[Federal Register: March 2, 2004 (Volume 69, Number 41)]
[Proposed Rules]
[Page 9763-9771]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr02mr04-12]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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[[Page 9763]]
DEPARTMENT OF AGRICULTURE
Agricultural Marketing Service
7 CFR Parts 1000, 1001, 1005, 1006, 1007, 1030, 1032, 1033, 1124,
1126, and 1131
[Docket No. AO-14-A72, et al.; DA-03-08]
Milk in the Northeast and Other Marketing Areas; Tentative
Decision on Proposed Amendments and Opportunity To File Written
Exceptions to Tentative Marketing Agreements and to Orders
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7 CFR part Marketing area AO Nos.
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1001..................... Northeast.................... AO- 14-A72
1005..................... Appalachian.................. AO-388-A13
1006..................... Florida...................... AO-356-A36
1007..................... Southeast.................... AO-366-A42
1030..................... Upper Midwest................ AO-361-A37
1032..................... Central...................... AO-313-A46
1033..................... Mideast...................... AO-166-A70
1124..................... Pacific Northwest............ AO-368-A33
1126..................... Southwest.................... AO-231-A66
1131..................... Arizona-Las Vegas............ AO-271-A38
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AGENCY: Agricultural Marketing Service, USDA.
ACTION: Proposed rule.
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SUMMARY: This tentative decision adopts, on an interim final and
emergency basis, proposals to amend the classification of milk use
provisions in the current 10 Federal milk marketing orders.
Specifically, this decision will reclassify milk used to produce
evaporated milk in consumer-type packages or sweetened condensed milk
in consumer-type packages from Class III to Class IV. This decision
requires determination of whether dairy producers approve the issuance
of the amended orders on an interim basis. Additionally, public
comments on these adopted provisions and the proposal to reclassify
ending bulk milk inventory, which is not adopted by this tentative
final decision, are requested.
DATES: Comments are due on or before May 3, 2004.
ADDRESSES: Comments (6 copies) should be filed with the Hearing Clerk,
United States Department of Agriculture, Room 1083-STOP 9200, 1400
Independence Avenue, SW., Washington, DC 20250-9200, and you may also
send your comments by the electronic process available at Federal
eRulemaking portal at http://www.regulations.gov.
FOR FURTHER INFORMATION CONTACT: Antoinette M. Carter, Marketing
Specialist, USDA/AMS/Dairy Programs, Order Formulation and Enforcement
Branch, Room 2968--STOP 0231, 1400 Independence Avenue, SW.,
Washington, DC 20250-0231, (202) 690-3465, e-mail address:
antoinette.carter@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 Secretary
a petition stating that the order, any provision of the order, or any
obligation imposed in connection with the order is not in accordance
with the law. A handler is afforded the opportunity for a hearing on
the petition. After a hearing, the Secretary would rule on the
petition. The Act provides that the district court of the United States
in any district in which the handler is an inhabitant, or has its
principal place of business, has jurisdiction in equity to review the
Secretary's ruling on the petition, provided a bill in equity is filed
not later than 20 days after the date of the entry of the ruling.
Regulatory Flexibility Act and Paperwork Reduction Act
In accordance with the Regulatory Flexibility Act (5 U.S.C. 601 et
seq.), the Agricultural Marketing Service has considered the economic
impact of this action on small entities and has certified that this
proposed rule will not have a significant economic impact on a
substantial number of small entities. For the purpose of the Regulatory
Flexibility Act, a dairy farm is considered a ``small business'' if it
has an annual gross revenue of less than $750,000, and a dairy products
manufacturer is a ``small business'' if it has fewer than 500
employees.
For the purposes of determining which dairy farms are ``small
businesses,'' the $750,000 per year criterion was used to establish a
production guideline of 500,000 pounds per month. Although this
guideline does not factor in additional monies that may be received by
dairy producers, it should be an inclusive standard for most ``small''
dairy farmers. For purposes of determining a handler's size, if the
plant is part of a larger company operating multiple plants that
collectively exceed the 500-employee limit, the plant will be
considered a large business even if the local plant has fewer than 500
employees.
During June 2003--the most recent representative period used to
determine the number of small entities associated with Federal milk
orders--there were a total of 60,096 dairy producers whose milk was
pooled under Federal milk orders. Of the total, 56,818 dairy
producers--or about 95 percent--were considered small businesses based
on the above criteria. During this same period, there were about 1,622
plants associated with Federal milk orders. Specifically, there were
approximately 387 fully regulated plants (of which 143 were small
businesses), 92 partially regulated plants (of which 41 were small
businesses), 44 producer-handlers (of which 23 were considered small
businesses), and 108 exempt plants (of which 98 were considered small
businesses). Consequently, 950 of the 1,622 plants meet the definition
of a small business.
Total pounds of milk pooled under all Federal milk orders was
10.498 billion for June 2003 which represents 73.5 percent of the milk
marketed in the United States. Of the 10.498 billion
[[Page 9764]]
pounds of milk pooled under Federal milk orders during June 2003, 1.78
million pounds--or 1.7 percent--was used to produce evaporated milk and
sweetened condensed milk products in consumer-type packages.
Additionally, during this same period, total pounds of Class I milk
pooled under Federal milk orders was 3.475 billion pounds, which
represents 82.3 percent of the milk used in Class I products (mainly
fluid milk products) that were sold in the United States.
This decision adopts, on an interim basis, proposals that will
reclassify milk used to produce evaporated milk or sweetened condensed
milk in consumer-type packages from Class III to Class IV in all
Federal milk orders. This decision is consistent with the Agricultural
Agreement Act of 1937 (Act), which authorizes Federal milk marketing
orders. The Act specifies that Federal milk orders classify milk ``in
accordance with the form for which or purpose for which it is used.''
