[Federal Register: April 12, 2004 (Volume 69, Number 70)]
[Proposed Rules]
[Page 19291-19306]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr12ap04-21]
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Part III
Department of Agriculture
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Agricultural Marketing Service
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7 CFR Part 1033
Milk in the Mideast Marketing Area; Decision on Proposed Amendments to
Marketing Agreement and to Order; Proposed Rule
[[Page 19292]]
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DEPARTMENT OF AGRICULTURE
Agricultural Marketing Service
7 CFR Part 1033
[Docket No. AO-361-A35; DA-01-04]
Milk in the Mideast 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 July 26, 2002, concerning pooling provisions of the Mideast
Federal milk order. This document also sets forth the final decision of
the Department and is subject to approval by producers. Specifically,
this final decision would adopt amendments that would continue to amend
the Pool plant provisions which: eliminate automatic pool plant status
for the 6-month period of March through August, eliminate milk
shipments to a distributing plant regulated by another Federal milk
order as pool-qualifying shipments under the Mideast order, eliminate
the ``split plant'' feature, eliminate including diversions made by a
pool supply plant located outside the marketing area to a second pool
plant, and establish a ``net shipments'' provision. For the Producer
milk provisions, this final decision would continue to adopt amendments
which: seasonally adjust and increase the number of days that the milk
of a producer needs to be delivered to a pool plant and establishes
year-round diversion limits, adjusted seasonally, for producer milk for
handlers pooled under the Mideast order.
FOR FURTHER INFORMATION CONTACT: Gino M. Tosi, Marketing Specialist,
USDA/AMS/Dairy Programs, Order Formulation Branch, Room 2968, 1400
Independence Avenue, SW., STOP 0231, Washington, DC 20090-6456, (202)
690-1366, e-mail address gino.tosi@usda.gov.
SUPPLEMENTARY INFORMATION: This administrative action is governed by
the provisions of Sections 556 and 557 of Title 5 of the United States
Code and therefore is excluded from the requirements of Executive Order
12866.
These proposed amendments have been reviewed under Executive Order
12988, Civil Justice Reform. This rule is not intended to have a
retroactive effect. If adopted, this proposed rule will not preempt any
state or local laws, regulations, or policies, unless they present an
irreconcilable conflict with this rule.
The Agricultural Marketing Agreement Act of 1937, as amended (7
U.S.C. 601-674), provides that administrative proceedings must be
exhausted before parties may file suit in court. Under Section
608c(15)(A) of the Act, any handler subject to an order may request
modification or exemption from such order by filing with the Department
a petition stating that the order, any provision of the order, or any
obligation imposed in connection with the order is not in accordance
with the law. A handler is afforded the opportunity for a hearing on
the petition. After a hearing, the Department 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 Analysis and Paperwork Reduction Act
In accordance with the Regulatory Flexibility Act (5 U.S.C. 601 et
seq.), the Agricultural Marketing Service has considered the economic
impact of this action on small entities and has certified that this
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.
10,756 of the 11,133 dairy farmers, or 97 percent, whose milk was
pooled under the Mideast order at the time of the hearing (October
2001) would meet the definition of small businesses. On the processing
side, approximately 27 of the 58 milk plants associated with the
Mideast order during October 2001 would qualify as small businesses,
constituting 47 percent of the total.
Based on these criteria, the vast majority of the producers and
handlers would be considered small businesses. The adoption of the
amended pooling standards serve to revise and establish criteria that
ensure the pooling of producers, producer milk, and plants that have a
reasonable association with, and are consistently serving the fluid
milk needs of the Mideast milk marketing area. Criteria for pooling
milk are established on the basis of performance standards that are
considered adequate to meet the Class I fluid needs of the market, and
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
equal fashion to both large and small businesses. Therefore, the
Department has determined that 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 proposed amendments would have little or no
impact on reporting, recordkeeping, or other compliance requirements
because they would remain identical to the current requirements. No new
forms are proposed and no additional reporting requirements would be
necessary.
This action does not require additional information collection that
requires clearance by the Office of Management and Budget (OMB) beyond
currently approved information collection. The primary sources of data
used to complete the 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.
Prior Documents in This Proceeding
Notice of Hearing: Issued September 21, 2001; published September
28, 2001 (66 FR 49571).
[[Page 19293]]
Tentative Final Decision: Issued June 4, 2002; published June 11,
2002 (67 FR 39871).
Interim Final Rule: Issued July 22, 2002; published July 26, 2002
(67 FR 48743).
Preliminary Statement
A public hearing was held upon proposed amendments to the marketing
agreement and the order regulating the handling of milk in the Mideast
marketing area. The hearing was held, pursuant to the provisions of the
Agricultural Marketing Agreement Act of 1937, 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 Wadsworth, Ohio, on October 23-24, 2001, pursuant to a notice
of hearing issued September 21, 2001, and published September 28, 2001
(66 FR 49571).
Upon the basis of the evidence introduced at the hearing and the
record thereof, the Administrator, on June 4, 2002, issued a Tentative
Final Decision containing notice of the opportunity to file written
exceptions thereto.
The material issues, findings, conclusions, and rulings of the
tentative final decision are hereby approved and adopted and are set
forth herein. The material issues on the record of the hearing relate
to:
1. Pooling standards of the marketing order.
a. Standards for pool plants.
b. Standards applicable for producer milk.
2. Rate of partial payments to producers by handlers.
3. Conforming changes to the order.
4. Determining 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. Pooling Standards of the Order.
a. Standards for Pool Plants
Distributing Plants. A proposal seeking to increase one of the
distributing plant pooling standards and providing for the seasonal
adjustment of the standard was not adopted in the tentative final
decision and is not adopted in this final decision. Published in the
hearing notice as Proposal 1, this proposal specifically sought to
raise the minimum amount of the total quantity of fluid milk products
physically received by a distributing plant and disposed of as route
disposition, or transferred in the form of packaged fluid milk
products, by 5 percentage points (from 30 to 35 percent) for the months
of May through July, and by 10 percentage points (from 30 to 40
percent) for the months of August through April.
Supply Plants. Several amendments to the supply plant pooling
provisions of the Mideast order are adopted on a permanent basis by
this final decision. According to the tentative decision, certain
inadequacies of the supply plant pooling provisions, together with
unneeded features contained in the current provision, are resulting in
disorderly marketing conditions and unwarranted erosion of the blend
price received by those producers who are providing milk to satisfy the
fluid milk demands of the Mideast marketing area. Specifically, the
following amendments to the supply plant pooling standards, previously
adopted on an interim basis, are adopted on a permanent basis by this
final decision: (1) Eliminate automatic pool plant status during the 6-
month period of March through August for certain supply plants; (2)
eliminate the volume of milk shipments made by supply plants to
distributing plants regulated by another Federal milk marketing order
as a qualifying shipment for the purpose of meeting the Mideast supply
plant shipping standard; (3) eliminate the feature of providing for a
``split plant''; (4) exclude from receipts diversions made by a pool
plant to a second pool plant from the calculation of the diversion
limitation established for pool plants; and (5) provide a ``net
shipment'' standard for supply plant deliveries to the order's
distributing plants for the purpose of meeting the Mideast supply plant
shipping standard. These amendments to the pool plant pooling standards
were largely represented by, and in testimony related to, Proposal 2
and Proposal 5.
A proposal, Proposal 8, that would, in part, establish a 6-month
re-pooling delay whenever a pool supply plant elects not to meet the
supply plant pooling standards for the month, was not adopted in the
interim rule and is not adopted in this final decision. However, this
final decision adopts on a permanent basis that portion of the proposal
that would have August as the beginning month for meeting the pool
supply plant shipping standard. The adoption of this feature of
Proposal 8 makes it identical to the adoption of the same feature in
Proposal 2.
Four proposals seeking to modify the pooling standards for pool
plants of the Mideast order were considered in this proceeding. The
record evidence makes clear that the proponents of these four
proposals, described and discussed further below, are of the opinion
that the current pooling provisions of the order are not accurately
identifying those producers and the milk of those producers
consistently serving the fluid needs of the marketing area. Part of the
pooling standards of the Mideast order are contained in the Pool plant
provision of the order. Published in the hearing notice as Proposals 1,
2, 5, and 8, these proposals offered various changes to specific
components of the current pooling standards for supply plants and
distributing plants.
Proposals 1, 2, and 5 were proposed by Dairy Farmers of America
(DFA), Continental Farms Cooperative, Inc., Michigan Milk Producers,
Inc., and Prairie Farms Cooperative, Inc. Hereinafter, this decision
will refer collectively to these proponents as the ``Cooperatives.''
These organizations are cooperatives owned by dairy-farmer members that
supply a significant portion of the milk needs of the Mideast marketing
area and whose milk is pooled on the Mideast order.
Proposal 8 was proposed by Dean Dairy Products Company, Schneider's
Dairy Inc., Turner Dairy Farms, Inc., Marburger Farm Dairy, Inc.,
Fike's Dairy, Inc., United Dairy, Inc., Carl Colteryahn Dairy, Inc.,
Smith Dairy Products Company, Superior Dairy, Goshen Dairy, and Reiter
Dairy. Hereinafter, this decision will refer collectively to these
organizations as the ``Handlers.'' These organizations receive milk
from dairy farmers and cooperatives and distribute fluid milk and other
dairy products within the marketing area. They are regulated under the
terms of the order.
Proposal 1, offered by the Cooperatives, seeks to amend the pool
plant definition by increasing the minimum amount of milk that would,
in part, cause a distributing plant to become pooled on the Mideast
order. Proposal 1 would provide that 35 percent or more of the total
quantity of fluid milk products physically received at a distributing
plant be disposed of as route disposition or transferred in the form of
packaged fluid milk products to other distributing plants for the
months of May through July. Proposal 1 would also increase this same
minimum standard to 40 percent for the months of August through April.
