[Federal Register: September 21, 2005 (Volume 70, Number 182)]
[Proposed Rules]
[Page 55457-55478]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr21se05-44]
[[Page 55457]]
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Part II
Department of Agriculture
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Agricultural Marketing Service
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7 CFR Parts 1005 and 1007
Milk in the Appalachian and Southeast Marketing Areas; Partial Decision
on Proposed Amendments to Marketing Agreements and to Orders; Proposed
Rule
[[Page 55458]]
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DEPARTMENT OF AGRICULTURE
Agricultural Marketing Service
7 CFR Parts 1005 and 1007
[Docket No. AO-388-A15 and AO-366-A44; DA-03-11]
Milk in the Appalachian and Southeast Marketing Areas; Partial
Decision on Proposed Amendments to Marketing Agreements and to Orders
AGENCY: Agricultural Marketing Service, USDA.
ACTION: Proposed rule; partial final decision.
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SUMMARY: This partial final decision adopts proposed amendments to the
Appalachian and Southeast marketing areas as contained in a partial
recommended decision published in the Federal Register on May 20, 2005.
Specifically, this decision would expand the Appalachian milk marketing
area, eliminate the ability to simultaneously pool the same milk on the
Appalachian or Southeast order and on a State-operated milk order that
has marketwide pooling, and amend the transportation credit provisions
of the Southeast and Appalachian orders. The orders as amended are
subject to approval by producers in the affected markets.
FOR FURTHER INFORMATION CONTACT: Antoinette M. Carter, Marketing
Specialist, USDA/AMS/Dairy Programs, Order Formulation and Enforcement
Branch, STOP 0231-Room 2971, 1400 Independence Avenue, SW., Washington,
DC 20250-0231, (202) 690-3465, e-mail address:
antoinette.carter@usda.gov.
SUPPLEMENTARY INFORMATION: This administrative action is governed by
the provisions of Sections 556 and 557 of Title 5 of the United States
Code and, therefore, is excluded from the requirements of Executive
Order 12866.
These proposed amendments have been reviewed under Executive Order
12988, Civil Justice Reform. This rule is not intended to have a
retroactive effect. If adopted, this proposed rule will not preempt any
state or local laws, regulations, or policies, unless they present an
irreconcilable conflict with this rule.
The Agricultural Marketing Agreement Act of 1937, as amended (7
U.S.C. 601-674) (Act), 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.
During February 2004, the month in which the hearing was held, the
milk of 7,311 dairy farmers was pooled on the Appalachian (Order 5) and
Southeast (Order 7) milk orders (3,395 Order 5 dairy farmers and 3,916
Order 7 dairy farmers). Of the total, 3,252 dairy farmers (or 96
percent) and 3,764 dairy farmers (or 96 percent) were considered small
businesses on the Appalachian and Southeast orders, respectively.
During February 2004, there were a total of 36 plants associated
with the Appalachian order (25 fully regulated plants, 7 partially
regulated plants, 1 producer-handler, and 3 exempt plants) and a total
of 51 plants associated with the Southeast order (32 fully regulated
plants, 6 partially regulated plants, and 13 exempt plants). The number
of plants meeting the small business criteria under the Appalachian and
Southeast orders were 13 (or 36 percent) and 13 (or 25 percent),
respectively.
The proposed amendments adopted in this partial final decision
would expand the Appalachian milk marketing area to include 25 counties
and 15 cities in the State of Virginia that currently are not in any
Federal milk marketing area (the partial recommended decision
inadvertently referenced ``14 cities'' verses ``15 cities''). This
decision adopts proposed amendments to the producer milk provisions of
the Appalachian and Southeast milk orders that would prevent producers
who share in the proceeds of a state marketwide pool from
simultaneously sharing in the proceeds of a Federal marketwide pool on
the same milk. In addition, this decision adopts proposed amendments to
the transportation credit provisions of the Appalachian and Southeast
orders.
The proposed amendments to expand the Appalachian marketing area
would likely continue to regulate under the Appalachian order two fluid
milk distributing plants located in Roanoke, Virginia, and Lynchburg,
Virginia, and shift the regulation of a distributing plant located in
Mount Crawford, Virginia, from the Northeast order to the Appalachian
order.
The proposed amendments would allow the Kroger Company's (Kroger)
Westover Dairy plant, located in Lynchburg, Virginia, that competes for
a milk supply with other Appalachian order plants to continue to be
regulated under the order if it meets the order's minimum performance
standards. The plant has been regulated by the Appalachian order since
January 2000. In addition, the proposed amendments would remove the
disruption that occurs as a result of the Dean Foods Company's (Dean
Foods) Morningstar Foods plant, located in Mount Crawford, Virginia,
shifting its regulatory status under the Northeast order.
The Appalachian order currently contains a ``lock-in'' provision
that provides that a plant located within the marketing area that meets
the order's minimum performance standard will be regulated by the
Appalachian order even if the majority of the plant's Class I route
sales are in another marketing area. The proposed expansion along with
the lock-in provision would regulate fluid milk distributing plants
physically located in the marketing area that meet the order's minimum
[[Page 55459]]
performance standard even if the majority of their sales are in another
Federal order marketing area. Accordingly, the proposed amendments
would regulate three distributing plants under the Appalachian order:
Kroger's Westover Dairy, located in Lynchburg, Virginia; Dean Foods'
Morningstar Foods plant, located in Mount Crawford, Virginia; and
National Dairy Holdings' Valley Rich Dairy, located in Roanoke,
Virginia. Based on Small Business Administration criteria these are all
large businesses.
This decision adopts proposed amendments to the transportation
credit provisions of the Appalachian and Southeast orders. The
Appalachian and Southeast orders contain provisions for a
transportation credit balancing fund from which payments are made to
handlers to partially offset the cost of moving bulk milk into each
marketing area to meet fluid milk demands.
The proposed amendments adopted in this final decision would
increase the maximum rate of the transportation credit assessment of
the Appalachian and Southeast orders by 3 cents per hundredweight.
Specifically, the proposed amendments would increase the maximum rate
of assessment for the Appalachian order from 6.5 cents per
hundredweight to 9.5 cents per hundredweight while increasing the
maximum rate of assessment for the Southeast order from 7 cents per
hundredweight to 10 cents per hundredweight. Increasing the
transportation assessment rates will tend to minimize the exhaustion of
the transportation credit balancing fund when there is a need to import
supplemental milk from outside the marketing areas to meet Class I
needs.
Currently, the Appalachian and Southeast orders provide that
transportation credits shall apply to the milk of a dairy farmer who
was not a ``producer'' under the order during more than two of the
immediately preceding months of February through May but not more than
50 percent of the milk production of the dairy farmer, in aggregate,
was received as producer milk under the order during those two months.
The proposed amendments contained in this final decision would provide
the Market Administrator of the Appalachian order and the Market
Administrator of the Southeast order the discretionary authority to
adjust the 50 percent milk production standard.
This decision adopts proposed amendments that would prohibit the
simultaneous pooling of the same milk on the Appalachian or Southeast
milk marketing orders and on a State-operated order that provides for
the marketwide pooling of milk. Since the 1960's, the Federal milk
order program has recognized the harm and disorder that result to both
producers and handlers when the same milk of a producer is
simultaneously pooled on more than one Federal order. When this occurs,
producers do not receive uniform minimum prices, and handlers receive
unwarranted competitive advantages.
The need to prevent ``double pooling'' became critically important
as distribution areas expanded, orders merged, and a national pricing
surface was adopted. Milk already pooled under a State-operated program
and able to simultaneously be pooled under a Federal order has
essentially the same undesirable outcomes that Federal orders once
experienced and subsequently corrected. Accordingly, proposed
amendments to eliminate the ``double pooling'' of the same milk on the
Appalachian or Southeast order and a State-operated milk order that has
marketwide pooling are adopted.
The proposed amendments would be applied to all Appalachian and
Southeast order participants (producers and handlers), which consist of
both large and small business. Since the proposed amendments adopted in
this final decision would be subject to all the orders' producers and
handlers regardless of their size, the provisions are not expected to
provide a competitive advantage to any participant. Accordingly, the
proposed amendments will not have a significant economic impact on a
substantial number of small entities.
A review of reporting requirements was completed under the
Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35). It was
determined that these adopted proposed amendments would have no impact
on reporting, recordkeeping, or other compliance requirements because
they would remain identical to the current requirements. No new forms
are proposed and no additional reporting requirements would be
necessary.
