
representative of the value of any particular product. Further, the
manufacturing costs surveyed are, to a great extent, limited to the
costs of processing cheddar cheese.
Class III Make Allowance (Cheese). As in the tentative final and
recommended decisions, this final decision reduces the make allowance
for cheese from $0.1702 to $0.165 per pound. Several proposals to
adjust the manufacturing allowance for cheese were included in the
hearing notice and considered at the hearing. The NMPF witness
testified that the organization had determined that the most
appropriate cheese make allowance would be a weighted average of the
updated RBCS and CDFA surveys, with addition of a marketing allowance.
Thus, the NMPF supported adoption of a cheese make allowance of $0.1536
per pound of cheese. Several witnesses representing cooperative
associations supported the NMPF $0.1536 proposal but also would have
included a cost factor for return on investment. One witness testified
that the make allowance should be based on data from actual plant
operations through the surveys conducted by RBCS and CDFA and testimony
from individual plant operators; that it should include California
data, as California plants represent a large proportion of cheese
manufacture; and that it should be generous enough to assure adequate
plant capacity for continued manufacture of cheese.
The witness representing NCI testified that the cheese make
allowance should be no less that $0.1687, the weighted average of the
NCI-sponsored and CDFA surveys with the addition of a marketing cost of
$0.0011. He stated that such an allowance would represent the
production of 24 cheese plants and 53 percent of U.S. cheese. Several
cheese manufacturer representatives supported use of the NCI-supported
make allowance, stressing the importance of adoption of an allowance
that covers all of the costs of manufacturing cheese.
A witness representing Farmers Union and the American Farm Bureau
witness both supported adoption of a make allowance of $0.1521, as a
weighted average of RBCS and CDFA data; and a witness for National
Farmers Organization supported a make allowance of $0.141 composed of
the RBCS cost with the addition of a marketing allowance and return on
investment.
Although ADCNE, in its comments on the tentative final decision,
supported the use of California data as compiled and audited by a state
agency, ADCNE disagreed with inclusion in the cheese make allowance of
the CDFA ``general and administrative expense'' item, which added 1.9
cents per pound to the make allowance. ADCNE described this allowance
as ``generous, to say the least,'' as it represents $2-$3.5 million for
the newest, largest, and most efficient cheese plants, and stated a
preference for having some basis in testimony before building that sort
of expense level into plant costs at the expense of minimum producer
prices.
The general and administrative expense was one of the cost factors
included in the CDFA weighted average cost study, but not in the RBCS
study. Therefore, it must be added to the RBCS data to make the two
cost studies comparable.
The make allowance used for computing the Class III protein and
butterfat prices, $0.165, was determined by combining the CDFA plant
survey with the RBCS survey. As was pointed out by several witnesses at
the hearing, several cost factors that are necessary to maintain the
viability of processing plants are not represented in one or both of
the RBCS and the CDFA studies. These cost factors include marketing
costs, return on investment, and general and administrative expenses. A
discussion of these expenses is included earlier. Neither the CDFA nor
the RBCS survey included a marketing cost, so the $0.0015 marketing
allowance was added to both studies. In addition, the CDFA return on
investment cost of $0.0103 and the general and administrative expense
of $0.0190, both of which were included in the CDFA weighted average
cost, were added to the RBCS study, which included neither factor. The
resulting adjusted costs for each survey are $0.1708 for CDFA and
$0.15996 for RBCS. A weighted average of the two studies was computed
using the respective adjusted make allowances and the pounds of cheese
reported in each study--466,396,548 for the CDFA study and 633,142,812
for the RBCS study--to arrive at the Class III price make allowance of
$0.165.
In a comment filed in response to the tentative final decision, NFU
stated that the reduction in the cheese make allowance should have been
greater than $0.0052, but that the cooperative could support an
increased make allowance if it were tied to producer cost of production
and market price through implementation of a variable make allowance.
The $0.165 make allowance is based on actual costs discovered by two
surveys, the conduct of which were open to review in the hearing
record, and is very close to the results of another that was conducted
in a somewhat less accessible manner. There is no basis in the record
for adopting a lower make allowance and, as discussed earlier, no
acceptable rationale for implementing variable make allowances.
Class III Butterfat Price. As discussed in the introductory portion
of the Class III price section of the recommended decision, the Class
III butterfat price adopted in the tentative final decision was changed
by a court injunction to be the same as the Class IV butterfat price.
This final decision continues to calculate butterfat prices for all
classes based on the value of butterfat in butter. The order will refer
to both the Class III and Class IV butterfat prices as ``the butterfat
price,'' as it did previously.
The tentative final decision was based on the observation that
market distortions occur due to using the Class IV butterfat price
calculated from the value of butterfat in butter to also represent the
value of butterfat in cheese (Class III), and trying to incorporate the
difference in value in the protein price. Analysis shows that there is
very little relationship between the cheese price and either the
current butterfat price or the current protein price.
[[Page 67927]]
As a result, instances have occurred when the protein price
declines while, at the same time, the cheese price is increasing. This
outcome is contrary to the concept of pricing components on the basis
of the value of the products in which they are used. The same inverse
price scenario has affected the butterfat price, with occurrences in
which the Class III butterfat price increases because the butter price
has increased while the cheese market has been declining.
Although reflection of the value of a manufactured product in the
prices for the milk components that are instrumental in the yield of
that product would require that the Class III protein and butterfat
prices be tied more directly to their value in cheese than the result
obtained from the Federal order reform price formulas, that outcome
cannot be accomplished on the basis of this hearing record. However,
any distortion between the Class III butterfat and protein prices and
the cheese price should be ameliorated partially by the following
changes included in the protein formula.
Protein price. The protein price in this final decision is changed
from the recommended decision by changing the 1.405 factor to 1.383 to
reflect an adjustment for farm-to-plant losses and to reflect a change
from a 0.8325 casein factor to a casein factor of 0.822 based on a
reevaluation of the hearing record and comments filed in response to
the recommended decision. In addition, the butterfat yield coefficient
is changed from 1.582 to 1.572 to reflect the farm-to-plant butterfat
losses. The remainder of the protein price formula is unchanged.
The tentative final decision on the hearing record for this
proceeding derived formulas for calculating a Class III butterfat price
and a protein price that considered only the contribution of each of
those components to cheese yield and resulted in a 100 percent
correlation with the cheese market. Therefore, the individual factors
in the portion of the earlier protein price formula that adjusted the
contribution of protein to cheese yield to account for differences in
value between butterfat used in cheese and in butter and accounted for
much debate in the hearing record were not considered in any detail.
The protein price formula resulting from the tentative final
decision took the following form:
(NASS weighted average cheese price -0.165) x 1.405.
This formula eliminated the following butterfat adjustment portion
of the earlier protein price formula:
+{[(NASS weighted average cheese price -0.165) x 1.582] -[the butterfat
price]{time} x 1.28
This butterfat adjustment portion of the formula represents the
difference between the value of butterfat used in cheese and the value
of butterfat used in butter. The butterfat adjustment portion became
unnecessary when the Class III butterfat price was calculated from the
value of butterfat in cheese in the tentative final decision.
Reconsideration of the protein formula in light of the
determination that there should be only one butterfat price for Class
III and Class IV resulted in the following recommended protein price
formula:
[(NASS weighted average cheese price -0.165) x 1.405] + ({[(NASS
weighted average cheese price-0.165) x 1.582]-[the butterfat price x
0.9]{time} x 1.17).
Leprino, in response to the tentative final decision, urged that
the 1.405 factor used to reflect the yield effect of one pound of
protein in milk be reduced to 1.367 because the 1.405 factor assumes
that true protein contains more casein (83.3 percent) than is supported
by testimony in the record (82.2-82.4 percent).
The hearing record contained much discussion of the derivation of
the 1.32 cheese yield factor per pound of crude protein used to
determine the 1.405 cheese yield factor per pound of true protein. Two
explanations of the factor were advanced. The first involved assumption
of 75 percent casein retention, 90 percent butterfat retention, and 38
percent moisture content in the cheese. Holding butterfat and moisture
constant and changing the protein content by 0.1 results in a 0.1318
(rounded to 0.132) pound change in the cheese yield, or a one percent
change in protein results in a 1.32 pound change in cheese yield. The
second method assumes 78 percent casein retention, 90 percent butterfat
retention, and a 38 percent moisture content in the cheese. In this
second method the cheese yield is computed using a 3.2 percent protein
and zero butterfat. The resulting cheese yield is divided by 3.2 to
arrive at 1.316 pounds of cheese per pound of protein. The 1.316 was
rounded to 1.32. Given these particular assumptions, both methods
resulted in the same answer--1.32. A witness for National All Jersey
testified that the second method is the appropriate procedure and was
the one used to compute the 1.32 yield factor in past Federal order
protein price decisions. However, if 78 percent is a more appropriate
factor to use as the appropriate value for casein retention, then the
first method yields a 1.37 yield factor. The 1.32 factor was used in
the protein price formula in the Federal order reform proposed rule and
in the five Upper Midwest markets beginning in January 1996 to compute
the protein price prior to Federal order reform. The 1.32 yield factor
generally has been accepted as an appropriate factor to use for
computing a protein price.
When the final decision on Federal order reform was issued, the
protein price computation was changed to compute the protein price on
the basis of true protein rather than crude protein, which had been the
basis for protein price computations in the past. As in determining the
1.32 factor, certain assumptions were made to arrive at the current
1.405 yield factor. The 1.405 factor was computed based on the
assumption that milk testing 3.3 percent crude protein has an
equivalent true protein test of 3.1 percent. The relationship between
crude protein and true protein was based on the results of laboratory
testing of producer milk for both crude and true protein. The resulting
percentage change in protein is 1.0645 (3.\3/3\.1), which was then
multiplied by 1.32 to arrive at 1.405. In addition, use of the 1.405
yield factor when pricing true protein results in a protein value
equivalent to use of the 1.32 factor in pricing crude protein.
Regardless of which procedure is used, assumptions must be made
with regard to the various factors used in the formulas. These
assumptions directly affect the outcome of the factors used in the
protein formula and the resulting protein price and value. Since use of
the 1.405 factor resulted in an equivalent protein value to use of
1.32--and there was no testimony or comments filed that the 1.32 factor
was not appropriate--there was no reason to change the 1.405 cheese
yield factor in the recommended decision.
Leprino argued that the appropriate casein recovery should be 82.3
percent which, when using the second procedure above with a 2.99 true
protein level, would result in a factor of 1.388. However, the majority
(\2/3\) of the difference between 1.405 and the 1.367 factor advocated
by Leprino accounts for shrinkage between the farm and the cheese vat.
The issue of including shrinkage as an additional make allowance or
yield factor in the calculation of component prices was discussed in
the tentative final decision and was determined to be inappropriate at
that time. Eliminating shrinkage from the 1.367 protein factor resulted
in a
[[Page 67928]]
factor close to the recommended decision's 1.405. The recommended
decision also stated that using the second procedure and a 82.95 casein
recovery, which an expert witness testified was equivalent to the 78
percent casein recovery used for crude protein, and a true protein test
of 3 percent, which was equivalent to the 3.2 percent used in the
second procedure, the protein factor would have been 1.3997, again, not
significantly less than the recommended decision's 1.405. Testimony
from other parties also stated that the 1.405 was appropriate and
should be continued. Based on the hearing record, comments filed in
response to the hearing and tentative final decision, and the analysis
prior to the recommended decision, it was determined that there was no
justification for reducing the 1.405 cheese yield factor.
Comments received from Leprino, IDFA, Kraft, NDA and others
explained that the recommended decision did not correct what these
parties considered as errors in the protein price formula. With regard
to the protein price computation, the parties argued that the
percentage of casein in true protein used in the Van Slyke formula was
too high. They were of the opinion that since the Van Slyke formula is
generally used to analyze in-plant efficiencies, an adjustment needs to
be made for applying the formula to milk priced on farm weights and
tests. Leprino, commenting on behalf of cheese processors, stated that,
``In order to properly adopt the Van Slyke formula for use in setting
milk price policy * * * it is critical to understand the context for
its use.'' Leprino further commented that the Van Slyke formula is
commonly used by the industry to measure in-plant operational
performance, namely, product yield. Leprino expressed the importance of
including an allowance in the Van Slyke formula for farm-to-plant
shrinkage. Leprino stated that ``The Van Slyke yield formula can be
used to determine cheddar yields of milk measured at the farm, but only
if component losses [farm-to-plant] are accounted for. Although the Van
Slyke yield formula was developed to measure production efficiency
starting at the vat, the yield formula can still be useful in
determining the yield of farm level milk. However, if the Van Slyke
formula is to be used for this purpose, component losses prior to the
vat must be accounted for to accurately reflect the composition of milk
actually entering the vat.'' Nine other comments supported Leprino's
position on the need to include an allowance for farm-to-plant losses
within the Van Slyke cheese yield computation in order for it to
accurately determine the value of Class III farm milk.
This final decision finds that good reason exists to provide for
incorporating farm-to-plant loss allowances into the Van Slyke cheese
yield formula for determining the Class III milk price. As explained
earlier in this final decision, the record supports a finding that such
losses are 0.25 percent on all milk solid components and that butterfat
losses are fractionally higher. Butterfat losses are an additional
0.015 pounds on top of the 0.25 percent farm-to-plant loss. When farm-
to-plant losses are incorporated into the Van Slyke cheese yield
formula, the Van Slyke formula results in the protein price factors
from which the Class III protein price is derived.
The Van Slyke formula as proposed under reform and in the
recommended decision utilized a casein-to-protein ratio of 83.25
percent or 0.8325.
Comments received on the recommended decision indicated that the
cheese industry considers 82.2 percent casein as a reasonable and
appropriate reflection of milk composition nationally. An expert
witness testified that the casein from true protein ranges between
0.822 and 0.824. In this regard, according to Leprino, ``The Hearing
Record contains clear evidence regarding milk chemistry * * * that true
protein contains 82.20 percent casein.''
This final decision finds that using a casein percentage of 82.2 is
appropriate. The 0.822 is at the lower end of the range indicated by
the expert witness and is appropriate for use in determining minimum
Federal order prices. This casein-to-protein ratio is included in the
Van Slyke formula for determining the Class III protein formula
factors. In addition, this final decision computes the protein yield
factor by dividing the cheese yield attributable to protein by the
protein test. This method is consistent with record evidence and,
according to comments received in response to the recommended decision,
is superior to using the additional cheese yield that occurs when
additional protein is added. This results in reducing the 1.405 factor
in the protein price formula to 1.383. The computation of 1.383 is
shown later in this discussion.
