[Federal Register: August 27, 2003 (Volume 68, Number 166)]
[Proposed Rules]
[Page 51639-51656]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr27au03-34]
[[Page 51639]]
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Part II
Department of Agriculture
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Agricultural Marketing Service
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7 CFR Part 1032
Milk in the Central Marketing Area; Decision on Proposed Amendments to
Marketing Agreement and to Order; Proposed Rule
[[Page 51640]]
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DEPARTMENT OF AGRICULTURE
Agricultural Marketing Service
7 CFR Part 1032
[Docket No. AO-313-A44; DA-01-07]
Milk in the Central Marketing Area; Decision on Proposed
Amendments to Marketing Agreement and to Order
AGENCY: Agricultural Marketing Service, USDA.
ACTION: Proposed rule.
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SUMMARY: This document proposes to adopt as a final rule, order
language contained in the interim final rule published in the Federal
Register on February 12, 2003, concerning pooling provisions of the
Central Federal milk order. It sets forth the decision of the Secretary
and is subject to approval by producers. Specifically, this final
decision would continue to amend the Pool plant provisions which:
establish lower but year-round supply plant performance standards;
would not consider the volume of milk shipments to distributing plants
regulated by another Federal milk order as a qualifying shipment on the
Central order; exclude from receipts diverted milk made by a pool plant
to another pool plant in determining pool plant diversion limits; and
establish a ``net shipments'' provision for milk deliveries to
distributing plants. For Producer milk, this final decision would
continue to adopt amendments which: establish higher year-round
diversion limits; would base diversion limits for supply plants on
deliveries to Central order distributing plants; and eliminate the
ability to simultaneously pool milk on the Central order and a State-
operated milk order that has marketwide pooling.
FOR FURTHER INFORMATION CONTACT: Jack Rower or Carol S. Warlick,
Marketing Specialists, USDA/AMS/Dairy Programs, Order Formulation and
Enforcement Branch, Stop--0231--Room 2971, 1400 Independence Avenue,
SW., Washington, DC 20250-0231, (202) 720-2357, e-mail address:
jack.rower@usda.gov, or (202) 720-9363, e-mail address:
carol.warlick@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
of Agriculture (USDA) 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 would
rule on the petition. The Act provides that the district court of the
United States in any district in which the handler is an inhabitant, or
has its principal place of business, has jurisdiction in equity to
review the Department's ruling on the petition, provided a bill in
equity is filed not later than 20 days after the date of the entry of
the ruling.
Regulatory Flexibility Act and Paperwork Reduction Act
In accordance with the Regulatory Flexibility Act (5 U.S.C. 601 et
seq.), the Agricultural Marketing Service has considered the economic
impact of this action on small entities and has certified that this
proposed rule will not have a significant economic impact on a
substantial number of small entities. For the purpose of the Regulatory
Flexibility Act, a dairy farm is considered a ``small business'' if it
has an annual gross revenue of less than $750,000, and a dairy products
manufacturer is a ``small business'' if it has fewer than 500
employees.
For the purposes of determining which dairy farms are ``small
businesses,'' the $750,000 per year criterion was used to establish a
production guideline of 500,000 pounds per month. Although this
guideline does not factor in additional monies that may be received by
dairy producers, it should be an inclusive standard for most ``small''
dairy farmers. For purposes of determining a handler's size, if the
plant is part of a larger company operating multiple plants that
collectively exceed the 500-employee limit, the plant will be
considered a large business even if the local plant has fewer than 500
employees.
Approximately 9,695 of the 10,108 dairy producers (farmers), or
95.9 percent, whose milk was pooled under the Central order at the time
of the hearing (November 2001) would meet the definition of small
businesses. On the processing side, approximately 10 of the 56 milk
plants associated with the Central order during November 2001 would
qualify as ``small businesses,'' constituting about 17.9 percent of the
total.
Based on these criteria, more than 95 percent of the producers
would be considered as small businesses. The adoption of the proposed
pooling standards serves to revise established criteria that determine
those producers, producer milk, and plants that have a reasonable
association with, and are consistently serving the fluid needs of, the
Central milk marketing area and are not associated with other
marketwide pools concerning the same milk. Criteria for pooling are
established on the basis of performance levels that are considered
adequate to meet the Class I fluid needs and, by doing so, determine
those that are eligible to share in the revenue that arises from the
classified pricing of milk. Criteria for pooling are established
without regard to the size of any dairy industry organization or
entity. The criteria established are applied in an identical fashion to
both large and small businesses and do not have any different economic
impact on small entities as opposed to large entities. Therefore, the
proposed amendments will not have a significant economic impact on a
substantial number of small entities.
A review of reporting requirements was completed under the
Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35). It was
determined that these amendments would have no impact on reporting,
recordkeeping, or other compliance requirements because they would
remain identical to the current requirements. No new forms are proposed
and no additional reporting requirements would be necessary.
This action does not require additional information collection that
requires clearance by the Office of Management and Budget beyond
currently approved information collection. The primary sources of data
used to complete the forms are routinely used in most business
transactions. 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.
[[Page 51641]]
Prior Documents in This Proceeding
Notice of Hearing: Issued October 17, 2001; published October 23,
2001 (66 FR 53551).
Tentative Final Decision: Issued November 8, 2002; published
November 19, 2002 (67 FR 69910).
Interim Final Rule: Issued February 6, 2003; published February 12,
2003 (68 FR 7070).
Preliminary Statement
A public hearing was held upon proposed amendments to the marketing
agreement and the order regulating the handling of milk in the Central
marketing area. The hearing was held, pursuant to the provisions of the
Agricultural Marketing Agreement Act of 1937, as amended (7 U.S.C. 601-
674), and the applicable rules of practice and procedure governing the
formulation of marketing agreements and marketing orders (7 CFR part
900), at Kansas City, Missouri, on November 14-15, 2001, pursuant to a
notice of hearing issued October 17, 2001, and published October 23,
2001 (66 FR 53551).
Upon the basis of the evidence introduced at the hearing and the
record thereof, the Administrator, on November 8, 2002, issued a
Tentative Final Decision containing notice of the opportunity to file
written exceptions thereto.
The material issues, findings, and conclusions, rulings, and
general findings of the tentative final decision are hereby approved
and adopted and are set forth in full herein. The material issues on
the record of the hearing relate to:
1. Pooling Standards
a. Supply plant pooling standards.
b. Cooperative supply plant performance standards.
c. Supply plant system standards.
d. Standards applicable for Producer milk.
e. Establishing pooling standards for ``State units.''
2. Simultaneous pooling of milk on the order and on a State-
operated milk order providing for marketwide pooling.
3. Rate of partial payments to producers.
4. Determining whether emergency marketing conditions existed
warranting the omission of a recommended decision and the opportunity
to file written exceptions.
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. Pooling Standards
a. Supply Plant Pooling Standards
Several amendments to the pooling provisions of the Central order,
previously adopted on an interim basis, are proposed to be adopted on a
permanent basis by this final decision. According to the tentative
decision, certain inadequacies of the supply plant pooling provisions
were resulting in disorderly marketing conditions and the unwarranted
erosion of the blend price received by those producers who consistently
provide milk to meet the fluid demands of the Central marketing area.
Specifically, the following amendments to the Central order (Order 32)
for pool supply plants, previously adopted on an interim basis, are
proposed to be adopted on a permanent basis by this final decision: (1)
Lower the performance standards to 20 percent in each of the months of
August through February and 15 percent in each of the months of March
through July. Accordingly, automatic pool plant status during the 3-
month period of May through July is thereby eliminated from the order;
(2) Eliminate the volume of milk shipments made by supply plants to
distributing plants regulated by another Federal milk marketing order
as qualifying shipments in meeting the Central order supply plant
shipping standard; (3) Exclude from receipts the diversions made by a
pool plant to a second pool plant from the calculation of the diversion
limits established for pool plants; and (4) Provide a ``net shipments''
standard for supply plant deliveries to the order's distributing plants
for the purpose of meeting the Central order's supply plant shipping
standard. Expanding pool supply plant qualification to include milk
shipments to any plant that is part of a distributing plant unit was
not adopted in the interim rule and is not adopted in this final rule.
Prior to the adoption of the interim rule, the Central order
provided a supply plant performance standard whereby 35 percent of the
milk received directly from dairy farms and cooperative handlers had to
be transferred or diverted to distributing plants, including milk
diverted by the plant operator, during each of the months of September
through November and January. For all other months a 25 percent
standard applied.
In addition, the Central marketing order provided automatic pool
plant status during the 3-month period of May through July for supply
plants provided they were pool plants during each of the immediately
preceding months of August through April. The order did not include a
performance standard which considered shipments to any plant that was
part of a distributing plant unit as a qualifying shipment. The order
did not limit supply plant shipments to distributing plants on a ``net
shipments'' basis.
Prior to adoption of the interim rule, handlers could qualify
supply plants as pool plants located inside or outside the market area
by diverting milk to a pool distributing plant regulated by the Central
order. Supply plant transfers to distributing plants regulated by
another Federal order were considered as qualifying shipments for the
purpose of determining if the Central supply plant shipping standard
had been met.
The following amendments to the supply plant pooling standards were
presented in testimony related to a proposal published in the hearing
notice as Proposal 1. This proposal was offered by Dairy Farmers of
America (DFA), Prairie Farms Cooperative (Prairie Farms), and Swiss
Valley Farms (Swiss Valley). These organizations are cooperative
associations that historically have pooled milk on the Central milk
order or one of the nine orders consolidated to form the Central milk
order. Hereinafter, this decision will refer to these proponents as
``DFA, et al.'' All three cooperative associations have ownership
interests in fluid milk processing plants. Prairie Farms and Swiss
Valley operate fluid plants.
Amendments to the supply plant pooling standards were offered, the
proponents assert, because the pooling provisions of the order are not
appropriately linking the ability to pool milk on the order with
demonstrating consistent service in supplying the fluid needs of the
market. DFA, et al., proposed changing the seasonally adjusted
performance standard for supply plants to 25 percent during each of the
months of August through November and to 20 percent for each of the
months of December through July. Adopting these standards would also
eliminate automatic pool plant status for the 3-month period of May
through July provided by the order. DFA, et al., expressed continued
support for these performance levels during the same periods in their
comments on the tentative final decision.
Proposal 1 as offered would no longer consider milk deliveries to
distributing plants regulated by another Federal milk marketing order
as qualifying shipments for determining if the supply plant performance
standard for the Central Order had been met. Similarly, the proposal
would not consider milk deliveries to distributing plants that are part
of a distributing plant unit as
[[Page 51642]]
qualifying shipments for determining if the supply plant performance
standard had been met.
Proposal 1 also would limit a handler's ability to qualify supply
plants located outside the Central Order marketing area as pool plants
through direct deliveries of milk to pool distributing plants. The
proposal also calls for establishing a ``net shipments'' provision. A
net shipments standard would exclude from a supply plant's qualifying
shipments any transfer or diversion of bulk fluid milk products made by
a distributing plant receiving a qualifying shipment.
In support for Proposal 1, the DFA, et al., witness testified that
the orderly marketing of milk requires appropriate performance
standards for supply plants to ensure that distributing plants are
adequately supplied with milk as a condition for receiving the Central
order's blend price. The witness explained that performance standards
should require a level of association to a market by demonstrating the
ability to supply the Class I needs of that market. The witness
testified that milk located far from the market also should have
performance standards that are workable and consistent with Federal
order policy. According to the witness, the current practice of using
direct deliveries from farms to distributing plants located inside the
marketing area as a method to qualify plants located outside of the
Central order marketing area as pool supply plants is inappropriate
because milk pooled in this manner does not provide any reasonable
service to the Class I needs of the market.