This action does not require additional information collection that
requires clearance by the Office of Management and Budget (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 January 16, 2004; published January 23,
2004 (69 FR 3278).
Partial Recommended Decision: Issued May 13, 2005; published May
20, 2005 (70 FR 29410).
Preliminary Statement
A public hearing was held upon proposed amendments to the marketing
agreements and orders regulating the handling of milk in the
Appalachian and Southeast marketing areas. The hearing was held,
pursuant to the provisions of the Agricultural Marketing Agreement Act
of 1937, as amended (7 U.S.C. 601-674), and the applicable rules of
practice and procedure governing the formulation of marketing
agreements and marketing orders (7 CFR part 900), at Atlanta, Georgia,
on February 23-26, 2004, pursuant to a notice of hearing issued January
16, 2004, and published January 20, 2004 (69 FR 3278).
Upon the basis of the evidence introduced at the hearing and the
record thereof, the Department, on May 13, 2005, issued a Partial
Recommended Decision containing notice of the opportunity to file
written exceptions thereto.
The material issues, findings, conclusions, and rulings of the
Partial Recommended Decision are hereby approved and adopted and are
set forth in herein. The material issues on the record of the hearing
relate to:
1. Merger of the Appalachian and Southeast Marketing Areas.
a. Merging the Appalachian and Southeast milk marketing areas and
remaining fund balances.
b. Expansion of the Appalachian marketing area.
c. Transportation credits provisions.
2. Promulgation of a new ``Mississippi Valley'' milk order.
3. Eliminating the simultaneous pooling of the same milk on a
Federal milk order and a State-operated milk order that provides for
marketwide pooling.
4. Producer-handler provisions.
This partial final decision deals only with Issues 1 through 3.
Issue No. 4 will be addressed separately in a forthcoming decision.
Findings and Conclusions
The following findings and conclusions on the material issues are
based on evidence presented at the hearing and the record thereof:
[[Page 55460]]
1. Merger of the Appalachian and Southeast Marketing Areas
1a. Merging the Appalachian and Southeast Milk Marketing Areas and
Remaining Fund Balances
This decision does not adopt a proposal that would merge the
current Appalachian marketing area and Southeast milk marketing area
into a single marketing area under a proposed single milk order.
Accordingly, a proposal that would combine the fund balances of the
current Appalachian and Southeast orders is rendered moot and is not
adopted in this final decision.
The Appalachian marketing area consists of the States of North
Carolina and South Carolina, parts of eastern Tennessee, Kentucky
excluding southwest counties, 7 counties in northwest/central Georgia,
20 counties in southern Indiana, 8 counties and 2 cities in Virginia,
and 2 counties in West Virginia. The Southeast order marketing area
consists of the entire States of Alabama, Arkansas, Louisiana,
Mississippi, Georgia (excluding 7 northern counties), southern
Missouri, western/central Tennessee, and southern Kentucky.
A witness testifying on behalf of Southern Marketing Agency, Inc.
(SMA), presented testimony in support of Proposals 1 and 2 as contained
in the hearing notice published in the Federal Register (69 FR 3278).
Proposal 1 would merge the current Appalachian and Southeast marketing
areas into a single marketing area (hereafter referred to as the
proposed merged milk order) and Proposal 2 would combine the remaining
balances of funds of the current Appalachian and Southeast orders if
the proposed merged order was adopted. According to the witness, SMA is
a marketing agency whose cooperative members include Arkansas Dairy
Cooperative Association, Inc. (ADCA), Dairy Farmers of America, Inc.
(DFA), Dairymen's Marketing Cooperative, Inc. (DMC), Lone Star Milk
Producers, Inc. (Lone Star), Maryland & Virginia Milk Producers
Cooperative Association, Inc. (MD&VA), and Southeast Milk, Inc. (SMI)
(proponent cooperatives).
The witness for the proponent cooperatives said SMA was created in
response to a changing market structure and is an extension of the
cooperatives' initiative to consolidate and seek enhanced marketing
efficiencies. The witness indicated that SMA pools certain costs and
returns for its cooperative member producers supplying distributing
plants fully regulated under the Appalachian and Southeast milk orders.
SMA considers the Appalachian and Southeast orders one market in terms
of the distribution of revenues, the allocation and pooling of
marketing costs, milk supply and demand, and the development of its
annual budget, the witness explained.
The proponent cooperatives' witness stated that the proposed merged
milk order would create a milk market which would be commonly supplied
and deserving of a common blend price. The witness testified that the
continued existence of the separate Appalachian and Southeast Federal
milk orders across a functionally single fluid milk marketing area
inhibits market efficiency in supplying and balancing the market,
creates unjustified blend price differences, encourages uneconomic
movements of milk, and results in the inequitable sharing of the Class
I proceeds of what should be a single market.[FEDREG][VOL]*[/
VOL][NO]*[/NO][DATE]*[/DATE][PRORULES][PRORULE][PREAMB][AGENCY]*[/
AGENCY][SUBJECT]*[/SUBJECT][/PREAMB][SUPLINF][HED]*[/HED]?>
The proponent cooperatives' witness stated that different blend
prices and different and separate pool qualification requirements
constitute disruptive conditions that would be removed by a merger of
the orders. The witness asserted that the proposed merger would allow
producer milk to flow more freely between pool plants and provide for
the equal sharing of balancing costs across all producers in the
proposed merged milk order.
The proponent cooperatives' witness stressed that the adoption of
the proposed merged milk order would assure producers that milk would
be sold at reasonable minimum prices and producers would share pro rata
in the returns from sales of milk including milk not needed for fluid
use. The witness further stated that handlers would be assured that
competitors would pay a single set of minimum prices for milk set by
the established order. The witness stated that a proposed merged milk
order is in the public interest because it assures that an adequate
supply of high quality milk will be available for consumers.
The proponent cooperatives' witness noted that the adoption of a
new Federal order is contingent upon being able to show that interstate
commerce occurs in the proposed marketing area. It is the opinion of
the witness that ``interstate commerce'' does exist due to the movement
of bulk and packaged milk products within, into, and out of the
Appalachian and the Southeast marketing areas--the proposed marketing
area.
The proponent cooperatives' witness noted a trend of larger
geographical areas being served by fewer Federal milk marketing orders.
Specifically, the witness said between 1996 and 2003 the number of
dairy farmers in the southeastern States of Alabama, Arkansas, Georgia,
Kentucky, Louisiana, Mississippi, Missouri, North Carolina, South
Carolina, Tennessee, and Virginia declined from 11,712 to 7,180. This
decrease, the witness explained, parallels the trend of a drop in the
number of dairy farmers pooled on the current Appalachian and Southeast
orders. The witness stated that based on the final decision for Federal
Order Reform (issued March 12, 1999, and published April 2, 1999 (64 FR
16025), 8,180 dairy farmers were expected to pool their milk on the
consolidated Appalachian and Southeast orders. However, the witness
noted only 7,243 dairy producers supplied milk to the two orders during
December 2003.
The proponent cooperatives' witness stressed that there is an acute
milk deficit in the Appalachian and Southeast Federal orders.
Referencing data obtained from the USDA National Agricultural
Statistics Service (NASS) for the States of Alabama, Arkansas, Georgia,
Kentucky, Louisiana, Mississippi, Missouri, North Carolina, South
Carolina, Tennessee, and Virginia (southeast region), the witness
testified that a decline in dairy farmers led to a decline in milk
production in the southeast region. The witness noted milk production
decreased from 13,518 million pounds in 1996 to 10,671 million pounds
in 2003 a decline of 21 percent. The witness asserted that this decline
coupled with an increase in population has resulted in a major
expansion of the milkshed for the southeastern region of the United
States.
According to the proponent cooperatives' witness, 9,072 million
pounds of Class I producer milk was pooled on the combined Appalachian
and Southeast orders during 2003. The witness said marketings of milk
produced in the southeastern region was 10,671 million pounds in 2003,
which means 85 percent of Grade A milk production was needed for Class
I use on an annual basis.
In 1996, the proponent witness testified, it was anticipated that
72 fluid milk processing plants were or would become fully regulated
distributing plants on the consolidated Appalachian and Southeast
orders. However, the witness noted, only 52 remained regulated by the
orders during December 2003. The witness indicated that of the fully
regulated pool plants existing in both January 1996 and December 2003,
more than two-thirds have experienced at least one ownership change and
some have experienced several ownership changes.