As was proposed in the recommended decision, this final decision
adopts a butterfat-to-protein ratio of 1.17. The recommended decision
proposed a fat-to-protein ration of 1.17 that was based upon the fat-
to-protein ratio of standard milk at the dairy farm (3.5/2.9915 =
1.17). The recommended decision concluded that a 1.17 (or lower)
butterfat-to-protein ratio assured that the value adjustment for
butterfat in butter to the value of butterfat in cheese (included in
the protein price formula) would account for the total value of
butterfat in producer milk.
Comments received in response to the recommended decision from
NMPF, Select, Leprino and others supported the use of the 1.17
butterfat-to-protein ratio in the protein price formula. This final
decision continues to use the 1.17 factor.
This final decision uses the following variables in the Van Slyke
formula for computing the protein and butterfat yield factors used for
computing the protein price:
1. Butterfat at the farm: 3.50 pounds per hundredweight.
2. Protein at the farm: 2.9915 pounds per hundredweight.
3. Butterfat retention: 0.9.
4. Casein to true protein ratio: 0.822.
5. Moisture: 38 percent.
For illustration purposes how the Van Slyke cheese yield formula
has been relied upon since Federal order reform is provided below for
ease in comparing the adopted changes to previous formulas.
The Van Slyke Formula Used Under Order Reform
[sbull] Cheddar cheese pounds attributable to butterfat = ((0.9 x
3.5) x 1.09)/(1-0.38) = 5.5379 pounds of cheddar cheese
[sbull] Cheddar cheese pounds attributable to protein = ((0.8325 x
2.9915) -0.01 ) x1.09/(1-0.38) = 4.2025 pounds of cheddar cheese
[sbull] Cheddar cheese pounds attributable to standard farm milk =
5.5379 pounds of cheese from butterfat
+4.2025 pounds of cheese from protein
-----------
9.7404 total pounds of cheese from standard milk
[sbull] Cheddar cheese yield contribution per pound of fat at farm
= 5.5379 pounds of cheddar/3.5 pounds of fat at farm = 1.582
[sbull] Cheddar cheese yield contribution per pound of protein at
farm = 4.2025 pounds of cheddar/2.9915 pounds of protein at farm =
1.405
[sbull] Protein pounds in standard milk = 3.1 x 0.965 = 2.9915
[sbull] The butterfat-to-protein ratio factor used under reform was
a fixed 1.28
[[Page 67929]]
The Van Slyke Formula as Proposed Under the Recommended Decision
[sbull] Cheddar cheese pounds attributable to butterfat = ((0.9 x
3.5) x 1.09)/(1-0.38) = 5.5379 pounds of cheddar cheese
[sbull] Cheddar cheese pounds attributable to protein = ((0.8325 x
2.9915) -0.01 ) x1.09/(1-0.38) = 4.2025 pounds of cheddar cheese
[sbull] Cheddar cheese pounds attributable to standard farm milk =
5.5379 pounds of cheese from butterfat
+4.2025 pounds of cheese from protein
-----------
9.7404 total pounds of cheese from standard milk
[sbull] Cheddar cheese yield contribution per pound of fat at farm
= 5.5379 pounds of cheddar/3.5 pounds of fat at farm = 1.582
[sbull] Cheddar cheese yield contribution per pound of protein at
farm = 4.2025 pounds of cheddar/2.9915 pounds of protein at farm =
1.405
[sbull] The butterfat-to-protein ratio factor proposed under the
recommended decision was 1.17 and was derived by dividing the butterfat
in standard milk by the protein in standard farm milk (i.e. 3.5 pounds
of butterfat/2.9915 pounds of protein = 1.17).
The Van Slyke Formula Used in This Final Decision
[sbull] Cheddar cheese pounds attributable to butterfat = ((0.9 x
3.5) x 1.09 / (1 - 0.38) = 5.5379 pounds of cheddar cheese
[sbull] Cheddar cheese pounds lost due to the 0.015 farm-to-plant
butterfat loss = ((0.9 x 3.5) x 1.09 / (1 - 0.38) = 0.0237 pounds of
cheddar cheese, 5.5379 - 0.0237 = 5.5142 of cheese after farm-to-plant
loss.
[sbull] Cheddar cheese pounds lost due to the 0.25 percent solids
loss on fat solids = 5.5142 pounds of cheese from butterfat x (1 -
0.0025), 5.5142 x 0.9975 = 5.5004 pounds of cheese from farm butterfat
[sbull] Cheddar cheese yield contribution per pound of fat at farm
= 5.5004 pounds of cheddar / 3.5 pounds of fat at farm = 1.572
[sbull] Cheddar cheese pounds attributable to protein = ((0.8220 x
2.9915) - 0.01) x 1.09 / (1 - 0.38) = 4.1473 pounds of cheddar cheese
[sbull] Cheddar cheese pounds lost due to the 0.25 percent solids
loss on protein solids = 4.1473 pounds of cheese from protein x (1 -
0.0025) for farm-to-plant loss = 4.1473 x 0.9975 = 4.1369 pounds of
cheese from farm protein
[sbull] Cheddar cheese yield contribution per pound of protein at
farm = 4.1369 pounds of cheddar / 2.9915 pounds of protein at farm =
1.383
[sbull] Cheddar cheese pounds from standard farm milk =
5.5004 pounds of cheese from standard farm butterfat
+4.1369 pounds of cheese from standard farm protein
-----------
9.6615 total pounds of cheese from standard farm milk
[sbull] The butterfat-to-protein ratio factor in this final
decision is 1.17 and is derived by dividing the farm butterfat by the
farm protein (i.e. 3.5 pounds of butterfat / 2.9915 pounds of protein =
1.17).
The results of the above computations yield the following protein
price formula:
((NASS cheese price -0.165) x 1.383) + (((NASS cheese price - 0.165) x
1.572) -(butterfat price x 0.9)) x 1.17
As stated in the recommended decision, since all of the butterfat
used in Class III is to be priced on the basis of its value in butter,
an adjustment must be made to account for the difference in butterfat
values between cheese and butter. The butterfat adjustment portion of
the protein price formula is the method chosen for making that
adjustment. The first part of the butterfat adjustment portion of the
protein price formula calculates the value of butterfat in Cheddar
cheese using the Van Slyke formula, assuming a 90 percent recovery of
butterfat in the finished cheese. The resulting cheese yield factor
attributable to butterfat is a multiplier of 1.582. Testimony in the
hearing record and comments on the tentative final decision urged
adoption of different multipliers in the butterfat adjustment portion
of the protein price formula that represents the effects of butterfat
on cheese yield. Suggestions to increase the butterfat recovery factor
of 1.582 (to 1.6 or 1.617) were made by DFA; Select, Elite, et. al; and
National All-Jersey, Inc. These commenters relied on hearing testimony
that butterfat recovery in cheddar cheese generally ranges between 90
and 93 percent, although Kraft testified that their butterfat recovery
is lower. The commenters favored use of a factor that reflected 91 or
92 percent fat recovery because that level of recovery is common. In a
comment filed by Leprino, the cheese manufacturer urged that the 1.582
factor not be increased, as any increase would exacerbate the
overvaluation of whey fat in the current formula and because the 90
percent recovery factor reflects results from many cheese vats
installed prior to the late 1980's.
The recommended decision stated that even though many cheese makers
may be able to achieve a higher fat retention in cheese, the use of the
1.582 factor representing 90 percent fat recovery in cheese continued
to be appropriate. The recommended decision also stated that as a
result of the 90 percent level, butterfat in cheese was not overvalued,
and those cheese makers who fail to recover more than 90 percent of the
fat would not suffer a competitive disadvantage. The preponderance of
the record indicates that most cheese manufacturers should be able to
obtain a 90 percent butterfat recovery.
In testimony at the hearing and comments filed on the tentative
final decision the issue was raised of whether the butterfat adjustment
portion of the protein price formula in which the value of butterfat in
butter is subtracted from the value of butterfat in cheese is based on
equivalent amounts of butterfat. The 1.582 factor represents 90 percent
recovery in cheese of one pound of butterfat used in its manufacture,
while the butterfat price represents the value of one pound of
butterfat used to make butter. Clearly, subtracting the value of a
pound of butterfat in butter from the value of 0.9 pounds of butterfat
in cheese reduces the actual value of butterfat used in cheese.
Therefore, the value of butterfat used in butter should be reduced by
10 percent in this calculation.
Comments received from Select, NMPF, LOL and National All-Jersey
(NAJ), in response to the recommended decision, supported the use of
the factor resulting from multiplying the butterfat price by 0.9 prior
to subtracting the butterfat price from the value of butterfat in
cheese. NAJ was of the opinion that the 0.9 adjustment is appropriate
in that it recognizes that only ninety percent of the butterfat is
retained in cheese. Select explained that using an adjustment to the
value of butterfat in cheese (the 0.9) provides an important factor for
correcting the relatively low butterfat retention in cheese, but
maintained that the butterfat retention factor should be larger. LOL
supported the addition of the 0.9 factor and indicated that it
represented a more consistent margin across a wide range of butter and
cheese prices.
Opponents to the use of the 0.9 adjustment factor to the butterfat
value included Leprino, Kraft, IDFA, and the Wisconsin Cheese Makers
Association (WCMA). These parties instead favored using a 0.95 factor.
They explained that
[[Page 67930]]
not all of the butterfat attributable to the 0.9 factor is represented
in whey cream, but rather is lost in the handling process. They were of
the opinion that the portion that is lost in the handling process
should be accounted for in the protein price by using a factor of 0.95.
They explained that butterfat in whey cream is overvalued in the Class
III pricing formulas and that sweet cream is worth approximately 40
cents more than whey cream. In addressing this difference in value, the
commenters suggested subtracting 2-cents from the butterfat adjustment
portion of the protein price formula.
As explained in the previous discussion on shrinkage, this final
decision makes a purposeful adjustment for farm-to-plant milk losses,
but not for in-plant losses. The use of the 0.9 factor is more
appropriate than a 0.95 factor since the Van Slyke formula uses a 0.9
butterfat retention factor for computing the cheese yield attributable
to butterfat. The aforementioned adjustment for farm-to-plant loss is
also contained in the butterfat factor (1.572) used for computing the
protein price, as well as an adjustment for farm-to-plant losses in the
Class III butterfat price. It would not be appropriate to include
additional reductions in the protein price for butterfat losses. This
finding is also supported by testimony by several witnesses indicating
that whey cream is often returned to the cheese vat for use in cheese
making, thus increasing the value of whey cream above the value of whey
cream used for whey butter, which is not accounted for in the protein
formula.
As stated in the recommended decision, testimony at the hearing and
analysis of the relationship between the current cheese, butterfat, and
protein prices revealed that the current Class III pricing formulas
cause inequities in producer payments based on the relationship between
producers' butterfat and protein tests. The inequities were attributed
to the use of the 1.28 factor used in the portion of the protein price
formula that is designed to incorporate the butterfat value of milk
used in cheese that is not already accounted for by the Class III and
IV butterfat price. Such a factor is necessary to reflect the fact that
there is more than one pound of butterfat in cheese for every pound of
protein. The record supports a conclusion that when the price of butter
increases, the price paid for milk used in cheese and for milk
delivered by producers will decline if the milk has a fat to protein
ratio of less than 1.28, and decline at a more rapid rate than that at
which the butter price increases. According to the record and numerous
comments filed, most milk delivered by producers has a fat-to-protein
ratio less than 1.28.
In a number of the comments filed in response to the tentative
final decision, commenters argued that this factor should be reduced--
to 1.22, 1.19, or 1.17--to better reflect the fat-to-protein ratio in
producer milk. The factor, which originally appeared in a comment filed
early in the Federal order reform process as 1.20, was calculated by
dividing 1.582 by 1.32. When the change was made from crude protein to
true protein, 1.20 was multiplied by 1.0645 to reflect that change,
becoming 1.28. The recommended factor of 1.17 in the protein price
formula represented a minimum value for the ratio of butterfat to true
protein in producer milk. Its use assures that the value adjustment for
butterfat in butter to butterfat in cheese included in the protein
price formula accounts for the full amount of butterfat in producer
milk.
The Alliance of Western Milk Producers argued in a comment filed in
response to the tentative final decision that the Class III component
price formulas adopted in that decision would lead to disorderly
marketing and provide an incentive for processors to seek alternative
sources of butterfat, resulting in negative effects on producer income.
The Alliance favored a return to the Federal order reform Class III
component price formulas, but suggested that a snubber to prevent the
butterfat value adjustment to the protein price from becoming negative
would mitigate the potential for undervaluing protein under the
formula.
This final decision concludes that the Class III protein formula to
be adopted is as follows:
((NASS Cheese
Price -0.165) x 1.383) +
((((NASS Cheese
Price -0.165) x 1.572) -
(Class III & IV Butterfat
Price x 0.9)) x 1.17)
Class III--Other Nonfat Solids price (Dry Whey). As discussed
above, this final decision provides a loss allowance for the other
solids lost in moving milk from the farm to the processing plant. This
loss is reflected in the Class III dry whey formula by adjusting the
0.968 divisor for farm-to-plant losses. The divisor is also converted
to a multiplier in order to provide simplification and consistency in
the price formulas.
As proposed in the recommended decision, the manufacturing
allowance for dry whey is increased from the 14 cents per pound adopted
in the tentative final decision to 15.9 cents per pound of dry whey to
reflect a higher cost of drying whey relative to the cost of drying
nonfat dry milk.
The hearing included several proposals that would change the dry
whey or other solids price formula by changing the make allowance.
Although the hearing notice included a proposal to use the CME average
dry whey price, the proponent withdrew support for the proposal when it
became apparent that the CME has no cash exchange market for dry whey.
The NASS survey that currently is being used to identify commodity
prices has included price data on dry whey since September 1998. There
were no proposals to change the 0.968 yield factor in the other solids
price formula. The 0.968 factor reflects the solids content of dry
whey, given a 3.2 percent moisture content.
As explained earlier in this decision, an adjustment factor for
farm-to-plant losses on all milk solids is 0.0025. Application of this
loss adjustment to the other solids price computation formula is as
follows:
[sbull] One pound of dry whey minus 0.0025 farm-to-plant solids
loss equals 0.9975 pounds of dry whey.
[sbull] Since each pound of dry whey contains 96.8 percent milk
solids, 0.9975 is divided by 0.968 to equal a dry whey factor of 1.03.