The order currently provides a minimum standard of 30 percent and,
unlike the proposal, makes no seasonal adjustments. Proposal 1 does not
seek to change this provision's current exclusion of
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concentrated milk received from another plant for other than Class I
use.
Proposal 2, offered by the Cooperatives, seeks to amend three
features of the supply plant provision of the order as follows: Change
certain details that currently provide for the automatic pooling of
supply plants; not consider milk shipments from a Mideast supply plant
to a distributing plant regulated by another Federal milk order as a
qualifying shipment in meeting the performance standards for becoming a
pool plant on the Mideast order; and count on a ``net receipts'' basis
all supply plant shipments, including milk that is transferred or
diverted and physically received by distributing plants regulated by
the order. The ``net receipts'' criteria would exclude from a supply
plant's qualifying shipment any transfers or diversions of bulk fluid
milk products made by a distributing plant receiving a qualifying
shipment. In this regard, the concept of a ``net receipt'' is similar
to what is also commonly referred to as a ``net shipment.'' The
difference between the two terms is that a ``net receipt,'' as
presented in this proceeding, applies to distributing plants receiving
milk. The term ``net shipment,'' as referred to in the record of this
proceeding, applies to supply plants shipping milk to distributing
plants. The intended use of these terms is clear, and herein after,
this tentative final decision will refer to this feature of Proposal 2
as ``net shipments'' because the proposed change would amend how the
order applies pooling performance standards to supply plants shipping
milk to distributing plants. The Mideast order currently has no ``net
shipment'' provision.
The order currently provides automatic pool plant status during the
months of March through August, provided the supply plant met the
applicable performance standards for pool supply plants during each of
the immediately preceding months of September through February.
Additionally, the order currently considers shipments of milk to a
distributing plant regulated by another Federal order as qualifying
shipments in meeting the performance standards of the Mideast order.
Proposal 8, offered by the Handlers, seeks to change the months in
which the pool plant standard is applicable for supply plant shipments
to distributing plants from September through February to August
through February. In this regard, Proposal 8 is similar to Proposal 2.
However, Proposal 8 also seeks to provide that in the event a supply
plant opts not to be a pool plant during the month, the plant will not
be eligible to regain pool plant status for a period of six months.
Proposal 5, offered by the Cooperatives, seeks to eliminate what is
often referred to as the ``split plant'' provision. This provision
provides for designating a portion of a pool plant as a nonpool plant,
provided that the nonpool portion of the plant is physically separate
and operated separately from the regulated or pool side of the plant.
A DFA witness, representing the Cooperatives, testified that two
primary benefits of the Federal order program are allowing producers to
benefit from the orderly marketing of milk and the marketwide
distribution of revenue that results mostly from Class I milk sales.
Orderly marketing influences milk to move to the highest value use when
needed, and for milk to clear the market when not used in Class I, said
the Cooperatives. The witness noted that marketwide pooling allows
qualified producers to equitably share in the returns from the market
and in a manner that provides incentives for supplying the market in
the most efficient manner. The witness insisted that the pooling of
milk which does not service the Class I market is inconsistent with
Federal order policy.
The Cooperatives' witness was of the opinion that the new Class I
pricing structure, implemented under Federal order reform, together
with the pooling provisions found in each order, resulted in changes in
the marketplace for milk pooled on Federal milk orders, including the
Mideast order. The link between performance and pooling, said the
witness, was altered by these reforms and needs review. The
Cooperatives noted that many entities, including DFA, moved quickly to
take advantage of these changes in order rules. The witness indicated
that as a participant in a competitive dairy economy, one must make
pooling decisions that aim to increase returns or risk their
competitive position.
The Cooperatives' witness was of the opinion that the principles
underlying the economic models that formulated the Class I price
surface established during Federal order reform assumed that supplies
of milk associated with a demand point were aggregated into a single
market and were actually shipped from the counties that were located in
the population centers where demand points were fixed. There were no
provisions in the mathematical equations for those models allowing for
milk to be associated with a market if it did not actually ship to or
supply the market, said the witness. The current pooling practices, say
the Cooperatives, clearly exploit the price surface, and if we are to
retain it, pooling standards need to be restructured to parallel the
model.
Pooling standards are universal in their intention, stressed the
Cooperatives, requiring a measure of commitment to a market marked by
the ability and willingness to supply the Class I fluid needs of that
market. The witness noted that pooling standards are individualized in
their application and each market requires standards that work for the
conditions that apply in that individual market. The witness quoted the
Final Decision of milk order reform: ``The pooling provisions for the
consolidated orders provide a reasonable balance between encouraging
handlers to supply milk for fluid use and ensuring orderly marketing by
providing a reasonable means for producers with a common marketing area
to establish an association within the fluid market.''
The Cooperatives' witness also relied on, and drew heavily from,
the order reform Final Decision detailing the primary criteria used to
form the boundaries of the consolidated orders, including the
consolidated Mideast order. The Cooperatives' witness emphasized the
first and most important criteria of Federal order consolidation as the
area of overlapping route distribution of Class I milk. Also taken from
the Final Decision, the Cooperatives' witness noted that, ``The pooling
of milk produced within the same procurement area under the same order
facilitates the uniform pricing of producer milk,'' concluding that
milk procurement areas were also considered as a criteria in
establishing the consolidated marketing area boundaries. The witness
also noted other criteria used, including the number of handlers within
a market, naturally occurring boundaries, cooperative association
service areas, features or regulatory provisions common to existing
orders, and milk utilization in common dairy products.
The Cooperatives' witness continued to rely on, and drew heavily
from, the Final Decision of milk order reform by relating the
decision's geographical description of the Mideast order and how the
aforementioned criteria were applied to form the boundaries of the
Mideast marketing area. In this regard, the witness indicated that the
consolidated Mideast marketing area was the result of combining the
pre-reform orders of the Ohio Valley, Eastern Ohio-Western
Pennsylvania, Southern Michigan, and Indiana Federal milk orders, plus
Zone 2 of the Michigan Upper Peninsula Federal milk
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order, and most of the then unregulated counties in Michigan, Indiana,
and Ohio. The witness stressed that the order reform Final Decision
concluded that nearly all milk produced within the area would be pooled
on the consolidated Mideast order.
The Cooperatives' witness was of the opinion that ``open pooling''
is not appropriate for the Mideast order. When milk shares in a pool's
proceeds but does not service the Class I needs of the market or help
to balance the market, the witness indicated, there is cause for
concern. The witness emphasized that the cost of providing service to
the Class I market always falls back on the local milk supply. To allow
the pooling of milk which does not provide such services to the Class I
needs of the market only lowers returns of those dairy farmers whose
milk is actually supplying the local Class I market, concluded the
witness.
The Cooperatives' witness presented evidence which reviewed the
various Federal order performance standards, concluding that while all
the standards differ, they nevertheless address the importance of
performance to the market by serving the Class I needs of the market as
a condition for milk to be pooled and receive the order's blend price.
According to the Cooperatives' witness, a new phenomenon is
occurring in the area of performance standards. Several entities have
solicited milk located in the marketing area in order to pool milk
located outside of the marketing area, said the witness. Their
deliveries of this local supply to distributing plants, said the
Cooperatives' witness, provide the opportunity to pool much more milk
located outside the marketing area. This practice, the Cooperatives'
witness said, does not bring any new milk to be actually received at
pool plants, and the milk located outside of the marketing area is not
available and does not demonstrate any consistent or actual service to
meeting the fluid milk needs of the market.
This practice of pooling milk located far outside the Mideast
marketing area, said the Cooperatives' witness, is accomplished through
a feature of current pool plant performance standards which allows a
supply plant to use direct deliveries from farms to satisfy up to 90
percent of its performance standard by diversions. This standard, said
the witness, is a good standard for milk located inside the marketing
area, but is not an appropriate standard for milk supplies located
outside of the area.
The use of direct deliveries from inside the marketing area to
qualify supply plants and milk supplies located far outside the
marketing area should be greatly limited if allowed at all, said the
Cooperatives' witness. The witness stated that allowing direct shipped
milk from the farm to qualify a supply plant was intended to provide
economic efficiency in moving milk, for example, thereby saving the
reload in and pump-over costs for the sole purpose of meeting a pooling
standard. However, this feature is now being used to qualify milk
supplies physically located far outside of the Mideast. This,
emphasized the witness, runs counter to the initial intent of the
provision and has resulted in disorderly marketing conditions.
The Cooperatives' witness provided evidence indicating that the
Mideast order has the second largest volume of Class I use in the
Federal Order system. According to the witness, the performance
standards for the Mideast order should assure meeting this demand by
specifying a performance standard that results in actual serving of the
market's Class I needs as a condition to receive the order's blend
price.
Along this theme, the Cooperatives' witness relied on data showing
that the volume of Class I and II milk used in the Mideast changed
little in the (then) 21 months since implementation of Federal order
reform. However, noted the witness, the amount of reserve milk,
represented by Class III and IV use, had grown dramatically. The
witness concluded from the data that it is difficult to justify the
need to have pooling standards which have allowed pooling some 250
percent of additional milk on the Mideast order when that milk does not
service the Class I needs of the market. The witness indicated that
additional milk pooled on the order was produced in states far from the
marketing area, including the States of Illinois, Iowa, Kansas,
Minnesota, New York, North Dakota, South Dakota, and Wisconsin.
The witness also faulted the Mideast order's lack of having a
performance standard for pool supply plants during the months of March
through August as another way to pool milk on the Mideast order from
other marketing areas that have lower blend prices. The evidence for
this observation, said the Cooperatives' witness, is exhibited by data
indicating that producers located in Wisconsin and South Dakota began
pooling large volumes of their milk beginning in March 2000. The
Cooperatives' witness, relying on the same statistics, observed that
the volume of milk pooled on the order during this 21-month time
period, but produced on farms located far outside the marketing area,
increased by 395.66 percent, or by 430,222,762 pounds.