According to the DFA, et al., witness, the reform of Federal milk
orders provided unique pooling standards that apply to each market on
an individual basis. The witness testified that during the reform
process, the more lenient performance standard was often selected for
the new consolidated orders. According to the witness, such standards
are proving to be inappropriate for the larger consolidated Central
milk marketing order.
As evidence that milk is being inappropriately pooled on the order,
the DFA, et al., witness noted that at the time of implementing Federal
milk order reform, the consolidated Central order was expected to have
Class I use of nearly 50 percent. Instead, Class I use is averaging
below 30 percent, the witness noted. The witness was of the opinion
that this shortfall in projected Class I use was due to pooling much
more milk from sources outside the marketing area than could be
explained by consolidating the nine pre-reform orders into the current
Central order. The DFA, et al., witness asserted that milk order reform
did not intend to provide for pooling milk supplies on the Central
order that would not also provide a consistent and reliable service to
the Class I needs of the market. Stressing that such milk does not
provide a consistent and reliable service to the Class I needs of the
market, the witness maintained that such milk should not be pooled on
the Central order and receive the order's blend price.
The DFA, et al., witness testified that the ability of handlers to
pool large volumes of milk from distant sources without having to
actually deliver the milk to the market has resulted in a significant
reduction of the blend price received by producers who are serving the
market's Class I needs. The witness also asserted that some Central
order fluid handlers are having difficulties in obtaining sufficient
milk supplies and find themselves competing for a supply of milk with
other fluid handlers regulated under adjacent orders where blend prices
are higher.
The DFA, et al., witness also explained that a portion of the pre-
reform Southwest Plains order area had contributed a significant share
of the milk supply needed for fluid use in the southeastern portion of
the current Central marketing area. Much of the milk produced in
Arkansas and southern Missouri became part of the milk supply for the
Southeast order area, added the DFA, et al., witness. The witness was
of the opinion that adoption of Proposal 1 would result in a higher
blend price for the Central order dairy farmers and enhance the ability
of local Class I handlers to procure local milk supplies.
A DFA, et al., witness from Prairie Farms testified that the
significantly higher blend prices paid to producers under the
neighboring Southeast and Appalachian orders are attracting milk
supplies located in the southern and southeastern areas of the Central
marketing area. The witness observed that these producers receive a
higher price for their milk without incurring a significant change in
hauling costs. The witness indicated that this situation is resulting
in distributing plants needing to pay substantial over-order premiums
to obtain a supply of milk for distribution in the Central marketing
area.
Witnesses representing several distributing plant operators
confirmed that they are experiencing problems obtaining an adequate
supply of milk for fluid use, especially during the fall months. These
fluid handlers supported the adoption of Proposal 1 because the link
between milk pooled on the Central order needs to be tied to actual
deliveries of milk to the order's pool distributing plants.
A witness from Anderson-Erickson (A-E), a distributing plant
operator regulated by the Central order, testified that the order's
pooling provisions need to be revised to better condition the receiving
of the order's blend price to actual performance in supplying the
market's Class I needs. Similarly, a witness representing Suiza Foods
(Suiza), a company which owns and operates distributing plants
regulated by the Central order, testified that the pooling of milk on
the Central order needs to be directly tied to actual performance in
serving the fluid market. The Suiza witness stressed that actual
performance in serving the fluid market should be necessary because it
is the fluid market that generates the additional dollars to the
marketwide pool.
The Suiza witness testified that their costs and ability to obtain
raw milk for Class I use are tied directly to the pooling provisions of
Federal milk orders, including the Central milk order. The witness
stressed that blend prices, especially relative blend prices, provide
the incentives for producers to move milk to where it is needed.
However, explained the witness, Suiza faces new challenges in the
Central marketing area since its formation under milk order reform.
Specifically, the witness noted difficulty in procuring milk at one of
their plants because local dairy farmers are delivering their milk to
plants regulated on the Southeast and Appalachian orders. According to
the witness, the blend prices in those orders are higher than in the
Central milk order and therefore attract milk to those markets.
The Suiza witness was of the opinion that milk order reform placed
other Central order distributing plants at a similar competitive
disadvantage in competing for a supply of milk. While noting that the
purpose of this proceeding is to address pooling problems resulting in
lower blend prices to Central order dairy farmers, the witness stressed
that in their opinion, the real issue that needs to be addressed is
whether the Central order is too large. The witness cited the
geographic diversity of the order and vastly differing marketing
conditions within the marketing area's boundaries to question whether
the Central order is truly a viable, single milk marketing area.
A witness from Mid States Dairy, an organization that operates a
distributing
[[Page 51643]]
plant regulated by the Central order, testified that they were no
longer able to source milk from their usual milksheds in southern
Missouri and central Illinois. This witness stated that until recently,
they had to rely on contracts with southern milk sources at premium
prices to obtain a supply of milk because milk supplies were not
available locally.
The DFA, et al., witness testified that the order's supply plant
performance standards should continue to be adjusted seasonally but at
slightly different times. According to the witness, a higher standard
of performance is needed for the months of August through November
because increased customer demand occurs in those months. More
importantly, the witness indicated that performance should be specified
for every month of the year. In this regard, the witness from Prairie
Farms added that specifying August through November for increased
performance would help to ease their need to obtain additional milk
supplies from other marketing areas.
Using milk located within the marketing area to qualify milk for
pooling at plants located far from the marketing area was described by
the DFA, et al., witness as ``pyramiding.'' The witness also attributed
pyramiding to inadequate performance standards. As an illustration, the
witness provided evidence to show how pooling provisions permit the
pooling of milk volumes that cannot reasonably demonstrate performance
in serving the Class I needs of the Central marketing area. As an
example, the witness explained how a single tanker load of milk
delivered to a pool plant within the Central order marketing area can
qualify as many as 15 additional tanker loads of milk for pooling on
the order through diversions. The witness contended that the ability to
pyramid milk for pooling in this way reveals the inadequacy of the
current pooling standards. Eliminating the ability to pyramid milk for
pooling, the witness stressed, provides a basis for lowering the
order's supply plant performance standard.
The DFA, et al., witness testified that supply plants delivering
milk to distributing plants not regulated by the Central milk order
should not be counted in determining if the Central order's performance
standards have been met. The witness indicated that such milk does not
serve the Class I needs of the Central order. The witness offered that
standards allowing for pool qualification to be earned from shipments
to another order's distributing plants stem from pre-reform pooling
provisions that were generally associated with ``reserve supply''
orders where Class I use was relatively small. The witness contended
that the consolidated Central order is not such an order. While
deliveries of milk to another order could still occur, noted the
witness, the deliveries should not count toward pool qualification.
The witness from DFA, et al., also offered a modification to
Proposal 1 for incorporating a ``net shipments'' feature for pool
supply plants as a way to ensure that fluid milk was actually received
and retained at a distributing plant for Class I use. According to the
witness, this feature would prevent a supply plant from physically
shipping milk into the facilities of a distributing plant only to have
the milk reloaded and moved to another plant for uses other than Class
I. The witness also noted that without a ``net shipments'' provision,
suppliers could qualify milk for pooling on the Central order without
that milk ever being available to service the Class I needs of the
market.
The witnesses from A-E concurred with the need for a ``net
shipments'' provision, as did a witness from Foremost Farms, USA, a
cooperative whose plants were regulated under the Central and Upper
Midwest milk marketing orders. A witness from Suiza, testified that
while they did not oppose a ``net shipments'' provision, they were of
the view that milk actually delivered to a distributing plant was
performing a service to the Class I needs of the market. To the extent
that the same milk is subsequently pumped back out of the plant,
indicated the witness, that decision is made by the receiving handler.
Therefore, concluded the Suiza witness, such milk should be counted in
determining if the supply plant performance standard is being met.
Briefs from both A-E and Dean Foods \1\ reaffirmed their opposition
to the inclusion of supply plant shipments to distributing plant unit
plants as counting towards meeting pool qualifying performance
standards noting that a relatively large non-Class I volume of milk is
often associated with distributing plant units. The briefs contended
that pooling stand-alone Class II operations could result in placing
pooling priority for milk used in Class II dairy products on a par with
milk used for Class I. They viewed that adoption of expanding supply
plant qualifying deliveries to distributing plant units would create
inequities and perhaps even result in creating new disorderly marketing
conditions.
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\1\ Suiza Foods Corporation merged with Dean Foods Company on
December 21, 2001, at which time the name of the merged company
became Dean Foods Company.
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Exceptions to the tentative final decision from A-E and Dean Foods
agreed that the decision adequately and appropriately addressed the
disorderly conditions raised by them and others in the record.
A group of cooperative associations with members located primarily
in the Upper Midwest milk marketing area opposed amendments included in
Proposal 1 because it was their view that the amendments would limit
their ability to pool milk on the Central order. The cooperative
associations included: Associated Milk Producers, Inc. (AMPI); Foremost
Farms, USA (Foremost); Land O'Lakes (LOL); First District Association
(FDA); Family Dairies USA (Family Dairies); and Lakeshore Federated
Dairy Cooperative (Lakeshore), comprised of Midwest Dairymen's (Midwest
Dairymen) Company, Manitowoc Milk Producers Cooperative, and Milwaukee
Cooperative Milk Producers. Hereinafter this decision will collectively
refer to this group of cooperative associations as the ``Upper Midwest
Cooperatives.''
Testimony by the Upper Midwest Cooperatives'' witnesses argued that
the adoption of more restrictive pooling standards would force milk
that currently is pooled on the Central order to be pooled instead with
the Upper Midwest pool. According to the witnesses, this would result
in lower blend prices to Upper Midwest producers because of the lower
Class I use in that area. The witnesses also argued that adopting the
amendments contained in Proposal 1 would establish the more stringent
pooling provisions that were in effect prior to milk order reform.
According to the witnesses, this would establish a barrier to pooling
the milk of producers who had long been associated with the markets
merged to form the Central order.
To illustrate their point that the amendments of Proposal 1 would
limit their ability to pool milk on the Central order, an Upper Midwest
Cooperatives' witness testified that under current pooling provisions,
every pound of milk delivered to Central order pool distributing plants
provides the ability to pool 15 additional pounds of milk. If the
pooling provisions proposed are adopted, the witnesses indicated that
only 3 additional pounds of milk could be pooled for each pound of milk
delivered on the Central order.
The Foremost witness, testifying on behalf of AMPI, LOL, Family
Dairies, Midwest Dairymen, and FDA, testified that if Proposals 1 and 5
(Proposal 5 is discussed in more detail later in this decision) were
adopted, and if they
[[Page 51644]]
were pooling the maximum amount of milk allowed in the pre-reform
orders, approximately 400 million pounds of milk per month would no
longer be pooled on the Central order. Instead, the witness testified,
this milk would be pooled on the Upper Midwest order. The witness
maintained that this would increase the blend price differences between
the two orders.
According to the Foremost witness, the blend price differences
would have ranged between 32 cents per hundredweight (cwt) to as much
as 91 cents per cwt for the one-year period of September 2000 through
August 2001 if the pooling standards proposed had been in effect during
that time. The witness emphasized this would have had an enormous
adverse effect on the net income of Upper Midwest producers.
An Upper Midwest Cooperatives' witness from Family Dairies
testified in opposition to pooling provision amendments that would
limit the ability to pool milk on the Central Order and result in lower
blend prices to producers located in the Upper Midwest. The witness
stated that adoption of such proposals would result in creating more
regional pricing problems and give selected handlers the ability to use
the blend price as a procurement tool in areas outside the Central
Order.