[sbull] Therefore, the Class III dry whey price per pound is
computed as follows:
(NASS butter price - 0.159) x 1.03
The other solids formula divisor is converted to a multiplier to
simplify and provide consistency with the other formulas contained in
this final decision.
Make Allowance (Dry Whey). This final decision continues to use a
dry whey make allowance of 0.159 as contained in the recommended
decision.
Since the most recent CDFA and RBCS cost surveys did not include
costs for drying whey, there is no information from those two studies
to use for computing the dry whey make allowance. A witness from NMPF
suggested using the nonfat dry milk manufacturing cost allowance for
dry whey since both products involve similar processing equipment and
then adding $0.01 per pound to reflect the additional energy and higher
equipment costs incurred in drying whey. Since the make allowance for
nonfat dry milk adopted under the tentative final decision is $0.140,
this procedure would result in a dry whey make allowance of $0.150. DFA
proposed a dry whey make allowance of $0.1478 per pound based on costs
at its plant at Smithfield, Utah. The plant is a cheddar block plant
running throughout the year
[[Page 67931]]
that condenses and dries whey from the cheese manufactured in this
Smithfield plant only. The DFA costs include both direct and indirect
costs, and return on investment and marketing cost data.
A witness from Western States Dairy Producers Trade Association, et
al. (WSDPTA) testified that there is no reason to change the other
solids price computation from the current formula, and that it is a
necessary component of the cheese pricing formula. He noted that the
use of dry whey as a commodity is correct and that the 0.968 factor in
the pricing formula reflects 96.8 pounds of solids in 100 pounds of dry
whey.
Most witnesses who testified about the cost of drying whey
expressed the belief that drying whey costs more than drying nonfat dry
milk. Two cooperative association witnesses testified that their
organizations have determined that the returns from whey powder with
the current make allowance would not cover the costs associated with
building and operating whey powder plants. At the hearing, IDFA
presented the results of the survey contracted for by NCI. The IDFA
witness testified that the survey showed a dry whey manufacturing cost
of at least $0.1592. The IDFA witness testified that using the nonfat
dry milk make allowance significantly understates the manufacturing
cost of dry whey due to the relatively higher percentage of water in
liquid whey compared to skim milk and the additional crystallization
process required.
A witness representing Leprino testified on the differences in the
manufacturing processes for dry whey and nonfat dry milk that result in
higher costs to produce whey powder. The witness concluded that the
cost of making dry whey is $0.02559 above the cost of drying nonfat dry
milk.
The brief submitted by Leprino argued that the additional costs of
processing whey powder over those of processing nonfat dry milk should
include additional staffing, cleaning, and maintenance associated with
the additional equipment for whey product.
A witness from Kraft agreed that the dry whey manufacturing costs
are about 2.6 cents per pound greater than the nonfat dry milk
manufacturing costs. Although Kraft described its Tulare plant as large
and efficient, it also represents a recent capital investment, meaning
that depreciation costs are likely higher than average.
Comments on the dry whey make allowance portion of the tentative
final decision generally followed the lines of the testimony in the
hearing record. WSDPTA favored maintaining the 14-cent make allowance
adopted in the tentative final decision, and ADCNE/DFA supported not
using the NCI survey on the manufacturing cost of dry whey. IDFA,
Leprino, and Northwest Dairy Association advocated adoption of a dry
whey make allowance of at least 15.92 cents per pound, the level
determined in the NCI survey. These comments cited testimony in the
record that the cost of drying whey is as much as 2.6 cents greater
than that of drying skim milk, a calculation that would result in a
make allowance of 16.6 cents. Kraft favored adding a value reflecting
the reduced value of butterfat in whey to the whey make allowance and
increasing the make allowance by at least 2 cents.
Since information regarding the costs of drying whey was not
available from the sources used for determining the other make
allowances in product price formulas, the tentative final decision
determined that the dry whey make allowance should remain the same as
that for nonfat dry milk. However, in the recommended decision it was
determined that the dry whey make allowance should be changed to
reflect testimony and other evidence in the hearing record that the
cost of drying whey is greater than that of drying nonfat dry milk.
The recommended decision concluded that the other solids price
would be computed by subtracting the make allowance of $0.159 from the
NASS weighted average dry whey price and dividing the result by 0.968.
The differential costs of manufacturing whey powder, from one source,
over those of nonfat dry milk, from others, did not provide close
enough agreement with the NCI-sponsored survey to use them with any
confidence. Neither of the witnesses who testified that the extra costs
of drying whey are 2.6 cents greater than the costs of drying nonfat
dry milk testified about the total costs of either operation.
In lieu of other studies and direct evidence of the total cost of
drying whey, the recommended decision concluded that the NCI-
commissioned study results, rounded to the nearest \1/10\ cent, should
be used for determining the dry whey make allowance. National Milk
Producers, in their comments on the recommended decision, stated that
the dry whey make allowance was acceptable. Schreiber and Leprino also
stated that they supported the dry whey make allowance of 0.1592
(essentially 0.159).
DFA and Select/Continental, in their comments to the recommended
decision, opposed the recommended decision's proposed increase from
0.14 to 0.159. They based their opposition on lack of credible
evidence.
The comments opposing the recommended decision's increase to the
dry whey make allowance are not persuasive. This final decision
concludes that the NCI-commissioned study should be utilized in the
absence of other studies or direct evidence of the total cost of drying
whey. This final decision adopts the $0.159 make allowance as proposed
in the recommended decision.
Snubber/Other Solids Price. The tentative final decision snubbed
the other solids price at zero. Thus, if the NASS dry whey price minus
the make allowance resulted in a negative number, the other solids
price would become zero. Michigan Milk Producers Association supported
the inclusion of such a ``snubber'' concept for the whey price in a
brief, citing testimony in which the DFA witness referred to the
difficulty of explaining to producers a negative component price.
Snubbing the other solids price to zero would have prevented it from
negatively affecting the value of other Class III components or having
a negative impact on the producer price differential. Support was
expressed for use of the snubber in two additional comments received on
the tentative final decision.
The snubber in the other solids price formula was opposed in
comments filed by two parties. Leprino stated that sound policy should
allow not only positive, but negative net revenues to be reflected in
the milk price to prevent overvaluing milk. IDFA opposed the snubber on
the grounds that it would prevent manufacturers of dry whey from
covering all manufacturing costs if wholesale prices for dry whey
failed to fully cover manufacturing costs. Both commenters suggested
that if the component price were to become negative, the negative value
could be pooled as part of the producer price differential, as inferred
by the DFA witness.
The prices calculated for the components in Class III milk are
intended to reflect the value of those components in the products from
which the prices are calculated. Use of a snubber to limit the other
nonfat solids price would be inconsistent with the purpose of a pricing
formula to reflect a component value and would appear to be an
arbitrary adjustment to the price formula. After a thorough review of
the record, including briefs and the comments on the tentative final
decision and the recommended decision, USDA has determined that the
snubber on the other solids price should be eliminated.
[[Page 67932]]
d. Effects of Changes to Class III and Class IV Price Formulas
The changes to the Class III and Class IV component price formulas
discussed above would result not only in changes to the respective
component prices, but also to the resulting Class III and Class IV skim
milk and hundredweight milk prices at 3.5 percent butterfat. The
changes discussed are relative to the formulas resulting from Federal
order reform. The calculations that were made in the recommended
decision showed some increase in the level of the Class III price. USDA
believed that the Class III pricing formulas incorporated in the
recommended decision were more technically correct than those adopted
as a result of Federal order reform because they were based on more
complete information derived through the formal rulemaking process. The
product-price formulas adopted as part of Federal order reform have
contributed to further industry analysis and participation in
developing more precise and accurate measures of determining the
pricing formulas adopted herein.
It is important to note that these calculated class price
differences, or the ``static effect'' of the recommended changes, are
based on historical product price data and not on product prices that
will occur in the future. The price differences calculated in this
portion of the decision cannot be used to calculate or estimate changes
in revenue that would have occurred or may occur in the future because
changing intersections of supply and demand for each product result in
different prices.
The 19-month comparisons included in the recommended decision were
calculated based on the NASS weighted average commodity prices from
January 2000 through July 2001. NASS weighted average commodity prices
for that time period were available, and no estimates of the relevant
commodity prices were needed. Although that time period was relatively
short, a number of interesting price relationships occurred in the data
series.
For instance, during that period the cheddar cheese (39 percent
moisture) market ranged from a low of $1.0245 per pound during November
2000 to a high of $1.6434 per pound during July 2001. The November low
was about 7.5 cents below the $1.10 per pound support price for 40-
pound blocks of cheddar. During this same 19-month period the NASS
weighted average nonfat dry milk price showed little movement until
July 2001, ranging from a high of $1.0165 per pound during January 2001
to a low of $0.9634 per pound during July 2001. The July 2001 decline
was the result of a reduced support price. In fact, the nonfat dry milk
price stayed within about one cent of support over the January 2000
through June 2001 period.
Unlike the cheese and nonfat dry milk market, the butter price did
not trade anywhere near the butter support price of $0.65 per pound or
the revised support price of $0.8548 per pound. The butter price traded
in a range from a low of $0.8820 per pound during January 2000 to a
high of $1.9263 per pound during June 2001. It is important to keep in
mind that since all milk is priced on the basis of butterfat and skim
or nonfat components under Federal orders, focusing on the calculated
hundredweight prices at 3.5 percent butterfat that are announced for
comparison purposes may result in misleading conclusions.
The formulas used for computing the Class IV prices in the
recommended decision were unchanged from those contained in the
tentative final decision which currently are being used.
Changing the butterfat price make allowance from $0.114 to $0.115
would have resulted in a calculated average decline in the Class IV
butterfat price of $0.0012 over the 19-month period included in the
recommended decision. The two changes to the Class IV nonfat solids
formula--increasing the make allowance from $0.137 to $0.140 and
eliminating the 1.02 divisor--would have resulted in a net increase of
$0.0141 per pound in the Class IV nonfat solids price in the absence of
any other changes. Since the Class II prices were to continue to be
computed on the basis of the Class IV formulas plus the Class II
differential of $0.70 per hundredweight, changes to the Class II prices
would have been the same as the changes to the Class IV prices. The
calculated Class IV skim milk price would have increased by an average
of $0.127 per hundredweight. The calculated 3.5 percent Class IV milk
price would have increased by an average of $0.118 per hundredweight,
reflecting the net difference between the increase in the skim milk
price and the very small decline in the Class IV butterfat price.
As a result of the 38 percent moisture adjustment to barrel cheese
prices, the NASS weighted average cheese price used for computing the
Class III protein price would have been calculated to be higher by
$0.011 per pound over the 19-month period January 2000 through July
2001. Use of this cheese price increase in the recommended protein
price formula would have resulted in an increase of 3.6 cents per pound
of protein. The decrease in the make allowance from $0.1702 to $0.165
in the recommended protein price formula would have accounted for an
increase of 1.7 cents per pound of protein. The two changed factors in
the protein price formula (0.9 and 1.17), using data for the 19-month
period, would have resulted in an increase in the calculated protein
price averaging approximately 14.8 cents. The total increase in the
protein price as a result of three changes to aspects of the Federal
order reform protein price formula (moisture adjustment, make
allowance, and formula changes) would have been approximately 20.6
cents above the price that would have been computed based on the
formula prior to 2001.
At the same time, the increase from $0.137 to $0.159 in the dry
whey make allowance for calculating the other solids price would have
resulted in a calculated decline in the other solids price of $0.0227
over the 19-month period. Elimination of the snubber on the other
solids price would have made no difference during the period
considered. The combination of the changes in both the protein price
and the other solids price would have resulted in an average of about
$0.50 per hundredweight increase in the Class III skim milk price over
the 19-month period if cheese and dry whey prices were unchanged.
The recommended decision showed that the changes in the protein
price formula improved significantly the relationship between the
cheese price and the protein price, from a correlation coefficient of
0.54, using the Federal order reform protein formula, to a correlation
coefficient of 0.70 using the formula recommended in that decision. In
addition to improving the relationship between the cheese price and the
protein price, the recommended protein formula reduced the variability
of the protein price and moderated the extremes that occurred under the
Federal order reform protein formula, thereby giving producers a more
consistent and positive protein price signal.
The calculation of the Class III price at 3.5 percent butterfat,
based on the formulas contained in the recommended decision, would have
averaged about $0.48 per hundredweight above the 3.5 percent Class III
price based on the Class III formulas implemented under Federal order
reform.
In comments filed in response to the tentative final decision, IDFA
and Leprino urged that in no case should the Class III price be
enhanced relative to price levels under Federal order reform. Leprino
reiterated the importance of assuring that yield factors not be too
[[Page 67933]]
high or make allowances too low for cheese plants to retain sufficient
revenue to maintain their operations. IDFA focused on the negative
long-term effects on producer prices, as described in USDA's analysis,
of adopting enhanced Class III and Class IV prices. As described in
detail above (in Issue 3c), the factors incorporated in the Class III
component price calculations are based solidly on testimony and data in
the hearing record.
The recommended decision stated that the record provided ample
basis for believing that the margins provided in the formulas would
have been adequate for cheesemakers to maintain their operations. As
observed at the hearing and in comments filed in response to the
tentative final decision by the expert witness from Cornell, a break-
even point would be where the value of cheese plus whey cream plus whey
powder equals the value of the milk price plus the make allowances.
According to the witness, under Federal order reform, and to a greater
extent in the tentative final decision, the total value of these
products exceeded the sum of the milk price and the make allowances.
The discussion at the hearing centered specifically on the make
allowance used in the protein formula, with the implication that it
represented the entire make allowance for cheese. The recommended
decision stated that unlike the Class IV price formulas, where the make
allowances used in the butterfat and nonfat solids price formulas can
be attributed directly to butter and nonfat dry milk, the make
allowances used for butterfat, protein, and other solids in the pricing
formulas for Class III must be looked at in aggregate. The recommended
decision also stated that all three components are involved in the
cheesemaking process and have a significant effect on cheesemakers'
costs and returns.
The recommended decision stated that gross margins (including make
allowances) could be compared using both the cost of milk based on the
Federal order reform Class III formulas, and the cost of milk based on
the Class III formulas. For this purpose, gross margins in the
recommended decision were defined as the difference between the sum of
the selling price of cheese and dry whey based on monthly average NASS
prices and whey butter, estimated at nine cents below the NASS AA
butter price, and the cost of milk under the two sets of formulas. The
gross margins therefore reflected the amount of money available to
processors to procure, process, and market the end products of milk
used in Class III: cheese, whey butter and dry whey.