Currently, the Federal milk order system provides for the uniform
classification of milk in provisions that define four classes of use
for milk (Class I, Class II, Class III, and Class IV). Each Federal
milk order sets minimum prices that processors must pay for milk based
on how it is used and computes weighted average or uniform prices that
dairy producers receive.
Under the milk classification provisions of all Federal milk
orders, Class I consists of those products that are used as beverages
(whole milk, low fat milk, skim milk, flavored milk products like
chocolate milk, etc.) \1\ Class II includes soft or spoonable products
such as cottage cheese, sour cream, ice cream, yogurt, and milk that is
used in the manufacture of other food products. Class III includes all
skim milk and butterfat used to make hard cheeses--types that may be
grated, shredded, or crumbled; cream cheese; other spreadable cheeses;
plastic cream; anhydrous milkfat; and butteroil. Class III also
consists of evaporated milk and sweetened condensed milk in consumer-
type packages. Class IV includes, among other things, butter and any
milk product in dried form such as nonfat dry milk.
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\1\ Federal milk orders do not classify products but instead
classify the milk (skim milk and butterfat) disposed of in the form
of a product or used to produce a product. This decision references
``Class I products,'' ``Class II products,'' ``Class III products,''
and ``Class IV products'' to simplify the findings and conclusions.
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Evaporated milk and sweetened condensed milk in consumer-type
packages should be classified as Class IV because of their product
characteristics and because their product yields are tied directly to
the raw milk used to make these products. Like other Class IV products,
evaporated milk and sweetened condensed milk in consumer-type packages
have a relatively long shelf-life (i.e., the products can be stored for
more than one year without refrigeration). These products also may be
substituted for other Class IV products (e.g., nonfat dry milk) and
compete over a wide geographic area with products made from non-
federally regulated milk. Additionally, like other Class IV products,
evaporated milk and sweetened condensed milk in consumer-type packages
are competitive outlets for milk surplus to the Class I needs of the
market.
The proposed amendments adopted in this decision should not have a
significant economic impact on dairy producers or handlers associated
with Federal milk orders. Since the reclassification of evaporated milk
and sweetened condensed milk in consumer-type packages will be uniform
in all Federal milk orders, dairy producers and handlers associated
with the orders will be subject to the same provisions. The
classification change should have only a minimal impact on the price
dairy producers receive for their milk due to the small quantity of
milk pooled under Federal milk orders that is used to produce
evaporated milk or sweetened condensed milk in consumer-type packages.
For example, using the Department's production data provided in the
record for milk, skim milk, and cream used to produce evaporated milk
and sweetened condensed milk in consumer-type packages by handlers
regulated under Federal milk orders for the three years of 2000 through
2002, the reclassification of the milk used to produce these products
from Class III to Class IV would have affected the statistical uniform
price for all Federal milk orders combined by only $0.0117 per
hundredweight.
A review of reporting requirements was completed under the
Paperwork Reduction Act of 1995 (44 U.S.C. chapter 35). It is
determined that these proposed amendments will have no impact on
reporting, recordkeeping, or other compliance requirements because they
will remain identical to the current requirements. No new forms are
proposed and no additional reporting requirements would be necessary.
This notice does not require additional information collection that
requires clearance by the Office of Management and Budget (OMB) beyond
currently approved information collection. The primary sources of data
used to complete the 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.
Interested parties are invited to submit comments on the probable
regulatory and informational impact of this proposed rule on small
entities. Also, parties may suggest modifications of this proposal for
the purpose of tailoring their applicability to small businesses.
Prior Documents in this Proceeding
Notice of Hearing: Issued September 2, 2003; published September 8,
2003 (68 FR 52860).
Correction of Notice of Hearing: Issued October 9, 2003; published
October 16, 2003 (68 FR 59554).
Since this proceeding commenced, the Western order has been
terminated, effective April 1, 2004, as published in the Federal
Register on February 24, 2004 (69 FR 8327). The termination is based on
producers' disapproval of the issuance of the Western order as amended
by a tentative final decision issued in August 2003 and published in
the Federal Register on August 18, 2003 (68 FR 49375), and comments
received in response to the proposed termination--published January 13,
2004 (69 FR 1957). The termination removed all of the operating
provisions of the order. The remaining administrative provisions of the
order will be terminated at a later date.
Preliminary Statement
Notice is hereby given of the filing with the Hearing Clerk of this
tentative final decision with respect to proposed amendments to the
tentative marketing agreements and the orders regulating the handling
of milk in the northeast and all other Federal order marketing areas.
This notice is issued pursuant to the provisions of the Agricultural
Marketing Agreement Act and the applicable rules of practice and
procedure governing the formulation of marketing agreements and
marketing orders (7 CFR part 900).
Interested parties may file written exceptions to this decision
with the Hearing Clerk, U.S. Department of Agriculture, Room 1083-STOP
9200, 1400 Independence Avenue, SW., Washington, DC 20250-9200, by May
3, 2004. Six (6) copies of the exceptions
[[Page 9765]]
should be filed. All written submissions made pursuant to this notice
will be made available for public inspection at the office of the
Hearing Clerk during regular business hours (7 CFR 1.27(b)).
The hearing notice specifically invited interested persons to
present evidence concerning the probable regulatory and informational
impact of the proposals on small businesses. While no evidence was
received that specifically addressed these issues, some of the evidence
encompassed entities of various sizes.
The proposed amendments set forth below are based on the record of
a public hearing held at Alexandria, Virginia, on October 21, 2003,
pursuant to a notice of hearing issued September 2, 2003, and published
September 8, 2003 (68 FR 52860), and a correction of notice of hearing
issued October 9, 2003, and published October 16, 2003 (68 FR 59554).