[[Page 55461]]
The proponent cooperatives' witness cited a set of criteria used
for consolidation of marketing areas and orders during the reform
process. The witness said this list included overlapping route sales
and areas of milk supply, the number of handlers within a market, the
natural boundaries, the cooperative associations operating in the
service area, provisions common to the existing orders, milk
utilization in common dairy products, disruptive marketing conditions,
and transportation differences.
The proponent cooperatives' witness testified that significant
competition for sales between plants exists between the Appalachian and
Southeast marketing areas. The witness noted that a ``corridor of
competition'' is the shared border of the Appalachian and Southeast.
The witness testified that Federal milk order data for 2003 shows Class
I disposition on routes inside the Southeast order by Appalachian order
pool plants was 11.25 percent of the total Class I route disposition by
all plants in the Southeast order. According to the witness, Class I
route disposition in the Southeast marketing area by Appalachian order
pool plants has increased in total by 11.1 percentage points since
January 2000 (i.e., 5.9 percentage points from 2000 to 2001, 2.1
percentage points from 2001 to 2002, and 1.9 percentage points from
2002 to 2003). In addition, the witness stated that record data reveals
that Class I route disposition by Appalachian order pool plants into
the Southeast marketing area was 63.9 percent of the total Class I
disposition by all nonpool plants for the Southeast order during 2003.
According to the proponent cooperatives' witness, all of the
distributing plants currently regulated under the Appalachian and
Southeast orders are expected to be fully regulated by the proposed
merged milk order. Using December 2003 data, the witness stated that
the proposed merged milk order would have had a Class I route
distribution of 773.4 million pounds. The witness added that 86.58
percent of Class I sales would have been from milk produced in the
proposed marketing area. The witness stated that the proposed Southeast
marketing area would rank third in the total number of pool plants
regulated by a Federal milk order.
The proponent cooperatives' witness stated that there is
substantial and significant overlap of the supply of producer milk for
the Appalachian and Southeast marketing areas. The witness noted
Federal order data for 2000 through 2003 shows that dairy farmers
located in southern Indiana, central Kentucky, central Tennessee,
central North Carolina, western South Carolina, and central and
southern Georgia have supplied milk to plants regulated under
Appalachian or Southeast orders. The witness said milk of dairy farmers
located in the Central marketing area and Southwest marketing area, and
dairy farmers located in northwestern Indiana and south central
Pennsylvania, have supplied fluid milk plants regulated by the
Appalachian and Southeast orders.
In December 2003, the witness stated, dairy farmers located in 28
states supplied milk to handlers regulated under the Appalachian or
Southeast orders. Sixteen of the 28 states supplied milk to both
marketing areas and 13 states were located wholly or partially within
the proposed merged milk order marketing area, the witness noted.
The witness for the proponent cooperatives testified that the
proposed merged milk marketing area and order would rank second in
Class I utilization representing 19.5 percent of total Class I sales in
all Federal milk orders. Using annual Federal milk order data, the
witness noted that for 2003, Class I utilization for the Appalachian
and Southeast marketing areas was 70.36 percent and 65.47 percent,
respectively. The witness said the combined Class I utilization for the
proposed merged milk marketing area would have been 67.77 percent for
2003 or 9,072 million pounds of 13,386 million pounds of producer milk
pooled.
The proponent cooperatives' witness noted that milk not needed for
fluid uses in the Appalachian marketing area is primarily used in Class
II and Class IV while milk not needed for fluid uses in the Southeast
marketing area is primarily used in Class III. For 2003, the witness
noted that non-fluid milk utilization for the Appalachian order was
14.41 percent Class II, 7.11 percent Class III, and 8.12 percent Class
IV, while the non-fluid milk utilization for the Southeast order was
9.97 percent Class II, 17.79 percent Class III, and 6.78 percent Class
IV. The witness stressed that these differing uses of milk result in
different blend prices between the Appalachian and Southeast orders
which leads to disorderly marketing conditions. The witness emphasized
that differences in blend prices between the two orders is largely due
to significant differences in uses and prices in the manufacturing
classes and is not necessarily due to significant differences in Class
I milk utilization.
The witness explained that SMA in April 2002 began the common
pooling of the costs and returns to supply the customers of member
cooperatives in the separate orders in an effort to alleviate
disruptive blend price differences. The witness testified that while
this procedure has resolved some blend price differences, their
procedure does not result in removing inequitable blend prices for all
producer milk pooled on the separate orders.
Regarding the commonality of cooperative associations in the two
marketing areas, the proponent cooperatives' witness stated that
cooperative membership is an indication of market association and
provides support for the consolidation of marketing areas. The witness
noted that the six SMA member cooperatives accounted for approximately
734 million pounds of producer milk during November 2003, which
represents about 67 percent of the total producer milk that would be
pooled on the proposed merged milk order. Also, the witness stated
these cooperatives market milk of other cooperatives whose member
producers' milk would be pooled on the proposed merged milk order.
Using November 2003, the witness stated approximately 871 million
pounds or 79 percent of the producer milk pooled under the proposed
merged milk order would be represented by these proponent cooperatives.
The witness for the proponent cooperatives pointed out that the
regulatory provisions of the Appalachian and Southeast orders are
similar in most respects except for the qualification standards for
producer milk and a producer. While not a Federal milk order regulatory
provision, the proponent witness stated that the common handling of
costs and returns for milk that would be pooled on the proposed merged
milk order recognized similar marketing conditions within the proposed
marketing area.
The proponent cooperative witness testified that the proposed
merged milk order should retain the Appalachian order pool plant
provisions. The witness recommended adopting provisions that would
allow the pooling of a supply plant operated by a cooperative
association that is located outside the marketing area but within the
State of Virginia. The witness stated that the proposed merged milk
order should include the Appalachian order ``split'' pool plant
provision which would continue to provide for defining that portion of
a pool plant designated as a ``nonpool plant'' that is physically
separate and operates separately from the pool portion of such plant.
The proponent cooperatives' witness stated that lock-in provisions
should be included in the proposed merged milk order. According to the
witness,
[[Page 55462]]
distributing plants in the Southeastern markets have been ``locked in''
or fully regulated as pool plants under the order in which they are
physically located since the mid-1980s. The witness testified that unit
pooling distributing plants on the basis of their physical location
should be retained in the proposed merged milk order. The witness noted
that the Appalachian and Southeast orders currently provide that two or
more plants operated by the same handler that are located within the
marketing area may qualify for pool status as a unit by meeting the in-
area Class I route disposition standards specified for pool
distributing plants.
The witness for the proponent cooperatives explained that lock-in
provisions help to preserve the viability of capital investments in
pool distributing plants. The witness indicated that lock-in provisions
in the Southeast and Appalachian orders adequately provide for
regulatory stability for pool plants on the edge of a market area that
may shift regulatory status between two orders due to changes in route
disposition patterns.
The proponent cooperatives' witness recommended changing the
``touch base'' requirement of the producer milk provision from a
``days'' production standard to a ``percentage'' production standard.
This change, the witness stated, will accommodate pooling the milk of
large producers who ship multiple loads of milk per day. The witness
proposed that individual producers deliver 15 percent of their monthly
milk production (equivalent to approximately 4.5 days of milk
production) to a pool plant during January through June and 33 percent
(equivalent to about 10 days of milk production) of their of monthly
milk production during the months of July through December. The witness
stated that the 33 percent production standard is a reasonable minimum
requirement for establishing a producer's association with the market
during the short production months of July through December. Under
their proposal, the milk of a dairy farmer would be eligible for
diversion to a nonpool plant the first day of the month during which
the milk of such dairy farmer meets the order's touch base
requirements.
The proponent cooperatives' witness indicated that their proposal
contains current Southeast order language that limits the total amount
of producer milk that may be diverted by a pool plant operator or
cooperative association to 33 percent during the months of July through
December and 50 percent during January through June.
The proponent cooperatives' witness proposed that the reserve
balances of the marketing services, administrative expense, producer-
settlement funds, and the transportation credit balancing funds that
have accrued in the individual Appalachian and Southeast orders be
merged or combined in their entirety if the proposed merged milk order
is adopted. The witness explained that the handlers and producers
servicing the milk needs of the individual orders would continue to
furnish the milk needs of the proposed marketing area.