A witness for Lakeshore joined other Upper Midwest Cooperatives'
witnesses by also stating their concern that the proposed pooling
changes specifically in Proposals 1, 3, 5, and 7 (Proposals 3, 5, and 7
are discussed later in this decision) could force milk currently pooled
on the Central order to instead be pooled on the Upper Midwest order.
According to the witness, this would result in decreasing producer
returns for those dairy farmers located in Northern Illinois and the
surrounding area. Specifically, the Lakeshore witness explained that
while a fluid milk plant at Rockford, Illinois, and a Dubuque, Iowa,
distributing plant have the same federal order-dictated Class I price,
the Rockford plant is disadvantaged because it has to pay a higher
competitive value to attract Class I milk, adversely impacting their
northern Illinois businesses.
A witness from LOL emphasized the necessity of basing pooling
provisions on performance in serving the Class I needs of the market
rather than the location of where milk originates. The witness was also
of the opinion that the current order provisions provide adequate
incentives to service Central order distributing plants. Stating that
producers who share in the pool must be willing to serve the market,
the LOL witness nevertheless stressed that the ability to pool milk on
the Central order pool should not be restricted for the benefit of a
select few. The LOL witness testified that milk no longer pooled on the
Central order would instead be pooled on adjoining milk orders such as
the Upper Midwest or Western marketing areas and characterized these
areas as already carrying a disproportionate volume of reserve milk.
In response to concerns that Central order Class I handlers are
having difficulty in obtaining a supply of milk, the LOL witness
provided an analysis which suggested that tightening pooling provisions
would not achieve what the proponents of Proposal 1 assert. The witness
estimated that adopting the proposed pooling provisions would result in
an increase of 35 cents per cwt in the Central Order blend price.
According to the witness, such an increase would still leave the
Central order blend price $1.48 per cwt below the blend price of the
Southeast order thus weakening the argument that the higher blend price
would mitigate the problem of Central order distributing plants
securing a supply of milk.
The LOL witness asserted that the combination of Proposals 1, 3, 5,
and 7 would place unreasonable restrictions on milk produced outside
the marketing area relative to milk produced inside the marketing area.
The witness indicated that supply plants located outside the marketing
area would be required to receive milk and transfer it to distributing
plants, thereby causing uneconomic movements of milk, adding costs and
degrading milk quality due to additional handling. Furthermore,
barriers to trade would be created by adopting these proposals,
indicated the witness.
Two of the Upper Midwest Cooperatives' witnesses introduced cost-
of-production studies conducted by universities indicating that dairy
farmers in northern Illinois and Wisconsin enjoy little financial
return from their dairy operations. The Foremost witness cited the
Wisconsin study to indicate that in Wisconsin the marginal return of
producing milk can be less than zero. According to the witnesses, the
financial impact by limiting participation in the Central order pool
through increased performance standards would be detrimental to Upper
Midwest dairy farmers. In this regard, all of the Upper Midwest
Cooperatives' witnesses stressed that their member producers are
considered small businesses pursuant to the Regulatory Flexibility Act
and that such status should be considered in determining appropriate
performance standards for the Central order.
The witnesses for A-E and Suiza testified in opposition to
considering supply plant shipments to distributing plant ``units'' as
counted in determining pool-qualifying deliveries unless each plant of
the ``unit'' could independently be a distributing plant under the
terms of the order. The witness noted that relatively large non-Class I
volumes of milk associated with a distributing plant unit could result
in reducing the actual need for qualifying shipments made to
distributing plants. In post-hearing briefs, Dean Foods indicated
opposition to expanding qualifying shipments to any plant that is part
of a distributing plant unit, noting that such performance standards
would be inequitable and result in the creation of new disorderly
marketing conditions.
The record of this proceeding strongly supports the conclusion in
the tentative decision that the various features of the Central milk
marketing order's supply plant pooling standards were either inadequate
or unnecessary. These deficiencies contained in the pooling standards
for supply plants were causing much more milk to be pooled on the
Central milk order than could reasonably be considered as properly
associated with the Central marketing area. Such milk does not
demonstrate reasonable levels of performance necessary to conclude that
it provides a regular and reliable service in satisfying the Class I
milk demands of the Central marketing area.
The pooling standards of all milk marketing orders, including the
Central order, are intended to ensure that an adequate supply of milk
is supplied to meet the Class I needs of the market and to provide the
criteria for identifying those who are reasonably associated with the
market as a condition for receiving the order's blend price. The
pooling standards of the Central order are represented in the Pool
Plant, Producer, and Producer milk provisions of the order. Taken as a
whole, these provisions are intended to ensure that an adequate supply
of milk is supplied to meet the Class I needs of the market. In
addition, it provides the criteria for identifying those whose milk is
reasonably associated with the market by meeting the Class I needs and
thereby sharing in the marketwide distribution of proceeds arising
primarily from Class I sales. Pooling standards of the Central order
are based on performance, specifying standards that, if met, qualify a
producer, the milk of a producer, or a plant to share in the
[[Page 51645]]
benefits arising from the classified pricing of milk.
Pooling standards that are performance-based provide the only
viable method for determining those eligible to share in the marketwide
pool. This is because it is the additional revenue from the Class I use
of milk that adds additional income, and it is reasonable to expect
that only those producers who consistently bear the costs of supplying
the market's fluid needs should be the ones to share in the
distribution of pool proceeds. Pool plant standards--specifically
standards that provide for the pooling of milk through supply plants--
also need to reflect the supply and demand conditions of the marketing
area. This is important because producers whose milk is pooled receive
the market's blend price.
Similarly, supply plant pooling standards should provide for those
features and accommodations that reflect the needs of proprietary
handlers and cooperatives in providing the market with milk and dairy
products. When a pooling feature's use deviates from its intended
purpose, and its use results in pooling milk that cannot reasonably be
determined as serving the fluid needs of the market, it is appropriate
to re-examine the need for continuing to provide that feature as a
necessary component of the pooling standards of the order. Because one
of the objectives of pooling standards is ensuring an adequate supply
of fluid milk for the market, a feature which results in pooling milk
on the order that does not provide such service should be considered as
unnecessary for that marketing area.
Pooling standards are needed to identify the milk of those
producers who are providing service in meeting the Class I needs of the
market. If a pooling provision does not reasonably accomplish this end,
the proceeds that accrue to the marketwide pool from fluid milk sales
are not properly shared with the appropriate producers. The result is
the unwarranted lowering of returns of those producers who actually
incur the costs of servicing and supplying the fluid needs of the
market.
The post-hearing brief received from the Upper Midwest Cooperatives
continued to stress opposition to the amendments offered by Proposals 1
(and Proposals) 3, 5, and 7. They view that such changes to the Central
milk marketing order are discriminatory and that the proposed
amendments would foster inefficiencies in milk marketing. The brief re-
iterated their view that the Department's policy has been to design
plant and producer pooling provisions that provide a regulatory balance
between the fluid needs of the market and transportation efficiency to
meet those needs. In this regard, the brief stressed the opinion that
orderly marketing is promoted by not requiring shipments to
distributing plants when such shipments are not needed for fluid uses.
Additionally, the brief asserts that the Department has long recognized
that excluding milk from the pool under rigid performance rules is a
greater threat to orderly marketing in surplus marketing areas than is
the pooling of surplus milk supplies.
The Upper Midwest Cooperatives' brief added that marketwide pooling
has been determined as a constitutional means for surplus Grade A milk
to share in the additional revenue resulting from fluid sales.
Additionally, the brief noted that the 43-day national hearing review
and reform proceeding of 1990--and the Second Amplified Decision of
1996 of that proceeding--articulate the policy of the Department to
allow milk to shift to different markets in response to blend price
changes. The brief also cited case law to maintain that the statutory
scheme for promoting orderly marketing is the sharing of proceeds among
producers in the form of uniform, or blend, prices. The opinion
expressed in the Upper Midwest brief cites that case law has concluded
that producer blend prices cannot be thwarted by a discriminatory
transportation burden imposed on distant producers by government
mandate.
The Upper Midwest Cooperatives objected to the tentative final
decision, as restricting the amount of pooled milk on the Central
Marketing order by mechanisms such as committed and controlled supplies
from established producer organizations. The Upper Midwest Cooperatives
continued by stating that the decision would eliminate much ``out-of-
area'' milk from the pool and would also exclude Grade A milk produced
inside the Central order.
The record of this proceeding clearly supports a finding that
certain features of pooling standards of the Central Order established
under the Federal order reform process, especially as they relate to
supply plants, were either inadequate or unnecessary and that the
Department was justified in adopting the interim rule. The Final
Decision of milk order reform examined and discussed the various
pooling standards and features of the pre-reform orders for their
applicability in a new, larger consolidated milk order. The pooling
standards and features adopted for the consolidated Central Order were
designed to reflect and retain those standards and features of the pre-
reform orders so as not to cause a significant change and indeed to
provide for the continued pooling of milk that had been pooled by those
market participants.
As noted in the tentative decision, the record provides strong
evidence to conclude that several features of the Pool plant
definition, specifically the provisions and features for supply plants,
were not being used for the reasons they were intended. Other
shortcomings of the Central order, specifically as they relate to
producer milk (discussed later in this decision) also have contributed
to the inappropriate pooling of the milk of producers who are not a
legitimate part of the Central milk marketing area. Here too the impact
has been an unwarranted pooling of milk classed at lower prices
resulting in a lower blend price to those producers who actually and
consistently supply the Class I needs of the market.
The tentative decision and this final decision find that the milk
of some producers was benefitting from the blend price of the Central
order while not demonstrating actual and consistent service in
satisfying the Class I needs of the Central milk marketing area. This
finding was attributed to improper and inadequate features of the
pooling standards. The pooling provisions provided in the Final
Decision of milk order reform established pooling standards and pooling
features that envisioned the needs of the market participants resulting
from the consolidation of nine pre-reform milk marketing areas
consolidated to form the current Central milk marketing area. The
reform Final Decision, as it related to the Central marketing area, did
not intend or envision that the pooling standards and pooling features
adopted would result in the sharing of Class I revenues with those
persons, or the milk of those persons, who would not be demonstrating a
measure of service in providing the Class I needs of the Central
marketing area.
The reform Final Decision examined and discussed various pooling
standards and features of the pre-reform orders for applicability in
new, larger consolidated milk orders. The pooling standards and
features adopted for the Central order were intended to reflect and
retain those standards and features of the pre-reform orders so as to
not cause a significant change, and indeed to provide for the continued
pooling of milk that had been pooled by market participants. The
pooling provisions of the Central order were based largely on the
predecessor Iowa milk marketing order (then known as Order 79). The
Iowa order contained the more liberal pooling provisions of the nine
orders consolidated to form the
[[Page 51646]]
Central order. The record of this proceeding reveals that the
combination and features adopted for pool plants, especially as they
apply to pool supply plants, have not been reasonable or appropriate
standards for the much larger consolidated Central order.
The record of this proceeding reveals that two-thirds of the
Central marketing area population (and corresponding demand for fluid
milk) is located in the southern and western portions of the marketing
area. However, the adoption of the Central order pooling provisions did
not anticipate that the adopted pooling standards would not adequately
consider the impact on the northern Central marketing area resulting
from the Arkansas and southern Missouri portions of the pre-reform
Southwest Plains marketing area becoming part of the current Southeast
marketing area. Milk produced in these regions had been regularly
pooled on the Southeast milk order prior to the expansion of the
Southeast order as part of milk order reform and is an integral part of
the current Southeast marketing area milkshed. Changes in marketing
conditions, as revealed in the record, have resulted from the pooling
standards existing prior to the interim rule as an important factor in
explaining why fluid handlers in the southern reaches of the Central
order have had difficulties obtaining a supply of milk.