The material issues on the record of the hearing relate to:
1. Classification of evaporated milk and sweetened condensed milk
in consumer-type packages;
2. Classification of monthly bulk milk ending inventory; and
3. Determination as to whether emergency marketing conditions exist
that would warrant 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. Classification of Evaporated Milk and Sweetened Condensed Milk in
Consumer-Type Packages
This tentative decision adopts, on an interim basis, proposed
amendments that will reclassify evaporated milk and sweetened condensed
milk in consumer-type packages from Class III to Class IV. The proposed
amendments are consistent with the statutory authority for Federal milk
orders, which specifies that milk should be classified ``in accordance
with the form in which or purpose for which it is used.''
A proposal by O-AT-KA Milk Products Cooperative, Inc. (O-AT-KA),
published in the hearing notice as Proposal 1, seeks to reclassify
evaporated milk in consumer-type packages (canned evaporated milk) from
Class III to Class IV. Proposal 2, published in the hearing notice as
proposed by Diehl, Inc., and Milnot Holding Corporation, would
reclassify sweetened condensed milk in consumer-type packages (canned
sweetened condensed milk) from Class III to Class IV. The proponents
for Proposals 1 and 2 ask that they be considered on an emergency basis
and, in this regard, that a recommended decision be omitted.
A witness appearing on behalf of O-AT-KA testified in support of
the reclassification of evaporated milk from Class III to Class IV and
supported the reclassification of sweetened condensed milk from Class
III to Class IV. The witness stated that O-AT-KA is owned by over 2,000
dairy producers who are members of Upstate Farms Cooperative, Inc.,
Niagara Milk Cooperative, Inc., and Dairylea Cooperative Inc. In 2002,
the witness noted that over 700 million pounds of milk was processed by
O-AT-KA.
The witness estimated that O-AT-KA is the second largest
manufacturer of canned evaporated milk products in the United States.
According to the witness, the largest manufacturer of canned evaporated
milk is Nestle Foods Company, which produces its product in California
from milk likely pooled on the California State order. Other Federal
order manufacturers of canned evaporated milk, the witness indicated,
include Diehl, Inc., based in Ohio, and Milnot Holding Corporation,
located in Missouri.
The O-AT-KA witness also provided a historical background on the
classification of canned evaporated milk. The O-AT-KA witness explained
that milk used to produce canned evaporated milk products had
traditionally been classified in the lowest use class of Federal milk
orders. The witness cited the uniform classification decision of 1974
in which USDA stated (referencing a 3-class system): ``A Class II
classification should not apply to evaporated or condensed milk or skim
milk in consumer-type containers as the cooperatives proposed. Such
storable products should remain in the lowest price class. A Class III
classification for milk in these products will permit such uses to
remain as a competitive outlet for milk surplus to the needs of the
Class I market. Such products made from milk regulated under these
orders must compete over wide areas with the same products processed
from ungraded milk or other graded milk that is often priced at no more
than the Minnesota-Wisconsin price. Comparable pricing should prevail
under these 32 orders.'' published March 5, 1974 (39 FR 8461-8462). The
witness noted that the Class III classification determination of canned
evaporated milk was left unchanged when the national uniform
classification of Federal milk marketing orders was reviewed in 1993.
The O-AT-KA witness explained that the reform of Federal milk
marketing orders, effective in January 2000, continued to classify milk
used to produce canned evaporated milk as Class III even though the
lowest use manufacturing classes--Class III and Class IV--were
definitively split. He stated that Class III became a cheese use class
based on a cheese yield and cheese pricing formula. According to the
witness, the reclassification of canned evaporated milk to a more
appropriate Class IV milk use was simply overlooked.
The O-AT-KA witness testified that the characteristics and
composition of canned evaporated milk--including the production yields,
nonfat solids content, and shelf life--all support a Class IV
classification of the product. The witness explained that evaporated
milk products are made by the evaporation of water resulting in a milk
solids content of a minimum of 6.5 percent butterfat and 23 percent
total solids. Like nonfat dry milk, the witness stressed, the product
yields of evaporated milk products are impacted by the nonfat solids
content of the raw milk used to produce the products. Thus, the witness
asserted, the higher the nonfat solids content of the raw milk used to
produce the product the less water needs to be evaporated and the more
cans of the product can be made. In addition, the witness stated that
evaporated milk products are packaged in steel cans so that the
products are sterile with a shelf life that can exceed 12 months.
Accordingly, the witness contended that canned evaporated milk products
are more appropriately classified as a Class IV rather than Class III
milk use.
The O-At-KA witness testified that the current Class III
classification contributes to improper pricing and potential raw milk
product cost inequity because the yields of evaporated milk products
are nonfat-solids based rather than protein-based. Also, the witness
stated, evaporated milk products are not a substitute for cheese
products but may be substituted for nonfat dry milk. Additionally, the
witness stressed evaporated milk products can be and are produced from
reconstituted nonfat dry milk, stressing that these products cannot be
produced from cheese.
The O-AT-KA witness provided actual price data from January 1998
through September 2003 and forecasted price data from October 2003
through December 2004. According to the witness, the higher raw milk
costs dictated by the higher minimum Class III prices of late cannot be
competitively
[[Page 9766]]
recovered in the marketplace for canned evaporated milk products. The
witness also speculated that the disadvantageous price relationship was
likely to continue into the foreseeable future and threatens the
continued production of these products at their associated plants.
The O-AT-KA witness also indicated that label recognition,
competing handlers who are supplied by non-federally regulated milk
sources, and the contract bidding processes are exacerbating the
disadvantageous conditions that are now being borne by O-AT-KA members
in the form of reduced returns. If the mis-classification is allowed to
continue, the witness forecasted evaporated milk plants like O-AT-KA
could ultimately be forced out of producing these products, which would
likely cause raw milk to be ultimately diverted to nonfat dry milk and
butter (Class IV classification). Thus, the witness indicated that a
reclassification to Class IV would deter such unfavorable potential
outcomes.