According to the proponent cooperatives' witness, it would be
appropriate to combine the reserve balances of the orders' marketing
service funds since marketing service programs for producers would
continue under the proposed merged milk order. In regards to the
administrative expense funds, the witness stated that it would be
equitable and more efficient to combine the remaining administrative
funds accumulated under the individual orders. In addition, the witness
indicated that this would enable the producer-settlement funds and the
transportation credit funds of the proposed merged milk order to
continue without interruption.
Witnesses for Maryland & Virginia Milk Producers Cooperative, Inc.
(MD&VA), Arkansas Dairy Cooperative, Inc. (ADCA), Lone Star Milk
Producers, Inc. (Lone Star), and Dairymen's Marketing Cooperative, Inc.
(DMC), testified in support of consolidating the current Appalachian
and Southeast milk orders into a single milk order. According to
witnesses, MD&VA is comprised of 1,450 to 1,500 dairy farmers, ADCA has
160 member dairy farmers, Lone Star is comprised of about 160 member
dairy farmers, and DMC is comprised of 168 member dairy farmers. The
witnesses indicated that all of the cooperatives are members of SMA and
that the milk of their dairy farmer members is shipped to plants
regulated by the Appalachian or Southeast orders.
The MD&VA witness asserted that the consolidation of the current
Appalachian and Southeast marketing areas and orders is necessary due
to changes in the marketing structure (i.e., milk production and
processing sectors) in the southeastern United States. The witness was
of the opinion that the area covered by the two current orders is
essentially a single market and that all of the producers delivering
milk to the market should share a common Federal order blend price.
The witnesses for MD&VA, ADCA, Lone Star, and DMC stated the
producer milk requirements under the current Appalachian and Southeast
orders make it difficult to ensure the pooling of milk on the orders.
The witnesses contended a merger of the Appalachian and Southeast
marketing areas and orders would enhance market equity, allow for
increased efficiencies in supplying a deficit milk region, and
eliminate the disruptive and disorderly marketing conditions that
currently exist in the Appalachian and Southeast orders by eliminating
blend price differences.
A witness representing Georgia Milk Producers, Inc. (GMP),
testified in opposition to the merger as proposed in Proposals 1 and 2.
The witness was of the opinion that USDA had made a mistake in 2000
when the western part of the current Southeast marketing area, which
had a lower Class I utilization, was added to the Southeast marketing
area which had a higher Class I utilization.
Other testimony presented on behalf of GMP, and relying on 1997
data, indicated that milk production in Georgia fell short of Georgia's
fluid milk demand by about 122 million pounds as compared to only 4 to
11 million pound supply shortfalls in the other states included in the
proposed merged milk order area. The witness stated that the widening
supply-demand gap will accelerate as population increases and milk
production declines in Georgia. The GMP witness stated that: ``Based on
the decline in production in the region compared to the growth in
demand, USDA has not sufficiently considered the needs of the dairy
farmers in the states covered by the Order.'' According to the witness,
GMP dairy farmers have lost income each time the Southeast Federal
order has been expanded.
The GMP witness testified that a rejection of the proposed merged
milk order together with the creation of a new Mississippi Valley
Order, as offered by Proposal 5, would be the first step to help
rectify the mistake made in Federal milk order reform. The witness
supported raising the utilization in the most deficit areas of the
Southeastern States by creating a Mississippi Valley order and
combining the high utilization areas of the remainder of the current
Southeast order (Order 7) into a new smaller Southeast Order.
The GMP witness asserted that historically, the larger the
marketing area, the higher the balancing costs in a deficit market. The
witness further asserted that transportation credits shift part of that
cost to the entire market rather than to the dairy farmers in the order
who are members of cooperatives. The witness testified that
transportation credits unintentionally encourage the importation of
milk rather than
[[Page 55463]]
encourage increased production of local milk.
A witness representing the Kroger Company (Kroger) testified in
support of the proposed merger of the Appalachian and Southeast orders.
According to the witness, Kroger owns and operates Winchester Farms
Dairy, in Winchester, Kentucky, and Westover Dairy, in Lynchburg,
Virginia. The witness stated that both plants are pool distributing
plants regulated on the Appalachian milk order. The witness stated that
Kroger owns and operates Heritage Farms Dairy in Murfreesboro,
Tennessee, and Centennial Farms Dairy in Atlanta, Georgia, both fully
regulated distributing plants under the Southeast milk order.
According to the Kroger witness, their Winchester, Kentucky, plant
was associated with the Ohio Valley order (now part of the Mideast
order) from 1982 to 1988, with the Louisville-Lexington-Evansville
order from 1988 through 1999, and with the Appalachian order since
2000. The witness indicated that previous decisions by USDA adopted
pool plant provisions that allowed their Winchester, Kentucky, plant to
be regulated under the Appalachian order. According to the witness,
being regulated by the Appalachian order retains that plant's ability
to procure milk with a higher blend price when compared with the
Mideast order.
The Kroger witness indicated that with the exception of the
Murfreesboro, Tennessee, plant, which has a minority supply of milk
from independent producers, all of the Kroger pool distributing plants
are supplied by Dairy Farmers of America, Inc. The witness indicated
that if their Winchester plant were to again be associated with the
Mideast order, the returns to the milk supplying cooperative would be
reduced due to the lower Mideast order blend price. The witness
requested that the current Appalachian order pool plant definition be
included in the proposed merged milk order. This request, according to
the witness, would permit their plant located in Winchester, Kentucky,
to continue its association with the proposed merged milk order rather
than with the Mideast order.
A witness representing Dairy Farmers of America, Inc. (DFA),
testified that the proponents do not anticipate any difficulties from
merging of the two orders or expanding the proposed merged milk order
area to include additional Virginia counties. According to the witness,
the Virginia State Milk Commission has been able to simultaneously
operate a producer base milk pricing program for producers supplying
milk to plants with Class I sales within the State. The witness
indicated that DFA opposes any change to the proposed merged milk order
provisions that may cause conflicts between the operations of the
Virginia State Milk Commission and the Federal milk marketing order
program.
A witness representing Prairie Farms testified in opposition to
Proposals 1 and 2. The witness indicated that the fluid milk industry
would be better served by more Federal milk marketing orders covering
smaller areas rather than fewer Federal milk marketing orders covering
large areas. The witness indicated that Federal milk order reform left
``dead zones'' in the States of Illinois and Missouri, near St. Louis.
According to the witness, this area is not able to attract a fluid milk
supply and experiences weekly fluid milk deficits.
The Prairie Farms witness indicated that the low per capita milk
production in Illinois, in combination with economic incentives to move
the milk produced in Illinois and eastern Missouri into the Appalachian
and Southeast orders, has caused disorderly marketing conditions. The
witness indicated that the blend price differences between the Upper
Midwest order and the Central order are not sufficient to cover the
transportation cost of moving milk to the ``dead zones''. The witness
testified that at an October 31, 2001, meeting, DFA--Prairie Farms'
major supplier--indicated that they would no longer be able to provide
supplemental milk supplies to Prairie Farms due to the lack of
incentives and expenses.
The Prairie Farms witness stated that today's dairy environment
shows that the current order system needs to be reconfigured and
inequities fixed system-wide. The witness asserted that the
consequences for nearby marketing areas and adjacent orders must be
considered when revising or merging orders. The witness indicated that
market efficiency suffers and difficulties occur in supplying and
balancing the market at all Federal milk order borders. The witness
indicated that the lines drawn between marketing areas create
unjustified blend price differences, encourage uneconomic movements of
milk, and result in the inequitable sharing of Class I proceeds.
A witness representing Dean Foods testified in opposition to the
proposed merger of the Appalachian and the Southeast market areas.
According to the witness, more and smaller order areas create more
flexible incentives to deliver milk to Federal order pool plants.
According to the witness, relative blend prices determine where milk is
shipped and pooled. According to the witness the disincentives
associated with increased transportation costs increase faster than the
incentives from the higher location value of the merged order blend
price. The witness cited the St. Louis/southern Illinois area and its
chronic milk deficit as a prime example of these phenomena.
Post-hearing briefs addressing Proposals 1 and 2 were submitted by
SMA, Dean Foods, and Prairie Farms. The proponent cooperatives for the
proposed merged milk order, submitted a post-hearing brief reiterating
their support for the merger of the Appalachian and Southeast orders.