The recommended decision stated that using Class III component
tests from the Upper Midwest market to estimate product yields, the
estimated gross margins would have averaged approximately $3.00 per
hundredweight using the Federal order reform Class III formulas and
$2.52 per hundredweight over the 19-month period of January 2000
through July 2001 if the recommended Class III formulas had been in
effect. The gross margins indicated in the recommended decision were
significantly different than the cheese make allowances of $0.1702 and
$0.165 used in the formulas, which would have been equivalent to
approximately $1.70 and $1.65 per hundredweight of milk with an
estimated yield of 10 pounds of cheese. Such a difference was expected
since the make allowances for whey butter and dry whey were
significantly lower than the cheese make allowance. Any residual value
could have been used by the handler to improve returns or increase
producer pay prices. Also, the lower gross margins under the
recommended formulas could have lead to reduced over-order premiums to
reflect increased milk costs and maintain current gross margins.
Comments received from Leprino, IDFA, and NDA expressed concern
with the accuracy of gross margin analysis contained in the recommended
decision. Comments received from Select and Continental stated that the
gross margins presented in the recommended decision effectively
restored the margins to their computed ``implied margin'' offered in
their testimony at the hearing. Because of industry concerns regarding
the accuracy of the gross margin analysis together with the industry's
concern regarding the definition of ``implied margin,'' the gross
margin analysis was not considered in adopting the provisions contained
in this final decision.
This final decision compares prices over the period of January 2000
through May 2002 instead of the more limited 19-month price period from
January 2000 to July 2001. Nevertheless, the 29-month period from
January 2000 through May 2002 used in this final decision arrives at
similar conclusions as those reached in the recommended decision. In
particular, the conclusions made in the recommended decision regarding
make allowances continue to be valid. Product yield formulas have been
amended to include a farm-to-plant loss allowance and to provide
simplification and consistency in pricing formulas. The effects on
class prices are different due to the amendments adopted in this final
decision together with their application to the expanded 29-month
period.
It is important to again note that these calculated class price
differences, or the ``static effect'' of the following adopted changes,
are based on historical product price data and not on product prices
that will occur in the future. The price differences calculated in this
portion of the decision cannot be used to calculate or estimate changes
in revenue that would have occurred or may occur in the future because
changing intersections of supply and demand for each product result in
different prices.
Class III Butterfat. When the Class III formulas adopted in this
decision are applied to the 29-month period from January 2000 through
May 2002, the value of Class III fat would have been $0.0247 per
butterfat pound lower from the announced price of $1.5126 per butterfat
pound. The adopted formula results in an average of $1.4879 per
butterfat pound. As proposed in the recommended decision, Class III
formulas would have resulted in an average butterfat price of $1.5121.
The following table is provided for comparison purposes:
Class III Butterfat Price
[$/lb]
----------------------------------------------------------------------------------------------------------------
Announced Recommended
price decision Final decision
----------------------------------------------------------------------------------------------------------------
2000 average.................................................... 1.2522 1.2509 1.2309
2001 average.................................................... 1.8480 1.8480 1.8184
Jan-May 2002 average............................................ 1.3325 1.3325 1.3112
29-month average................................................ 1.5126 1.5121 1.4879
----------------------------------------------------------------------------------------------------------------
[[Page 67934]]
Class III Protein. Using the same 29-month period, the Class III
protein price would have been higher if the formula adopted herein had
been used. The Class III protein price would have increased from the
announced average of $1.8610 per protein pound to $2.0213 per protein
pound. The Class III protein price as proposed in the recommended
decision would have resulted in an average protein price of $2.0334.
The following table is provided for comparison purposes:
Class III Protein Price
[$/lb]
----------------------------------------------------------------------------------------------------------------
Announced Recommended
price decision Final decision
----------------------------------------------------------------------------------------------------------------
2000 average.................................................... 1.6938 1.8631 1.8513
2001 average.................................................... 1.9613 2.1612 2.1498
Jan-May 2002 average............................................ 2.0218 2.1352 2.1210
29-month average................................................ 1.8610 2.0334 2.0313
----------------------------------------------------------------------------------------------------------------
Class III Other Solids. Using the 29-month period, the Class III
other solids price would have been lower if the formula adopted herein
had been used. Most of this difference is explained by using the
increased dry whey make allowance of $0.159 instead of $0.140. Under
the same conditions, the Class III other solids price would have
decreased from the announced average of $0.0904 per other solids pound
to $0.0692 per other solids pound. The Class III other solids price as
proposed in the recommended decision would have resulted in an average
other solids price of $0.0694. The following table is provided for
comparison purposes:
Class III Other Solids Price
[$/lb]
----------------------------------------------------------------------------------------------------------------
Announced Recommended
price decision Final decision
----------------------------------------------------------------------------------------------------------------
2000 average.................................................... 0.0509 0.0282 0.0281
2001 average.................................................... 0.1343 0.1146 0.1143
Jan-May 2002 average............................................ 0.0796 0.0600 0.0598
29-month average................................................ 0.0904 0.0694 0.0692
----------------------------------------------------------------------------------------------------------------
Class III Standard Skim. Using the 29-month period, the Class III
standard skim milk price would have been higher if the formula adopted
herein had been used. The Class III standard skim price would have
increased from the announced average of $6.30 per hundredweight to
$6.67 per hundredweight. The Class III skim price as proposed in the
recommended decision would have resulted in an average Class III skim
price of $6.71 per hundredweight. The following table is provided for
comparison purposes:
Class III Standard Skim Milk Price
[$/cwt]
----------------------------------------------------------------------------------------------------------------
Announced Recommended
price decision Final decision
----------------------------------------------------------------------------------------------------------------
2000 average.................................................... 5.55 5.94 5.90
2001 average.................................................... 6.87 7.38 7.34
Jan-May 2002 average............................................ 6.74 6.97 6.93
29-month average................................................ 6.30 6.71 6.67
----------------------------------------------------------------------------------------------------------------
Class III Standard Milk. Using the 29-month period, the Class III
standard milk price would have been higher if the formula adopted
herein had been used. The Class III standard milk price would have
increased from the announced average of $11.38 per hundredweight to
$11.65 per hundredweight. The Class III milk price as proposed in the
recommended decision would have resulted in an average Class III
standard milk price of $11.77 per hundredweight. The following table is
provided for comparison purposes:
[[Page 67935]]
Class III Standard Milk Price
[$/cwt]
----------------------------------------------------------------------------------------------------------------
Announced Recommended
price decision Final decision
----------------------------------------------------------------------------------------------------------------
2000 average.................................................... 9.74 10.11 10.01
2001 average.................................................... 13.10 13.59 13.45
Jan-May 2002 average............................................ 11.16 11.39 11.27
29-month average................................................ 11.38 11.77 11.65
----------------------------------------------------------------------------------------------------------------
Class IV Butterfat (same as Class III butterfat). When the Class IV
formulas adopted in this decision are applied to the 29-month period
from January 2000 through May 2002, the value of Class IV fat would
have been $0.0247 per butterfat pound lower from the announced price of
$1.5126 per butterfat pound. The adopted formula results in an average
of $1.4879 per butterfat pound. As proposed in the recommended
decision, Class IV formulas would have resulted in an average butterfat
price of $1.5121. The following table is provided for comparison
purposes:
Class IV Butterfat Price
[$/lb]
----------------------------------------------------------------------------------------------------------------
Announced Recommended
price decision Final decision
----------------------------------------------------------------------------------------------------------------
2000 average.................................................... 1.2522 1.2509 1.2309
2001 average.................................................... 1.8480 1.8480 1.8184
Jan-May 2002 average............................................ 1.3325 1.3325 1.3112
29-Month average................................................ 1.5126 1.5121 1.4879
----------------------------------------------------------------------------------------------------------------
Class IV Nonfat Milk Solids (NFMS). When the Class IV formulas in
this decision are applied to the 29-month period the prices of Class IV
nonfat milk solids would have been lower. Using the 29-month period,
the Class IV NFMS solids price would have decreased from an average of
$0.8340 per NFMS pound to $0.8315 per NFMS pound. Class IV NFMS as
proposed in the recommended decision would have resulted in an average
NFMS price of $0.8399 per hundredweight. The following table is
provided for comparison purposes:
Class IV Nonfat Milk Solids Price
[$/lb]
----------------------------------------------------------------------------------------------------------------
Announced Recommended
price decision Final decision
----------------------------------------------------------------------------------------------------------------
2000 average.................................................... 0.8574 0.8715 0.8629
2001 average.................................................... 0.8391 0.8391 0.8306
Jan-May 2002 average............................................ 0.7656 0.7658 0.7580
29-month average................................................ 0.8340 0.8399 0.8315
----------------------------------------------------------------------------------------------------------------
Class IV Standard Skim. Using the 29-month period, the Class IV
standard skim milk price would have been lower if the pricing formulas
adopted herein had been used. The Class IV standard skim milk price
would have decreased from the announced average of $7.51 per
hundredweight to $7.48 per hundredweight. The Class IV skim milk price
as proposed in the recommended decision would have resulted in an
average Class IV skim price of $7.56 per hundredweight. The following
table is provided for comparison purposes:
Class IV Standard Skim Milk Price
[$/cwt]
----------------------------------------------------------------------------------------------------------------
Announced Recommended
price decision Final decision
----------------------------------------------------------------------------------------------------------------
2000 average.................................................... 7.72 7.84 7.77
2001 average.................................................... 7.55 7.55 7.48
Jan-May 2002 average............................................ 6.89 6.89 6.82
29-month average................................................ 7.51 7.56 7.48
----------------------------------------------------------------------------------------------------------------
[[Page 67936]]
Class IV Standard Milk. The Class IV milk price over the 29-month
period would have decreased from the announced average price of $12.54
per hundredweight to a $12.43 per hundredweight price (a decrease of
$0.11/cwt) if the formulas adopted herein had been used. Class IV milk
as proposed in the recommended decision would have resulted in an
average Class IV milk price of $12.59 per hundredweight. The following
table is provided for comparison purposes:
Class IV Standard Milk Price
[$/cwt]
------------------------------------------------------------------------
Announced Recommended Final
price decision decision
------------------------------------------------------------------------
2000 average.................. 11.83 11.95 11.80
2001 average.................. 13.76 13.76 13.58
Jan-May 2002 average.......... 11.31 11.31 11.17
29-month average.............. 12.54 12.59 12.43
------------------------------------------------------------------------
Class Price Relationships
The price relationships between Classes I, II , III and IV
established under the Federal order reform process should be
maintained. One proposal heard in this proceeding would have reduced
the Class IV butterfat price without affecting the computation of other
butterfat or product prices. That proposal is addressed specifically in
the Class IV Butterfat price.
The current pricing system uses the same formulas for computing the
advance component prices used to compute the Class I skim milk and
butterfat prices and Class II skim milk price as are used to calculate
the Class III and Class IV component prices. Several witnesses
testified as to what the class price relationships should be if changes
were made to any of the Class III or Class IV component price formulas.
The witness for IDFA and several other parties stated that any changes
to the Class III and Class IV formulas should also apply to the advance
price formulas used for computing the Class I and Class II prices. The
witness explained that failure to use the same formulas between the
related classes of use would result in a direct impact on the Class I
and Class II differentials which was clearly not the intent of Congress
when it instructed the Secretary to conduct a rulemaking proceeding
concerning the Class III and Class IV price formulas.
A witness for Hershey Foods pointed out that the Secretary went to
great lengths to justify the 70-cent Class II differential above the
Class IV price. In support of Proposal 31, the witness said that there
is no justification or new evidence for changing the current price
relationship that exists between the manufactured products (butter and
nonfat dry milk) and the Class II price if the Class IV formulas were
revised as suggested in several proposals. The witness stated that such
changes in price relationships clearly were not the intent of Congress.
A brief filed on behalf of IDFA in support of Proposal 31 stated that
the correct price relationship between NFDM and Class II is 70 cents
and that the record provides no basis for changing that relationship.
Actually, as explained in the final decision on Federal order reform,
70 cents represents the correct price relationship between milk used to
make dry milk powder and milk used in Class II, as nearly as can be
determined from the information available.
A proposal (Proposal 30) by two parties that any increases
resulting from changes to the Class III and Class IV price formulas not
be allowed to result in increases in Class I prices was supported in
testimony by one of the parties, who argued that any increases in the
Class I price mover should be balanced with reductions in Class I
differentials. The witness stated that the proponents want to be sure
that Class I prices are not further decoupled from Class III and Class
IV pricing formulas, or that Class I prices are not artificially
inflated.
Neither Proposal 30 nor Proposal 31 was adopted under the tentative
final decision.
In comments on the tentative final decision filed by ADCNE and
fully supported by DFA, consideration of Proposal 30 was opposed as
being beyond the scope of the Congressional mandate and not fully
debated at the hearing. ADCNE further opposed any modifications to
Proposal 30, such as the Family Dairies' testimony supporting a
weighted average Class I price mover, or to a similar proposal relative
to the Class II price, that would change the basis for Class I and
Class II prices or Class I and Class II differentials. ADCNE continued
that there was no evidence presented at the hearing that would support
the substantial revenue reductions to farmers throughout the Federal
order system which Proposals 30 and 31 would cause. ADCNE urged that
the conclusions of the tentative final decision to deny proposals 30
and 31 be affirmed.
The recommended decision also did not adopt Proposal 30 or Proposal
31. Comments received on the recommended decision from DFA indicated
agreement with the Department's reasoning for rejecting these proposals
and any modifications to those proposals that called for changing how
Class I and Class II prices as established. Accordingly, this final
decision continues with the findings contained in the recommended
decision for not adopting Proposal 30 or 31.
According to the recommended decision, neither the price
relationships established in the tentative final decision between milk
used in Class III and Class IV, nor milk used in Classes I and II,
should be changed. The recommended decision stated that changes should
be reflected in the Class I and Class II prices to the extent that
there may be differences in the Class III or Class IV prices between
the current prices as a result of adjustments to the component pricing
formulas. Any reevaluation of the formulas used to price the components
used in manufactured products should be carried through to the class
prices that are based on those component prices. A change in the
computation of the nonfat solids price, for instance, is intended to
better reflect the value of those solids in dry milk products. If the
new nonfat solids price formula results in an increase in the Class IV
price, the record provides no basis for changing the difference in the
value of the milk used in those solids between Class IV and Class II
use. Similarly, the availability of milk for use in Class I is related
to the higher of the alternative manufacturing
[[Page 67937]]
values for that milk. The current relationships should be maintained.