The O-AT-KA witness was of the opinion that blend prices to
producers would not be significantly affected if Proposal 1 was adopted
because of the relatively low volume of pooled milk used to produce
evaporated milk products when compared to the higher volumes of milk
used to produce all other dairy products. The witness contended that
the current competitive disparity between Federal milk order
manufacturers and non-Federal order manufacturers of these products
will continue until this classification issue is resolved. The witness
concluded by asking that USDA consider this proposal on an emergency
basis and take immediate action by issuing a final decision.
O-AT-KA filed a post-hearing brief reiterating its support for the
reclassification of canned evaporated milk and canned sweetened
condensed milk from Class III to Class IV.
A witness representing the Milnot Holding Corporation (Milnot)
testified in support of Proposals 1 and 2 to reclassify canned
evaporated milk and canned sweetened condensed milk as Class IV. The
witness testified that Milnot is a small business that employs about
422 employees and processes approximately 200 million pounds of raw
milk annually into evaporated milk and sweetened-condensed milk in
consumer-type packages. The witness stated that milk used to make these
products should be classified in the lowest manufacturing use class
because of the products' shelf-life and characteristics.
The Milnot witness stated that canned evaporated milk and canned
sweetened condensed milk products are packaged in shelf-stable packages
that provide a shelf life of a year or more without refrigeration. The
witness stressed that canned evaporated milk and canned sweetened-
condensed milk products are driven by the nonfat solids composition of
the raw milk used to produce the products which is similar to nonfat
dry milk--a Class IV product. Similar to the O-AT-KA representative,
the Milnot witness explained that the higher the nonfat solids content
of the raw milk, the less water needs to be removed and the more cans
of product result from the raw milk. Thus, the witness concluded that
canned evaporated milk and canned sweetened condensed milk products are
closely related and that such products, therefore, should be classified
as Class IV since ``the production of these milk items is not related
to the protein-driven curd development'' associated with cheese
production.
The Milnot witness also cited the 1974 uniform classification
decision, published March 5, 1974 (38 FR 8461-8462), which stated that
evaporated milk or condensed milk or skim milk products in consumer-
type containers are storable products that should remain in the lowest
price class (Class III). Like the O-At-KA witness, the witness pointed
out that the reform of milk marketing orders provided a definitive
split between Class III and Class IV and overlooked canned evaporated
milk and canned sweetened condensed milk products by continuing the
Class III classification for milk used to make these products.
The Milnot witness also testified that the disadvantageous price
relationship between Class III and Class IV had become increasingly
acute over the past year, and it is now especially critical that the
Department handle the matter expeditiously.
A witness representing Eagle Family Foods (Eagle) also testified in
support of reclassifying milk used to produce canned evaporated milk
products, as well as canned sweetened condensed milk, as a Class IV use
of milk. The witness explained that Eagle is a small business,
employing about 300 people and operating two manufacturing plants
located in Wellsboro, Pennsylvania, and Starkville, Mississippi.
According to the witness, the primary business of the company is
manufacturing sweetened condensed milk products for national
distribution.
The Eagle witness explained that the milk purchased by their plants
for manufacturing canned sweetened condensed milk products is pooled on
Federal milk orders. The cost of the raw milk, the witness contended,
makes it more difficult to compete and can drastically affect the
viability of their business. The witness also asserted that sweetened
condensed milk products are solids-based rather than protein-based
products and therefore should be classified as Class IV use of milk. As
did the O-AT-KA and Milnot witnesses, the Eagle witness asked that the
issue be handled on an emergency basis.
A witness appearing on behalf of Diehl, Inc. (Diehl), testified in
support of reclassifying milk used to produce both canned evaporated
milk and canned sweetened condensed milk products from Class III to
Class IV because milk used to produce such products are solids-based
products versus protein-based products. The witness testified that
Diehl is a family-owned and operated small business which manufactures
canned dairy products, including canned evaporated milk and canned
sweetened condensed milk products. The witness stated that Diehl has
plants in Ohio, Michigan, and Idaho that purchase milk pooled under
Federal milk orders. The witness also asked that the proposals be
handled on an emergency basis due to what they view as the improper
classification of milk used to make these products.
A witness appearing on behalf of Association of Dairy Cooperatives
of the Northeast (ADCNE) testified in favor of the proponents'
proposals concerning the reclassification of canned evaporated milk and
canned sweetened condensed milk products as Class IV. According to the
witness, ADCNE is comprised of several cooperatives that collectively
represent more than 65 percent of the producers pooled under the
northeast milk order.
The ADCNE witness testified that it is important for Federal milk
orders to appropriately classify products. Canned evaporated milk and
canned sweetened condensed milk, the witness asserted, are long-shelf-
life products that fit best in Class IV under the current system of
product classification and end-product pricing. He pointed out that
large price differences between Class III and Class IV can place
Federal order manufacturers of canned evaporated milk and canned
sweetened condensed milk products--which are distributed nationally--at
a substantial competitive disparity with non-Federal order
manufacturers. The witness supported USDA adopting Proposals 1 and 2 on
an emergency basis.
ADCNE also filed a post-hearing brief reiterating their position
and asserting that the mis-classification of canned
[[Page 9767]]
evaporated milk and canned sweetened condensed milk products in Class
III (cheese use category) has resulted in a $4.00 per hundredweight
price discrepancy between Class III and Class IV that is extremely
burdensome to Federal order processors of these products, including the
ADCNE member O-AT-KA. ADCNE stated that it is imperative the changes be
made on an expedited basis to restore order to the national market for
these products.
A witness appearing on behalf of New York State Dairy Foods, Inc.
(NYSDF), testified in support of Proposal 1. The witness contended that
O-AT-KA can no longer effectively compete in evaporated milk markets
without incurring very large losses due to the current price disparity
between federally regulated milk used to produce evaporated milk
consumer products and non-federally regulated milk used to make such
products.