The brief described conditions existing in the Appalachian and
Southeast orders as disruptive and disorderly, and asserted that these
conditions are symptoms of a market that has changed significantly
since the orders were promulgated by Federal order reform, effective
January 1, 2000.
According to the proponent cooperatives' brief, a merger of the
existing orders would bring blend price uniformity, recognize inter-
order competition and integrate Class I sales within the proposed
merged milk order, recognize common supply areas within the proposed
merged milk order, and allow producer milk to move more freely between
pool plants within the proposed marketing areas. In addition,
proponents contended it would equalize the costs of balancing within
the proposed marketing area, erase the artificial line that separates a
common milk market, and recognize the common pooling of costs and
returns for producer milk within the proposed merged order. The brief
asserts that no additional parties would become regulated as a result
of the proposed merged milk order. According to the proponent
cooperatives' brief, other options that forestall a complete merger are
inadequate to correct the present disruptive and disorderly conditions
in the separate orders.
Opposition to Proposal 1 was reiterated by Dean Foods and Prairie
Farms in a joint post-hearing brief. The brief suggested that blend
price differences between orders cause milk to move to where it is most
needed. Dean Foods and Prairie Farms stated that without blend price
differences milk movements between and within marketing areas are
impaired. The opponents brief suggested a national hearing in order to
consider simultaneously all marketing regions because the results of
one proceeding directly affects other regions. The brief stated that
combining the Appalachian
[[Page 55464]]
and Southeast marketing areas was considered but was not adopted under
Federal milk order reform.
The Dean Foods and Prairie Farms joint brief stated that market
administrator data demonstrates that moving milk to where it is needed
through blend price differences effectively moves milk from the west to
the east for the Southeast marketing area and from north to south for
the Appalachian marketing area. The brief offered the St. Louis area as
an example of blend price differences that are sometimes too small to
cover additional costs of transporting milk to major metropolitan area
for fluid use. The brief indicated that similar problems could result
elsewhere if the two orders are merged.
In their joint brief, Dean Foods and Prairie Farms suggested that
although a majority of dairy market participants may favor a merger, it
is important to consider the minority opinion. The brief also requested
the inclusion of the Kentucky counties of Ballard, Calloway, Carlisle,
Fulton, Graves, Hickman, Marshall, and McCracken in the Southeast
marketing area if Proposal 1 is denied and Proposal 5 is adopted.
Dean Foods and Prairie Farms' joint brief contended that the
proposal to merger the Appalachian and Southeast orders brings forth a
significant policy and legal question the Department must address prior
to issuing a decision on the merits of the proposal. The proposed
merger, if adopted, would cause the number of Federal orders to fall to
below the minimum number of 10 required by Congress in the 1996 Farm
Bill, they stated.
A written statement submitted on behalf of LuVel Dairy Products,
Inc., requested that the administrative requirements of the producer-
settlement fund be modified to extend the time period in which payments
to the fund are due by one full business day and to allow payments due
to the fund to be submitted overnight instead of through the electronic
wiring of funds. However, this was not a noticed proposal and no
evidence or witness was available to testify regarding this written
request.
The 1996 Farm Bill mandated that Federal milk orders be
consolidated to not less than 10 or more than 14. The Federal order
reform final decision issued March 12, 1999, and published in the
Federal Register April 2, 1999 (64 FR 16026), meet the requirements set
forth in the 1996 Farm Bill through the consolidation of the 31 Federal
milk orders into 11 orders. The Agricultural Marketing Agreement Act of
1937 (Act), as amended, provides the Department the authority to issue
and amend orders. Accordingly, the merger proposal may be considered by
the Department.
A partial recommended decision published in the May 13, 2005,
Federal Register (70 FR 29410) found that record evidence does not
support merging the Southeast and Appalachian marketing areas or
substantiate the need for merging these two separate marketing order
areas. Record evidence of this proceeding clearly demonstrates that the
measure of association between the Appalachian and Southeast marketing
areas in terms of overlapping Class I route sales and overlapping milk
procurement areas is relatively unchanged since the consolidated orders
were implemented in January 2000. The evidence of this record does not
indicate that current marketing conditions within the two marketing
areas are disorderly.
Southern Marketing Agency, Inc., (SMA) and Dairy Farmers of
America, Inc., (DFA) filed comments in response to the partial
recommended decision expressing opposition to the Department's denial
of the proposed merger. They noted that the proposed merger was
supported by a substantial portion of market participants servicing the
Class I needs of the market with minimal opposition from milk
processing companies. In comments filed by MD&VA and ADCA, the
cooperatives maintained their support for the proposed order merger.
In comments and exceptions filed in response to the recommended
decision, both SMA and DFA contended that the proposed order merger is
needed due to the milk supply relative to the demand for milk
southeastern region of the United States. The proponents continue to
maintain that the two marketing orders are effectively a single fluid
market.
SMA reiterated the need for the merger of the marketing areas and
orders stating logistical and marketing efficiency in supplying these
deficit markets with supplemental milk is paramount to the area
producers, to processors of milk, and ultimately to consumers. SMA
contended that the milk deficit condition in the southeast region
necessitates the importation of milk from wherever it is available,
which currently is the Southwest and Mideast marketing areas. The
proponents asserted that daily interplay of the milk supply to the
Appalachian and Southeast marketing areas from these outside-area
locations demonstrates the absolute need to merge the two orders.
SMA stated that other alternatives to the proposed merger were
considered including the merger of the transportation credit funds of
the two orders and other amendments to the orders' transportation
credit provisions, development of reciprocal producer qualification
standards on the two orders, adjustments in the orders' producer milk
qualification provisions, and amendments to the orders' pool plant
provisions. SMA contended that the proposed merger is the only viable
alternative to resolving all the issues in the proposed marketing area.
DFA expressed disappointment at the recommended denial of the
proposed merger and stated that the main concern of DFA and other
proponent cooperatives is the additional costs associated with serving
the market in two marketing areas. According to DFA, the proposed
merger is critical because the milk supply relative to demand in the
southeastern region grows even more deficit each month. The cooperative
stated that servicing a deficit milk market is an extremely expensive
proposition and suggested that efforts to reduce marketing costs be
given the most serious consideration. DFA contended the proposed order
merger would aid the market's suppliers in returning more dollars to
dairy farmers.
SMA and DFA contended the partial recommended decision provided no
set standards regarding overlapping Class I route disposition and milk
procurement areas which the denial of the proposed merger was based.
They asked that a standard be identified or developed and communicated
to the industry. DFA indicated the partial recommended decision
provided references to the 1999 Federal order reform decision that do
not explicate the objective basis of that decision but rather simply
invokes the decision. DFA insisted the industry would be better served
by more transparent decision-making criteria.
As proposed in the partial recommended decision, this decision
finds that record evidence does not support merging the Southeast and
Appalachian marketing areas. Record evidence of this proceeding does
not substantiate the need for merging these two separate marketing
order areas. Overlap of Class I route disposition between the two
marketing areas is relatively unchanged since the separate orders were
created in 2000. The overlap in milk supply areas for plants in the
Appalachian and Southeast marketing areas remains minimal and unchanged
since 2000. Blend price differences and other marketing conditions in
the two marketing areas raised by the proponents are not significantly
different from conditions existing in 2000. The proponents have
[[Page 55465]]
not demonstrated that the current marketing conditions are disorderly.
The proponents have not made a convincing case that the current
marketing conditions are disorderly.
The Act provides that milk orders may be issued where the marketing
of milk is in the current of interstate or foreign commerce or where it
directly burdens, obstructs, or affects interstate or foreign commerce.
Federal milk orders define the terms under which handlers in specified
markets purchase milk from dairy farmers. The orders are designed to
promote the orderly exchange of milk between dairy farmers (producers)
and the first buyers (handlers) of milk. As the proponents assert,
orders do provide terms and provisions to identify those who are
supplying the Class I needs of a market and thus, should share in the
order revenues. The record evidence of this proceeding does not support
a finding that the current Appalachian and Southeast milk orders are
not achieving the goal of orderly marketing.