California Price Relationships
Many witnesses provided comments on the recommended decision in
regard to the relationship of Federal order Class III prices as
compared to the California 4b prices. These two prices are considered
to be minimum prices that reflect the value of producer milk used to
make cheese. Multiple comments received indicated the importance of
maintaining a close relationship between these prices.
Northwest Dairy Association expressed concern that the recommended
decision ``simply ignored'' the ``issue of price alignment with the
nation's largest dairy producing state'' and that there are
``differences between the Federal and California pricing systems that
the Department has utterly failed to explore and explain.''
A comment received from Agri-Mark stated that ``USDA must take in
consideration the competitive situation between California and Federal
Order Class III and IV plants.''
In their comments, Dairylea stated that ``It is important that
manufacturers buying Federal order milk pay Class prices that are
competitive with similar manufacturers in California and Idaho.''
A comment received from Western United Dairymen stated that, ``It
is imperative that California's prices maintain a close relationship
with Federal order prices.''
Lastly, a comment received from Select Milk Producers and
Continental Dairy Products stated that, ``Considering the fact that
California has transformed itself into the number one dairy state and
soon to be number one cheese producing state in little more than a
decade, it is appealing to consider modeling the decision in this
hearing off the California system.'' They go on to state that
``Producer groups in California along with others are now seeking to
have California adjust to the Federal scheme. It would be a sad day
indeed if the [Department] reduced prices to meet California's while
California was in the process to make such an effort unnecessary.''
Class III and Class IV prices established under the Federal milk
order program should not be based upon, aligned with, or identical to
the equivalent class prices established for milk under California's
State milk order program. The equivalent class prices established under
the California milk order program are based largely on the conditions
unique to California while the Class III and Class IV prices
established under Federal milk orders are based on national dairy
product prices which reflect the national supply and demand conditions
of milk used in these two classes. The California milk program is
single-state oriented while the Federal program is national in scope.
Class III and Class IV dairy products compete in a national market.
Because of this, Class III and Class IV milk prices established for all
Federal milk marketing order areas are the same. The Federal milk order
program gradually adopted the Minnesota-Wisconsin (M-W) price as the
Class III price in all Federal milk marketing orders. Although the M-W
was first adopted in 1963, it was not until the mid 1970's that the M-W
established a uniform class price for milk used in Class III products
in all Federal milk orders. Observations of the market place for
cheese, butter, and nonfat dry milk provided the basis for concluding
that these products compete in a market that is national in scope. Such
findings were upheld with the adoption of the Basic Formula Price
(BFP), which provided an interim pricing method for milk (due largely
to the declining statistical reliability of the M-W price series) until
a more long-term pricing method could be developed.
The implementation of milk order reform in January 2000 continued
finding that Class III and Class IV dairy products compete in a
national marketplace. However, a competitive price for milk, as
represented by the M-W and BFP prices, was no longer viable. As an
intended long-term method, the Federal milk order program has adopted
end-product price formulas, valuing Class III and Class IV milk on the
basis of the value of Class III and Class IV end-products in the
marketplace. The NASS price survey for dairy products used as a basis
for establishing Class III and Class IV prices includes all dairy
product prices and sales volumes in all regions of the country,
including California. In this regard, the Federal order program has and
will continue to reflect California's impact on dairy product prices
while establishing Class III and Class IV prices that are reflective of
national supply and demand conditions.
With the adoption of end-product pricing formulas under order
reform, the need for periodic adjustments that would arise with the
changes in marketing conditions is acknowledged. Although the
relationship of Federal Order prices to California prices is important,
the record does not indicate how California and Federal order prices
should be aligned or what the appropriate relationship between the
California and the Federal order program should be.
5. Class I Price Mover
A proposal that was not included in the hearing notice was made at
the hearing by a Family Dairies, USA, witness on behalf of that
cooperative and the Midwest Dairy Coalition, which represents 13
additional organizations of dairy farmers. The proposal would change
the Class I price mover from the higher of the Class III and Class IV
prices to a weighted average of the two. The witness for Family Dairies
testified that the results of the current regulation are disturbing and
unanticipated with the unexpected strength of the Class IV price
relative to Class III.
In testimony at the hearing, the Family Dairies representative
complained that 10 percent of production under Federal orders (milk
used to make nonfat dry milk) has been driving the Class I price that
applies to 40 percent of the milk. As a result, he testified, milk
production for fluid purposes is encouraged in markets with high Class
I differentials and relatively high Class I use at a time when
marketing conditions (an oversupply of milk) should have the opposite
effect. As fluid-oriented markets are receiving increased prices
relative to markets in which cheese is the dominant use, he complained,
inequities in blend prices between markets are increasing.
A group representing Upper Midwest producer interests filed a brief
describing the recent movement of milk from the Upper Midwest pool onto
the Central and Mideast marketwide pools as disorderly marketing caused
by increases of Class I prices in these higher-Class I use markets.
An argument in another brief stated that since the 1960's the dairy
industry has used a Class I mover tied to a market-clearing price
represented by a weighted average of milk used in butter, cheese, and
powder.
In several briefs it was argued that the Regulatory Impact Analysis
(RIA) published with the final decision on Federal order reform stated
that the price formulas adopted therein were expected to generate a
sufficient quantity of milk, and that both the adoption of Class I
pricing option IA and use of the higher of the Class III and IV prices
as the price mover have worked to enhance Class I price levels.
A brief filed by a group representing fluid milk handlers suggested
that USDA should give careful consideration to the proposal to use a
weighted average of the Class III and Class IV prices to move Class I
prices.
[[Page 67938]]
Based on analysis of the hearing record and briefs filed by
interested persons, the tentative final decision continued use of the
higher of the advance Class III or Class IV prices as the mover for
Class I prices.
In comments on the tentative final decision, the Midwest Dairy
Coalition repeated its position that the existing mover should be
changed to a weighted average of the advanced Class III and advanced
Class IV prices, with the weight based on the portion of manufacturing
milk used for Class III and Class IV during the prior year. The
Coalition stated that using the higher of Class III or Class IV prices
could result in setting a minimum fluid milk price that is actually
above the market clearing price for milk, especially if the higher of
the Class III and IV prices were not representative of manufacturing
markets. The Coalition also expressed concern that the tentative final
decision adopted, as an unnoticed and unsupported change, the higher of
the advanced Class III or Class IV milk prices at 3.5 percent butterfat
as the new Class I mover instead of using the skim value.
In comments, NMPF noted that significant fluctuation that could
occur in the Class I skim milk price mover due to using the higher of
the advanced Class III or Class IV prices at 3.5 percent butterfat.
Several parties noted that use of the advanced price at 3.5 percent
butterfat could cause the Class III price to be the Class I price
mover, even with a very low Class III skim milk price, causing
significant month-to-month changes in the Class I skim milk price.
Michigan Milk Producers Association (MMPA) filed comments, stating
that using a weighted average to set the Class I mover would severely
impact fluid users' ability to attract sufficient quantities of milk
when there were large differences between Class III and Class IV
prices. MMPA and NMPF supported the continued use of the higher of the
Class III or Class IV prices as the Class I mover.
ADCNE's comments to the tentative final decision, fully supported
by DFA, expressed opposition to the Family Dairies' proposal for a
weighted average Class I price mover or any other proposal that would
change the basis for Class I and Class II prices or Class I and Class
II differentials. ADCNE argued that there was no evidence presented at
the hearing that would support the substantial revenue reductions to
farmers throughout the Federal order system which would result from
adoption of the weighted average Class I price mover. ADCNE urged that
the conclusions of the tentative final decision to continue to use the
higher of the advanced Class III and IV prices as the basis for
calculating the Class I price mover be affirmed.
The shift in the pooling of milk from the Upper Midwest to higher-
valued markets complained of in one Upper Midwest brief has been a
long-sought outcome on the part of Upper Midwest producer groups. It is
difficult to understand why it is now seen as a manifestation of
disorderly marketing.
Those briefs that cited the sufficient level of milk production
projected under the RIA for Federal order reform appeared to base their
arguments in opposition to use of the ``higher of'' Class I price mover
on that projection. It should be noted that Congressional action
relative to Class I prices following issuance of the final decision on
Federal order reform applied only to the Class I pricing surface. Use
of the higher of the Class III and IV prices as the Class I price mover
was included in Federal order reform and in the accompanying RIA.
The Upper Midwest Coalition's concern that the tentative final
decision adopted the higher of the advanced Class III or Class IV milk
prices at 3.5 percent butterfat instead of using the skim value as the
new Class I mover, and the NMPF criticism that doing so would result in
significant fluctuations in the Class I skim price is now moot because
of the return to the use of one butterfat price. Use of the same
butterfat price for the Class III and Class IV prices will result in
the ``higher of'' the two being determined by the relative skim milk
prices. Therefore, the recommended decision concluded that fluctuations
in the Class I skim milk price projected under the tentative final
decision should be reduced.
The price referred to in the brief expressing preference for the
historical use of a weighted average of prices paid for milk used in
butter, cheese, and powder was, at first, the Minnesota-Wisconsin price
series (the M-W). The M-W, and later the M-W adjusted by a weighted
average of current product prices for manufactured products, was
specific to the Upper Midwest area and included very little NFDM, since
that area manufactures a higher percentage of cheese, relative to NFDM,
than the rest of the U.S. The current pricing system is much more
representative of national supply and demand for manufactured dairy
products than either of the versions of the former Class I mover.
As explained in the final decision on Federal order reform, the
higher of the Class III or Class IV prices are used to move the Class I
price to assure that fluid plants will be better able to attract milk
away from manufacturing uses. Use of the weighted average of the two
prices when there is a significant difference between them would
provide no assurance that milk would be available as needed for fluid
uses and would be more likely to result in Class price inversions
(where the Class I price falls below one or more of the manufacturing
class prices). In addition, use of a weighted average Class I price
mover would increase the occurrence of the blend price falling below
the Class III or IV price in markets with low Class I utilization.
Aside from the fact that the proposal to use a weighted average of
the Class III and Class IV prices as the Class I mover was not noticed
for consideration in this proceeding, it should be rejected on the
basis of its lack of merit.
Comments received on the recommended decision from the Kroger
Company opposed using the higher of Class III or Class IV for
establishing the Class I price for milk. They suggested a review of
alternatives that would not lead to higher Class I milk prices.
Comments received from MMPA and DFA on the recommended decision,
however, continued to express their support for using the ``higher
of.'' MMPA was of the opinion that using the higher of the Class III or
Class IV prices as the Class I mover establishes farm milk prices that
assure priority in providing milk for Class I uses. After consideration
of the entire record on this proceeding this final decision adopts the
recommended decision provision to continue to use the higher of the
advance Class III or Class IV prices for establishing the Class I base
price or, as it is sometimes referenced, the Class I mover.
6. Miscellaneous and Conforming Changes
a. Advanced Class I butterfat price. Because of the change made
between the interim rule and this final decision--to use only one
butterfat price for butterfat used in both Class III and Class IV--the
conforming change made in the interim final rule to the procedure for
calculating the Class I butterfat and hundredweight prices is no longer
necessary. The advanced butterfat price used for pricing Class I
butterfat will continue to be calculated by the application of the
Class III and Class IV price formulas to the advanced NASS prices as
announced.
b. Classification. The classification of anhydrous milkfat,
butteroil, and plastic cream was changed in the tentative final
decision from Class III to Class IV as a conforming change required by
the
[[Page 67939]]
adoption of separate butterfat prices for the two classes. The hearing
notice contained no proposal to change the classification of these
products, and there was no testimony in the record of the proceeding
supporting their re-classification. Therefore, with the elimination of
the separate Class III butterfat price, the sole basis for the change
in classification also is eliminated.
As noted in the tentative final decision, a difference between the
classification of these products, which have a very high butterfat
content, and butter should not cause any market dislocation in a
pricing plan where butterfat used in Class III products has the same
value as butterfat used in Class IV products. One commenter to the
tentative final decision opposed changing the classification of these
products.
In comments to the recommended decision, MMPA disagreed with
returning anhydrous milkfat, butteroil, and plastic cream back to Class
III classification because, in their opinion, the products compete with
butter and therefore should have a cost base similar to butterfat.
Comments received from NDA and WestFarm Foods also indicated opposition
to returning these products back to Class III.
As a result of the elimination of the separate Class III butterfat
price, this final decision finds that anhydrous milkfat, butteroil, and
plastic cream is most appropriately classified as Class III.
In a comment filed in response to the tentative final decision,
Hershey Foods urged that the Federal orders adopt a 2-class pricing
system. Such a suggestion is entirely outside the scope of the current
proceeding.
c. Distribution of Butterfat Value to Producers. There were several
responses in comments on the tentative final decision to the issue of
whether the butterfat price paid to producers should be the result of
pooling butterfat prices from the different classes or continue to
reflect the value of butterfat in Class III. A witness from Northwest
Dairy Association testified that being able to line up the Class III
price to plants with the component value calculation for producers is
helpful, especially with regard to forward pricing. In a brief filed on
behalf of DFA and ADCNE, the co-op groups supported continued use of
the Class III butterfat price as the producer butterfat price.
According to the brief, changes in direct pricing to the producer are
not prudent at this time, and any change between the Class III and
Class IV butterfat price should be settled through the producer price
differential mechanism in the market order pools. The brief continued
that the producer price differential is a blending of various debits
and credits in the pooling process and the additional equalizing of any
butterfat pricing adjustments through this procedure currently makes
the most sense.
In a post-hearing brief, National All-Jersey (NAJ) urged that USDA
retain the current practice of using Class III milk component values to
price producer component values. NAJ noted that this scenario makes it
easier to use accepted hedging tools, such as Class III futures
contracts, and helps simplify pricing for producers. NAJ further stated
that the current procedure maintains the same producer butterfat price
in all Federal orders with multiple component pricing (MCP).
Seventy-nine dairy organizations supported payment to producers on
the basis of the milk components priced in Class III, including the
Class III butterfat price instead of a pooled butterfat price, plus the
producer price differential in a comment filed in response to the
tentative final decision. The commenters argue that payment to
producers on the basis of Class III components facilitates the use of
risk management tools by producers and avoids wider fluctuations in
Class I and producer fat, skim, and component values.