The NYSDF witness also testified that a Class IV classification is
appropriate since evaporated milk, like dried milk powders, is a
product end use involving extensive special processing and the removal
of the water from milk. The witness asserted that evaporated milk is
similar to nonfat milk powder and butter because it has a relatively
long storage capability. The witness also supported the
reclassification of milk used to produce canned sweetened condensed
milk from Class III to Class IV.
The National Milk Producers Federation (NMPF) filed a brief in
support of the reclassification of canned evaporated milk and canned
sweetened condensed milk from Class III to Class IV. NMPF represents
nearly 60,000 dairy farmers that produce the majority of the United
States milk supply.
NMPF's brief asserted that Class III is fundamentally for cheese
products, which is consistent with the Class III cheese based pricing
formula, whereas Class IV is a class for milk ingredients such as
butter and milk powders. NMPF beleives evaporated and sweetened
condensed milk products are more appropriately associated with products
such as milk powders and butter rather than cheese products.
NMPF encouraged USDA to consider, with respect to adopting
Proposals 1 and 2, the compatibility with State regulations, which
would contribute to more orderly marketing both in and outside of
Federal milk marketing order areas. The federation also supported the
handling of the action on an emergency basis to remove the competitive
disadvantage currently imposed on Federal order manufacturers of canned
evaporated milk and canned sweetened condensed milk products.
There was no opposition testimony for the adoption of Proposals 1
and 2 given at the hearing or contained in post-hearing briefs.
Findings and Conclusions
The record evidence clearly supports the reclassification of milk
used to produce evaporated milk in consumer-type packages or sweetened
condensed milk in consumer-type packages from Class III to Class IV.
The proposed amendments adopted in this decision reclassify milk used
to produce canned evaporated milk or canned sweetened condensed milk
products to a Class IV use of milk. The milk used to produce these
products, like other Class IV products, has a relatively long shelf
life, may be stored without refrigeration, is sold over a wide
geographic area and competes for sales with milk from non-federally
regulated sources, and remains an outlet for milk not needed for fluid
use. Most importantly, the yields of these products are based directly
on the nonfat solids content of the raw milk used to make these
products. Thus, the reclassification will appropriately classify and
price under all Federal milk orders milk used to produce evaporated
milk or sweetened condensed milk products in consumer-type packages.
The Agricultural Marketing Agreement Act of 1937 specifies that
Federal milk marketing orders classify milk ``in accordance with the
form in which or the purpose for which it is used.'' Currently, Federal
milk orders establish uniform classification of milk provisions for all
Federal milk orders consisting of four classes of use (Class I, Class
II, Class III, and Class IV) for pricing milk.
The classes of use can be categorized as a fluid/beverage class and
three manufacturing classes of milk. Class I consists of those products
that are used for fluid/beverage use with certain exceptions for
formulas especially prepared for infant feeding or dietary use in
hermetically-sealed containers. Class II includes soft or spoonable
products such as cottage cheese, sour cream, ice cream, yogurt, and
milk that is used in the manufacture of other food products. Class III
consists of milk used in hard cheeses, cream cheese, and other
spreadable cheese. Class IV consists of butter or any milk product in
dried form and bulk milk that is in inventory at the end of the month.
Federal milk marketing orders establish and maintain orderly
marketing conditions for dairy farmers and handlers through classified
pricing (pricing milk based on use) and the pooling of the proceeds of
milk used in a marketing area. These provisions allow Federal milk
marketing orders to establish minimum prices that handlers must pay for
milk based on use and return a weighted average or uniform price that
dairy farmers receive for their milk. These provisions ensure that all
dairy farmers supplying a market share in the benefit that arises from
classified pricing through marketwide pooling of milk.
Federal milk orders provide a pricing system for manufactured dairy
products that is based on end-product price formulas. Under this system
of pricing, the Class III price for milk is derived from the price of
butterfat, protein, and other nonfat/non-protein milk solids (other
solids). The butterfat, protein, and other solids prices are dependent
upon the wholesale prices of butter, cheese, and dry whey,
respectively, and make allowances and yield factors for the dairy
products. The Class IV price is derived from the price of butterfat and
nonfat solids. The price of butter and nonfat solids are dependent upon
the wholesale price of butter and nonfat dry milk, respectively, and
make allowances and yield factors for the products.
The record evidence clearly indicates that product yields for
canned evaporated milk and canned sweetened condensed milk products are
based exclusively on the solids content of the raw milk used to make
the product. The record indicates that evaporated milk must have a
minimum of 6.5 percent butterfat and 23 percent total solids and that
sweetened condensed milk must have a minimum of 8 percent butterfat and
28 percent total solids. The higher the milk solids content of the raw
milk used to make canned evaporated milk or canned sweetened condensed
milk the less water needs to be removed, which results in more cans of
these products produced at the above standards. The protein content of
the raw milk is not relevant to the production of these condensed milk
products. Accordingly, the reclassification of milk used to produce
evaporated and sweetened condensed milk products as a Class IV use will
ensure that the milk used to produce these products is properly
classified and priced.
The uniform classification of milk decision of 1974 stated that
canned evaporated milk and canned sweetened condensed milk are storable
products that should remain in the lowest manufacturing use class based
on a 3-class system. The 1974 decision further states that ``A Class
III classification for producer milk in these products will permit such
uses to remain as a competitive outlet for milk surplus to
[[Page 9768]]
the needs of the Class I market.'' The decision also states such
products made from milk regulated under these orders must compete over
wide areas with the same products processed from ungraded milk or other
graded milk.'' These characteristics of evaporated and sweetened
condensed milk products remain applicable today, some 30 years later.