As previously indicated, pooling milk on the Central order without
demonstrating actual performance in servicing the Class I needs of the
market area is neither appropriate nor intended. The record indicates
that the volume of milk pooled on the Central Order originating from
sources far outside the marketing areas of the nine predecessor
marketing areas increased by 186 percent when comparing, for example,
the pre-reform month of December 1998 with the post-reform month of
December 2000. Of the increase shown in this comparison, milk pooled on
the order and originating within the marketing area increased by only
10 percent. Of the additional milk pooled on the Central order, the
greatest increase is represented by milk priced at lower class prices.
Additionally, testimony by Upper Midwest Cooperatives' witnesses
clearly indicated that under the Central order's current pooling
provisions, milk pooled on the Central order is not necessarily
available to fill the Central market's fluid needs.
The tentative decision as well as this final decision agree with
the proponents and those entities who expressed support for adopting
Proposal 1 that the order's pooling standards warrant changes. Both the
tentative decision and this final decision find, however, that the
performance standards of Proposal 1 are unreasonably high when
considering the complete context of the pooling provision modifications
made in this decision. If adopted as proposed, together with the other
amendments adopted in this decision, milk that has had a long-
established association in supplying those pre-reform marketing order
areas consolidated to form the Central order may no longer be pooled on
the Central order. Most of this milk originates from areas in the Upper
Midwest marketing area. The performance standards sought in Proposal 1
may unintentionally compound the difficulties of Central order
distributing plants in securing needed milk supplies that could be made
available if not for unreasonably high performance standards.
Accordingly, this final decision proposes to adopt on a permanent basis
the following amendments to the pooling standards and features of the
order that were adopted in the interim final rule:
1. Performance standards for supply plants are reduced to (1) 20
percent in each of the months of August through February and (2) 15
percent in each of the months of March through July. Lower supply plant
shipping performance standards are established because of accompanying
adjustments to the order's other pooling provisions and features.
Lowering supply plant performance standards also addresses the concern
by Upper Midwest Cooperatives that a ``tightening'' of the order's
performance standards would erect an unreasonable barrier in supplying
to, and to pooling milk on, the Central order. As noted in the
tentative decision, it should also be emphasized in this final decision
that, to the extent that the supply plant performance standards may
warrant further refinement, the order provides the means for initiating
a change by providing authority for the Market Administrator to
consider and make needed changes.
Given that performance standards are specified in every month, the
need to continue with the automatic pool plant feature for supply
plants during the 3-month period of May through July is rendered
unnecessary and contrary to establishing such standards of performance
in the first place. The adoption of year-round performance standards,
adjusted seasonally, will better assure that a consistent and reliable
supply of milk will be provided to the fluid market throughout the
year.
August should be included for those months in which a higher
performance standard is warranted. Including August in the higher
performance months is supported by record evidence which reveals August
as the beginning of seasonal increased demand due to the opening of
schools occurring at the same time as a general overall decline in milk
supplies.
2. As in the tentative decision, this final decision would
eliminate a handler's ability to qualify plants located outside the
marketing area by cooperative handlers (as defined in Sec. 1000.9(c))
or diversions from a pool plant of the Central order to another pool
plant of the Central order. The record supports a finding that milk
pooled in this manner does not actually demonstrate real service in
meeting the Class I needs of the Central marketing area. Milk pooled in
this manner was often referred to in record testimony as
``pyramiding.'' No reasonable basis can be found in the record evidence
to conclude that milk pooled in this manner warrants receiving the
Central order blend price. The record can only support concluding that
milk pooled in this manner serves to lower the blend price paid to
producers who actually do supply the market's Class I needs.
3. The tentative decision and this final decision find that
shipments of milk to distributing plants regulated by another Federal
milk marketing order should not be considered in determining if a
supply plant meets the specified performance standard of the Central
order for pooling. The performance standards proposed to be adopted by
this decision for the Central order are designed so that its
distributing plants are adequately supplied with milk. Milk shipments
to distributing plants regulated by another Federal order only serve
the Class I needs of that other order. Pooling standards for the
Central marketing area provide the criteria for determining the milk of
those producers who are serving the Class I needs of the Central
marketing area and who would thereby receive the Central order blend
price. It is reasonable in light of this objective to conclude that
serving the needs of another market is not providing a service to the
Central marketing area. Accordingly, such milk should not be considered
as a qualifying shipment for meeting the supply plant performance
standards of the Central order.
4. The tentative decision and this final decision find that the
modification of Proposal 1 offered by DFA to limit pool qualifying
deliveries to distributing plants on a ``net shipments'' basis is
warranted. Milk deliveries to
[[Page 51647]]
distributing plants will be limited to milk transferred or diverted and
physically received by distributing pool plants, less any transfers or
diversions of bulk fluid milk products from the distributing plant.
Relying on net shipments for determining pool qualifying deliveries to
distributing plants is applicable to both supply plant deliveries and
milk moved to distributing plants directly from the farms of producers.
Adoption of this feature will help ensure that milk not serving the
market's Class I needs will not be counted towards meeting the
specified performance standard.
Providing a net shipments feature for the Central order is
reasonable and will likely not be burdensome despite opposition to its
adoption. Even with the inappropriate pooling of milk on the order,
lower supply plant performance standards adopted in the tentative
decision and this final decision are at levels below the Central
market's Class I use of milk. While distributing plants do have some
transfers and diversions of milk resulting from variations in demand
arising from changing fluid milk needs on weekend days and holidays,
the tentative decision and this final decision find it is doubtful that
the magnitude of these transfers and diversions would be such that a
supply plant would risk loss of pool plant status. Additionally, other
changes to the order's pooling standards continuing to be adopted in
this decision (discussed below) would provide the necessary safeguards
that would make it even more unlikely that a supply plant would lose
its pool status. This final decision continues to find that adoption of
a net shipments feature in the pooling standards of the Central order
also would aid in properly identifying the milk of those producers who
actually supply milk to meet the Central marketing area's fluid needs.
b. Cooperative Supply Plant Performance Standards
A cooperative supply plant pooling provision, together with the
feature of authorizing the market administrator to adjust the
performance standards for cooperative supply plants, should be retained
as suggested in the tentative decision. It was unclear at the time the
tentative decision was issued whether Proposals 2 and 4, seeking
removal of the cooperative supply plant performance standard and the
corresponding provision authorizing the market administrator to adjust
those standards, should be adopted in the tentative decision. Because
the evidence in the record did not support the removal of these
provisions and because there were no additional persuasive comments on
this subject in response to the tentative decision, the Department has
not proposed adopting these proposals in this final decision.
The Central marketing order provides for a cooperative association
plant as a type of supply plant on the order provided the cooperative
association's plant is located within the marketing area and that at
least 35 percent of the milk which the cooperative association handles
is shipped to a Central order distributing plant during any current
month or in the immediately preceding 12-month period. In addition, the
provision requires that the cooperative association plant not qualify
as a distributing or supply plant under the Central order or any other
Federal milk marketing order.
The DFA, et al., witness stated that adoption of some of the other
proposals considered in this proceeding, such as modifying supply plant
performance standards and providing for net shipments and a one-time
``touch base'' standard, makes retaining this provision unnecessary.
The witness also testified that the provision has not been used since
implementation of the consolidated Central order.
Elimination of the provision was supported in testimony by
witnesses representing both A-E and Suiza Foods. Both witnesses stated
that the provision is unnecessary and is not being used. In their post-
hearing briefs, both A-E and Dean Foods reiterated that no plant is
presently qualified under the cooperative supply plant definition.
Although there was no opposition testimony to the removal of the
cooperative supply plant provision in the Central Order, both the
tentative decision and this final decision find that this provision and
the corresponding provision authorizing the market administrator to
make needed adjustments should be retained. The testimony contained in
the record does not contain sufficient reason for a finding to
eliminate this standard other than it is a provision that is not used.
The provision allows pool qualification for cooperative supply plants
on either an average of the preceding 12-month's shipments or the
current month's shipments and provides pooling flexibility for
cooperatives. The cooperative supply plant definition contains features
that are unique and intentional. While the proponents and supporters of
Proposals 2 and 4 testified that the cooperative supply plant provision
is not currently being used, testimony received did not address the
apparently diminished importance of this pooling provision that was
used in four of the nine pre-reform milk orders consolidated to form
the Central order. The provision also is a pooling feature provided in
most other Federal orders and, as with the Central order, is not
currently being used in most of the other Federal orders containing
this provision. Given the current record, removing this provision from
the Central order may result in the unintended removal of a pooling
provision intended for cooperative associations that may be needed at
some future time. Accordingly, this final decision does not adopt
Proposals 2 and 4.
c. Supply Plant System Standards
Proposal 3 of the hearing notice seeking to increase the
performance standards for a system of supply plants--and modified at
the hearing to limit supply plant system formation to single handler
entities instead of currently allowing such systems to be formed by
multiple handlers--was not adopted in the tentative decision and is not
proposed to be adopted in this final decision. As previously discussed,
the record contains evidence that distributing plants regulated by the
Central milk order are having difficulty obtaining an adequate supply
of milk for fluid use. While this proposal's aim is, in part, to
address this problem, there nevertheless remains the potential for a
supply plant system to pool milk supplies that may not demonstrate
actual service to the fluid needs of the Central marketing area. The
modification of the proposal seeking to limit supply plant system
formation to a single handler entity has merit. However, taking into
account the current record and the fact that there were no exceptions
to the tentative decision on this issue, it is not adopted as a
modification to the order's current system pooling provision in this
final decision. It is noted that the hearing testimony often referred
to supply plant systems as ``supply plant units.'' Nevertheless, it is
clear that hearing participants intended to mean ``supply plant
systems'' and, accordingly, this final decision continues to consider
the testimony in the context intended.
The supply plant system provisions of the Central order currently
provide that a system of supply plants may qualify for pooling if 2 or
more plants operated by one or more handlers meet the applicable
performance standards established for a supply plant. A supply plant
system would qualify to pool all of its milk receipts, including
diversions, by meeting a performance standard of 25 percent in each of
the months of September through November
[[Page 51648]]
and January and 35 percent for all other months. The order currently
limits the formation of a supply plant system to plants located within
the marketing area.
Proposal No. 3, by DFA, et al., would raise the performance
standards for supply plant systems by 5 percentage points for each of
the months of August through November and by 3 percentage points higher
in all other months. The proponent witness (representing DFA, et al.)
testified that providing for supply plant systems extends benefits and
efficiencies not otherwise available for individual handlers to reduce
transportation costs by delivering milk from a more advantageously
located supply plant at a volume that would satisfy the performance
standards as if all supply plants not as advantageously located had
individually met the indicated performance standard. According to the
witness this also would avail plant efficiencies in the manufacturing
operation of all supply plants that are part of the system. The witness
also envisioned that the proposal could ease otherwise disruptive
shipping obligations to their manufacturing operations, potentially
reduce paperwork, and provide the opportunity for producers to receive
prices higher than regulated minimum prices. Because system pooling
offers a rewarding degree of pooling flexibility, the witness was of
the opinion that a supply plant system should meet slightly higher
performance standards than those applicable for a single supply plant.
This rationale is consistent, the witness indicated, with the pre-
reform Chicago Regional order which specified a performance standard at
twice the rate for supply plant systems than was applicable for
individual supply plants.
According to the DFA, et. al., witness, a higher performance
standard for supply plant systems would contribute to making it easier
to obtain additional milk supplies in the most efficient manner.
Additionally, the witness was of the opinion that this change, together
with other changes proposed, would eliminate the ability to ``pyramid''
the pooling of milk on the order and renew interest in supply plant
systems for the market.