One of the principal reasons given in the tentative final decision
for changing the pooling provisions of the MCP orders was that
potential large differences between the Class III and Class IV/II
butterfat prices would be likely to result in significant distortions
in the effect of those differences on the producer price differential.
The recommended decision also concluded that according to observation
made under the tentative final decision, it was possible that pool
calculations in some markets would result in a negative producer price
differential if the producer butterfat price was not changed to
represent a blend of the values of butterfat in the four classes of
use.
The reversal to calculate separate Class III and Class IV butterfat
prices invalidated the principal reason for pooling butterfat under the
MCP orders.
Therefore, in the recommended decision it was determined that
producer payments under the MCP orders would continue to be made on the
basis of the prices for milk components used in Class III rather than
pooling the butterfat values of the four classes and this continues in
this final decision. The four orders that do not have component pricing
will continue to pool the class use butterfat values and return a
weighted average butterfat price to producers. The difference adopted
in this final decision may result in some inconsistency between the
producer butterfat prices under MCP and non-MCP orders. However, it is
expected that such inconsistency will not result in disorderly
marketing.
d. Inclusion of Class I other source butterfat in producer
butterfat price computation. In the process of promulgating the
tentative final decision, it was determined that the value associated
with the occasional classification of other source milk as Class I
should be included in pooling the class butterfat values to determine
butterfat prices to producers. For the orders under which butterfat is
pooled, this change was made in the interim final rule and should
continue so that the value of all of the butterfat in the pool will be
reflected in the producer butterfat price.
In the component pricing orders, the changes made in the interim
final rule to include the Class I other source butterfat value in the
butterfat pool should be reversed. Although the District Court's
injunction had the effect of reversing these changes and the Federal
order reform language has continued in effect, the order language in
the Code of Federal Regulations reflects the provisions adopted in the
interim final rule. The proposed order language amendments in the
recommended decision and in this final decision reflect the language
that is currently in effect in the MCP orders, reversing the changes
that were made to include Class I other source butterfat in the
butterfat pool.
7. Issue of Reopening of the Hearing, or Issuance of a Final Decision
The statute requiring that this proceeding be held to reconsider
the Class III and Class IV pricing formulas also required that a final
decision be published by December 1, 2000, with any amendments to the
orders to be effective January 1, 2001.
The hearing record reflected unanimity among those addressing the
issue that the industry should be afforded the opportunity to comment
on a decision before its content results in a final rule. Consequently,
a tentative final decision was issued affording interested persons an
opportunity to comment even though the amendments adopted in the
decision were to become effective January 1, 2001. An injunction was
issued on January 31, 2001, to prevent some of the provisions adopted
in the interim final rule from becoming effective.
[[Page 67940]]
The recommended decision noted that several interested parties
commented in opposition to reopening the proceeding with regard to the
Class III butterfat and protein price formulas. The only commenter that
favored revisiting any of the issues involved stated that some way of
reflecting increased energy costs in make allowances should be
explored. The commenter seemed to refer to conducting an entirely new
proceeding rather than reopening the current proceeding. At that time
it was decided that reopening the proceeding would not be considered
due to the lack of interest in pursuing development of Class III
component prices that are more closely correlated with cheese prices.
Two commenters on the tentative final decision urged that USDA act
quickly to conclude the proceeding. The most rapid conclusion to the
proceeding was through issuance of a tentative final decision, followed
by a determination of producer approval and issuance of a final rule
for the orders approved. However, because significant changes were made
to the tentative final decision by the District Court order and by the
recommended decision, interested parties were given an additional
opportunity to comment on those changes. Therefore, USDA issued the
recommended decision and provided for a 30-day comment period.
Additional time to file comments was requested by a number of
proprietary and cooperative handlers in order to allow for more
thorough analysis of the impacts of the technical changes in the
pricing formulas.
Several comments on the recommended decision were received urging
prompt implementation of the amendments recommended. The National Milk
Producers Federation (NMPF) supported the recommended decision's
amendments in their entirety. They stated that, ``In the absence of a
clear-cut industry consensus for change, and without clear evidence of
a market failure caused by federal order provisions, we believe it
would be detrimental to the industry to reopen these proceedings in the
near future.''
Several comments from both processors and producers on the
recommended decision suggested reopening the hearing. A few comments
noted the outdated nature of some of the data, while other comments
indicated a need to further study the impacts that new price formulas
would have on cheese plants that are small businesses. The proceeding
is not being reopened and this final decision is being issued.
Rulings on Proposed Findings and Conclusions
Briefs, proposed findings and conclusions, and comments on the
tentative final decision and the recommended decision were filed on
behalf of certain interested parties. These briefs, the proposed
findings and conclusions, the comments, 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 final
decision.
General Findings
The findings and determinations hereinafter set forth supplement
those that were made when each of the aforesaid orders were first
issued and when they were amended. The previous findings and
determinations are hereby ratified and confirmed, except where they may
conflict with those set forth herein.
The following findings are hereby made with respect to each of the
aforesaid tentative marketing agreements and orders;
(a) The tentative marketing agreements and the orders, 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 aforesaid marketing areas, and the
minimum prices specified in the tentative marketing agreements and the
orders, 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 agreements and the orders, 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, marketing
agreements upon which a hearing has been held.
Rulings on Exceptions
In arriving at the findings and conclusions, and the regulatory
provisions adopted in this final decision, all exceptions received were
considered in conjunction with the record evidence. To the extent that
the findings and conclusions and the regulatory provisions of this
final decision are at variance with any of the exceptions, such
exceptions are hereby overruled for the reasons previously stated in
this final 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 orders regulating the handling of milk in the Northeast
and other marketing areas, which have 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 referenda be conducted and completed on
or before the 30th day from the date this decision is issued, in
accordance with the procedure for the conduct of referenda (7 CFR
900.300-311), to determine whether the issuance of the orders as
amended and as hereby proposed to be amended, regulating the handling
of milk in the Northeast and Mideast marketing areas are approved or
favored by producers, as defined under the terms each of the orders, 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 areas.
The representative period for the conduct of such referenda is
hereby determined to be May 2002.
The agents of the Secretary to conduct such referenda are hereby
designated to be the respective market administrators of the aforesaid
orders.
Determination of Producer Approval and Representative Period for All
Other Orders
May 2002 is hereby determined to be the representative period for
the purpose of ascertaining whether the issuance of the orders, as
amended and as hereby proposed to be amended, regulating the handling
of milk in the Appalachian, Florida, Southeast, Upper Midwest, Central,
Pacific Northwest, Southwest, Arizona Las-Vegas, and Western marketing
areas is approved or favored by producers, as defined under
[[Page 67941]]
the terms of each of these orders 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 areas.
List of Subjects in 7 CFR Parts 1000, 1001, 1005, 1006, 1007, 1030,
1032, 1033, 1124, 1126, 1131, and 1135.
Milk marketing orders.
Dated: October 25, 2002.
A.J. Yates,
Administrator, Agricultural Marketing Service.
Order Amending the Orders Regulating the Handling of Milk in the
Northeast and Other Marketing Areas
(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 orders were first issued and when they
were 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 agreements and to the orders
regulating the handling of milk in the Northeast and other marketing
areas. 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 orders 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 areas. The
minimum prices specified in the orders 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 orders as hereby amended regulate the handling of milk
in the same manner as, and are applicable only to persons in the
respective classes of industrial or commercial activity specified in
marketing agreements upon which a hearing has been held.
Order Relative to Handling
It is therefore ordered, that on and after the effective date
hereof, the handling of milk in the Northeast and other marketing areas
shall be in conformity to and in compliance with the terms and
conditions of the order, as amended, and as hereby amended, as follows:
The provisions of the proposed marketing agreements and orders
amending the orders contained in the recommended decision issued by the
Associate Administrator, Agricultural Marketing Service, on October 19,
2001, and published in the Federal Register on October 25, 2001 (66 FR
54064), as modified herein, shall be and are the terms and provisions
of this order, amending the orders, and are set forth in full herein.
1. The authority citation for 7 CFR parts 1000, 1001, 1005, 1006,
1007, 1030, 1032, 1033, 1124, 1126, 1131, and 1135 continues to read as
follows:
Authority: 7 U.S.C. 601-674.
PART 1000--GENERAL PROVISIONS OF FEDERAL MILK MARKETING ORDERS
1. Section 1000.40 is amended by adding paragraph (c)(1)(ii) and
revising paragraph (d)(1)(i) to read as follows:
Sec. 1000.40 Classes of Utilization.
* * * * *
(c) * * *
(1) * * *
(ii) Plastic cream, anhydrous milkfat, and butteroil; and
* * * * *
(d) * * *
(1) * * *
(i) Butter; and
* * * * *
2. Section 1000.50 is amended by revising the last sentence of the
introductory text; by revising paragraphs (a), (b), (c), (g), (h), (j),
(l), (m), (n), (o), (p)(1), and (q)(3); and by removing paragraph
(q)(4) to read as follows:
Sec. 1000.50 Class prices, component prices, and advanced pricing
factors.
* * * The price described in paragraph (d) of this section shall be
derived from the Class II skim milk price announced on or before the
23rd day of the month preceding the month to which it applies and the
butterfat price announced on or before the 5th day of the month
following the month to which it applies.
(a) Class I price. The Class I price per hundredweight, rounded to
the nearest cent, shall be 0.965 times the Class I skim milk price plus
3.5 times the Class I butterfat price.
(b) Class I skim milk price. The Class I skim milk price per
hundredweight shall be the adjusted Class I differential specified in
Sec. 1000.52 plus the higher of the advanced pricing factors computed
in paragraph (q)(1) or (2) of this section.
(c) Class I butterfat price. The Class I butterfat price per pound
shall be the adjusted Class I differential specified in Sec. 1000.52
divided by 100, plus the advanced butterfat price computed in paragraph
(q)(3) of this section.
* * * * *
(g) Class II butterfat price. The Class II butterfat price per
pound shall be the butterfat price plus $0.007.
(h) Class III price. The Class III price per hundredweight, rounded
to the nearest cent, shall be 0.965 times the Class III skim milk price
plus 3.5 times the butterfat price.
* * * * *
(j) Class IV price. The Class IV price per hundredweight, rounded
to the nearest cent, shall be 0.965 times the Class IV skim milk price
plus 3.5 times the butterfat price.
* * * * *
(l) Butterfat price. The butterfat price per pound, rounded to the
nearest one-hundredth cent, shall be the U.S. average NASS AA Butter
survey price reported by the Department for the month less 11.5 cents,
with the result multiplied by 1.20.
(m) Nonfat solids price. The nonfat solids price per pound, rounded
to the nearest one-hundredth cent, shall be the U.S. average NASS
nonfat dry milk survey price reported by the Department for the month
less 14 cents and multiplying the result by 0.99.
(n) Protein price. The protein price per pound, rounded to the
nearest one-hundredth cent, shall be computed as follows:
(1) Compute a weighted average of the amounts described in
paragraphs (n)(1)(i) and (ii) of this section:
(i) The U.S. average NASS survey price for 40-lb. block cheese
reported by the Department for the month; and
(ii) The U.S. average NASS survey price for 500-pound barrel
cheddar cheese (38 percent moisture) reported by the Department for the
month plus 3 cents;
(2) Subtract 16.5 cents from the price computed pursuant to
paragraph (n)(1) of this section and multiply the result by 1.383;
[[Page 67942]]
(3) Add to the amount computed pursuant to paragraph (n)(2) of this
section an amount computed as follows:
(i) Subtract 16.5 cents from the price computed pursuant to
paragraph (n)(1) of this section and multiply the result by 1.572; and
(ii) Subtract 0.9 times the butterfat price computed pursuant to
paragraph (l) of this section from the amount computed pursuant to
paragraph (n)(3)(i) of this section; and
(iii) Multiply the amount computed pursuant to paragraph (n)(3)(ii)
of this section by 1.17.
(o) Other solids price. The other solids price per pound, rounded
to the nearest one-hundredth cent, shall be the U.S. average NASS dry
whey survey price reported by the Department for the month minus 15.9
cents, with the result multiplied by 1.03.
(p) * * *
(1) Multiply 0.0005 by the weighted average price computed pursuant
to paragraph (n)(1) of this section and round to the 5th decimal place;
* * * * *
(q) * * *
(3) An advanced butterfat price per pound, rounded to the nearest
one-hundredth cent, shall be calculated by computing a weighted average
of the 2 most recent U.S. average NASS AA Butter survey prices
announced before the 24th day of the month, subtracting 11.5 cents from
this average, and multiplying the result by 1.20.
PART 1001--MILK IN THE NORTHEAST MARKETING AREA
1. Section 1001.60 is amended by revising paragraphs (c)(3),
(d)(2), and (h) to read as follows:
Sec. 1001.60 Handler's value of milk.
* * * * *
(c) * * *
(3) Add an amount obtained by multiplying the pounds of butterfat
in Class III by the butterfat price.
(d) * * *
(2) Add an amount obtained by multiplying the pounds of butterfat
in Class IV by the butterfat price.
* * * * *
(h) Multiply the difference between the Class I price applicable at
the location of the nearest unregulated supply plants from which an
equivalent volume was received and the Class III price by the pounds of
skim milk and butterfat in receipts of concentrated fluid milk products
assigned to Class I pursuant to Sec. 1000.43(d) and Sec.
1000.44(a)(3)(i) and the corresponding step of Sec. 1000.44(b) and the
pounds of skim milk and butterfat subtracted from Class I pursuant to
Sec. 1000.44(a)(8) and the corresponding step of Sec. 1000.44(b),
excluding such skim milk and butterfat in receipts of fluid milk
products from an unregulated supply plant to the extent that an
equivalent amount of skim milk or butterfat disposed of to such plant
by handlers fully regulated under any Federal milk order is classified
and priced as Class I milk and is not used as an offset for any other
payment obligation under any order.
* * * * *
2. Section 1001.61 is revised to read as follows:
Sec. 1001.61 Computation of producer price differential.
For each month, the market administrator shall compute a producer
price differential per hundredweight. The report of any handler who has
not made payments required pursuant to Sec. 1001.71 for the preceding
month shall not be included in the computation of the producer price
differential, and such handler's report shall not be included in the
computation for succeeding months until the handler has made full
payment of outstanding monthly obligations. Subject to the conditions
in this paragraph, the market administrator shall compute the producer
price differential in the following manner:
(a) Combine into one total the values computed pursuant to Sec.
1001.60 for all handlers required to file reports prescribed in Sec.