Proponents in providing justification to merge the Appalachian and
Southeast marketing areas and orders advanced a set of criteria that
was essentially the same criteria as the criteria the Department used
during Federal milk order reform. The criteria included overlapping
Class I route sales and overlapping milk procurement areas. As noted in
the partial recommended decision, the criteria considered when the
current Appalachian and Southeast marketing areas and orders were
established as part of Federal milk order reform are considered in this
decision. The Department considered and weighed this set of criteria
and the supporting justification offered by proponents of the proposed
order merger.
In determining whether Federal milk order marketing areas should be
merged, the Department generally has considered the extent to which
Federal order markets share common characteristics such as overlapping
sales and procurement areas, and other commonly shared structural
relationships. The most important of these factors are evidence of
overlapping sales patterns among handlers of Class I milk and
overlapping milk procurement area. In support of the proposed merger,
proponents assert that there is substantial overlap in Class I route
sales and milk procurement areas between the Appalachian and Southeast
markets. However, record evidence of this proceeding clearly
demonstrates that the measure of association between these two
marketing areas in terms of overlapping Class I route sales and
overlapping milk procurement areas is relatively unchanged since the
consolidated orders became effective in January 2000.
Several criteria were used by the Department in determining which
of the 31 milk order marketing areas exhibited a sufficient measure of
association in terms of sales, procurement area, and other structural
relationships to warrant consolidation or mandated by the 1996 Farm
Bill into the current 10 milk marketing areas. These criteria included
overlapping route disposition, overlapping areas of milk supply, number
of handlers within a market, natural boundaries, cooperative
associations, common regulatory provisions, and milk utilization in
common dairy products.
The primary factors during reform that supported the creation of
the consolidated Appalachian milk order marketing area and the
consolidated Southeast milk order marketing area were overlapping route
sales and milk procurement areas between the marketing areas. The
determinations were based on an analysis of milk sales and procurement
area overlap between the pre-reform orders using 1997 data.
Specifically, the Federal order reform final decision issued March 1999
stated that the primary factors for the consolidation of the (1)
Tennessee Valley, (2) Louisville-Lexington-Evansville, and the (3)
Carolina marketing areas into the current Appalachian milk order
marketing area were commonality of overlapping route disposition and
milk procurement between the two marketing areas. The decision found
that there was ``a stronger relationship between the three marketing
areas involved than between any one of them and any other marketing
area on the basis of both criteria'' (64 FR 16059).
For the Southeast order, the Federal order reform final decision
stated that the basis for the adopted Southeast marketing area which
consolidated the former Southeast marketing area with additional
counties in Arkansas, Kentucky, and Missouri was ``overlapping route
dispositions within the marketing area to a greater extent than with
other marketing areas. Procurement of producer milk also overlaps
between the states within the market'' (64 FR 16064).
Proposals to merge the Appalachian and Southeast order marketing
areas into a single marketing area were considered during the Federal
order reform process. Dairy Farmers of America, Inc., and Carolina-
Virginia Milk Producers Association submitted comments requesting that
the proposed consolidated Appalachian order marketing area and the
proposed consolidated Southeast order marketing area be combined into a
single consolidated Southeast marketing area. Also, the Kentucky Farm
Bureau Federation requested a single Federal order consisting of the
proposed consolidated Appalachian and Southeast marketing areas
including all of the State of Kentucky.
The proponents for merging the two consolidated marketing areas
contended that common procurement areas between the orders would result
in different blend prices paid to producers if the orders were not
consolidated. The Federal order reform final decision rejected this
assertion stating that ``As discussed in the proposed rule,
consolidating the Carolina and Tennessee Valley markets with the
Southeast does not represent the most appropriate consolidation option
because of the minor degree of overlapping route disposition and
producer milk between these areas'' (64 FR 16060). Accordingly, the
order merger proposals were not adopted during Federal order reform.
These findings continue to apply to the current proposed merged order.
Record evidence indicates that the Appalachian and Southeast order
marketing areas share minor and unchanged commonality in sources of
milk supply, fluid milk route sales, and market participants
(cooperative associations and handlers). However, as discussed later in
this decision, such measures of association between the Appalachian and
Southeast order marketing areas can only support a finding to maintain
two separate Federal order marketing areas with some minor
modifications.
Overlapping Route Sales and Milk Supply. Current proponents of
merging the Appalachian and Southeast marketing areas contend that
there is substantial overlap in route sales and milk supply areas. The
movements of packaged fluid milk between Federal milk order marketing
areas provide evidence that plants from more than one Federal milk
order are in competition with each other for fluid milk sales.
Overlapping sales patterns that result in the regulatory shifting of
handlers between orders tend to cause disorderly marketing conditions
by changing the price relationships between competing handlers and
neighboring dairy farmers. As discussed later in this decision, there
is no evidence of disorder occurring within the Appalachian and
Southeast order marketing areas as a result of plants shifting
regulation to other orders.
[[Page 55466]]
Overlapping milk supply principally applies when the major
proportions of a market's milk is supplied by the same area. The cost
of a handler's milk is influenced by the location of the milk supply
which affects other competitive factors. The common pooling of milk
produced within the same procurement area under the same order
facilitates the uniform pricing of producer milk among dairy farmers.
However, all marketing areas having overlapping procurement areas do
not warrant consolidation. An area that supplies a minor proportion of
an adjoining area's milk needs from minor proportions of its own total
milk supply and has minimal competition among handlers in the adjacent
marketing area for fluid sales, supports concluding that the two
marketing areas are clearly separate and distinct.
As contained in the partial recommended decision, this decision
provides detailed analysis of the association between the Appalachian
and Southeast order marketing areas in terms of overlapping Class I
route sales and milk procurement areas from 2000 through 2003.
Based on record evidence of Federal milk order data, Table 1
illustrates that the Appalachian and Southeast order marketing areas
have experienced no significant change in overlapping Class I route
sales or milk procurement since the orders were consolidated.
Table 1:--Overlapping Route Sales and Milk Supply Appalachian (Order 5)
and Southeast (Order 7) Milk Orders
------------------------------------------------------------------------
From order 5 From order 7
Date to order 7 to order 5
(percent) (percent)
------------------------------------------------------------------------
Route Disposition
(Share of Class I Sales)
------------------------------------------------------------------------
Annual Average--2000........................ 11.4 1.9
Annual Average--2001........................ 12.2 2.4
Annual Average--2002........................ 12.2 1.9
Annual Average--2003........................ 12.4 2.0
---------------------------------------------
Overlapping Milk Supply
(Share of Total Producer Milk)
------------------------------------------------------------------------
Annual Average--2000........................ 3.1 8.5
Annual Average--2001........................ 3.2 6.9
Annual Average--2002........................ 3.2 6.8
Annual Average--2003........................ 3.2 4.3
------------------------------------------------------------------------
Source: Appalachian and Southeast Market Administrator Data.
For the 2000 through 2003 period, route sales by distributing
plants regulated by the Appalachian order into the Southeast marketing
area averaged about 12 percent, while the route sales from plants
regulated by the Southeast order into the Appalachian marketing area
averaged about 2 percent. Record data also indicates that the majority
of the Class I sales by distributing plants regulated by the
Appalachian and Southeast orders is within each of the respective
orders. For the 4-year period, Appalachian order handlers accounted for
about 75 percent of the total Class I sales within the order's
marketing area and plants regulated by the Southeast order accounted
for about 85 percent of the order's total Class I sales.
Of the total producer milk pooled on the Appalachian order, the
amount of producer milk produced in the Southeast marketing area
decreased from 8.5 percent in 2000 to 4.3 percent in 2003. The milk
produced in the Appalachian marketing area that was pooled on the
Southeast order accounted for about 3.2 percent of the total producer
milk pooled on the Appalachian order for the same 4-year period.
In summary, the Table 1 data illustrates that route sales from
Appalachian order handlers into the Southeast marketing area increased
slightly (1 percentage point) from 2000 to 2003, while route sales from
the Southeast order regulated plants into the Appalachian marketing
area remained relatively unchanged for the 4-year period. Likewise, the
data in Table 1 shows that producer milk pooled on the Appalachian
order that originated from the Southeast marketing area declined each
year since 2000, while the producer milk pooled on the Southeast order
that originated from the Appalachian marketing area has remained
unchanged since the orders were consolidated in January 2000.
Table 2, which is based on Federal milk order record data, further
details the source of producer milk pooled on the Appalachian and
Southeast orders.