The tentative final decision inadvertently listed comments filed in
brief by Land O' Lakes (LOL) as testimony given at the hearing in
regards to Proposal 1. This final decision clarifies that LOL was in
strong support of ``performance oriented'' pooling standards, along
with the adoption of Proposal 1. This support was articulated in their
post-hearing brief, and not in testimony given at the hearing.
Additional support for Proposals 1 and 2 was offered by Prairie
Farms Dairy, Inc. (Prairie Farms). Prairie Farms operates three pool
distributing plants regulated by the Mideast order. Their milk is
supplied by their 176 producer members located in Indiana, Michigan,
and Ohio.
The Prairie Farms witness stated that certain provisions of the
Mideast order have made it too easy to pool milk without the milk
actually servicing the Class I needs of the market. Federal orders
should not be written so restrictively that pooling any milk supplies
beyond normal basic Class I needs is impossible, said the Prairie Farms
witness. However, continued the witness, orders should not be written
so liberally that pooling milk becomes an end unto itself rather than a
standard that assures milk is actually serving the fluid needs of the
market. As the Mideast milk order regulations are currently written,
added the witness, the pooling of milk far beyond the day-to-day needs
of the market can and does occur.
According to the Prairie Farms witness, Class I use by Mideast
order distributing plants has been relatively stable since
implementation of order reform, but the amount of Class III and Class
IV milk pooled on the order has increased markedly. The witness
indicated the additional quantities of milk pooled on the order only
lower the returns to its members and others who actually do serve the
Class I needs of the market every day.
A witness from Foremost Farms who appeared on behalf of the Mideast
Milk Marketing Agency (MEMA), testified in support of Proposals 1 and
2. The MEMA is a new organization resulting from the union of three
previous milk marketing agencies that served milk processors by
arranging for milk supplies in the pre-reform milk orders consolidated
to form the current Mideast milk marketing area. The MEMA witness
indicated that the needs of their customers and variations in
[[Page 19296]]
production cause them to have an occasional need to secure additional
volumes of milk, citing the opening of schools as an example of when
additional milk supplies are needed. The witness also indicated that
the supply and demand situation in spring months shows increased
production and decreased Class I demands that generally begin in late
April and continue through mid-July. During this time of the year, the
MEMA witness indicated, they assume responsibility to sell milk not
required by their customers. Most often these sales are to
manufacturing plants located in the marketing area and to plants
located as far away as Wisconsin and Minnesota, the witness said.
Often, noted the witness, such sales are below the minimum class prices
of the order and the costs of disposing of surplus milk are borne by
MEMA members.
The MEMA witness noted that sufficient raw milk is secured through
its member cooperatives and other suppliers within the marketing area
to service its customers on a year-round basis, with the fall months
being the only exception. In light of this supply and demand situation,
the witness could find no reason why the Mideast marketing order should
provide for the pooling of two to three times the milk supply actually
needed to serve the Class I needs of the market.
A witness appearing on behalf of the Michigan Milk Producers
Association (MMPA) also testified in support of Proposals 1 and 2. MMPA
is a dairy farmer owned-and-operated cooperative engaged exclusively in
the marketing of milk and dairy products on behalf of 2,600 of their
member dairy farmers in Michigan, Ohio, northern Indiana, and northeast
Wisconsin.
The MMPA witness testified that each of the five predecessor orders
merged into the consolidated Mideast order had more demanding pool
plant qualification standards. The witness stressed that pooling
provisions are not intended to create barriers to pooling. However, the
witness indicated, it is reasonable to expect that a market with a
fluid demand as large as the Mideast warrants a higher level of
performance than in markets with lower Class I use.
The MMPA witness stated that adequate supplies of milk exist within
the order to satisfy the requirements of at least the Michigan portion
of the marketing area. The witness noted that during the past 24
months, Class I sales in Michigan had declined 7 percent. Also, the
witness noted that milk production in Michigan has been increasing and
indicated that local supplies have increased 7 percent since 1998. The
MMPA witness was of the opinion that with declining fluid sales and
increasing milk production, pooling standards that result in pooling
additional quantities of milk supplies cannot be justified.
The MMPA witness noted that nearly all of the increased volume of
milk pooled on the Mideast order since order reform was used at Class
III or IV manufacturing plants, which the witness concluded has only
served to lower producer pay prices. In their opinion, this occurred
because the current performance standards required for pool
qualification are too lenient. These performance standards have
resulted in an inequitable distribution of proceeds from this market's
pool, stressed MMPA, while the proceeds from the fluid market were
improperly shared with producers who did not service the Class I needs
of the market. The MMPA witness was of the strong opinion that this
situation should be treated as an emergency by the Department and a
Recommended Decision should therefore be omitted.
In addition to supporting the testimony given by the DFA witness on
behalf of the Cooperatives regarding Proposal 2, the MMPA witness
offered a modification to Proposal 2. The MMPA modification would
specifically limit the practice of using pooled milk located inside of
the marketing area to qualify milk of a plant located outside of the
marketing area for pooling its milk receipts on the order. According to
the witness, a one-time delivery of the milk of a producer located
outside the marketing area qualifies a ``distant'' producer as a
producer under the Mideast order and, in turn, qualifies the milk of a
``distant'' producer to thereafter be diverted to nonpool plants. Most
often, stressed the witness, these plants are also located at a great
distance from the marketing area and this milk need never meet the
order's performance standards. The MMPA witness concluded that the
pooling standards should not allow such milk to be part of the Mideast
pool. The witness stressed that eliminating the ability to pool milk in
this manner would not affect the efficiencies afforded by direct-
shipped milk from farms located within the marketing area. The MMPA
witness added it would also prohibit an abuse of pooling principles
that never intended to qualify milk for pooling under the order without
an actual relationship to the order's supply plants in supplying the
Class I needs of the market.
A witness from Dean Foods (Dean) testified in support of a portion
of Proposal 2. They supported eliminating the feature of the current
pool supply provision which does not establish a performance standard
during the months of March through August. They were also in agreement
with other witnesses that the Department should treat this proceeding
on an emergency basis. The Dean witness reasoned that the economic
damage to the producers whose milk actually serves the Class I needs of
the market should be resolved as soon as possible.
A witness appeared on behalf of Suiza Foods (Suiza) in general
support of Proposals 1 and 2. The witness reasoned that once
performance becomes a monthly requirement to pool milk, both processors
and producers will be better able to plan deliveries based upon the
need for milk during the fall months when milk supplies are generally
less plentiful. The witness also stated that August should be the
initial month when higher performance standards should apply because of
increased demand caused by the opening of schools occurring at the same
time as generally declining overall milk supplies.
The Suiza witness also was of the opinion that the adoption of a
net shipment provision for supply plants should also be applicable for
plants operated by a cooperative association--another type of pool
plant provided for in the Mideast order. In their post-hearing brief,
Suiza emphasized that in the interest of fairness and equitable
regulatory treatment, providing a net shipment provision applicable to
this type of pool plant would be appropriate. According to Suiza, not
providing for a net shipment feature for supply plants operated by a
cooperative association would merely change the incentives for
cooperatives that operate supply plants to become a pool plant under
this provision applicable for cooperative associations. Although not a
part of the direct testimony by the proponents of Proposal 2, or its
supporters, all parties agreed that a net shipment provision should
also be provided for plants operated by cooperative associations.
A witness representing Scioto County Cooperative Milk Producers
Association (Scioto) testified in support of Proposals 1 and 2. Scioto
has dairy farmer members in southern Ohio and northern Kentucky whose
milk is pooled on the Mideast order.
The Scioto witness noted that during the period of 2000-2001, the
amount of producer milk pooled on the Mideast market increased by
nearly 42 percent. Virtually all of this increase can be attributed to
producers in States not included as part of the Mideast marketing area,
while the amount of the
[[Page 19297]]
Class I use in the Mideast order remained relatively constant,
maintained the witness. In light of the increased amount of milk pooled
on the Mideast order, Scioto indicated their support for proposals
which would establish higher pooling standards. Scioto indicated this
would also ensure that the revenue generated by Class I sales are
properly shared with those producers and pool plants which actually
perform service to the Class I market.
The Scioto witness also indicated support for the addition of
August as a month when additional shipments should be made to
distributing plants. However, Scioto opposed establishing performance
standards for the remaining months which currently have none. The
witness concurred that the hot days of August have a significant impact
on milk production and noted more schools are starting as early as
middle August. Scioto said that this combined effect makes it more
difficult to meet the fluid needs of the market and concluded that
supply plant standards should be established to assure those needs.
Opposition to a part of Proposal 2 was offered by the Scioto
witness. The witness stated that a provision for specifying ``net
shipments'' for supply plant deliveries to pool distributing plants
should not be adopted. The witness was of the opinion that performance
standards should only require supply plants to ship milk when needed by
the market and that performance standards should provide the
flexibility to retain milk at local supply plants during the flush
season when milk supplies are more plentiful.
Opposition to a portion of Proposal 2 by LOL was provided in their
post-hearing brief. LOL indicated they do not support establishing a
``net shipments'' provision because it would effectively raise the
supply plant shipping standards above the indicated pool supply plant
performance standard. The LOL brief indicated that virtually all
distributing plants have some transfers or diversions resulting from
decreased demand on weekends and holidays for Class I milk. According
to LOL, this should be considered so that supply plants are not
penalized by being viewed as not performing in supplying the fluid
market during such situations.
Proposal 8, offered by the Handlers, seeks, in part, to change the
months during which pool supply plant shipping standards would be
applicable--to begin in August and continue through to February.