1001.30;
(b) Subtract the total of the values obtained by multiplying each
handler's total pounds of protein, other solids, and butterfat
contained in the milk for which an obligation was computed pursuant to
Sec. 1001.60 by the protein price, other solids price, and the
butterfat price, respectively;
(c) Add an amount equal to the minus location adjustments and
subtract an amount equal to the plus location adjustments computed
pursuant to Sec. 1001.75;
(d) Add an amount equal to not less than one-half of the
unobligated balance in the producer-settlement fund;
(e) Divide the resulting amount by the sum of the following for all
handlers included in these computations:
(1) The total hundredweight of producer milk; and
(2) The total hundredweight for which a value is computed pursuant
to Sec. 1001.60(h); and
(f) Subtract not less than 4 cents nor more than 5 cents from the
price computed pursuant to paragraph (e) of this section. The result,
rounded to the nearest cent, shall be known as the producer price
differential for the month.
3. Section 1001.62 is amended by revising paragraphs (e) and (g) to
read as follows:
Sec. 1001.62 Announcement of producer prices.
* * * * *
(e) The butterfat price;
* * * * *
(g) The statistical uniform price for milk containing 3.5 percent
butterfat computed by combining the Class III price and the producer
price differential.
4. Section 1001.71 is amended by revising paragraphs (b)(2) and
(b)(3) to read as follows:
Sec. 1001.71 Payments to the producer-settlement fund.
* * * * *
(b) * * *
(2) An amount obtained by multiplying the total pounds of protein,
other solids, and butterfat contained in producer milk by the protein,
other solids, and butterfat prices respectively; and
(3) An amount obtained by multiplying the pounds of skim milk and
butterfat for which a value was computed pursuant to Sec. 1001.60(h)
by the producer price differential as adjusted pursuant to Sec.
1001.75 for the location of the plant from which received.
5. Section 1001.73 is amended by revising paragraphs (a)(2)(ii) and
(b)(3)(vi) to read as follows:
Sec. 1001.73 Payments to producers and to cooperative associations.
(a) * * *
(2) * * *
(ii) Multiply the pounds of butterfat received by the butterfat
price for the month;
* * * * *
(b) * * *
(3) * * *
(vi) Multiply the pounds of butterfat in Class III and Class IV
milk by the butterfat price for the month;
* * * * *
PART 1030--MILK IN THE UPPER MIDWEST MARKETING AREA
1. Section 1030.60 is amended by revising paragraphs (c)(3),
(d)(2), and (i) to read as follows:
Sec. 1030.60 Handler's value of milk.
* * * * *
(c) * * *
(3) Add an amount obtained by multiplying the pounds of butterfat
in Class III by the butterfat price.
(d) * * *
[[Page 67943]]
(2) Add an amount obtained by multiplying the pounds of butterfat
in Class IV by the butterfat price.
* * * * *
(i) Multiply the difference between the Class I price applicable at
the location of the nearest unregulated supply plants from which an
equivalent volume was received and the Class III price by the pounds of
skim milk and butterfat in receipts of concentrated fluid milk products
assigned to Class I pursuant to Sec. 1000.43(d) and Sec.
1000.44(a)(3)(i) and the corresponding step of Sec. 1000.44(b) and the
pounds of skim milk and butterfat subtracted from Class I pursuant to
Sec. 1000.44(a)(8) and the corresponding step of Sec. 1000.44(b),
excluding such skim milk and butterfat in receipts of fluid milk
products from an unregulated supply plant to the extent that an
equivalent amount of skim milk or butterfat disposed of to such plant
by handlers fully regulated under any Federal milk order is classified
and priced as Class I milk and is not used as an offset for any other
payment obligation under any order.
* * * * *
2. Section 1030.61 is revised to read as follows:
Sec. 1030.61 Computation of producer price differential.
For each month the market administrator shall compute a producer
price differential per hundredweight. The report of any handler who has
not made payments required pursuant to Sec. 1030.71 for the preceding
month shall not be included in the computation of the producer price
differential, and such handler's report shall not be included in the
computation for succeeding months until the handler has made full
payment of outstanding monthly obligations. Subject to the conditions
of this paragraph, the market administrator shall compute the producer
price differential in the following manner:
(a) Combine into one total the values computed pursuant to Sec.
1030.60 for all handlers required to file reports prescribed in Sec.
1030.30;
(b) Subtract the total values obtained by multiplying each
handler's total pounds of protein, other solids, and butterfat
contained in the milk for which an obligation was computed pursuant to
Sec. 1030.60 by the protein price, other solids price, and the
butterfat price, respectively, and the total value of the somatic cell
adjustment pursuant to Sec. 1030.30(a)(1) and (c)(1);
(c) Add an amount equal to the minus location adjustments and
subtract an amount equal to the plus location adjustments computed
pursuant to Sec. 1030.75;
(d) Add an amount equal to not less than one-half of the
unobligated balance in the producer-settlement fund;
(e) Divide the resulting amount by the sum of the following for all
handlers included in these computations:
(1) The total hundredweight of producer milk; and
(2) The total hundredweight for which a value is computed pursuant
to Sec. 1030.60(i); and
(f) Subtract not less than 4 cents nor more than 5 cents from the
price computed pursuant to paragraph (e) of this section. The result
shall be known as the producer price differential for the month.
3. Section 1030.62 is amended by revising paragraphs (e) and (h) to
read as follows:
Sec. 1030.62 Announcement of producer prices.
* * * * *
(e) The butterfat price;
* * * * *
(h) The statistical uniform price for milk containing 3.5 percent
butterfat, computed by combining the Class III price and the producer
butterfat price differential.
4. Section 1030.71 is amended by revising paragraphs (b)(2) and
(b)(4) to read as follows:
Sec. 1030.71 Payments to the producer-settlement fund.
* * * * *
(b) * * *
(2) An amount obtained by multiplying the total pounds of protein,
other solids, and butterfat contained in producer milk by the protein,
other solids, and butterfat prices respectively;
* * * * *
(4) An amount obtained by multiplying the pounds of skim milk and
butterfat for which a value was computed pursuant to Sec. 1030.60(i)
by the producer price differential as adjusted pursuant to Sec.
1030.75 for the location of the plant from which received.
5. Section 1030.73 is amended by revising paragraphs (a)(2)(ii),
(c)(2)(v), and (c)(3)(ii) to read as follows:
Sec. 1030.73 Payments to producers and to cooperative associations.
(a) * * *
(2) * * *
(ii) The pounds of butterfat received times the butterfat price for
the month;
* * * * *
(c) * * *
(2) * * *
(v) The pounds of butterfat in Class III and Class IV milk times
the butterfat price;
* * * * *
(3) * * *
(ii) The pounds of butterfat received times the butterfat price for
the month;
* * * * *
PART 1032--MILK IN THE CENTRAL MARKETING AREA
1. Section 1032.60 is amended by revising paragraphs (c)(3),
(d)(2), and (i) to read as follows:
Sec. 1032.60 Handler's value of milk.
* * * * *
(c) * * *
(3) Add an amount obtained by multiplying the pounds of butterfat
in Class III by the butterfat price.
(d) * * *
(2) Add an amount obtained by multiplying the pounds of butterfat
in Class IV by the butterfat price.
* * * * *
(i) Multiply the difference between the Class I price applicable at
the location of the nearest unregulated supply plants from which an
equivalent volume was received and the Class III price by the pounds of
skim milk and butterfat in receipts of concentrated fluid milk products
assigned to Class I pursuant to Sec. 1000.43(d) and Sec.
1000.44(a)(3)(i) and the corresponding step of Sec. 1000.44(b) and the
pounds of skim milk and butterfat subtracted from Class I pursuant to
Sec. 1000.44(a)(8) and the corresponding step of Sec. 1000.44(b),
excluding such skim milk and butterfat in receipts of fluid milk
products from an unregulated supply plant to the extent that an
equivalent amount of skim milk or butterfat disposed of to such plant
by handlers fully regulated under any Federal milk order is classified
and priced as Class I milk and is not used as an offset for any other
payment obligation under any order.
* * * * *
2. Section 1032.61 is revised to read as follows:
Sec. 1032.61 Computation of producer price differential.
For each month the market administrator shall compute a producer
price differential per hundredweight. The report of any handler who has
not made payments required pursuant to Sec. 1032.71 for the preceding
month shall not be included in the computation of the producer price
differential, and such handler's report shall not be included in the
computation for succeeding months until the handler has made full
payment of outstanding monthly obligations.
[[Page 67944]]
Subject to the conditions of this paragraph, the market administrator
shall compute the producer price differential in the following manner:
(a) Combine into one total the values computed pursuant to Sec.
1032.60 for all handlers required to file reports prescribed in Sec.
1032.30;
(b) Subtract the total values obtained by multiplying each
handler's total pounds of protein, other solids, and butterfat
contained in the milk for which an obligation was computed pursuant to
Sec. 1032.60 by the protein price, the other solids price, and the
butterfat price, respectively, and the total value of the somatic cell
adjustment pursuant to Sec. 1032.30(a)(1) and (c)(1);
(c) Add an amount equal to the minus location adjustments and
subtract an amount equal to the plus location adjustments computed
pursuant to Sec. 1032.75;
(d) Add an amount equal to not less than one-half of the
unobligated balance in the producer-settlement fund;
(e) Divide the resulting amount by the sum of the following for all
handlers included in these computations:
(1) The total hundredweight of producer milk; and
(2) The total hundredweight for which a value is computed pursuant
to Sec. 1032.60(i); and
(f) Subtract not less than 4 cents nor more than 5 cents from the
price computed pursuant to paragraph (e) of this section. The result
shall be known as the producer price differential for the month.
3. Section 1032.62 is amended by revising paragraphs (e) and (h) to
read as follows:
Sec. 1032.62 Announcement of producer prices.
* * * * *
(e) The butterfat price;
* * * * *
(h) The statistical uniform price for milk containing 3.5 percent
butterfat, computed by combining the Class III price and the producer
price differential.
4. Section 1032.71 is amended by revising paragraphs (b)(2) and
(b)(4) to read as follows:
Sec. 1032.71 Payments to the producer-settlement fund.
* * * * *
(b) * * *
(2) An amount obtained by multiplying the total pounds of protein,
other solids, and butterfat contained in producer milk by the protein,
other solids, and butterfat prices respectively;
* * * * *
(4) An amount obtained by multiplying the pounds of skim milk and
butterfat for which a value was computed pursuant to Sec. 1032.60(i)
by the producer price differential as adjusted pursuant to Sec.
1032.75 for the location of the plant from which received.
5. Section 1032.73 is amended by revising paragraphs (a)(2)(ii),
(c)(2)(v), and (c)(3)(ii) to read as follows:
Sec. 1032.73 Payments to producers and to cooperative associations.
(a) * * *
(2) * * *
(ii) The pounds of butterfat received times the butterfat price for
the month;
* * * * *
(c) * * *
(2) * * *
(v) The pounds of butterfat in Class III and Class IV milk times
the butterfat price;
* * * * *
(3) * * *
(ii) The pounds of butterfat received times the butterfat price for
the month;
* * * * *
PART 1033--MILK IN THE MIDEAST MARKETING AREA
1. Section 1033.60 is amended by revising paragraphs (c)(3),
(d)(2), and (i) to read as follows:
Sec. 1033.60 Handler's value of milk.
* * * * *
(c) * * *
(3) Add an amount obtained by multiplying the pounds of butterfat
in Class III by the butterfat price.
(d) * * *
(2) Add an amount obtained by multiplying the pounds of butterfat
in Class IV by the butterfat price.
* * * * *
(i) Multiply the difference between the Class I price applicable at
the location of the nearest unregulated supply plants from which an
equivalent volume was received and the Class III price by the pounds of
skim milk and butterfat in receipts of concentrated fluid milk products
assigned to Class I pursuant to Sec. 1000.43(d) and Sec.
1000.44(a)(3)(i) and the corresponding step of Sec. 1000.44(b) and the
pounds of skim milk and butterfat subtracted from Class I pursuant to
Sec. 1000.44(a)(8) and the corresponding step of Sec. 1000.44(b),
excluding such skim milk and butterfat in receipts of fluid milk
products from an unregulated supply plant to the extent that an
equivalent amount of skim milk or butterfat disposed of to such plant
by handlers fully regulated under any Federal milk order is classified
and priced as Class I milk and is not used as an offset for any other
payment obligation under any order.
* * * * *
2. Section 1033.61 is revised to read as follows:
Sec. 1033.61 Computation of producer price differential.
For each month the market administrator shall compute a producer
price differential per hundredweight. The report of any handler who has
not made payments required pursuant to Sec. 1033.71 for the preceding
month shall not be included in the computation of the producer price
differential, and such handler's report shall not be included in the
computation for succeeding months until the handler has made full
payment of outstanding monthly obligations. Subject to the conditions
of this paragraph, the market administrator shall compute the producer
price differential in the following manner:
(a) Combine into one total the values computed pursuant to Sec.
1033.60 for all handlers required to file reports prescribed in Sec.
1033.30;
(b) Subtract the total values obtained by multiplying each
handler's total pounds of protein, other solids, and butterfat
contained in the milk for which an obligation was computed pursuant to
Sec. 1033.60 by the protein price, the other solids price, and the
butterfat price, respectively, and the total value of the somatic cell
adjustment pursuant to Sec. 1033.30(a)(1) and (c)(1);
(c) Add an amount equal to the minus location adjustments and
subtract an amount equal to the plus location adjustments computed
pursuant to Sec. 1033.75;
(d) Add an amount equal to not less than one-half of the
unobligated balance in the producer-settlement fund;
(e) Divide the resulting amount by the sum of the following for all
handlers included in these computations:
(1) The total hundredweight of producer milk; and
(2) The total hundredweight for which a value is computed pursuant
to Sec. 1033.60(i); and
(f) Subtract not less than 4 cents nor more than 5 cents from the
price computed pursuant to paragraph (e) of this section. The result
shall be known as the producer price differential for the month.
3. Section 1033.62 is amended by revising paragraphs (e) and (h) to
read as follows:
Sec. 1033.62 Announcement of producer prices.
* * * * *
[[Page 67945]]
(e) The butterfat price;
* * * * *
(h) The statistical uniform price for milk containing 3.5 percent
butterfat, computed by combining the Class III price and the producer
price differential.
4. Section 1033.71 is amended by revising paragraphs (b)(2) and
(b)(4) to read as follows:
Sec. 1033.71 Payments to the producer-settlement fund.