A witness from AMPI, who also testified on behalf of the Upper
Midwest Cooperatives, opposed adoption of Proposal 3. The witness
explained that increased performance standards would simply cause a
handler to discontinue pooling its plants as a system, thus forcing the
handler to ship a lower percentage of milk receipts from each of the
individual supply plants. The witness asserted that this alternative
would increase transportation costs without providing additional milk
to distributing plants.
The AMPI witness also testified that a supply plant system operated
by multiple handlers has the potential for one handler with
substantially more sales to distributing plants than needed to meet the
supply plant performance standard to pool the milk receipts of other
handlers. According to the witness, this could reduce the total volume
of milk shipments to distributing plants while technically meeting the
order's performance standards. According to the witness, such a
provision allows some handlers to entirely escape responsibility for
supplying the fluid market and encourages handlers to pay other
handlers to qualify their milk supplies for pooling. In light of these
concerns, the witness offered a modification to Proposal 3 that limits
supply plant system formation to single handler entities.
A witness testifying on behalf of Foremost, AMPI, LOL, Family
Dairies, Midwest Dairymen, and FDA supported the advantages supply
plant systems offer as a means to promote more efficient movement of
milk to distributing plants. However, given the higher performance
standards called for by the proposal, the witness indicated opposition
to Proposal 3. The witness was of the opinion that there is no
justification for supply plant systems to be required to meet higher
performance standards than individual supply plants. The witness did
note that a higher performance standard for a supply plant system
formed by multiple handlers may be appropriate.
Providing pooling flexibility by permitting more than a single
supply plant to form into a single pooling system offers the potential
to increase efficiencies by minimizing transportation costs that may
not be obtainable when each supply plant of the handler would need to
meet the performance standards separately for each plant. Additionally,
providing for supply plant systems serves to accommodate the
specialization of plant operations without otherwise encouraging such a
plant to deliver milk to a distributing plant solely to retain pool
status. Providing the opportunity to gain such efficiencies is intended
by the supply plant system provision because it does not disrupt the
flow of milk for Class I use from supply plants to distributing plants.
The record suggests that supply plant systems formed by multiple
handler entities offer the potential to pool milk on the Central order
without meeting intended performance standards. The modification to
Proposal 3, which would limit the formation of a supply plant system to
a single handler entity, may offer a warranted change in the current
supply plant system provisions without changing the current performance
standards. However, the tentative decision found that the record did
not provide sufficient evidence to tentatively adopt a change in the
performance standards for supply plant systems or to limit the
formation of supply plant systems to a single handler entity. Because
there were no comments to the tentative decision on the provisions
which would limit the formation of supply plant systems to a single
handler entity, such provisions are not adopted in this final decision.
d. Standards Applicable for Producer Milk
Several changes to the pooling standards contained in the Producer
milk definition of the Central Order that were previously adopted on an
interim basis are proposed to be adopted on a permanent basis by this
final decision. The adopted amendments were largely contained in a
proposal, published in the hearing notice as Proposal 5, which was
modified at the hearing by its proponents. The changes in the producer
milk pooling standard are necessary to more accurately identify the
milk of those dairy farmers who actually serve the Class I needs of the
market. The amendments include: (1) Continue to establish year-round
diversion limits, adjusted seasonally, for the amount of milk that a
pool plant may divert to nonpool plants at 80 percent for each of the
months of August through February and at 85 percent for each of the
months of March through July. Accordingly, the provision, adopted on an
interim basis, corrected the lack of diversion limits for the months of
May through August; (2) Diversion limits for supply plants will
continue to be based on deliveries to Central order pool distributing
plants and will not include deliveries to other pool supply plants of
the Central order. This eliminates the ability of a pool plant to pool
increased volumes of milk by diversion to nonpool plants by diverting
milk to a second pool plant; and (3) Continue to establish a net
shipments feature for producer milk. These amendments maintain the
integrity of the performance standards for pool plants of the Central
marketing area and more appropriately identify those producers whose
milk actually supplies the Central marketing area's Class I milk needs.
[[Page 51649]]
Prior to the adoption of the interim final rule, the Producer milk
provision of the Central order provided for diversion limits of 65
percent during the months of September through November and January and
limits of 75 percent during the months of February through April and
December. While the Central order limits the pooling eligibility of
diverted milk to nonpool plants in specified months, the order placed
no limits on milk diversions to other pool supply plants of the order.
Milk diverted from one pool plant to another pool plant enabled the
diverting pool plant to increase the amount of milk that could be
pooled but diverted to nonpool plants. During the months of May through
August, an unlimited amount of producer milk could be diverted by pool
plants to nonpool plants. The milk of a producer was not eligible for
diversion until at least one day's production of a dairy farmer was
physically received at a pool plant and the producer continually
retained producer status on the Central order both before and after
adoption of the interim rule. Finally, the order did not determine
producer milk on a net-shipments basis until adoption of the interim
rule.
Proposal No. 5, offered by DFA, et al., seeks to establish new
year-round diversion limits for producer milk at 75 percent for each of
the months of August through November and at 80 percent for each of the
months of December through July. These limits are subject to satisfying
certain performance measures and would specify that at least 20 percent
of receipts in each of the months of August through February and 15
percent in each month of all other months are delivered to Central
order distributing plants. Because year-round diversion limits would be
established for all months, the proposal is intended to eliminate the
ability to pool an unlimited amount of milk on the order during May
through August by diversion. As noted in the discussion of supply plant
performance requirements earlier, DFA, et al., repeated their argument
for these diversion limits in their exceptions to the tentative
decision.
Proposal 5, offered by DFA, et al., was modified in testimony by
the DFA witness. The modification proposed sought also to incorporate a
net-shipments feature for producer milk as they had proposed as a
modification to Proposal 1. According to the witness, the net-shipments
feature would be used to determine pool-qualifying diverted milk on the
basis of milk receipts transferred or diverted to and physically
received by Central order distributing plants less any transfers or
diversions of milk from such distributing plants. In exceptions to the
tentative decision, DFA, et al., stated that the net shipment provision
for producer milk is at least as important as it is for supply plant
milk.
The DFA, et al., witness testified that the core issues of the
hearing are restoring orderly marketing conditions and economically
justifying the appropriate performance standards that, if met, warrant
receiving the Central Order blend price. The witness explained that
orderly marketing embodies the principles of common terms and pricing
that attracts milk to move to the highest-valued use when needed and
for milk to clear the market when not needed in higher-valued uses. The
DFA witness was of the opinion that the percentage of allowable
diversions should be increased over those currently applicable in the
Central order. The witness indicated that this becomes possible with
the adoption of the other pooling provision amendments, including
changing performance standards and considering milk deliveries to
distributing plants on a net shipments basis.
The DFA, et al., witness testified that the Central order should
provide a limit on the amount of milk that can be diverted to nonpool
plants each month by conditioning diversions on the basis of milk
shipments to pool distributing plants or distributing plant units of
the Central order. The witness stated that the aim of these features is
to provide a better correlation between the order's pooling provision
standards.
A witness representing several fluid milk processing plants joined
in expressing their support for adopting year-round diversion limits.
They were of the opinion that this would enhance pooling the milk of
only those who provide an adequate supply of milk for fluid uses.
Witnesses representing the Upper Midwest cooperatives testified in
opposition to the adoption of Proposal 5 and to the proposal's
modification to incorporate a net-shipments feature. In their opinion,
these changes would unnecessarily limit the amount of milk that could
be pooled on the Central order. The witnesses indicated that this would
force surplus milk supplies to be pooled instead on the Upper Midwest
order. As a result, they testified, the Upper Midwest pool would be
diluted and result in a lower blend price for their producers in the
Upper Midwest.
A witness for the First District Association testified that
diversion limits are not always needed for every month. The witness
maintained that having year-round diversion limits would reduce
competition and result in lower milk prices for producers of the
Central marketing area. The witness argued that diversion limits should
be provided only for ensuring the orderly marketing of fluid milk but
should not be used so as to constitute a barrier to pooling milk.
In their exceptions to the tentative decision, the Upper Midwest
Cooperatives reiterated their opposition to the addition of a net
shipments provision and the limitation on diversions to only
distributing plants, not milk received by any pool plant. They stated
that this provision would eliminate a large amount of the milk that
does not have a committed share of the Class I market. These
cooperatives believe this unfairly allows nearby suppliers to accrue a
higher blend.
The Central milk order, as all other Federal milk marketing orders,
provides and accommodates for diverting milk because it facilitates the
orderly and efficient disposition of the market's milk not needed for
fluid use without the loss of the benefits that arise from being pooled
on the order. When producer milk is not needed by the market for Class
I use, its movement to nonpool plants for manufacturing should be
provided for without loss of producer milk status. Preventing or
minimizing the inefficient movement of milk solely for pooling purposes
also needs to be reasonably accommodated. However, it is just as
necessary to safeguard against excessive milk supplies becoming
associated with the market through the diversion process.
A diversion limit establishes the amount of producer milk that may
be an integral milk supply of a pool plant. With regard to the pooling
issues of the Central order, the tentative decision as well as this
final decision stress that it is the lack of diversion limits to
nonpool plants, in part, that significantly contributes to the pooling
of much more milk on the order that does not provide service to the
Class I market yet receives the Central order blend price. Such milk is
not a legitimate part of the reserve supply of the plant.
According to the tentative decision and this final decision, milk
diverted to nonpool plants is milk not physically received at a pool
plant. However, it is included as a part of the total producer milk
receipts of the diverting plant. While diverted milk is not physically
received at the diverting plant, it is nevertheless an integral part of
the milk supply of that plant. If such milk is not part of the integral
supply of the diverting plant, then that milk should not be associated
with the diverting
[[Page 51650]]
plant. Therefore, such milk should not be pooled.
Both the tentative decision and this final decision state that the
lack of diversion limits only provides a means for associating much
more milk with the market without the burden of demonstrating actual
service in meeting the Class I needs of the market. Associating more
milk than is actually part of the legitimate reserve supply of the
diverting plant unnecessarily reduces the potential blend price paid to
dairy farmers. Without diversion limits, the order's ability to provide
for effective performance standards and orderly marketing is weakened.
The lack of diversion limit standards applicable to pool plants
opens the door for pooling much more milk on the market. While the
potential size of the pool should be established by the order's pooling
standards, the lack of diversion limits renders the potential size of
the pool as undefined. With respect to the marketing conditions of the
Central marketing area evidenced by the record, both the tentative
decision as well as this final decision find that the lack of year-
round diversion limits on producer milk has caused much more milk to be
pooled on the order than can reasonably be considered part of the
legitimate reserve supplies of the pool plants and does not provide any
actual service in meeting the Central market's Class I needs.
The lack of standards applicable for diversions to nonpool plants
for the months of May through August prior to the interim rule resulted
in the pooling of much more milk than can demonstrate any actual
service in meeting the Class I needs of the Central marketing area. The
diversion limit standards of Proposal 5 address this concern. However,
the diversion limits adopted in the tentative decision and proposed to
be adopted on a permanent basis by this final decision are higher than
those proposed. Increasing the diversion limit standard is made
possible because of other changes adopted in the tentative decision
that would also be adopted in this final decision. The changes to the
diversion limits standards adopted in the tentative decision are also
proposed to be adopted in this final decision at a level to
appropriately complement the performance standards. Accordingly, this
decision proposes to establish a diversion limit for producer milk of
80 percent for each of the months of August through February and 85
percent for each of the months of March through July. In addition, the
diversion limits may be adjusted by the Market Administrator.