The Class III classification determination of canned evaporated
milk and canned sweetened condensed milk was left unchanged during the
review of the national uniform classification of milk provisions for
Federal milk marketing orders in 1993. During the reform of the Federal
milk order program the classification of milk used to produce canned
evaporated milk and canned sweetened condensed milk products remained
as Class III milk use products even though Federal order reform
resulted in a definitive split between milk used to produce Class III
and Class IV products. The Class III designation in all Federal milk
orders was determined for milk used to produce cheese with the
corresponding Class III price based primarily on cheese prices, the
make allowance for cheese, and cheese yields from a hundredweight of
milk.
The product characteristics of evaporated milk and sweetened
condensed milk are more similar to nonfat dry milk (a Class IV product)
rather than cheese (a Class III product). Like dry milk powder, these
products can be stored for long periods of time without refrigeration.
These products also are competitive outlets for milk that is surplus to
the Class I needs of a market and thereby provide a balancing function
for Federal order marketing areas. Most importantly, the product yields
for evaporated and sweetened condensed milk products are tied directly
to the yields of milk solids contained in the raw milk used to produce
these products.
The record evidence provided historical data of class prices
covering the period since Federal milk orders were reformed in January
2000 through September 2003. According to this data, the Class IV price
exceeded the Class III price by an average of $2.13 per hundredweight
in 2000, $0.91 per hundredweight in 2001, and $0.42 per hundredweight
in 2002. However, the Class III price for the period of January 2003
through September 2003 has exceeded the Class IV price by an average of
$1.07 per hundredweight. The monthly Class III price for milk generally
was below the Class IV price from the implementation of Federal milk
marketing order reform in January 2000 through June 2003. The monthly
Class III price increased above the Class IV price beginning in July
2003, and the price difference increased to a level of $4.25 per
hundredweight in September 2003. This data clearly demonstrates that
the Class III and Class IV price relationship has shifted since the
reform of Federal milk orders in 2000 and that the Class III and Class
IV prices move independently of each other.
The price difference between Class III and Class IV gave rise to
proponents' concerns of competitive inequities. The predictions of
competitive inequities that would likely continue if the Department
determined that milk used to produce such products remain classified as
a Class III use of milk may or may not be valid. These concerns alone
do not provide adequate rationale for determining if the milk used to
produce such products are properly classified under the Federal milk
order system. What is most important is that milk is properly
classified in accordance with form and use and in doing so promotes
orderly marketing conditions.
All of the proponents of Proposals 1 and 2 are handlers who operate
nonpool plants and, accordingly, are not regulated by any Federal milk
marketing order. However, the record reveals that these entities
purchase and receive milk that is pooled and priced under a Federal
milk marketing order. Unlike pool handlers, nonpool handlers do not
pool their milk receipts or share in the returns that are determined
through the marketwide pooling of milk. Nonpool handlers are not
required to purchase milk already pooled and priced under the terms of
an order. In this regard, the price paid by nonpool handlers is not
known if purchased through nonpool sources, and even if purchased
through pool sources, such purchase may or may not have transacted at
minimum class prices. Such is especially true when a nonpool handler
receives milk through diversion from pool handlers. A pooled handler
diverting milk to a nonpool plant is the entity that incurs the payment
obligation to dairy farmers and accounts to the marketwide pool for the
volume of milk at the classified use value of milk so diverted.
Consequently, the price a nonpool handler actually pays for such milk
is not known. Therefore, it cannot be determined whether a competitive
advantage or disadvantage may arise in those times when the Class III
price for milk rises above the Class IV price, which results in the
Class IV price being the lowest valued use of milk.
Hearing participants expressed concern about price disparities that
result from the improper classification of milk used to produce
evaporated milk and sweetened condensed milk products as Class III with
entities that do not use milk priced under a Federal milk marketing
order. This decision does not rely on findings with respect to such
concerns as a reason for changing the classification of milk used to
produce these products from the current Class III milk use
classification to a Class IV use.
As indicated by the record, milk used to produce canned evaporated
milk and canned sweetened condensed milk products is directly tied to
the value of the milk solids content of raw milk and resulting product
yields based on the solids content of raw milk. The current
inappropriate classification of milk used to produce canned evaporated
milk or canned sweetened condensed milk products as a Class III use of
milk has implications affecting both handlers and producers. From the
handler perspective, the mis-classification of milk may affect the
price they pay for milk in these uses and may affect their competitive
position with milk from non-Federally regulated sources. From the
producer viewpoint, the mis-classification of milk affects the total
value of the marketwide pool of milk and thus affects the blend price
dairy farmers receive for their milk. Analysis of production data from
2000 to 2002 for canned evaporated milk and canned sweetened condensed
milk reveals that the blend price for all orders would have increased
by $0.0117 per hundredweight. From either viewpoint, all market
participants should be assured that orderly marketing conditions are
advanced by properly classifying milk in accordance with form and use.
Based upon the official record it is therefore concluded that milk
used to produce evaporated milk or sweetened condensed milk in
consumer-type packages should be classified as a Class IV use of milk
and that the associated amendments to the orders should be effective
immediately.
2. Classification of Monthly Bulk Milk Ending Inventory
Proposal 3 of the hearing notice, seeking to classify milk in bulk
ending inventory each month to the lowest priced class of Class III or
Class IV, is not adopted. Currently, bulk fluid milk products and bulk
fluid cream products in inventory at the end of the month are
classified as a Class IV use of milk.
A witness testifying on behalf of New York State Dairy Foods, Inc.
(NYSDF), testified that the classification of bulk ending inventories
beginning with Class IV often tends to increase the volume of
[[Page 9769]]
other source milk assigned to a higher-valued class at the transferee
plants than is accorded producer milk pooled on an order. The witness
asserted that this was not the intent of the present provision dealing
with the proper classification of milk in ending inventory. The witness
presented data and testimony which indicated that class prices often
fluctuate independently and do not always maintain a constant
relationship to one another. According to the witness, the typically
higher-valued classes can experience a price inversion resulting in a
negative producer price differential. The witness asserted that a more
equitable sharing of pool proceeds would result from bulk ending
inventories being classified at the lowest-valued class. There was no
opposing testimony provided at the hearing.