* * * * *
(b) * * *
(2) An amount obtained by multiplying the total pounds of protein,
other solids, and butterfat contained in producer milk by the protein,
other solids, and butterfat prices, respectively;
* * * * *
(4) An amount obtained by multiplying the pounds of skim milk and
butterfat for which a value was computed pursuant to Sec. 1033.60(i)
by the producer price differential as adjusted pursuant to Sec.
1033.75 for the location of the plant from which received.
5. Section 1033.73 is amended by revising paragraphs (a)(2)(ii) and
(b)(3)(v) to read as follows:
Sec. 1033.73 Payments to producers and to cooperative associations.
(a) * * *
(2) * * *
(ii) The pounds of butterfat received times the butterfat price for
the month;
* * * * *
(b) * * *
(3) * * *
(v) The pounds of butterfat in Class III and Class IV milk times
the butterfat price;
* * * * *
PART 1124--MILK IN THE PACIFIC NORTHWEST MARKETING AREA
1. Section 1124.60 is amended by revising paragraphs (c)(3),
(d)(2), and (h) to read as follows:
Sec. 1124.60 Handler's value of milk.
* * * * *
(c) * * *
(3) Add an amount obtained by multiplying the pounds of butterfat
in Class III by the butterfat price.
(d) * * *
(2) Add an amount obtained by multiplying the pounds of butterfat
in Class IV by the butterfat price.
* * * * *
(h) Multiply the difference between the Class I price applicable at
the location of the nearest unregulated supply plants from which an
equivalent volume was received and the Class III price by the pounds of
skim milk and butterfat in receipts of concentrated fluid milk products
assigned to Class I pursuant to Sec. 1000.43(d) and Sec.
1000.44(a)(3)(i) and the corresponding step of Sec. 1000.44(b) and the
pounds of skim milk and butterfat subtracted from Class I pursuant to
Sec. 1000.44(a)(8) and the corresponding step of Sec. 1000.44(b),
excluding such skim milk and butterfat in receipts of fluid milk
products from an unregulated supply plant to the extent that an
equivalent amount of skim milk or butterfat disposed of to such plant
by handlers fully regulated under any Federal milk order is classified
and priced as Class I milk and is not used as an offset for any other
payment obligation under any order.
* * * * *
2. Section 1124.61 is revised to read as follows:
Sec. 1124.61 Computation of producer price differential.
For each month the market administrator shall compute a producer
price differential per hundredweight. The report of any handler who has
not made payments required pursuant to Sec. 1124.71 for the preceding
month shall not be included in the computation of the producer price
differential, and such handler's report shall not be included in the
computation for succeeding months until the handler has made full
payment of outstanding monthly obligations. Subject to the conditions
of this paragraph, the market administrator shall compute the producer
price differential in the following manner:
(a) Combine into one total the values computed pursuant to Sec.
1124.60 for all handlers required to file reports prescribed in Sec.
1124.30;
(b) Subtract the total values obtained by multiplying each
handler's total pounds of protein, other solids, and butterfat
contained in the milk for which an obligation was computed pursuant to
Sec. 1124.60 by the protein price, the other solids price, and the
butterfat price, respectively;
(c) Add an amount equal to the minus location adjustments and
subtract an amount equal to the plus location adjustments computed
pursuant to Sec. 1124.75;
(d) Add an amount equal to not less than one-half of the
unobligated balance in the producer-settlement fund;
(e) Divide the resulting amount by the sum of the following for all
handlers included in these computations:
(1) The total hundredweight of producer milk; and
(2) The total hundredweight for which a value is computed pursuant
to Sec. 1124.60(h); and
(f) Subtract not less than 4 cents nor more than 5 cents from the
price computed pursuant to paragraph (e) of this section. The result
shall be known as the producer price differential for the month.
3. Section 1124.62 is amended by revising paragraphs (e) and (g) to
read as follows:
Sec. 1124.62 Announcement of producer prices.
* * * * *
(e) The butterfat price;
* * * * *
(g) The statistical uniform price for milk containing 3.5 percent
butterfat, computed by combining the Class III price and the producer
price differential.
4. Section 1124.71 is amended by revising paragraphs (b)(2) and
(b)(3) to read as follows:
Sec. 1124.71 Payments to the producer-settlement fund.
* * * * *
(b) * * *
(2) An amount obtained by multiplying the total pounds of protein,
other solids, and butterfat contained in producer milk by the protein,
other solids, and butterfat prices respectively; and
(3) An amount obtained by multiplying the pounds of skim milk and
butterfat for which a value was computed pursuant to Sec. 1124.60(h)
by the producer price differential as adjusted pursuant to Sec.
1124.75 for the location of the plant from which received.
5. Section 1124.73 is amended by revising paragraphs (a)(2)(ii),
(c)(2)(v), and (c)(3)(ii) to read as follows:
Sec. 1124.73 Payments to producers and to cooperative associations.
(a) * * *
(2) * * *
(ii) The pounds of butterfat received times the butterfat price for
the month;
* * * * *
(c) * * *
(2) * * *
(v) The pounds of butterfat in Class III and Class IV milk times
the butterfat price;
* * * * *
(3) * * *
(ii) The pounds of butterfat received times the butterfat price for
the month;
* * * * *
[[Page 67946]]
PART 1126--MILK IN THE SOUTHWEST MARKETING AREA
1. Section 1126.60 is amended by revising paragraphs (c)(3),
(d)(2), and (i) to read as follows:
Sec. 1126.60 Handler's value of milk.
* * * * *
(c) * * *
(3) Add an amount obtained by multiplying the pounds of butterfat
in Class III by the butterfat price.
(d) * * *
(2) Add an amount obtained by multiplying the pounds of butterfat
in Class IV by the butterfat price.
* * * * *
(i) Multiply the difference between the Class I price applicable at
the location of the nearest unregulated supply plants from which an
equivalent volume was received and the Class III price by the pounds of
skim milk and butterfat in receipts of concentrated fluid milk products
assigned to Class I pursuant to Sec. 1000.43(d) and Sec.
1000.44(a)(3)(i) and the corresponding step of Sec. 1000.44(b) and the
pounds of skim milk and butterfat subtracted from Class I pursuant to
Sec. 1000.44(a)(8) and the corresponding step of Sec. 1000.44(b),
excluding such skim milk and butterfat in receipts of fluid milk
products from an unregulated supply plant to the extent that an
equivalent amount of skim milk or butterfat disposed of to such plant
by handlers fully regulated under any Federal milk order is classified
and priced as Class I milk and is not used as an offset for any other
payment obligation under any order.
* * * * *
2. Section 1126.61 is revised to read as follows:
Sec. 1126.61 Computation of producer price differential.
For each month the market administrator shall compute a producer
price differential per hundredweight. The report of any handler who has
not made payments required pursuant to Sec. 1126.71 for the preceding
month shall not be included in the computation of the producer price
differential, and such handler's report shall not be included in the
computation for succeeding months until the handler has made full
payment of outstanding monthly obligations. Subject to the conditions
of this paragraph, the market administrator shall compute the producer
price differential in the following manner:
(a) Combine into one total the values computed pursuant to Sec.
1126.60 for all handlers required to file reports prescribed in Sec.
1126.30;
(b) Subtract the total of the values obtained by multiplying each
handler's total pounds of protein, other solids, and butterfat
contained in the milk for which an obligation was computed pursuant to
Sec. 1126.60 by the protein price, other solids price, and the
butterfat price, respectively, and the total value of the somatic cell
adjustment pursuant to Sec. 1126.30(a)(1) and (c)(1);
(c) Add an amount equal to the minus location adjustments and
subtract an amount equal to the plus location adjustments computed
pursuant to Sec. 1126.75;
(d) Add an amount equal to not less than one-half of the
unobligated balance in the producer-settlement fund;
(e) Divide the resulting amount by the sum of the following for all
handlers included in these computations:
(1) The total hundredweight of producer milk; and
(2) The total hundredweight for which a value is computed pursuant
to Sec. 1126.60(i); and
(f) Subtract not less than 4 cents nor more than 5 cents from the
price computed pursuant to paragraph (e) of this section. The result
shall be known as the producer price differential for the month.
3. Section 1126.62 is amended by revising paragraphs (e) and (h) to
read as follows:
Sec. 1126.62 Announcement of producer prices.
* * * * *
(e) The butterfat price;
* * * * *
(h) The statistical uniform price for milk containing 3.5 percent
butterfat, computed by combining the Class III price and the producer
price differential.
4. Section 1126.71 is amended by revising paragraphs (b)(2) and
(b)(4) to read as follows:
Sec. 1126.71 Payments to the producer-settlement fund.
* * * * *
(b) * * *
(2) An amount obtained by multiplying the total pounds of protein,
other solids, and butterfat contained in producer milk by the protein,
other solids, and butterfat prices respectively;
* * * * *
(4) An amount obtained by multiplying the pounds of skim milk and
butterfat for which a value was computed pursuant to Sec. 1126.60(i)
by the producer price differential as adjusted pursuant to Sec.
1126.75 for the location of the plant from which received.
5. Section 1126.73 is amended by revising paragraphs (a)(2)(ii) and
(b)(3)(v) to read as follows:
Sec. 1126.73 Payments to producers and to cooperative associations.
(a) * * *
(2) * * *
(ii) Multiply the pounds of butterfat received times the butterfat
price for the month;
* * * * *
(b) * * *
(3) * * *
(v) The pounds of butterfat in Class III and Class IV milk times
the butterfat price;
* * * * *
PART 1135--MILK IN THE WESTERN MARKETING AREA
1. Section 1135.60 is amended by revising paragraphs (c)(3), (d)(2)
and (h) to read as follows:
Sec. 1135.60 Handler's value of milk.
* * * * *
(c) * * *
(3) Add an amount obtained by multiplying the pounds of butterfat
in Class III by the butterfat price.
(d) * * *
(2) Add an amount obtained by multiplying the pounds of butterfat
in Class IV by the butterfat price.
* * * * *
(h) Multiply the difference between the Class I price applicable at
the location of the nearest unregulated supply plants from which an
equivalent volume was received and the Class III price by the pounds of
skim milk and butterfat in receipts of concentrated fluid milk products
assigned to Class I pursuant to Sec. 1000.43(d) and Sec.
1000.44(a)(3)(i) and the corresponding step of Sec. 1000.44(b) and the
pounds of skim milk and butterfat subtracted from Class I pursuant to
Sec. 1000.44(a)(8) and the corresponding step of Sec. 1000.44(b),
excluding such skim milk and butterfat in receipts of fluid milk
products from an unregulated supply plant to the extent that an
equivalent amount of skim milk or butterfat disposed of to such plant
by handlers fully regulated under any Federal milk order is classified
and priced as Class I milk and is not used as an offset for any other
payment obligation under any order.
* * * * *
2. Section 1135.61 is revised to read as follows:
Sec. 1135.61 Computation of producer price differential.
For each month the market administrator shall compute a producer
price differential per hundredweight. The report of any handler who has
not made payments required pursuant to Sec. 1135.71 for the preceding
month shall
[[Page 67947]]
not be included in the computation of the producer price differential,
and such handler's report shall not be included in the computation for
succeeding months until the handler has made full payment of
outstanding monthly obligations. Subject to the conditions of this
paragraph, the market administrator shall compute the producer price
differential in the following manner:
(a) Combine into one total the values computed pursuant to Sec.
1135.60 for all handlers required to file reports prescribed in Sec.
1135.30;
(b) Subtract the total values obtained by multiplying each
handler's total pounds of protein, other solids, and butterfat
contained in the milk for which an obligation was computed pursuant to
Sec. 1135.60 by the protein price, the other solids price, and the
butterfat price, respectively;
(c) Add an amount equal to the minus location adjustments and
subtract an amount equal to the plus location adjustments computed
pursuant to Sec. 1135.75;
(d) Add an amount equal to not less than one-half of the
unobligated balance in the producer-settlement fund;
(e) Divide the resulting amount by the sum of the following for all
handlers included in these computations:
(1) The total hundredweight of producer milk; and
(2) The total hundredweight for which a value is computed pursuant
to Sec. 1135.60(h); and
(f) Subtract not less than 4 cents nor more than 5 cents from the
price computed pursuant to paragraph (e) of this section. The result
shall be known as the producer price differential for the month.
3. Section 1135.62 is amended by revising paragraphs (e) and (g) to
read as follows:
Sec. 1135.62 Announcement of producer prices.
* * * * *
(e) The butterfat price;
* * * * *
(g) The statistical uniform price for milk containing 3.5 percent
butterfat computed by combining the Class III price and the producer
price differential.
* * * * *
4. Section 1135.71 is amended by revising paragraph (b)(2) and
removing and reserving paragraph (b)(3) to read as follows:
Sec. 1135.71 Payments to the producer-settlement fund.
* * * * *
(b) * * *
(2) An amount obtained by multiplying the total pounds of protein,
other solids, and butterfat contained in producer milk by the protein,
other solids, and butterfat prices respectively; and
(3) [Reserved]
* * * * *
5. Section 1135.73 is amended by revising paragraphs (a)(2)(ii) and
(b)(3)(v) to read as follows:
Sec. 1135.73 Payments to producers and to cooperative associations.
(a) * * *
(2) * * *
(ii) The pounds of butterfat received times the butterfat price for
the month;
* * * * *
(b) * * *
(3) * * *
(v) The pounds of butterfat in Class III and Class IV milk times
the butterfat price;
* * * * *
Marketing Agreement Regulating the Handling of Milk in Certain
Marketing Areas
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. --------\1\ to --------, all
inclusive, of the order regulating the handling of milk in the (----
---- Name of order--------) marketing area (7 CFR PART--------\2\)
which is annexed hereto; and
---------------------------------------------------------------------------
\1\ First and last sections of order.
\2\ Appropriate Part number.
---------------------------------------------------------------------------
II. The following provisions: Sec. --------\3\ Record of milk
handled and authorization to correct typographical errors.
---------------------------------------------------------------------------
\3\ Next consecutive section number.
---------------------------------------------------------------------------
(a) Record of milk handled. The undersigned certifies that he/
she handled during the month of--------\4\, hundredweight of milk
covered by this marketing agreement.
---------------------------------------------------------------------------
\4\ Appropriate representative period for the order.
---------------------------------------------------------------------------
(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.
Sec. --------\3\ Effective date. This marketing agreement shall
become effective upon the execution of a counterpart hereof by the
Secretary 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. 02-27570 Filed 11-6-02; 8:45 am]
BILLING CODE 3410-02-P