Proposal 8 also seeks to establish a 6-month re-pooling delay whenever
a pool supply plant elects to not meet the pool plant standards for the
month. According to the Handlers, a 6-month delay in being able to
return to the order as a pool plant would eliminate the ability of
handlers to participate in the pool only when it was advantageous and
to not participate in the pool when it was not.
A witness from Dean Foods, appearing on behalf of the Handlers,
testified that the current pool supply plant provisions permitting
handlers to pool and de-pool milk causes market instability. The
witness noted the occurrence of a class-price inversion (when the blend
price is lower than the Class III price) as an example of when supply
plants have the economic incentive to opt out of pooling their milk
supplies. Nevertheless, the Dean witness was of the opinion that a 6-
month re-pooling delay would serve to assure consistent and reliable
association of milk with the marketing area and in meeting the market's
Class I demands.
Opposition to Proposal 8 was raised by DFA. DFA was of the opinion
that class-price inversions are a function of the order providing
advanced pricing to handlers for Class I and II milk. The witness
indicated advanced pricing is a needed and good provision of Federal
milk marketing orders. However, if the Class I sector of the market
were not provided advanced pricing, reasoned the DFA witness, depooling
might never occur. Nevertheless, noted the DFA witness, there should be
no reason why Class III and IV handlers should ever have to equalize
class-use values with the blend price by paying this difference into
the pool for the benefit of Class I handlers simply because of price
inversion. Imposing a 6-month re-pooling delay may cause Class III and
IV handlers to pay into the pool only to retain pool status, but doing
so can result in causing financial damage to the reserve and balancing
sectors of the market, maintained the DFA witness.
Proposal 5, offered by the Cooperatives, seeks to eliminate what is
commonly referred to as the ``split plant'' provision from the Mideast
order. A split plant designates a portion of the plant as the ``pool''
side and another portion of the plant as the ``nonpool'' side.
According to the Cooperatives, this provision was initially used to
accommodate a plant's use of both Grade A and Grade B milk while
providing for diversion from the pool plant side of the plant to the
nonpool side for use in manufactured products. This designation was
provided, said the witness, for orders with lower Class I differentials
and low Class I use. However, the witness noted that its purpose seems
to have been broadened to also afford a supply plant to gain economic
efficiencies by avoiding incurring costs for transporting milk solely
to meet pool standards.
The Cooperatives' witness argued that the split plant provision
continues to have validity in low Class I use and low Class I
differential orders, but does not have a legitimate role to play in a
higher differential, higher utilization order like the Mideast. This
provision, said the witness, serves no purpose for the Mideast order,
stressing that none of the Mideast's predecessor orders provided for it
and that no plant located within the Mideast marketing area makes use
of the provision. Rather, it has only become a tool to pool distant
milk on the market which is not serving the Class I milk needs of the
market, maintained the witness.
Citing data provided by the Mideast Market Administrator, the
Cooperatives observed that increasing volumes of milk pooled from
distant areas began in June 2000. The amount of distant milk pooled
then was about 16 million pounds and grew dramatically to some 480.5
million pounds by June 2001. The total pounds of milk pooled through
split plants ranged from 69 to 179 million pounds for the months of
January through August 2001, noted the witness. The witness indicated
that this statistic represents a significant percentage of the total
milk pooled on the order. Diversions of distant milk by pool
distributing plants, added the witness, were similarly significant.
However, the witness stressed that actual physical deliveries used to
qualify the additional volumes of milk pooled through split plants were
as little as 50,000 pounds. These statistics, said the Cooperatives'
witness, clearly prove that the current pooling standards are allowing
milk to be pooled without demonstrating reasonable relationship, or
providing actual service, to the market's fluid needs. According to the
witness, using split plants to pool milk in this way can only be viewed
as an abuse of an accommodation not intended when originally adopted
for the Mideast order.
Scenarios were presented by the Cooperatives' witness as examples
for illustrating the harm being caused by the split plant provision.
One example depicted how milk currently being pooled on the order, but
located far from the marketing area, would not likely seek to be on the
Mideast order without a split plant provision. According to the
Cooperatives' witness, this is because the cost of transportation would
exceed the gain of receiving the Mideast's blend
[[Page 19298]]
price. Another example demonstrated the negative impacts of split
plants to the Mideast market because of the lack of diversion limits.
According to the Cooperatives' witness, the pool side of the split
plant is being used to establish an ``outpost'' that serves no other
purpose than to qualify milk for pooling from other marketing areas
where blend prices are lower. By meeting the minimal one-day delivery
standard for becoming a producer on the order, the milk of producers
located far from the marketing area, but whose milk is actually
delivered to an ``outpost'' pool plant nearer their farms, may qualify
milk for pooling on the Mideast order. Further, stressed the witness,
the milk of these producers can thereafter be diverted to manufacturing
plants nearer their farms without ever again being delivered to pool
plants located in marketing area. This milk can hardly be viewed as
servicing the market, the Cooperatives' witness asserted. Additionally,
concluded the witness, the daily, weekly, and seasonal supplying of
fluid milk, and meeting the balancing needs of the market are
consistently being borne by the local producers who are only having
their blend price diluted from the pooling of milk that does not
consistently provide these services.
A witness representing Suiza testified in support of Proposal 5.
This witness stressed that the split plant provision did not exist in
all marketing orders prior to order reform and is not used today for
the purpose for which it was originally intended. The Suiza witness
concluded that the split plant provision is clearly not needed nor
justifiable under the Mideast order.
MMPA also testified in support of Proposal 5. The witness similarly
observed that pooling milk through the split plant provision only
serves to depress prices for producers who actually supply the market.
The witness maintained that a principle responsibility of the Federal
milk order program is to preserve the proceeds from the fluid market
for those producers who demonstrate an ability and willingness to serve
that market. Since the split plant provision does not serve this end,
concluded the witness, it should be eliminated from the order.
The witness representing Scioto expressed doubt that adopting
Proposal 5 would solve the pooling problem presented by split plants.
In this regard, the witness proposed a limit on the maximum amount of
producer milk that could be associated with a pool supply plant during
the months when no performance standard is applicable. The witness
offered that 110 percent of the daily average producer receipts, pooled
during the months specifying a performance standard, is a reasonable
alternative performance standard for such months. According to the
Scioto witness, amending the split plant feature in this way would
recognize normally higher production levels during the spring and
summer months as compared to generally lower production levels during
the fall and winter months. It would still allow supply plants from
outside the marketing area to participate in the Class I returns of the
market for the entire year, noted the witness, but would prevent plants
from abusing the market by only pooling milk during the spring and
summer months with milk that does not service the market.
Post-hearing briefs submitted by LOL expressed opposition to the
adoption of Proposal 5. The split plant provision, indicated LOL, has
historically recognized commingled Grade A and Grade B milk in
procurement areas and has provided a way for Grade A milk to be
diverted to the non-pool plant for manufacturing uses. Removing this
pooling feature, concluded LOL in their brief, would result in the need
for full plant accountability, including determining milk shrinkage and
overage, in the manufacturing (nonpool) portion of a plant. LOL is of
the opinion that this would be very burdensome and would result in the
need for costly record keeping by both handlers and the Market
Administrator's office, while providing no benefit to producers or
handlers.
As specified in the tentative final decision, the record contains
testimony clearly indicating general support for increasing and
seasonally adjusting the distributing plant pooling standard offered by
Proposal 1. The proposal would increase minimum standards for
triggering pool plant status for a distributing plant and therefore
become regulated under the terms of the Mideast milk marketing order.
Beyond statements indicating general support for the adoption of
Proposal 1, the record contains little, if any, evidence that indicates
why this pooling standard should be increased. To the extent that
excess milk is being pooled on the order through distributing plants,
this decision attributes the pooling of excess milk to inadequacies in
other pooling standards of the order. Specifically, the record reveals
that the lack of diversion limits during certain times of the year
provides the ability for distributing plants to pool milk on the
Mideast order (the issue of diversions and diversion limits are
discussed later in this decision) far beyond the legitimate reserve
supply of milk for the plant. Therefore, in the absence of other
evidence, and as specified in the tentative final decision, the record
does not support a finding that distributing plants should meet a
higher standard by increasing the amount of milk receipts disposed of
as route disposition, or transferred in the form of packaged fluid milk
products, as a condition for designation as a pool plant.
The record of this proceeding strongly supports the conclusion of
the tentative final decision that the various features of the Mideast
order's supply plant pooling standards were either inadequate or
unnecessary. Because the order currently contains inadequate pooling
standards for supply plants, much more milk is able to be pooled on the
order than can be considered properly associated with the Mideast
market. This milk does not demonstrate a reasonable level of
performance necessary to conclude that it provides a regular and
reliable service in satisfying the Class I milk demands of the Mideast
marketing area. Therefore such milk should not be pooled on the order.
The pooling standards of all milk marketing orders, including the
Mideast 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 for sharing in the Class I proceeds. Pooling standards of the
Mideast order are represented in the Pool Plant, Producer, and the
Producer milk definitions of the order. Taken as a whole, these
definitions set forth the criteria for pooling. The pooling standards
for the Mideast order are based on performance, specifying standards
that, if met, qualify a producer, the milk of a producer, or a plant to
enjoy the benefits arising from the classified pricing of milk.
Pooling standards that are performance based provide the only
viable method for determining those eligible to share in the marketwide
pool. It is primarily the Class I use of milk that adds additional
revenue, and it is reasonable to expect that only those producers who
consistently supply 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 be reflective of the supply and demand
conditions of the marketing area. This is important because pooling
this milk ensures the receipt of the market's blend price.
[[Page 19299]]
Similarly, supply plant pooling standards should provide for those
features and accommodations that are reflective of 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 is not
serving the fluid needs of the market, it is appropriate to re-examine
the need for continuing to provide for that feature as a necessary
component of the pooling standards of the order. One of the objectives
of pooling standards is to ensure an adequate supply of fluid milk for
the marketing area. 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. Similarly, another objective of
pooling standards is for the proper identification of 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 lowering of returns to those producers whose milk is serving the
fluid market.