As previously discussed, both the tentative decision and this final
decision have determined that only deliveries or diversions to pool
distributing plants, and not deliveries to pool supply plants, should
be allowed to qualify subsequent supply plant diversions for pooling on
the order. Such conditions are carried into the producer milk
definition as a condition for diversion eligibility. It is also
consistent, in light of such linkage, that a net shipments feature
should be provided as part of the producer milk provision. However, as
discussed earlier in the section on pooling standards, the evidence
contained in the record does not support the inclusion of deliveries to
pool distributing plant units to qualify supply plant diversions for
pooling. Accordingly, this feature of Proposal 5 is not adopted.
A proposal, published in the hearing notice as Proposal 9, seeking
to allow milk to be eligible for diversion to nonpool plants and for
such milk to retain its association with the market for any months
during which a handler failed to pool a dairy farmer's milk under any
milk marketing order is not adopted. The tentative decision as well as
this final decision find that a dairy farmer's milk must be physically
received at a pool plant of the Central order before it is eligible for
diversion to nonpool plants. Additionally, this final decision
continues to find that if milk is not continuously pooled, it again
must be received at a pool plant before regaining pooling eligibility.
The Central order currently specifies that the milk of a new
producer, or a producer who has broken association with the market, is
not eligible for diversion until one day's production is physically
received at a pool plant in the first month, and the dairy farmer
continuously retained producer status in following months. The dairy
farmer's milk is associated with the market if it is included in the
pool each month, except as a result of a temporary loss of Grade A
approval.
Proposal 9 would allow milk diverted to a nonpool plant before the
producer's milk is actually delivered to a pool plant in the same month
to be considered producer milk. Proposal 9 also included a provision to
allow the milk of a dairy farmer to retain its association with the
market for any months during which the handler failed to pool the
producer's milk under any order.
Proposal 9 was offered by the Upper Midwest Cooperatives. A witness
from AMPI, testifying on behalf of the Upper Midwest Cooperatives,
explained that Proposal 9 is needed to assure that producers' milk can
be pooled for the entire month as long as one day's production is
physically received at a pool plant any day during the month. According
to the witness, producers could miss several days of being able to pool
milk on the Central order due to unexpected phenomena, such as weather,
trucking problems, and scheduling conflicts.
According to the AMPI witness, Proposal 9 also would allow milk to
return for pooling on the order in the month following the month in
which it was not pooled because the blend price was less than the Class
III or Class IV price. In this regard, the witness noted that the order
currently provides for milk to be pooled at least one day each month
before being eligible for diversion to nonpool plants regardless of
whether it is economically sound to pool milk based on the blend price
that would result for the month.
The touch base standard of an order establishes an initial
association by the producer, and the milk of the producer, with the
market. In this way, the touch base provision serves to maintain the
integrity of the order's performance standards. The record does not
contain sufficient evidence for setting conditions that negate the need
to properly re-establish association with the market. Doing so is
neither burdensome nor unreasonable considering that only one day's
milk production of a dairy farmer needs to be delivered to a plant and
pooled in order to maintain association with the market. Accordingly,
Proposal 9 is not adopted.
e. Establishing Pooling Standards for ``State Units''
A proposal, published in the hearing notice as Proposal 7, seeks to
establish pooling units organized and reported by State, specifying
that in order to pool milk from those States located outside of the
States and specified counties that comprise the Central marketing area,
each State unit would need to meet the performance standards applicable
for pool supply plants. This proposal was not adopted in the tentative
decision and is not adopted in this final rule. The Central order does
not currently provide for pooling milk located outside of the marketing
area in this manner.
Proposal 7, offered by Dairy Farmers of America (DFA), would group
and report milk in State units and specify performance standards for
such State units as those applicable to pool supply plants. The milk
that would be affected would be milk located outside the States of
Colorado, Illinois, Iowa, Kansas, Missouri, Nebraska, Oklahoma, and
South Dakota, the Minnesota counties of Fillmore, Houston, Lincoln,
Mower,
[[Page 51651]]
Murray, Nobles, Olmstead, Pipestone, Rock, and Winona, and the
Wisconsin counties of Crawford, Grant, Green, Iowa, Lafayette,
Richland, and Vernon.
The DFA witness testified that milk is being pooled on the Central
order that is located in areas so far from the marketing area that such
milk cannot and does not service the Class I needs of the Central
market. The witness argued that milk from such distant areas was never
intended to be a source of milk or a part of the Central order
milkshed. According to the witness, large portions of the States of
Minnesota and Wisconsin, characterized as a ``distant'' source of milk,
had not historically been part of the supply area for the pre-reform
marketing areas consolidated to form the Central milk marketing area.
DFA argued that milk from these areas should be subject to the same
performance standards as milk from other distant areas such as
California or New Mexico.
According to the DFA witness, distant milk currently pooled on the
Central order likely would not seek to be pooled on the order because
the benefits of receiving a higher blend price for milk actually
delivered to Central order pool plants would not offset the costs that
would be incurred in transporting milk. In attempting to clarify what
would be determined as being not distant, the DFA witness offered a
method to distinguish between historical and distant milk supplies.
Milk from counties associated with the Central market's pre-reform
orders, which in 1998 had a daily supply volume in excess of one 50,000
pound load, would be included with milk considered to be local or in-
area and not distant milk.
The principal problem confronting the Central order, as identified
by the DFA witness, is that the distant milk receives the order's blend
price without the burden of providing any regular and consistent
service to the market beyond meeting a one-day touch-base standard. The
witness argued that their proposal would set standards for milk from
distant areas identical to local milk as a condition for receiving the
order's blend price. Providing for this would not, according to the
witness, discriminate, penalize, or establish any barriers to the
pooling of milk on the Central order because the standards for local
milk supplies and distant milk supplies would be the same. Support was
given in testimony for establishing State units by witnesses
representing Prairie Farms and Suiza. In their exceptions to the
tentative final decision, DFA, et al., reiterated their support for
requiring performance on a unit basis by out of area milk.
A number of hearing participants opposed the adoption of the State
unit pooling proposal, specifically the witnesses representing Upper
Midwest cooperative associations. The Foremost Farms witness argued
that adoption of the proposal would discourage efficient movements of
milk to distributing plants and that such a provision would be
inconsistent with the Agricultural Marketing Agreement Act (AMAA). This
witness questioned why an organization with milk in the Central
marketing area should be required to transport milk from distant areas
in Minnesota and Wisconsin when the same organizations already have
enough milk in the marketing area to satisfy the order's pooling
standards. The witness indicated that this could result in forcing milk
located within the marketing area to be hauled long distances to make
room for the receipt of milk from distant locations.
The AMPI witness agreed with the Foremost witness' testimony and
the witness representing the First District Association, both of which
asserted that adopting State unit pooling for distant milk would
destroy the benefits of pooling milk on the Central order. They held
this opinion because the differences between Class I use and blend
prices between the Central and Upper Midwest orders would narrow.
In post-hearing briefs, the Upper Midwest Cooperatives continued to
express opposition to DFA's Proposal 7 (and to Proposals 1, 3, and 5).
They characterized their opposition as establishing barriers to pooling
on the basis of where milk is located through government-mandated
transportation costs. As indicated above on proposals affecting pool
plants and producer milk, their brief cited case law to advance their
contention that such amendments would not be legal.
The record does not support the adoption of performance standards
for pooling milk on the order on the basis of its location or as the
proponent and supporters of Proposal 7 describe as State units. The
marketing conditions of the Central order do not exhibit the need to
require additional performance standards for milk located outside of
the marketing area beyond those adopted in the tentative decision and
proposed to be adopted by this final decision. Accordingly, all plants,
regardless of location, may become eligible to have the milk of
producers pooled on the Central order by meeting the performance
standards specified for the various types of pool plants.
It is not important who provides the milk for Class I use or from
where this milk originates. The order boundaries of the Central order
were not intended to limit or define which producers, which milk of
those producers, or which handlers could enjoy the benefits of being
pooled on the Central order. What is important and fundamental to all
Federal orders, including the Central order, is assuring an adequate
supply of milk to meet the market's fluid needs, the proper
identification of those producers who supply the market, and an
equitable means of compensating those producers from the market's pool
proceeds.
As discussed earlier on pooling standards for pool supply plant
qualification, the provisions of the consolidated Federal milk orders
were not intended to exclude any milk from being pooled on any order,
as long as the fluid needs of a marketing area are being served by the
milk. At the same time, reform of Federal milk orders did not adopt
open pooling, but attempted to provide that each market pool would
include the milk that actually is available for serving the fluid needs
of the market. The determination of the boundaries of the Central
marketing area was guided by the identification of the common
characteristics of the predecessor orders that could be consolidated to
form the marketing area and to promulgate a marketing order to provide
for orderly marketing conditions. The consolidation of the pre-reform
orders into the current Central order was not intended to determine
those areas from which milk should, or should not, be obtained to serve
the market. The adoption of revised pooling standards proposed to be
adopted by this final decision should assure milk will be available for
the Central market's fluid needs and therefore renders the proposed
State unit provision unnecessary. Proposal 7 is not adopted.
2. Simultaneous Pooling of Milk on the Order and on a State-Operated
Milk Order Providing for Marketwide Pooling
A proposal, published in the hearing notice as Proposal 8, seeking
to exclude the same milk from being simultaneously pooled on the
Central order and any State-operated order which provides for
marketwide pooling, previously adopted on an interim basis, is proposed
to be adopted on a permanent basis by this final decision. The practice
of pooling milk on a Federal order and simultaneously pooling the same
milk on a State-operated order also has come to be referred to as
``double dipping.'' The Central order did not prohibit milk from being
simultaneously pooled on the order and a State-operated order that
[[Page 51652]]
provides for marketwide pooling prior to adoption of the interim rule.
Proposal 8 was offered by A-E, Swiss Valley Dairy, AMPI, Family Dairies
USA, FDA, Foremost, Milwaukee Cooperative Milk Producers, Manitowoc
Milk Producers Cooperative, and Mid-West Dairymen's Company.
The AMPI witness, testifying on behalf of all the proponents of
Proposal 8, stressed that a producer is prohibited from pooling the
same milk on more than one Federal order. The witness maintained that
the same restriction should be applicable between the Central order and
any other regulatory authority that provides for marketwide pooling and
the marketwide distribution of pooling revenue. According to the
witness, this has been occurring with milk pooled under the California
State-operated milk order program since March 2001 and continues.
The AMPI witness explained that the Central order pooling
provisions allow a one-time minimal delivery of a single day's milk
production of California producers to a Central order pool plant to
qualify all subsequent milk production of those California producers on
the Central order by diversion. However, the witness stressed, all of
the diverted California milk is pooled on the State's milk order
program and receives the pricing benefits that the California State
program offers its dairy farmers.
The AMPI witness testified that the volume of California milk
pooled on the Central order has been increasing since March 2001 and is
unnecessarily reducing milk prices paid to Central order producers. The
witness presented calculations that indicated that the impact on the
Central order blend price was an average reduction of about 2 cents per
hundredweight, amounting to almost $2 million in the 7-month period of
March through September 2001. The witness stated that due to the
obvious injurious effect on Midwest dairy farmers, the Department
should put an end to the practice of double dipping and to do so on an
emergency basis.
A witness testifying on behalf of the proponents explained that the
reason milk used in manufactured products is included in a marketwide
pool is that such milk represents a reserve supply of milk that is
available to serve fluid distributing plants when needed. Accordingly,
the witness stressed that the same milk cannot be considered to be
available as a supply for fluid distributing plants regulated under two
different marketwide pools. The witness explained that Proposal 8 would
not preclude the pooling of California milk or milk from any other
jurisdiction that has marketwide pooling on the Central order. However,
the proposal would preclude the pooling of the same milk on the Central
order when also pooled under some other order, like the California
State milk order that provides for marketwide pooling. In this regard,
the witness stated that there is no doubt that California's milk order
pooling plan provides for marketwide pooling, adding that those who say
it does not probably are basing their conclusion on California's quota
and overbase pricing for milk.