Table 2.--Source of Producer Milk for the Appalachian and Southeast Orders by Order and Unregulated Areas
--------------------------------------------------------------------------------------------------------------------------------------------------------
Percent from Percent from Percent from Percent from Percent from all
Year inside order northeast order mideast order southeast order other orders and
area area area area unregulated areas
--------------------------------------------------------------------------------------------------------------------------------------------------------
Appalachian Order Producer Milk
--------------------------------------------------------------------------------------------------------------------------------------------------------
2000..................................................... 51.9 6.7 9.1 8.5 23.9
2001..................................................... 47.9 6.9 11.4 6.9 26.8
2002..................................................... 46.7 7.3 14.6 6.8 24.6
2003..................................................... 45.1 5.8 19.2 4.3 25.6
----------------------------------------------------------
[[Page 55467]]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Percent from Percent from Percent from Percent from Percent from all
Year inside order central order southwest order Appalachian other orders and
area area area order area unregulated areas
--------------------------------------------------------------------------------------------------------------------------------------------------------
Southeast Order Producer Milk
--------------------------------------------------------------------------------------------------------------------------------------------------------
2000..................................................... 66.5 8.9 17.1 3.1 4.4
2001..................................................... 59.8 9.8 20.1 3.2 7.1
2002..................................................... 57.0 10.5 21.8 3.2 7.5
2003..................................................... 58.1 14.2 17.5 3.2 7.1
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Appalachian and Southeast Market Administrator Data.
The Table 2 data illustrates that the share of total producer milk
pooled on the Appalachian order produced within the marketing area
during 2000 through 2003 has declined from about 51 percent to about 45
percent. The amount of producer milk produced in the Southeast
marketing area as a share of the total amount of producer milk pooled
on the Appalachian order also has declined from 8.5 percent in 2000 to
4.3 percent in 2003. At the same time, the amount of producer milk
produced in the Mideast marketing area that was pooled on the
Appalachian order increased from 9.1 percent in 2000 to 19.2 percent in
2003.
During 2000 through 2003, the Northeast, Southeast, and Mideast
marketing areas accounted for about 27 percent of the total producer
milk pooled on the Appalachian order. Of the total producer milk pooled
on the Appalachian order that was produced outside the Appalachian
marketing area during this period, 12.7 percent was produced in the
Southeast marketing area, 12.8 percent in the Northeast marketing area,
and 26 percent in the Mideast marketing area. In addition, record data
indicates that approximately half of the pooled milk on the Appalachian
order is produced in counties within the marketing area and 20 percent
to 25 percent of the total pooled milk is supplied by Federally
unregulated areas, mainly from counties in the State of Virginia,
Pennsylvania, and New York.
For the 4-year period of 2000 through 2003, record data reveals the
share of the total Southeast order producer milk produced within the
marketing area declined from about 67 percent in 2000 to about 58
percent in 2003. However, this decline was not supplied by producer
milk that was produced in the Appalachian marketing area which remained
relatively unchanged at about 3 percent from 2000 through 2003. Record
data reveals that the supplemental milk for the Southeast order is
produced primarily in the Central and Southwest marketing areas.
Specifically, the share of producer milk produced in the Central
marketing area that was pooled on the Southeast order increased from
8.9 percent in 2000 to 14.2 percent in 2003. In addition, producer milk
produced in the Southwest marketing area that was pooled on the
Southeast order was about 17 percent in 2000, increased to about 22
percent in 2002, and declined to about 17 percent in 2003.
The record data clearly reveals the degree of overlap in milk
supply between the Appalachian and Southeast milk order marketing areas
has decreased over the 4-year period since Federal order reform while
the degree of overlap between the Appalachian and Mideast orders has
increased each year. The data further reveals that the primary out-of-
area sources of supplemental milk for the Appalachian order marketing
area are the Northeast and Mideast regions. In contrast, the primary
out-of-area sources of milk supply for the Southeast order marketing
area are the Southwest and Central marketing areas.
Record data reveals that the minimal overlap in milk supply areas
that exists between the Appalachian and Southeast milk order marketing
areas is primarily concentrated along the Tennessee and Kentucky
borders. Such overlap is typical for adjoining marketing areas. The
Federal order reform final decision addressed the issue of overlapping
milk supply areas among adjacent orders by stating that ``an area that
supplies a minor proportion of an adjoining area's milk supply with a
minor proportion of its own total milk production while handlers
located in the area are engaged in minimal competition with handlers
located in the adjoining area likely does not have a strong enough
association with the adjoining area to require consolidation. For a
number of the consolidated areas it would be very difficult, if not
impossible, to find a boundary across which significant quantities of
milk are not procured for other marketing areas.'' (64 FR 16045)
Accordingly, the overlap existing between the Appalachian and Southeast
milk order marketing areas does not warrant an order merger.
Based on the record data, this decision finds that the overlap in
route sales and milk procurement areas between the Appalachian and
Southeast milk order marketing areas does not support merging the two
orders.
Milk Utilization. During 2000 through 2003, the 4-year weighted
average Class I utilizations for the Appalachian and Southeast orders
were 66.9 percent and 63.1 percent, respectively. The level of Class I
utilization is a factor considered in determining whether orders should
be merged but does not form the basis for adopting a merger because it
is a function of how much milk is pooled on an order.
From 2000 through 2004, the non-Class I use of milk (Class II,
Class III, and Class IV) of the Appalachian and Southeast marketing
areas has been different. During this 5-year period, Appalachian order
Class II, Class III and Class IV utilization rates averaged 14.5
percent, 7.3 percent, and 10.1 percent, respectively. For the same
period, the Class II, Class III, and Class IV utilization rates for the
Southeast order averaged 10.8 percent, 17.3 percent, and 8.5 percent,
respectively. This data illustrates that the Appalachian marketing area
is balanced primarily by Class II and Class IV while in the Southeast
marketing area is balanced by Class II and Class III.
Blend Prices. Proponent cooperatives contend that the differences
in blend prices between the Appalachian and Southeast milk orders
result in disruptive marketing conditions. The blend price of an order
is a function of the utilization of milk in the respective classes
(Class I, Class II, Class III, and Class IV) at the corresponding class
prices. The blend prices for the Appalachian and Southeast order have
differed due to the orders' different class utilization of milk. The
magnitude of the blend price differences is primarily attributed to the
differences between the class prices since the Appalachian marketing
area is mainly balanced by Class II and Class IV and the Southeast
marketing area by Class II and Class III. The blend price difference
further illustrates that the Appalachian and
[[Page 55468]]
Southeast milk orders have separate and distinct market
characteristics.
For the 5-year period of 2000 to 2004, the annual average blend
price of the Appalachian order has been higher than that of the
Southeast order blend price. This is in part due to the Appalachian
order having a greater percentage of milk utilized in Class I compared
to the Southeast order over the past five years. The range of the blend
price differences for the Appalachian and Southeast orders is mainly
due to differences in the Class III and Class IV prices (i.e., the
``balancing'' classes of milk). When the Class III prices goes up
relative to the Class IV price, the blend price difference between the
two orders narrows due to the predominance of milk utilized in Class
III among the non-Class I uses in the Southeast marketing area.
Blend price differences between the Appalachian and Southeast
orders have narrowed since the orders were consolidated in 2000. The
differences in the weighted average blend prices for the two orders was
$0.36 per cwt in 2000, $0.24 per cwt in 2001, $0.21 per cwt in 2002,
$0.09 per cwt in 2003, and $0.08 per cwt in 2004. Over the 2000 to 2004
period, the Appalachian order blend price exceeded the Southeast order
blend price by an average of $0.20 per cwt.
A 1995 final decision that consolidated five former Southeastern
orders (Georgia, Alabama-West Florida, New Orleans-Mississippi, Greater
Louisiana, and Central Arkansas) with unregulated counties of four
states to form the Southeast order addressed the issue of blend price
differences among orders (60 FR 25014). The decision stated that blend
price differences between orders may be caused by a number of factors
including order provisions, institutional factors, the location of
surplus milk and differences in class prices. The decision concluded
that the five separate orders were encouraging plants to shift
regulation among the orders which resulted in disorderly marketing
conditions as producers and handler inequity greatly increased.