As noted in the tentative final decision, the record provides
sufficient evidence to conclude that several features of the supply
plant definition are not being used for the reasons they were
originally intended. Other shortcomings of the Mideast order's pooling
standards, specifically as they relate to producer milk, also
contribute to inappropriately pooling the milk of producers who are not
a legitimate part of the Mideast marketing area. Here too, the impact
is an unwarranted association of milk on the order. Milk is classed at
lower prices--a decrease in the relative Class I utilization of the
market--which results in a lower blend price to those producers who do
supply the Class I needs of the market.
The tentative final decision and this final decision find that the
milk of some producers is benefitting from the blend price of the
Mideast order while not reasonably demonstrating a service to the Class
I needs of the Mideast marketing area. This finding is attributable to
faulty pooling standards. The pooling provisions provided in the Final
Decision of milk order reform, implemented on January 1, 2000,
established pooling standards and pooling features that envisioned the
needs of the market participants resulting from the consolidation of
those pre-reform orders. The reform Final Decision, as it related to
the Mideast marketing area, did not intend or envision that the pooling
standards adopted would result in the sharing of Class I revenues with
those persons, or the milk of those persons, who do not provide a
reasonable measure of service in providing the Class I needs of the
market. The reform Final Decision 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 Mideast order were designed 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 those market
participants. As noted in the tentative final decision, the record of
this proceeding reveals that the combination of the standards and
features adopted for pool plants, especially those that apply to pool
supply plants, are not the appropriate or reasonable standards for a
much larger milk marketing area.
Accordingly, the tentative final decision and this final decision
find basic agreement in the evidence presented by the proponents of
Proposal 2 and Proposal 5, and those entities who expressed their
support for adopting these proposals, that certain pool plant
provisions should be eliminated from the Mideast order. These include:
(1) The provision of the order that currently provides for automatic
pool plant status during the 6-month period of March through August for
certain pool supply plants; (2) the provision that currently counts
supply plant shipments to distributing plants regulated by another
Federal milk marketing order as a qualifying shipment for meeting
supply plant performance standards of the Mideast order; and (3) the
provision of the order that provides for ``split plant'' recognition.
Supply plant deliveries of milk to a distributing plant regulated
by another Federal milk marketing order should no longer be considered
as a qualifying shipment for meeting the supply plant performance
standards of the Mideast order. While such milk is providing some
servicing of the fluid needs of another marketing area, such milk
provides no service to the Class I needs of the Mideast order. Pooling
standards for the Mideast marketing area, in part, provide for
determining those producers and the milk of those producers who are
serving the Class I needs of the Mideast marketing area and thereby
receive the blend price of the Mideast order. It is reasonable, in
light of this objective, to conclude that serving the fluid needs of
another market provides no service to the Mideast market. Accordingly,
such milk should not be considered as a qualifying shipment for meeting
the supply plant performance standard of the Mideast order.
In their exceptions to the tentative final decision, LOL reiterated
their opposition to the elimination of milk shipments to a distributing
plant regulated by another Federal milk order as pool-qualifying
shipments under the Mideast order. They asserted that not allowing
shipments to distributing plants located outside the Mideast marketing
area to be considered as a qualifying shipment for pooling purposes is
discriminatory to producers and restricts access to the proceeds of the
Mideast marketwide pool.
The modification of Proposal 2, offered by MMPA, intended to
provide a pooling standard that assists in the proper identification of
the milk of those producers who actually provide a service to the
order's Class I market, and previously adopted on an interim basis, is
adopted by this final decision. The proposed amendatory language has
been modified by the Department and is presented below. Safeguards are
added to the supply plant provision allowing that up to 90 percent of a
supply plant's qualifying shipments to distributing plants be directly
from farms of producers by diversion. The intent of this pooling
feature for supply plants was to provide flexibility and offer
efficiency in transporting milk, and thereby be less burdensome, for
those market participants of the pre-reform orders who would continue
to be pooled on the larger consolidated Mideast order. This feature was
not intended to be used as a mechanism to pool milk on the order that
was not providing a reasonable measure of service in supplying the
Class I needs of the Mideast marketing area.
As noted in the tentative final decision, the intent of the
modification of Proposal 2 by MMPA sought reasonable safeguards so that
milk pooled by handlers from sources distant from the marketing area,
resulting from the pooling of milk from within the marketing area,
would end. The reasons for modifying Proposal 2 are well supported by
evidence contained in the record of this proceeding. Currently, plants
located far from the marketing area can use diversion of near-in milk
for up to 90 percent of the distant plant's qualifying deliveries.
Supply plants qualified in this manner do not provide milk to the
marketing area that can be shown to be a service in meeting the Class I
needs of the Mideast marketing area. Therefore, both the
[[Page 19300]]
tentative final decision and this final decision find that there is no
reasonable basis to conclude that such milk should be pooled on the
order and thereby receive the order's blend price. This modification
would establish that supplemental milk supplies actually perform a
reasonable measure of service in supplying the fluid needs of the
Mideast marketing area.
Finally, this decision adopts a ``net shipment'' provision, a
feature of Proposal 2. As intended by the proponents, a net shipment
feature would not include transfers or diversions of bulk fluid milk
products of a supply plant's qualifying shipments to a distributing
plant by any amount of bulk milk transfers or diversions made from the
distributing plant. Providing such a feature for the pooling standards
for the Mideast order supply plants is reasonable, notwithstanding the
objections to its adoption by Scioto and LOL. It is true that
distributing plants have some transfers and diversions resulting from
variations in demand stemming from weekend days and holidays. However,
the current supply plant performance standard is below the Mideast
market's Class I use of milk, even with the pooling of milk
inappropriately associated with the market due to faulty pooling
standards. This decision finds it unlikely that transfers and
diversions by distributing plants on such occasions would involve a
sufficient volume of milk to cause a supply plant to lose pool status.
Additionally, given other changes to the order's pooling standards
adopted in this final decision (discussed below), placing a limit on
diversions that can be made by any pool plant to a nonpool plant should
provide the necessary safeguards that would make it even more unlikely
that a supply plant would lose its pool status. As indicated in the
tentative final decision, this final decision finds that adoption of a
net shipment feature in the pooling standards for Mideast supply plants
will aid in properly identifying the milk of those producers who
actually supply milk to meet the fluid needs of the market.
As noted in the tentative final decision, a brief submitted by
Suiza emphasized the need for providing a net shipment provision for a
supply plant operated by a cooperative association. The brief indicated
that it would provide for fair and equitable regulatory treatment of
two similar types of supply plants. The tentative final decision agreed
with the need to apply the same net shipment provision to supply plants
operated by a cooperative association. The tentative final decision
also noted that both supply plant and cooperative supply plant
performance standards were, for all intents and purposes, identical.
Subsequently, the tentative final decision concluded it reasonable to
adopt the same standard in considering the actual, or net, shipments
made to distributing plants by a plant operated by a cooperative
association.
In their exceptions to the tentative final decision, DFA, MMPA, and
Prairie Farms indicated opposition to net shipment provisions for
supply plants operated by cooperative associations as provided for in
Sec. 1033.7(d) of the order. Opponents argued that adoption of this
standard would, in effect, apply more rigorous performance standards to
cooperative supply plants qualified under Sec. 1033.7(d) than to
supply plants qualified under Sec. 1033.7(c) of the order. Opponents
noted that net shipments for a cooperative supply plant qualified under
Sec. 1033.7(d) would be applicable to the total volume of milk pooled
by the entire cooperative, while net shipments for a supply plant
qualified under Sec. 1033.7(c) would be based only on the total volume
of milk pooled at the plant. DFA, MMPA, and Prairie Farms described the
net shipments provision adopted on an interim basis as critical for
supply plants qualified solely on that plant's volume of milk receipts.
However, for cooperative supply plants that qualify on the basis of the
cooperative's entire supply of milk receipts, the net shipments
provision should not be provided for in the final decision.
The Department agrees with the exceptions to the tentative decision
by DFA, MMPA, and Prairie Farms to exclude supply plants qualified
under Sec. 1033.7(d) from the net shipments provision. A supply plant
operated by a cooperative association qualified under Sec. 1033.7(d)
qualifies their milk for pooling by shipping a percentage of all the
milk of the entire cooperative to pool distributing plants. In
contrast, supply plants qualified under Sec. 1033.7(c) need only ship
a percentage of the milk physically received at the plant to a pool
distributing plant. Consequently, it is reasonable to conclude that a
net shipment provision is not necessary for determining if a
cooperative supply plant under Sec. 1033.7(d) has to meet the
performance standard. Accordingly, this final decision does not adopt a
net shipments provision for cooperative supply plants under Sec.
1033.7(d).
Providing a 6-month re-pooling delay whenever a supply plant opts
not to meet the pooling standards for the month would not tend to
provide for orderly marketing conditions in the Mideast marketing area.
As noted in the tentative final decision, the record indicates that
handler interests seek every assurance for a steady and reliable milk
supply as the order can reasonably provide. Providing pooling standards
that may cause a supply plant to consider the longer-term implications
of dropping off the pool may also tend to ensure the desired outcome of
assuring reliable deliveries of milk to fluid handlers. However, the
need for a provision to prohibit a supply plant from rejoining the pool
through proper performance after a 6-month delay is not supported by
the record and is not adopted in this final decision.
Milk marketing orders are instruments for promoting stability in
the marketing relationship between producers and handlers. In this
regard, and considering the marketing conditions of the Mideast
marketing area, promoting stability in this manner is not appropriate
or needed. As noted in the tentative decision, the record indicates
that fluid milk handlers have not had significant difficulties in
securing milk supplies since the implementation of milk order reform.