Several other proponent witnesses representing cooperative
associations whose member milk is pooled under the Central order
supported the adoption of the proposal to eliminate ``double dipping''
as did two distributing plant operators. Both of the fluid processor
representatives argued that milk originating from outside of a 500-mile
radius of any of the order's distributing plants is not realistically
available to serve the Class I market on a regular basis.
The representative from Land O'Lakes was opposed to adopting
Proposal 8. The witness asserted that, despite evidence to the
contrary, California does not have a marketwide pool. The witness
explained that producers are paid on the basis of a quota price for
milk used in fluid and soft dairy product uses, while the basis for
non-quota milk is manufacturing values. The returns to producers
arising from quota uses of milk, stated the LOL witness, are not
distributed marketwide.
The LOL witness proposed a modification to Proposal 8 that would
eliminate ``double dipping'' only with respect to the ``quota'' portion
of the milk associated with the Central order and allow simultaneous
pooling of ``overbase'' California milk on both the California and
Central orders. The witness expressed concern that elimination of the
ability of the same milk to be pooled simultaneously under a Federal
order and a State order with marketwide pooling would cause problems in
dealing with milk supplies from other States--such as Pennsylvania and
North Dakota--that are considering modifying provisions to include
marketwide pooling.
For over 60 years, the Federal government has operated the milk
marketing order program. The law authorizing the use of milk marketing
orders, the Agricultural Marketing Agreement Act of 1937 (AMAA), as
amended, provides authority for milk marketing orders as an instrument
which dairy farmers may voluntarily opt to use to achieve objectives
consistent with the AMAA and that are in the public interest. An
objective of the AMAA, as it relates to milk, was the stabilization of
market conditions in the dairy industry. The declaration of the AMAA is
specific: ``the disruption of the orderly exchange of commodities in
interstate commerce impairs the purchasing power of farmers and
destroys the value of agricultural assets which support the national
credit structure and that these conditions affect transactions in
agricultural commodities with a national public interest, and burden
and obstruct the normal channels of interstate commerce.''
The AMAA provides authority for employing several methods to
achieve more stable marketing conditions. Among these is classified
pricing, which entails pricing milk according to its use by charging
processors differing milk prices on the basis of form and use. In
addition, the AMAA provides for specifying when and how processors are
to account for and make payments to dairy farmers. Plus, the AMAA
requires that milk prices established by an order be uniform to all
processors and that the price charged can be adjusted by, among other
things, the location at which milk is delivered by producers (Section
608c(5)).
As these features and constraints provided for in the AMAA were
employed in establishing prices under Federal milk orders, some
important market stabilization goals were achieved. The most often
recognized goal was the near elimination of ruinous pricing practices
of handlers competing with each other on the basis of the price they
paid dairy farmers for milk and in price concessions made by dairy
farmers. The need for processors to compete with each other on the
price they paid for milk was significantly reduced because all
processors are charged the same minimum amount for milk, and processors
had assurance that their competitors were paying the same value-
adjusted minimum price.
The AMAA also authorizes the establishment of uniform prices to
producers as a method to achieve stable marketing conditions.
Marketwide pooling has been adopted in all Federal orders because of
its superior features of providing equity to both processors and
producers, thereby helping to prevent disorderly marketing conditions.
A marketwide pool, using the mechanism of a producer settlement fund to
equalize on the use-value of milk pooled on an order, meets that
objective of the AMAA of ensuring uniform prices to producers supplying
a market.
The California State milk order program clearly has objectives
similar to
[[Page 51653]]
those of the AMAA. Exhibits presented at the hearing indicate that the
California State order program has a long history in the development
and evolution of a classified pricing plan and in providing equity in
pricing to handlers and producers. Important as classified pricing has
been in setting minimum prices, the issue of equitable returns to
producers for milk could not be satisfied by only the use of a
classified pricing plan. Some California plants had higher Class I
fluid milk use than did others and some plants processed little or no
fluid milk products. As with the Federal order system, producers who
were fortunate enough to be located nearer Class I processors had been
receiving a much larger return for their milk than producers shipping
to plants with lower Class I use or to plants whose main business was
the manufacturing of dairy products. Over time, disparate price
differences grew between producers located in the same production area
of the State which, in turn, led to disorderly marketing conditions and
practices. These included producers who became increasingly willing to
make price concessions with handlers by accepting lower prices and in
paying higher charges for services such as hauling. Contracts between
producers and handlers were the norm, but the contracts were not long-
term (rarely more than a single month) and could not provide a stable
marketing relationship from which the dairy farmers could plan their
operations.
In 1967, the California State legislature passed and enacted the
Gonsalves Milk Pooling Act. The law provided the authority for the
California Agriculture Secretary to develop and implement a pooling
plan, which was implemented in 1968. The California pooling plan
provides for the operation of a State-wide pool for all milk that is
produced in the State and delivered to California pool plants. It uses
an equalization fund that equalizes prices among all handlers and sets
minimum prices to be paid to all producers pooled on the State order.
While the pooling plan details vary somewhat from pooling details under
the Federal order program, the California pooling objectives are
basically identical to those of the Federal program.
It is clear from this review of the Federal and the California
State programs that the orderly marketing of milk is intended in both
systems. Both plans provide a stable marketing relationship between
handlers and dairy farmers and both serve the public interest. It would
be incorrect to conclude that the Federal and California milk order
programs have differing purposes when the means, mechanisms, and goals
are so nearly identical. In fact, the Federal order program has
precedent in recognizing that the California State milk order program
has marketwide pooling. Under milk order provisions in effect prior to
milk order reform, and under Sec. 1000.76(c), a provision currently
applicable to all Federal milk marketing orders, the Department has
consistently recognized California as a State government with
marketwide pooling.
Since the 1960's the Federal milk order program recognized the harm
and disorder that resulted to both producers and handlers when the same
milk of a producer was simultaneously pooled on more than one Federal
order. When this occurs, producers do not receive uniform minimum
prices, and handlers receive unfair competitive advantages. The need to
prevent ``double pooling'' became critically important as distribution
areas expanded and orders merged. The issue of California milk, already
pooled under its State-operated program and able to simultaneously be
pooled under a Federal order, has, essentially, the same undesirable
outcomes that Federal orders once experienced and subsequently
corrected. It is clear that the Central order should be amended to
prevent the ability of milk to be pooled on more than one order when
both orders employ marketwide pooling.
There are other State-operated milk order programs that provide for
marketwide pooling. For example, New York operates a milk order program
for the western region of that State. A key feature explaining why this
State-operated program has operated for years alongside the Federal
milk order program is the exclusion of milk from the State pool when
the same milk is already pooled under a Federal order. Because of the
impossibility of the same milk being pooled simultaneously, the Federal
order program has had no reason to specifically address double dipping
or double pooling issues, the disorderly marketing conditions that
arise from such practice, or the primacy of one regulatory program over
another. The other States with marketwide pooling similarly do not
double-pool Federal order milk.
The record testimony and evidence show milk pooled on the Central
order originating from places distant from the area. However, the
tentative decision and this decision acknowledge that with the advent
of the economic incentives for California milk to be pooled on the
Central order and, at the same time, enjoy the benefits of being pooled
under California's State-operated milk order program, more milk has
come to be pooled on the order that has no legitimate association with
the integral milk supplies of the Central order pool plants. The
association was possible only through what some market participants
describe as a regulatory loophole.
California milk should only be eligible for pooling on the Central
order when it is not pooled on the California State order and when it
meets the Central's pooling standards. It is the ability of milk from
California to ``double dip'' that is a source of disorderly marketing
conditions and for much more milk being pooled on the Central order.
Proposal 8 offers a reasonable solution for adding a prohibition on
allowing the same milk to draw pool funds from Federal and State
marketwide pools simultaneously. It is consistent with the current
prohibition against allowing the same milk to participate in two
Federal order pools simultaneously. Adoption of Proposal 8 in both the
tentative and this final decision will not establish any barrier to the
pooling of milk from any source that actually demonstrates performance
in supplying the Central market's need for milk used in Class I.
3. Rate of Partial Payments to Producers
A proposal that would change the rate of the partial payment to
producers and cooperatives for milk delivered during the first 15 days
of the month to the lowest class price for the prior month times 110
percent, published in the hearing notice as Proposal 6, was not adopted
in the tentative decision and is not proposed to be adopted in this
final decision. Therefore, the partial payment rate will remain as
currently provided for by the order--at the lowest class price for the
prior month.
This proposal offered by DFA intends to improve producer cash flow
by bringing the partial payment into a closer relationship to the final
blend price and to have the partial payment more closely reflect the
value of the milk delivered to handlers during the first 15 days of the
month. According to the DFA et al., witness, the partial payment rate
has declined as a share of the final payment since the consolidation of
the Central market under milk order reform.
The DFA, et al., witness stressed that producers need a more
consistent cash flow than they currently are experiencing. The witness
acknowledged that overpayment in the partial payment could be a problem
if the producer does not have enough funds coming in the month's final
[[Page 51654]]
payment to cover the producer's authorized deductions. The witness
noted that the existing $1.00 per hundredweight premiums above minimum
order prices enjoyed by Central order producers are probably adequate
to cover any overpayments made to producers.
Data provided by the DFA, et al., witness sought to indicate that
since order reform on January 1, 2000, the amount of the partial
payment received by producers relative to the total payment for milk
each month has been reduced when compared to the pre-reform orders. The
analysis consisted of approximating a weighted average blend price as a
proxy for a comparable order from the pre-reform order's information.
The analysis, explained the witness, is a comparison of the current
month's blend price with the lowest of the two lower class prices of
the prior month. For the entire 56-month period, the witness stated,
the average of the blend price minus the lowest class price was $1.59;
the first 36 months the average was $1.52; and the last 20 months the
average was $1.75. The witness concluded that the main concern revealed
by this data is that the spread is widening. After evaluating several
differing partial payment rates, the witness concluded that a five
percent inflation at the prior month's lowest class price was a
reasonable adjustment to approximating the spread that existed over the
first 36-month period.
The DFA, et al., witness also testified that there are a wide
variety of payment dates and payment levels among the 11 orders. There
are currently, said the DFA witness, three groupings: the Southern
orders' payments are a percentage of the prior month's blend price
adjusted for location; the Northwest and Central orders set the
advanced payment at the prior month's lowest class price; and the
Western orders use an add-on percentage applied to the prior month's
lowest class price. The witness also noted that while most orders have
one partial payment, the Florida order has two partial payments before
a final payment is due.
Several individual dairy farmers also testified that their cash
flow situations have deteriorated since the current partial payment
rate provisions became effective. In this regard, all dairy farmers
testified in support of increasing the rate of partial payment.
A representative of Leprino Foods, a national cheese-processing
firm, testified that USDA should reject Proposal 6 since it does not
appropriately address the issue it purports to remedy and it violates
the minimum pricing concepts for manufacturers, but not because there
is lack of need for an amendment. The Leprino witness testified that
the cause of the disparity between the partial and final payment rates
is a combination of a failure to blend the pool's higher use values
into the partial payment and the use of a price level from the previous
month rather than the current month. This witness argued that rather
than addressing these problems in the proposal, the proposed increase
in the rate merely transfers the burden to processors. The witness
stated that the proposal violates minimum pricing principles by setting
the partial rate above the equivalent market value for Classes III and
IV, with the resulting differences in partial payment rates between
orders causing disparate economic positions for competing Class III and
IV handlers in different orders.