The Association of Dairy Cooperatives in the Northeast (ADCNE)
filed a post-hearing brief in opposition to the proposal to change the
classification of monthly bulk ending inventory. The ADCNE brief stated
that testimony supporting the adoption of the proposal was only
provided by northeast milk order handlers even though the proposal
would affect all Federal milk orders in the United States. According to
ADCNE, the ``tilt'' in USDA/Commodity Credit Corporation butter/powder
support price purchase prices will continue into the foreseeable future
thus mitigating the need to reclassify milk in ending inventories as a
Class IV use of milk. ADCNE indicated there could be unintended
consequences of making such a change that could result in losses of
producer income. Accordingly, ADCNE concluded that the proposal is not
critical and should not be adopted without further input and a complete
examination of the issue.
The National Milk Producers Federation (NMPF) also filed a post-
hearing brief in opposition to the adoption of Proposal 3 on an
emergency basis. According to NMPF, the impact of the proposal to
reclassify monthly bulk ending inventory of fluid milk products and
fluid cream products from Class IV to the lowest-priced class of Class
III or Class IV cannot be analyzed without knowledge of the specific
conforming changes to other affected sections.
The NMPF brief stated that Proposal 3 seemed reasonable in that it
would allow processors to avoid advancing money to the pool that could
be returned for ultimate use in a lower priced class. The NMPF brief
argued that the ``lower-of'' concept for classifying inventories is
supportable as an analog to the ``higher-of'' principle for Class I
milk. Accordingly, the NMPF brief requested that interested parties be
provided ample opportunity to comment on the proposed rule should
Proposal 3 be recommended for adoption.
Findings and Conclusions
The hearing record does not provide sufficient evidence to adopt a
change in the classification rules applicable to monthly bulk ending
inventory. Specifically, the hearing record does not provide
information on the potential impact of the proposed amendment on
affected parties. Accordingly, the bulk ending inventory
reclassification proposal is not adopted.
3. Determining Whether Emergency Marketing Conditions Exist That Would
Warrant the Omission of a Recommended Decision and the Opportunity to
File Written Exceptions
The proposed amendments to reclassify milk used to produce
evaporated milk or sweetened condensed milk in consumer-type packages
from Class III to Class IV should be adopted on an emergency basis.
Record evidence clearly establishes that milk used to produce these
products is currently inappropriately classified as a Class III milk
use. The hearing record indicates that the milk used to produce these
products should be classified as Class IV and should be priced under
Federal milk orders accordingly.
Milk used to produce canned evaporated milk or canned sweetened
condensed milk products is more appropriately related to the solids
content of the raw milk used to make these products, which has a direct
bearing on the production yields of these products. The current Class
III classification of milk is tied to a value determined primarily to
reflect the protein content of milk, which distorts the basis for
determining the appropriate value of milk used to produce canned
evaporated milk and canned sweetened condensed milk products where the
solids content determines the appropriate milk value. Thus, the mis-
classification of milk results in improper pricing of such milk under
Federal milk orders which causes disorderly marketing conditions
affecting both handlers and producers.
Accordingly, it is determined that emergency marketing conditions
exist, and therefore the issuance of a recommended decision is omitted.
Based on the hearing record, as noted above, this decision adopts the
proposed reclassification amendments on an interim basis and provides
interested parties an opportunity to file written exceptions to the
proposed order amendments. Thus, an interim final rule amending the
orders will be issued if it is determined that producers approve the
orders, as amended on an interim basis.
Rulings on Proposed Findings and Conclusions
Briefs and proposed findings and conclusions were filed on behalf
of certain interested parties. These briefs, proposed findings and
conclusions, and the evidence in the record were considered in making
the findings and conclusions set forth above. To the extent that the
suggested findings and conclusions filed by interested parties are
inconsistent with the findings and conclusions set forth herein, the
requests to make such findings or reach such conclusions are denied for
the reasons previously stated in this decision.
General Findings
The findings and determinations hereinafter set forth supplement
those that were made when the northeast and other marketing orders were
first issued and when they were amended. The previous findings and
determinations are hereby ratified and confirmed, except where they may
conflict with those set forth herein.
(a) The interim marketing agreements and the orders, as hereby
proposed to be amended, and all of the terms and conditions thereof,
will tend to effectuate the declared policy of the Act;
(b) The parity prices of milk as determined pursuant to section 2
of the Act are not reasonable in view of the price of feeds, available
supplies of feeds, and other economic conditions which affect market
supply and demand for milk in the marketing area, and the minimum
prices specified in the interim marketing agreements and the orders, as
hereby proposed to be amended, are such prices as will reflect the
aforesaid factors, insure a sufficient quantity of pure and wholesome
milk, and be in the public interest; and
(c) The interim marketing agreements and the orders, as hereby
proposed to be amended, will regulate the handling of milk in the same
manner as, and will be applicable only to persons in the respective
classes of industrial and commercial activity specified in, marketing
agreements upon which a hearing has been held.
Interim Marketing Agreement and Interim Order Amending the Orders
Annexed hereto and made a part hereof are two documents, an interim
Marketing Agreement regulating the
[[Page 9770]]
handling of milk, and an Interim Order amending the orders regulating
the handling of milk in the northeast and all other marketing areas,
which have been decided upon as the detailed and appropriate means of
effectuating the foregoing conclusions.
It is hereby ordered that this entire decision and interim order
and the interim marketing agreement annexed hereto be published in the
Federal Register.