To the extent that handlers fear the potential disruption to the market
that may arise from depooling, that fear to date is only speculative.
The most important evidence provided on the record that provides
any justification for adopting a 6-month re-pooling delay rests on the
possible occurrence of a class-price inversion. Handlers see the issue
of opting off-and-on the pool as rushing to join the pool to secure the
advantages of price protection and dropping from the pool when prices
for Class III and IV milk are higher than the order's blend price.
Further, handlers worry that during such times, their ability to obtain
needed milk supplies is diminished. The DFA witness is of the opinion
that penalizing supply plants, often cooperative owned, may cause
financial damage to be borne by the manufacturing sectors of the
market. Additionally, DFA does not endorse the notion that producers
should incur any penalty because of price outcomes which, they
conclude, are the result of the order program providing for the advance
pricing of Class I and II milk that serves the interest of handlers.
The tentative decision and this final decision make no finding on
whether advance pricing is a cause or contributor to class-price
inversions. Additionally, neither the tentative decision or this final
decision make any findings regarding the damage that may result to
cooperatively owned manufacturers by being prevented from rejoining the
pool. These are both far beyond the scope of
[[Page 19301]]
this proceeding. However, the tentative decision and this final
decision do find that the amendments to the pooling standards adopted
by this final decision, taken as a whole, strengthen the effectiveness
of the order for the benefit of both producers and handlers, will
provide for more orderly marketing conditions, and provide for a more
consistent supply of milk to Class I handlers.
b. Standards for producer milk
Minimum Deliveries to Pool Plants--The Touch Base Standard. The
proposal seeking to change certain standards and features of the
Producer milk provision of the order, specified in the tentative final
decision, is also adopted in this final decision. The following
amendments include:
(1) Increasing the number of days of milk production of a producer
to be delivered to a pool plant before the milk of the producer is
eligible for diversion during each of the months of August through
November, or ``touch base'' is increased to 2-days' milk production. In
this regard, August is an addition to the touch base period.
Additionally, the amended touch base provision establishes a 2-day
touch base standard for new producers coming on the Mideast market
during each of the months of December through July. The 2-days' milk
production touch base standard will be applicable only if the producer
has not been part of the Mideast market during each of the previous
months of August through November. Adoption of a 2-day touch base
standard therefore concludes that the higher standards of either 3 or 4
days, supported by handlers and Scioto, is not adopted.
(2) Establishing diversion limits for all pool handlers in each
month of the year. Additionally, diversion limits will be seasonally
adjusted. For each of the months of August through February, the
diversion limit shall be 60 percent. For each of the months of March
through July, the diversion limit shall be 70 percent.
(3) Eliminating the ability of a pool plant to increase diversions
to nonpool plants by diverting milk to a second pool plant.
Proposal 7, which sought to add the months of August and March to
the current diversion limit standard of 60 percent for each of the
months of September through February, was not adopted in the tentative
final decision and is not adopted in this final decision.
Proposals 3, 7, and 9 seek to modify the order's standards for
determining the eligibility to pool the milk of a producer on the
order. The standards for determining this are described in the Producer
milk provision of the order. These three proposals are similar in the
changes proposed and the specific details of each proposal are
discussed in greater detail below. As explained earlier in this
decision, the collective references of the proponents as the
``Cooperatives'' and ``Handlers'' continues. Proposal 3 was offered by
the Cooperatives, Proposal 9 by the Handlers, and Proposal 7 by the
Independent Dairy Producers of Akron (IDPA), an association of dairy
farmers whose milk is pooled on the Mideast order.
A proposal, published in the hearing notice as Proposal 6, did not
receive testimony at the hearing and is considered by this decision to
be abandoned. This proposal called for providing year-round diversion
limits as did Proposal 3, but offered slightly differing seasonal
adjustments. No further reference will be made in this proceeding to
Proposal 6.
Published in the hearing notice as Proposal 3, the Cooperatives
seek changes in the number of days the milk of a dairy farmer must be
physically received at a pool plant, and in what months the standards
should apply (commonly referred to as a ``touch base'' provision),
before being eligible for diversion to nonpool plants. Additionally,
Proposal 3 would establish diversion limits for producer milk in months
where no limit is currently provided by the order and would seasonally
adjust these limits.
(1) Touch base. Proposal 3 would change the touch base feature of
the Producer milk provision by raising the current standard from one
day's milk production to two days' milk production of a producer in
each of the months of August through November. Additionally, Proposal 3
also includes a proviso that, in the event a handler did not cause at
least two days' milk production of a producer to touch base during each
of the months of August through November, at least two days' production
would need to touch base in each of the months of December through July
before milk is eligible for diversion to nonpool plants. Proposal 7,
proposed by the IDPA, seeks a 4-day touch base provision only for each
of the months of August through March.
(2) Diversion limits Proposals 3 and 9 seek diversion limits that
would be applicable year round but differ on the level proposed for the
spring and summer months. Under Proposal 3, a 60 percent limit would be
applicable in each of the months of August through February, and a 70
percent limit would be applicable in each of the months of March
through July. Alternatively, Proposal 9 would specify a 60 percent
limit in each of the months of August through February, but an 80
percent limit for each of the months of March through July. Proposal 7
seeks only to change the months in which a diversion limit would be
provided from the current 60 percent during each of the months
September through February and have the 60 percent limit be applicable
during each of the months of March through August.
The witness representing the Cooperatives testified that the
current provisions of the Mideast order do not adequately define the
potential amount of milk that can be pooled on the order and attributed
this shortcoming, in part, to the lack of adequate diversion limits.
The witness also indicated that establishing a limit on the amount of
producer milk that a pool plant can divert to a nonpool plant where
none are now specified would correct these deficiencies of the order's
pooling standards. The witness also cited the current touch base
standard as contributing to the improper pooling of the milk of
producers not actually serving the Class I needs of the market. The new
2-day touch base standard offered by Proposal 3, indicated the witness,
would need to be met before additional milk would be eligible for
diversion to nonpool plants.
Continental Dairy Products (Continental), a cooperative of dairy
farmers with members whose milk is marketed and pooled on the Mideast
order, indicated their support for amending the touch base standard as
well as providing year-round diversion limits on producer milk. They
noted that producer blend prices in the Mideast marketing area have
been reduced by as much as $8 million in a single month because of
inappropriate pooling standards. The pooling standards in the Mideast
order do not currently require a physical and economic association with
the marketing area, noted the witness, and therefore an enormous amount
of milk has been pooled on the Mideast order.
A witness from Prairie Farms, representing the positions of the
Cooperatives, testified in support of Proposal 3. The witness testified
that increasing the touch base provision would ensure that enough milk
would be available to cover the day-to-day fluid needs of the market
along with providing for adequate milk reserves. At the same time, said
the witness, the proposal would reduce the ability to pool milk on the
order that is not serving the markets fluid needs. The witness noted
that their dairy farmer
[[Page 19302]]
members have been financially harmed by the unwarranted additional
supplies of milk being pooled on the order. The Cooperatives' witness
stressed that pooling additional volumes of milk only serves to lower
returns to Mideast producers and supplemental suppliers who are
actually serving the fluid needs of the market every day.
A witness appearing on behalf of MEMA also testified in support of
Proposal 3. The MEMA witness related that in responding to changes in
customer needs, in addition to variations in production, their need to
secure additional volumes of milk for the fall months actually begins
in August and continues through November. This, noted the witness, is
because as schools return to session the demand for milk tends to
increase.
A witness appearing on behalf of MMPA testified in support of
Proposal 3. The MMPA witness offered that increasing the touch base
standard to 2-days' production better reflects the higher fluid needs
of the market that exist during specific months of the year. The
increase in demand for fluid milk attributed to school openings was
also offered by the witness as an example of such increased demand
beginning in August.
MMPA also indicated support for the proviso in Proposal 3 that
would establish a two-day touch base standard for each of the months of
December through July for producer milk which did not meet the touch
base standard in the proceeding months of August through November.
According to the witness, this feature of the touch base standard
supports the concept that pooling standards be performance oriented and
more accurately identify the milk of those producers which actually
service the fluid needs of the market.
A witness from Dean also testified in general support of Proposal
3. However, Dean offered a modification to Proposal 3 by endorsing a 3-
day touch base standard for producer milk. The witness provided an
analysis on the effects of ``non-historic'' milk pooled on the Mideast
order over the period of January 2001 through August 2001. This
analysis concluded that the Mideast's Producer Price Differential (PPD)
had been reduced by an average of 55 cents per hundredweight during
this 8-month time period. The witness stressed that this loss of
revenue is being borne by the producers who actually and regularly
supply the fluid needs of the market. Accordingly, indicated the Dean
witness, the pooling provision standards regarding producer milk need
changing.
A witness appearing on behalf of Suiza expressed similar general
support for Proposal 3 and endorsed the Dean modification calling for a
3-day touch base standard. Suiza was of the opinion that without a
meaningful touch base standard, individual producer-suppliers do not
actually have to perform by physically delivering milk to the Mideast
market as a condition for pooling. Meaningful touch base provisions,
noted Suiza, also provide handlers with reasonable assurance of
performance while simultaneously ensuring that the milk of dairy
farmers that actually serves the market is protected against lower
returns caused by pooling unneeded milk. Additionally, the Suiza
witness testified in support of specifying August as a month when lower
diversion limits should be applicable. The witness also cited the
opening of schools and the stresses on production from summer as
reflections of increasing demand for Class I milk occurring during a
time of generally lower milk production.
A witness representing Scioto expressed general support for
Proposal 3 but offered a 4-day touch base standard for each of the
months of August through November and a 2-day touch base standard for
each of the months of December and January.