The witness from Leprino concluded that the most appropriate
approach to address the root cause of the disparity between the partial
and final payment would be the implementation of a similar minimum
payment in pooling structure for the partial payment that exists in the
final payment. However, the witness did not propose its adoption
because such a remedy would require significant administration in terms
of plant reporting, report analysis, pool calculation, and movement of
funds into and out of the pool than the current system of minimum
payment at the lowest class price. This concept was not properly
noticed, the witness argued, and a more comprehensive review of all
provisions of the order that would be affected and the magnitude of the
impact would be necessary.
The Department reconstructed noticed data that recreated the
intended analysis presented by witnesses. The Department's
reconstruction relied, in part, on the partial payment provisions of
the pre-reform orders. The Department used the previous month's Class
III price of the pre-reform orders as the lowest class price because
the Class III price was used then to set the rate of partial payment.
In this regard, comparing partial payment relationship outcomes using
actual historical provisions provided for comparing pre- and post-
reform partial payment relationships as to the total payment for milk
in a month.
Even with the limited amount of data available since the
implementation of order reform, the Department's comparison of pre- and
post-reform partial payment relationships to total payments does appear
to support the observations made by the DFA witness. However, this
initial observation alone is not a sufficient basis for changing the
rate of the partial payment. Some significant differences in certain
key assumptions were made by the proponents of Proposal 6 from those
assumptions used by the Department in comparing pre- and post-reform
time periods.
Also of concern is the limitation inherent in comparing a 36-month
period to one of only 21 months. The 36-month time period shows price
trends rising and falling, while the 21-month time shows a period of
generally an upward trend in prices. This may suggest that there has
not yet been a sufficient period of elapsed time to infer the impact of
downward trends in prices and the possible effect on the relationship
between the partial and final payments to producers.
With regard to Leprino's concern about uniformity of partial
payment rates between orders, the current milk orders have a variety of
partial payment rates. Several orders use a partial payment rate based
on a percentage of the previous month's blend price, and the Florida
order, for example, provides for two partial payments. Additionally,
the Western and Arizona-Las Vegas orders, both of which pool
significant volumes of milk used in cheese, provide for partial payment
rates of 120 and 130 percent, respectively, of the previous month's
lowest class price.
There may be times when the partial payment rate exceeds the
balance due for the month. In this regard, handler interests point to
this outcome as requiring them to pay more for milk for part of the
month than its actual total value for the month. It is appropriate to
note that this exact outcome occurred several times during the pre-
reform 36-month period used by DFA. This decision finds the concerns of
handlers in this regard as unpersuasive.
Deductions authorized by producers are more often made in the final
payments for milk. There could be times when the amount deducted from
the final payment exceeds the amount of the final payment. If the
deductions are high enough for this to happen, it would be reasonable
to conclude that producers desiring to smooth their cash flow would opt
to allow a larger portion of their deductions to be made with receipt
of the partial payment, as the order allows.
The partial payment provision in Federal orders is a minimum
requirement placed on handlers to pay producers for milk delivered. It
is notable that cooperatives and handlers are not restricted to paying
only one partial payment at the rate specified in the order; partial
payments for milk can be made more often. Additionally,
[[Page 51655]]
cooperatives and handlers are also at liberty to negotiate agreements
for more frequent billings for milk and payments for milk above the
minimum established by the order. As made evident by the record, more
flexible partial payment options are available to both producers and
handlers than relying solely on changing the minimum payment
provisions.
As the Leprino witness noted, DFA's proposal does not incorporate
or blend the higher-valued uses of milk in their analysis. In response
to this observation, the Department compared the relationships between
the partial and total payment using various percentages of the Central
orders's previous month's blend price. Interestingly, if the desired
objective is to more closely approximate the partial payment rate using
the 36-month period before order reform, the proponents' 105 percent
rate of the previous month's lowest class price does seem to best
accomplish this. Nevertheless, the same limitations and concerns
mentioned above prevent a finding that the Central order's rate for
partial payment should be increased.
The tentative decision and this final decision find that the cash
flow concerns of producers may be better served by the adoption of
other proposals considered in this proceeding. Other amendments adopted
in this decision affecting the pooling of milk in the Central order
will likely reduce the erosion in the blend price received by Central
producers. It is expected that higher blend prices would result from
more accurately identifying those producers and the milk of those
producers who actually serve the Class I needs of the market.
Similarly, the relationship between the partial payment and the total
price received by producers may change by the adoption of these pooling
standard amendments. Accordingly, a finding that the rate of partial
payment to producers by handlers should be increased is not supported
by the evidence contained in the record of this proceeding.
4. Determining Whether Emergency Marketing Conditions Existed
Warranting the Omission of a Recommended Decision and the Opportunity
To File Written Exceptions
Evidence presented at the hearing established that the pooling
standards of the Central order were inadequate and were resulting in
the erosion of the blend price received by producers serving the Class
I needs of the market and should be changed on an emergency basis. The
unwarranted erosion of such producers' blend prices stems from improper
performance standards as they relate to pool supply plants and the lack
of limits for pool plant diversions to pool and nonpool plants. These
shortcomings of the pooling provisions have allowed milk that does not
provide a reasonable or consistent service to meeting the needs of the
Class I market to be pooled on the Central order. Consequently, it was
determined that emergency marketing conditions existed, and the
issuance of a recommended decision was therefore omitted. The record
clearly established a basis, as noted above, for amending the order on
an interim basis and provided an opportunity to file written exceptions
to the proposed amended order.
Evidence presented at the hearing also established that California
milk pooled simultaneously on the California State-operated order and
the Central Federal order, a practice commonly referred to as double
dipping, rendered the Central Federal milk order unable to establish
prices uniform to producers and to handlers and also has contributed to
the unwarranted erosion of milk prices to Central producers.
In view of this situation, an interim final rule amending the order
was issued as soon as the procedures were completed to determine the
approval of producers.
Rulings on Proposed Findings and Conclusions
Briefs and proposed findings and conclusions were filed on behalf
of certain interested parties. These briefs, proposed findings and
conclusions, and the evidence in the record were considered in making
the findings and conclusions set forth above. To the extent that the
suggested findings and conclusions filed by interested parties are
inconsistent with the findings and conclusions set forth herein, the
requests to make such findings or reach such conclusions are denied for
the reasons previously stated in this decision.
General Findings
The findings and determinations hereinafter set forth supplement
those that were made when the Central order was first issued and when
it was amended. The previous findings and determinations are hereby
ratified and confirmed, except where they may conflict with those set
forth herein.
(a) The tentative marketing agreement and the order, as hereby
proposed to be amended, and all of the terms and conditions thereof,
will tend to effectuate the declared policy of the Act;
(b) The parity prices of milk as determined pursuant to section 2
of the Act are not reasonable in view of the price of feeds, available
supplies of feeds, and other economic conditions which affect market
supply and demand for milk in the marketing area, and the minimum
prices specified in the tentative marketing agreement and the order, as
hereby proposed to be amended, are such prices as will reflect the
aforesaid factors, insure a sufficient quantity of pure and wholesome
milk, and be in the public interest; and
(c) The tentative marketing agreement and the order, as hereby
proposed to be amended, will regulate the handling of milk in the same
manner as, and will be applicable only to persons in the respective
classes of industrial and commercial activity specified in, a marketing
agreement upon which a hearing has been held.
Rulings on Exceptions
In arriving at the findings and conclusions, and the regulatory
provisions of this decision, each of the exceptions received was
carefully and fully considered in conjunction with the record evidence.
To the extent that the findings and conclusions and the regulatory
provisions of this decision are at variance with any of the exceptions,
such exceptions are hereby overruled for the reasons previously stated
in this decision.
Marketing Agreement and Order
Annexed hereto and made a part hereof is one document: A Marketing
Agreement regulating the handling of milk. The Order amending the order
regulating the handling of milk in the Central marketing area was
approved by producers and published in the Federal Register on February
12, 2003 (68 FR 7070) as an Interim Final Rule. Both of these documents
have been decided upon as the detailed and appropriate means of
effectuating the foregoing conclusions.
It is hereby ordered, that this entire final decision and the
Marketing Agreement annexed hereto be published in the Federal
Register.
Determination of Producer Approval and Representative Period
May 2003 is hereby determined to be the representative period for
the purpose of ascertaining whether the issuance of the order, as
amended in the Interim Final Rule published in the Federal Register on
February 12, 2003 (68 FR 7070), regulating the handling of milk in the
Central marketing area is approved or favored by producers, as defined
under the terms of the order (as amended and as hereby proposed to be
amended) who during such
[[Page 51656]]
representative period were engaged in the production of milk for sale
within the aforesaid marketing area.
List of Subjects in 7 CFR Part 1032
Milk marketing orders.
Dated: August 18, 2003.
A.J. Yates,
Administrator, Agricultural Marketing Service.
Order Amending the Order Regulating the Handling of Milk in the Central
Marketing Area
This order shall not become effective unless and until the
requirements of Sec. 900.14 of the rules of practice and procedure
governing proceedings to formulate marketing agreements and marketing
orders have been met.
Findings and Determinations
The findings and determinations hereinafter set forth supplement
those that were made when the order was first issued and when it was
amended. The previous findings and determinations are hereby ratified
and confirmed, except where they may conflict with those set forth
herein.
(a) Findings. A public hearing was held upon certain proposed
amendments to the tentative marketing agreement and to the order
regulating the handling of milk in the Central marketing area. The
hearing was held pursuant to the provisions of the Agricultural
Marketing Agreement Act of 1937, as amended (7 U.S.C. 601-674), and the
applicable rules of practice and procedure (7 CFR Part 900).
Upon the basis of the evidence introduced at such hearing and the
record thereof, it is found that:
(1) The said order as hereby amended, and all of the terms and
conditions thereof, will tend to effectuate the declared policy of the
Act;
(2) The parity prices of milk, as determined pursuant to section 2
of the Act, are not reasonable in view of the price of feeds, available
supplies of feeds, and other economic conditions which affect market
supply and demand for milk in the aforesaid marketing area. The minimum
prices specified in the order as hereby amended are such prices as will
reflect the aforesaid factors, insure a sufficient quantity of pure and
wholesome milk, and be in the public interest; and
(3) The said order as hereby amended regulates the handling of milk
in the same manner as, and is applicable only to persons in the
respective classes of industrial or commercial activity specified in, a
marketing agreement upon which a hearing has been held.
Order Relative to Handling
It is therefore ordered, that on and after the effective date
hereof, the handling of milk in the Central marketing area 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 order amending the order contained in the
interim amendment of the order issued by the Administrator,
Agricultural Marketing Service, on February 6, 2003, and published in
the Federal Register on February 12, 2003 (68 FR 7070), are adopted
without change and shall be and are the terms and provisions of this
order.
[This marketing agreement will not appear in the Code of Federal
Regulations]
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. 1032.1 to 1032.86, all inclusive,
of the order regulating the handling of milk in the Central
marketing area (7 CFR PART 1032) which is annexed hereto; and
II. The following provisions: Record of milk handled and
authorization to correct typographical errors.
(a) Record of milk handled. The undersigned certifies that he/
she handled during the month of ---------- 2001, ------
hundredweight of milk covered by this marketing agreement.
(b) Authorization to correct typographical errors. The
undersigned hereby authorizes the Deputy Administrator, or Acting
Deputy Administrator, Dairy Programs, Agricultural Marketing
Service, to correct any typographical errors which may have been
made in this marketing agreement.
Effective date. This marketing agreement shall become effective
upon the execution of a counterpart hereof by the 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. 03-21527 Filed 8-26-03; 8:45 am]
BILLING CODE 3410-02-P