Referendum Order To Determine Producer Approval; Determination of
Representative Period; and Designation of Referendum Agent
It is hereby directed that referenda be conducted and completed on
or before the 30th day from the date this decision is published in the
Federal Register, in accordance with the procedure for the conduct of
referenda (7 CFR 900.300-311), to determine whether the issuance of the
order(s) as amended and as hereby proposed to be amended, regulating
the handling of milk in the Northeast and Mideast marketing areas is
approved or favored by producers, as defined under the terms of the
order (as amended and as hereby proposed to be amended), who during
such representative period were engaged in the production of milk for
sale within the aforesaid marketing areas.
The representative period for the conduct of such referenda is
hereby determined to be June 2003.
The agents of the Secretary to conduct such referenda are hereby
designated to be the respective market administrators of the aforesaid
orders.
Determination of Producer Approval and Representative Period
June 2003 is hereby determined to be the representative period for
the purpose of ascertaining whether the issuance of the orders, as
amended and as hereby proposed to be amended, regulating the handling
of milk in the Appalachian, Florida, Southeast, Upper Midwest, Central,
Pacific Northwest, Southwest, and Arizona Las-Vegas marketing areas, is
approved or favored by producers, as defined under the terms of the
orders as amended and as hereby proposed to be amended, who during such
representative period were engaged in the production of milk for sale
within the aforesaid marketing areas.
List of Subjects in 7 CFR Parts 1000, 1001, 1005, 1006, 1007, 1030,
1032, 1033, 1124, 1126, and 1131
Milk marketing orders.
Dated: February 27, 2004.
A.J. Yates,
Administrator, Agricultural Marketing Service.
Interim Order Amending the Orders Regulating the Handling of Milk in
the Northeast and Other Marketing Areas
(This interim order shall not become effective unless and until the
requirements of Sec. 900.14 of the rules of practice and procedure
governing proceedings to formulate marketing agreements and marketing
orders have been met.)
Findings and Determinations
The findings and determinations hereinafter set forth supplement
those that were made when the orders were first issued and when they
were amended. The previous findings and determinations are hereby
ratified and confirmed, except where they may conflict with those set
forth herein.
(a) Findings. A public hearing was held upon certain proposed
amendments to the tentative marketing agreements and to the orders
regulating the handling of milk in the Northeast and other marketing
areas. The hearing was held pursuant to the provisions of the
Agricultural Marketing Agreement Act of 1937, as amended (7 U.S.C. 601-
674), and the applicable rules of practice and procedure (7 CFR part
900).
Upon the basis of the evidence introduced at such hearing and the
record thereof, it is found that:
(1) The said orders as hereby amended, and all of the terms and
conditions thereof, will tend to effectuate the declared policy of the
Act;
(2) The parity prices of milk, as determined pursuant to section 2
of the Act, are not reasonable in view of the price of feeds, available
supplies of feeds, and other economic conditions which affect market
supply and demand for milk in the aforesaid marketing areas. The
minimum prices specified in the orders as hereby amended are such
prices as will reflect the aforesaid factors, insure a sufficient
quantity of pure and wholesome milk, and be in the public interest; and
(3) The said orders as hereby amended regulate the handling of milk
in the same manner as, and are applicable only to persons in the
respective classes of industrial or commercial activity specified in,
marketing agreements upon which a hearing has been held.
Order Relative To Handling
It is therefore ordered, that on and after the effective date
hereof, the handling of milk in the northeast and other marketing are
as shall be in conformity to and in compliance with the terms and
conditions of the order, as amended, and as hereby amended, as follows:
1. The authority citation for 7 CFR parts 1000, 1001, 1005, 1006,
1007, 1030, 1032, 1033, 1124, 1126, and 1131 continues to read as
follows:
Authority: 7 U.S.C. 601-674.
PART 1000--GENERAL PROVISIONS OF FEDERAL MILK MARKETING ORDERS
2. In Sec. 1000.40, revise paragraph (c)(1)(ii), remove paragraph
(c)(1)(iii), redesignate paragraph (d)(1)(ii) as paragraph (d)(1)(iii),
and add new paragraph (d)(1)(ii) to read as follows:
Sec. 1000.40 Classes of utilization.
* * * * *
(c) * * *
(1) * * *
(ii) Plastic cream, anhydrous milkfat, and butteroil; and
* * * * *
(d) * * *
(1) * * *
(ii) Evaporated or sweetened condensed milk in a consumer-type
package; and
* * * * *
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. --------\1\ to --------, all
inclusive, of the order regulating the handling of milk in the (----
---- Name of order --------) marketing area (7 CFR PART --------
\2\) which is annexed hereto; and
---------------------------------------------------------------------------
\1\ First and last sections of order.
\2\ Appropriate Part number.
---------------------------------------------------------------------------
II. The following provisions: Sec. -------- \3\ Record of milk
handled and authorization to correct typographical errors.
---------------------------------------------------------------------------
\3\ Next consecutive section number.
---------------------------------------------------------------------------
(a) Record of milk handled. The undersigned certifies that he/
she handled during the month of -------- \4\, -------- hundredweight
of milk covered by this marketing agreement.
---------------------------------------------------------------------------
\4\ Appropriate representative period for the order.
---------------------------------------------------------------------------
(b) Authorization to correct typographical errors. The
undersigned hereby authorizes the Deputy Administrator, or Acting
Deputy
[[Page 9771]]
Administrator, Dairy Programs, Agricultural Marketing Service, to
correct any typographical errors which may have been made in this
marketing agreement.
Sec. -------- \3\ Effective date. This marketing agreement
shall become effective upon the execution of a counterpart hereof by
the Secretary in accordance with Section 900.14(a) of the aforesaid
rules of practice and procedure.
---------------------------------------------------------------------------
\3\ Next consecutive section number.
---------------------------------------------------------------------------
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. 04-4724 Filed 2-27-04; 2:04 pm]
BILLING CODE 3410-02-P