Testifying in support of Proposal 7, the IDPA witness stressed that
increasing the touch base standard to 4 days' production should be
applicable for each of the months of August through March and providing
a 60 percent diversion limit for each of these same months would be
beneficial to Mideast producers. The witness indicated that a physical
delivery of milk to the order's pool plants is a key indicator of milk
being a legitimate part of the market. The witness expressed support of
the need for an emergency decision because their returns are being
lowered by pooling milk that should not be considered as part of the
Mideast market.
Proposal 9, offered by the Handlers, seeks to limit the amount of
milk that could be diverted from a pool plant to a nonpool plant. The
proposal would set a 60 percent limit during each of the months of
August through February and an 80 percent limit during each of the
months of March through July. This proposal was abandoned by its
proponents. Instead, the proponents agreed to support Proposal 3
offered by the Cooperatives. While the Handlers indicated support for
Proposal 3, they were of the opinion that adopting a 3-day touch base
standard instead of a 2-day touch base standard would be best. They
indicated a 3-day touch base standard would contribute to a more
accurate identification of the milk of producers that actually supply
the fluid milk needs of the Mideast marketing area.
The witness representing Scioto testified in support of Proposal 9.
Proposal 9 limits diversions to a percentage of the milk physically
received at a plant, noted the witness. The concept of allowing
diversions based on milk physically received is logical, said the
witness, and is preferred by most of the dairy industry. The witness
was also of the opinion that August should be included as a month that
provides for a lower level of diversions to nonpool plants. The
combination of schools opening in the middle of August together with
the typically hot days of the summer season, cited the witness, has
negative impact on milk production and therefore the order should have
lower limits on the amount of milk that can divert to nonpool plants.
Diversion limits of 60 percent during each of the months of August
through February and 80 percent during each of the months of March
through July would also assure consumers and fluid milk processing
plants that their needs will be met, concluded the Scioto witness.
All milk marketing orders, including the Mideast, provide some
standard for identifying those producers who supply the market with
milk. To qualify as a producer on most orders, including the Mideast, a
producer can be associated with a market by making a delivery to a
market's pool plant. Additionally, other standards need to be met
before the milk of that producer is eligible to be diverted to a
nonpool plant and have that diverted milk pooled and priced under the
terms of the order. Currently, the Mideast order's standard is that one
day's production of milk of a producer be delivered to a pool plant
before that plant can divert the milk of the producer to a nonpool
plant.
The touch base standard of an order establishes an initial
association by the producer and the milk of the producer with the
market. Markets that exhibit a higher percentage of milk in fluid use
generally have touch base standards specifying more frequent physical
milk deliveries to pool plants. In this way, the touch base provision
serves to maintain the integrity of the order's performance standards.
When a touch base standard is too low, the potential for disorderly
marketing conditions arises on two fronts. First, pool plants are less
assured of milk supplies. Second, and most important for the Mideast
marketing area, an inadequate touch base standard provides the means
[[Page 19303]]
for the milk of producers, not providing a service in meeting the fluid
needs of the market, to be pooled on the order. This reduces the
order's blend price paid to producers who are providing service to the
Class I market.
As specified in the tentative final decision, the record of this
proceeding indicated various opinions about what the proper touch base
standard for the Mideast order should be and when it should be
applicable. These opinions ranged from 2 days' to as much as 4 days'
milk production of a producer. All agree that August would be a more
appropriate beginning month for its applicability. The more compelling
observation is that all participants in this proceeding recognized the
need for, and supported increasing, the touch base standard. The issue
for the Department is reduced to deciding which standard best serves
the needs of the Mideast order.
On the basis of the evidence, both the tentative final decision and
this final decision support adopting a 2-day touch base standard and
having this standard be applicable beginning in August. While a higher
standard would tend to further maintain the integrity of the order's
performance standards, adopting a higher touch base standard may result
in the uneconomic movement of milk solely for the milk of producers to
meet a pooling standard. Additionally, the Mideast order currently
provides that the Market Administrator may adjust the touch base
standard in the same way the order provides for the Market
Administrator to adjust the performance standards for supply plants and
the diversion limits for all pool plants. Other changes adopted in this
final decision will also serve to more accurately identify the milk of
producers who should be pooled on the order. Together with the Market
Administrator's authority to administratively change the touch base
standard, sufficient safeguards are provided to accomplish both needs.
Provisions for diverting milk are a desirable and needed feature of
an order because they facilitate the orderly and efficient disposition
of the market's milk not used for fluid use. When producer milk is not
needed by the market for Class I use, its movement to nonpool plants
for manufacturing, without loss of producer milk status, should be
provided for. Preventing or minimizing the inefficient movement of milk
solely for pooling purposes need also 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 associated with the integral milk supply of a pool plant. With
regard to the pooling issues of the Mideast order, it is the lack of
diversion limits to nonpool plants that significantly contributes to
the pooling of milk on the order that does not provide service to the
Class I market. Such milk is not a legitimate part of the reserve
supply of the plant.
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 plant. Therefore, such milk
should not be pooled.
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. Additionally, pooling milk
far in excess of reasonable needs of the market due to the lack of
diversion limits only provides for the association of milk with the
market by what is often described as ``paper-pooling'' and not by
actual service in meeting the Class I needs of the market. Without a
diversion limit, the order's ability to provide effective performance
standards and orderly marketing is weakened.
The lack of a diversion limit standard applicable to pool plants
opens the door for pooling much more milk and, in theory, an infinite
amount of 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 Mideast marketing area
evidenced by the record, this decision finds that the lack of year-
round diversion limits on producer milk has caused more milk to be
pooled on the order than can reasonably be considered as properly
associated with the market.
The lack of a diversion limit standard applicable for diversions to
nonpool plants has also resulted in the pooling of milk that does not
provide a service in meeting the Class I needs of the Mideast marketing
area. Proposal 7 offers reasonable diversion limit standards that would
be adjusted seasonally to reflect the changing supply and demand
conditions of the Mideast marketing area. Therefore, a 60 percent
diversion limit standard for each of the months of August through
February and a 70 percent diversion limit standard for each of the
months of March through July is adopted. To the extent that these
diversion limit standards may warrant adjustments, the order already
provides the Market Administrator with authority to adjust these
diversion standards as marketing conditions may warrant.
As mentioned above, the Mideast order currently provides for the
diversion of milk from a pool plant to a second pool plant. However,
the order does not consider such diversions in the total diversion
limit established for pool plants. It is through this shortcoming of
the order's pooling standards that the intent to only pool the milk of
producers who are consistently serving the Class I demands of the
market are circumvented. In this regard, a pool plant is able to
increase its milk diversions to a nonpool plant through diversions to a
second pool plant. The amendment provided below in the Producer milk
definition of the order provides the necessary technical correction
that will include diversions to other pool plants in the manner no
differently than diversions to nonpool plants.
As specified in the tentative decision, several changes to the
pooling standards contained in the Producer milk definition of the
order were needed to maintain the integrity of the other amendments
made in this decision affecting the performance standards for supply
plants. As indicated earlier, the record indicates that certain pooling
provisions of the Mideast order are either inadequate or unnecessary.
With respect to the pooling standards of the order as they are
contained in the Producer milk provision, the tentative decision and
this final decision find that certain features of the provision are
inadequate. These include:
(1) The touch base standard currently requiring one-days' milk
production of a producer be delivered to a pool plant is not providing
a sufficient standard in identifying those producers and the milk of
those producers who are serving the fluid needs of the market.
(2) The lack of year-round diversion limits for all pool plants has
resulted in the ability to pool far more milk than can be reasonably
part of the reserve supply of the plants pooling such milk. The lack of
a diversion limit for each and every month of the year has left the
potential size of the marketwide pool undefined. This inadequacy of the
Mideast order has resulted, too, in pooling the milk of producers who
are not providing a service to the Class I needs of the market. This
inadequacy contributes to the unnecessary erosion
[[Page 19304]]
of the order's blend price caused by pooling additional volumes of milk
used in lower priced classes which, in turn, reduces the market's Class
I utilization percentage of milk.
(3) The lack of limiting the ability of a pool plant to divert milk
to a second pool plant in the same manner as diverted milk to a nonpool
plant contributes and magnifies the impact of pooling the milk of
producers who provide no service to the Class I needs of the market.
The receipt of a lower blend price to those producers who are serving
the Class I needs of the market is found to be unwarranted and
contributes to disorderly marketing conditions in the Mideast marketing
area.
2. Rate of Partial Payment
Proposal 4, seeking to increase the rate of partial payment for
milk, was not recommended for adoption in the tentative decision and is
not adopted in this final decision. This proposal, offered by DFA,
would increase the rate of partial payment to producers and cooperative
associations for milk delivered during the first 15 days of a month to
110 percent of the previous month's lowest class price.
The intent of this proposal, according to the DFA witness, is to
improve the cash flow of dairy farmers pooled on the Mideast order.
According to DFA, a partial payment that more closely equals the final
payment for milk would more accurately reflect the true value of the
milk delivered to handlers during the first 15 days of the month. The
DFA witness testified that the partial payment rate, as a share of the
total payment for milk, has widened since the formation of the
consolidated Mideast marketing area. The witness stressed that
producers need a more consistent cash flow than they are currently
experiencing and adopting a higher partial payment rate would meet this
need.
The DFA witness provided data and an analysis they maintain
indicates that since the implementation of 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 orders' information. The witness indicated that data for a
36-month period, from January 1997 through December 1999, was compared
to the current Mideast order data of 17 months--the number of months
then available for which data existed.
Since the current Mideast order provides 4 classes of milk use, the
DFA witness indicated they used the pre-reform order's Class III-A
price as a proxy for the lowest class price so that a comparison could
be made between the pre-reform and post-reform partial payment
relationships to the total price for the month. The result of this
analysis, concluded the DFA witness, clearly indicates that by using
the lowest class price of the previous month as the rate of partial
payment, the relationship between the partial and total payment for
milk during the month has widened since the implementation of order
reform.
Three other witnesses testified in support of amending the partial
payment provision. These witnesses included an Ohio dairy farmer, a
representative of MMPA, and Scioto. All three witnesses testified that
their cash flow, or the cash flow of their members, has deteriorated
since the implementation of order reform.
As specified in the tentative decision, opposition by handler
interests for increasing the rate of partial payment was significant.
However, handler interests did not counter the expressed need for
improvement in producers' cash flow positions. Rather, handler
interests focused on presenting the impact to milk processors if a
higher partial payment rate was adopted.
A representative of Leprino Foods (Leprino), a national cheese-
processing firm which purchases and pools milk on the Mideast order,
testified that disparity between the partial and final payments is a
combination of a failure to blend the pool's higher use values into the
partial payment and using the lowest class price of the previous month.
The witness argued that increasing the rate of partial payment would
merely transfer the burden of producers' cash flow concerns to
processors. The Leprino witness was also of the opinion that increasing
the rate of partial payment would violate minimum pricing principles
used by Federal milk orders. In this regard, the witness noted that
Class III and IV products compete for sales in a national market,
unlike milk used in Class I products. The witness maintained that the
resulting differences in the rate of partial payment between orders
would cause disparate economic positions for handlers competing for
sales in areas where the rate of partial payment is lower.
A witness representing the Handlers also testified in opposition to
increasing the rate of partial payment. The witness provided an
analysis that evaluated the financial impact on handlers based on the
economic principle of the time value of money. In the analysis, the
Handlers' witness presented the financial impacts to handlers that
would likely result by advancing or delaying the partial payment.
Notwithstanding the desire or need of producers to improve their cash
flow positions, the witness was of the opinion that the cash flow
problem of producers would better be addressed through adoption of
other proposals under consideration in this proceeding.
Because of initial confusion in the data presented at the hearing
regarding appropriate historical prices and the months for which they
were applicable, 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 sufficient basis for changing the rate
of the partial payment. Some significant differences in certain key
assumptions were made by the proponents of Proposal 4 from those
assumptions used by the Department in comparing pre- and post-reform
time periods.
Also of concern is the limitations inherent in comparing a 36-month
period to one of only 17 months. Additionally, the 36-month time period
shows price trends rising and falling, while the 17-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 percent of the previous month's blend price, and the
[[Page 19305]]
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 rate of partial payment 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 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. Thus, it is determined that the concerns
of handlers in this regard are unpersuasive.
The DFA witness noted that deductions authorized by producers are
normally 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 even out
their cash flow would opt to allow a 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 important to note 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,
cooperatives and handlers are also at liberty to negotiate agreements
for more frequent billings for milk and in 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 provision.
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 90 percent of the previous month's
Mideast blend price. Interestingly, if the desired objective is to more
closely approximate the partial payment rate using the 36-month period
before order reform, a 90 percent rate of the previous month's blend
price seems to accomplish this. Nevertheless, the same limitations and
concerns mentioned above prevent a finding that the Mideast order's
rate for partial payment should be increased.
Both the tentative final decision and this final decision find
general agreement with the Handlers' opinion that the cash flow
concerns of producers would be better served by the adoption of other
proposals considered in this proceeding. Other amendments adopted in
this final decision affecting the pooling of milk in the Mideast order
will likely end the unnecessary erosion in the blend price received by
Mideast producers. Higher expected blend prices will 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.
3. Conforming Changes
One conforming change is made to the pool plant definition of the
order. Words to implement the consolidated order were needed when the
order first became effective on January 1, 2000. Since the order has
become effective such wording is no longer needed to effectuate the
implementation of the order. The removal of the wording presented below
is self explanatory.
4. Emergency Marketing Conditions
Evidence presented at the hearing established that the pooling
standards of the Mideast order are inadequate and result in the erosion
of the blend price received by producers who are serving the Class I
needs of the market and should be changed on an emergency basis. The
unwarranted erosion of such producers' blend price stems from improper
performance standards as they relate to pool supply plants and the lack
of diversion limits for pool plant diversions to pool and nonpool
plants. These shortcomings of the pooling provisions have allowed milk
to be pooled on the order that does not provide a reasonable or
consistent service to meeting the needs of the Class I market as a
standard for enjoying the pricing benefits arising from Class I sales
in the Mideast marketing area. Consequently, it was determined that
emergency marketing conditions existed, and the issuance of a
recommended decision was omitted.
Rulings on Proposed Findings and Conclusions
Briefs and proposed findings and conclusions were filed on behalf
of certain interested parties. These briefs and the evidence in the
record were considered in making the findings and conclusions set forth
above. To the extent that the suggested findings and conclusions filed
by interested parties are inconsistent with the findings and
conclusions set forth herein, the requests to make such findings or
reach such conclusions are denied for the reasons previously stated in
this decision.
General Findings
The findings and determinations hereinafter set forth supplement
those that were made when the Mideast order was first issued. 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 interim 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.
[[Page 19306]]
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 Mideast marketing area was
approved by producers and published in the Federal Register on July 26,
2002 (67 FR 48743), 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
October 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
July 26, 2002 (67 FR 48743), regulating the handling of milk in the
Mideast marketing area is approved or favored by producers, as defined
under the terms of the order (as amended and as hereby proposed to be
amended) who during such representative period were engaged in the
production of milk for sale within the aforesaid marketing area.
List of Subjects in 7 CFR Part 1033
Milk marketing orders.
Dated: April 5, 2004.
A. J. Yates,
Administrator, Agricultural Marketing Service.
Order Amending the Order Regulating the Handling of Milk in the Mideast
Marketing Area
This order shall not become effective unless and until the
requirements of Sec. 900.14 of the rules of practice and procedure
governing proceedings to formulate marketing agreements and marketing
orders have been met.
Findings and Determinations
The findings and determinations hereinafter set forth supplement
those that were made when the order was first issued and when it was
amended. The previous findings and determinations are hereby ratified
and confirmed, except where they may conflict with those set forth
herein.
(a) Findings. A public hearing was held upon certain proposed
amendments to the tentative marketing agreement and to the order
regulating the handling of milk in the Mideast marketing area. The
hearing was held pursuant to the provisions of the Agricultural
Marketing Agreement Act of 1937, as amended (7 U.S.C. 601-674), and the
applicable rules of practice and procedure (7 CFR Part 900).
Upon the basis of the evidence introduced at such hearing and the
record thereof, it is found that:
(1) The said order as hereby amended, and all of the terms and
conditions thereof, will tend to effectuate the declared policy of the
Act;
(2) The parity prices of milk, as determined pursuant to Section 2
of the Act, are not reasonable in view of the price of feeds, available
supplies of feeds, and other economic conditions which affect market
supply and demand for milk in the aforesaid marketing area. The minimum
prices specified in the order as hereby amended are such prices as will
reflect the aforesaid factors, insure a sufficient quantity of pure and
wholesome milk, and be in the public interest; and
(3) The said order as hereby amended regulates the handling of milk
in the same manner as, and is applicable only to persons in the
respective classes of industrial or commercial activity specified in, a
marketing agreement upon which a hearing has been held.
Order Relative to Handling
It is therefore ordered, that on and after the effective date
hereof, the handling of milk in the Mideast marketing area shall be in
conformity to and in compliance with the terms and 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 July 22, 2002, and published in the
Federal Register on July 26, 2002 (67 FR 48743), are adopted with one
minor change and shall be the terms and provisions of this order. The
revision to the order follows.
PART 1033--MILK IN THE MIDEAST MARKETING AREA
1. The authority citation for 7 CFR Part 1033 continues to read as
follows:
Authority: 7 U.S.C. 601-674.
2. Section 1033.7 is amended by revising paragraph (d)(2) to read
as follows:
Sec. 1033.7 Pool plant.
* * * * *
(d) * * *
(2) The 30 percent delivery requirement may be met for the current
month or it may be met on the basis of deliveries during the preceding
12-month period ending with the current month.
* * * * *
Marketing Agreement Regulating the Handling of Milk in the Mideast
Marketing Area
The parties hereto, in order to effectuate the declared policy
of the Act, and in accordance with the rules of practice and
procedure effective thereunder (7 CFR part 900), desire to enter
into this marketing agreement and do hereby agree that the
provisions referred to in paragraph I hereof as augmented by the
provisions specified in paragraph II hereof, shall be and are the
provisions of this marketing agreement as if set out in full herein.
I. The findings and determinations, order relative to handling,
and the provisions of Sec. Sec. 1033.1 to 1033.86 all inclusive, of
the order regulating the handling of milk in the Mideast marketing
area (7 CFR 1033 which is annexed hereto); and
II. The following provisions: Record of milk handled and
authorization to correct typographical errors.
(a) Record of milk handled. The undersigned certifies that he/
she handled during the month of ----, ----, -------- hundredweight
of milk covered by this marketing agreement.
(b) Authorization to correct typographical errors. The
undersigned hereby authorizes the Deputy Administrator, or Acting
Deputy Administrator, Dairy Programs, Agricultural Marketing
Service, to correct any typographical errors which may have been
made in this marketing agreement.
Effective date. This marketing agreement shall become effective
upon the execution of a counterpart hereof by the Department in
accordance with Section 900.14(a) of the aforesaid rules of practice
and procedure.
In Witness Whereof, The contracting handlers, acting under the
provisions of the Act, for the purposes and subject to the
limitations herein contained and not otherwise, have hereunto set
their respective hands and seals.
Signature
By (Name)-------------------------------------------------------------
(Title)---------------------------------------------------------------
(Address)-------------------------------------------------------------
(Seal)
Attest
[FR Doc. 04-8071 Filed 4-9-04; 8:45 am]
BILLING CODE 3410-02-P