The current Southeast and Appalachian orders do not experience
disorderly marketing conditions as a result of plants shifting
regulation between orders. This may be attributed to the current lock-
in and unit pooling provisions contained in the Appalachian and
Southeast orders' pooling provisions. The lock-in provisions provide
that a plant located within a marketing area that meets the minimum
performance standards of the order will be regulated by that order even
if the majority of its sales occur in another marketing area. Also, the
unit pooling provisions allow two or more plants located in the
marketing area and operated by the same handler to qualify for pool
status as a unit by meeting the order's total and in-area route
disposition standards as if they were a single distributing plant.
A plant shifting regulation to an order with a lower blend price
could jeopardize the plant's ability to maintain a milk supply. Current
Appalachian and Southeast order provisions allow a plant that meets the
performance standards of the order and is physically located within the
order marketing area to be regulated by the order even if the majority
of its sales are in another marketing area. The provisions were adopted
into the southeastern orders and retained in the consolidated
Appalachian and Southeast orders to allow plants that are associated
with the market and are servicing the market's fluid needs to be
regulated under the order in which they are physically located.
If these provisions were not present in the Appalachian and
Southeast orders, plants could shift regulation between orders which
could cause disorderly marketing conditions to occur. Since record data
indicates that the Appalachian and Southeast orders' blend price
differences are continuing to decrease and there are provisions that
prevent plants from shifting regulation among orders, this decision
finds that the blend price differences between the two orders do not
form a contributing basis for merging the two marketing areas.
Proponents of the proposed order merger filed comments to the
partial recommended decision stating that the decision placed great
weight on the fact that no plants have switched regulation between the
two orders and implied that such action is a preeminent form of
disorderly marketing. Proponents asserted that such an implication
misses the complexities of the marketplace. Proponents asserted the two
separate Appalachian and Southeast orders result in the improperly
sharing of Class I revenues under each of the orders and inefficient
milk movements.
The partial recommended decision noted a 1995 decision that
concluded that the existence of five separate orders were encouraging
plants to shift regulation among the orders which resulted in
disorderly marketing conditions. The partial recommended decision
indicated that no record evidence revealed marketing disorder in the
Appalachian and Southeast marketing areas resulting from the orders
provisions, which would support a merger on this basis.
The record provides no specific evidence of inefficient milk
movements resulting from the orders' provisions. Also, record evidence
reveals no inequitable sharing of the Class I proceeds within each of
the marketing areas.
Both the Appalachian and Southeast orders provide discretionary
authority to the Market Administrator to adjust certain performance
standards, if upon completion of an investigation, the Market
Administrator finds that the standards are resulting in inefficient
movements of milk, and that a modification of such standards will
ensure that the Class I needs of the market are met.
An analysis of the record data reveals that the proposed merger
would likely lower the blend price paid to dairy farmers whose milk is
pooled on the Appalachian milk order and increase the blend price paid
to dairy farmers whose milk is pooled on the Southeast milk order. The
gains to Southeast order dairy farmers would be offset by losses to
Appalachian order dairy farmers by a similar magnitude.
If the two order marketing areas are merged and assuming no
significant depooling in the Federal order system, it is projected that
for the period of 2005 through 2009 the blend price paid to dairy
farmers whose milk is pooled on the current Appalachian order would be
reduced by about $0.07 per cwt on average, while the blend price paid
to dairy farmers whose milk is pooled on the current Southeast order
would be increased by $0.07 per cwt on average. The $0.07 per cwt
decline in the current Appalachian order blend price would cause
average order pool receipts to decline by about 11 million pounds and
average order pool revenues to fall by $6.6 million. For the current
Southeast order, the $0.07 per cwt blend price increase would increase
average order pool receipts by an average of 11 million pounds,
resulting in an average gross pool revenue increase of $6.5 million per
year.
Record testimony by proponent cooperatives indicates that SMA has,
through its pooling of costs and returns, reduced their pay price
differences to their member producers. Thus, a merger of the
Appalachian and Southeast orders would merely increase the blend price
for Southeast order nonmember producers while reducing the blend price
received by Appalachian order nonmember producers.
Proponents of the proposed merger filed comments contending that
the consolidation of the Appalachian and
[[Page 55469]]
Southeast marketing areas and orders would result in additional money
to dairy farmers in terms of efficiencies in milk movements. The
proponents' assertions of market efficiencies arising for the proposed
merger are out weighed by the projected negative impact of the order
merger on the revenues of Appalachian order nonmember producers,
particularly, when the record does not contain any specific evidence of
disorder resulting from the provisions of the two orders. In effect,
while benefiting certain producers, the proposed merged milk marketing
area and order would negatively affect certain other dairy farmers.
Based on this analysis, the absence of disorderly marketing
conditions, together with the minimal and unchanged overlap between the
Appalachian and Southeast orders in Class I sales and milk procurement
area, the two marketing areas and orders should not be merged.
Cooperative Associations. Record evidence clearly demonstrates that
there is a strong cooperative association commonality between the
Appalachian and Southeast order marketing areas. During December 2003,
there were a total of 14 cooperatives marketing the milk of members on
the Appalachian and Southeast orders and 9 of these cooperatives
marketed milk on both orders. A number of these cooperatives are
members of SMA and others cooperatives have the milk of their members
that is pooled on the Appalachian and Southeast orders marketed by SMA.
The evidence indicates that proponent cooperatives market the
majority of the milk pooled on the Appalachian and Southeast orders.
For example, for December 2003, proponent cooperatives marketed 62.23
percent of the total producer milk pooled on the Appalachian order and
69.68 percent of the total producer milk pooled on the Southeast order.
While commonality of cooperative associations can be significant, it is
not a primary criteria used to determine whether orders should be
merged.
The record indicates that the proposed merger could likely provide
some administrative relief to SMA in marketing the milk of their
cooperative members. However, this outcome is at the expense of
independent dairy farmers who are currently associated with the
Appalachian order.
Market and Structural Changes. Record evidence indicates that there
have been several market and structural changes in the Southeast and
Appalachian markets since the Federal Order Reform process began in
1996 and the implementation of the consolidated orders in January 2000.
These changes include fewer and larger producers and producer
organizations, handler consolidations, and other plant ownership
changes.
From January 2000 through December 2003, the number of dairy
farmers pooled on the Appalachian and Southeast milk orders decreased.
For the Southeast, the decline was 13.2 percent from 4,213 to 3,658,
and the number of dairy farmers pooled on the Appalachian order
decreased by 15.6 percent from 4,974 to 4,200. Milk production in the
Appalachian and Southeast marketing areas has decreased since the
Federal orders were consolidated. This decrease in milk production has
caused additional supplemental milk to be imported into these deficit
milk production markets.
The record reveals that producer organizations associated with the
Appalachian and Southeast order marketing areas changed since the
Federal order reform process. In 1996, there were 14 cooperative
associations marketing the milk of their members on the current
Appalachian order and nine Southeast order cooperatives. During
December 2003, the number of cooperative associations marketing
members' milk on the Appalachian and Southeast orders was 12 and 11,
respectively. In 2002, five cooperative associations formed SMA, which
markets the majority of the raw milk supplied to plants regulated by
the Appalachian and Southeast orders.
The number of pool distributing plants on the Appalachian and
Southeast orders for 1996 was 29 and 36, respectively. For December
2003, the number of pool distributing plants for the orders was 24 and
27, respectively. The plant changes that have occurred include
ownership changes, new plant openings, as well as plant closings.
Taken singularly or as a whole, the structural changes that have
occurred from 1996 to present have had no significant impact on
overlapping route disposition and overlapping procurement patterns of
the Appalachian and Southeast orders.
Other order provisions. Proponent cooperatives' proposal to combine
the balances of the Producer Settlement Funds, the Transportation
Credit Balancing Funds, the Administrative Assessment Funds, and the
Marketing Service Funds of the Appalachian and Southeast milk orders
for the proposed merged milk order is not adopted in this decision. The
proposal is moot since this decision does not propose merging the two
orders.
Proponent cooperatives offered order provisions for inclusion in
the proposed merged milk order. These recommendations included adopting
for the proposed merged milk order provisions that currently are
included in the Appalachian order and/or the Southeast order. The
proponent cooperatives recommended that the proposed merged milk order
include pool plant provisions currently in the Appalachian order, and
proposed the ``touch-base'' requirement of the producer milk provisions
include a ``percentage'' production standard instead of a ``days''
production standard. Since this decision does not adopt the proposal to
merge the Appalachian and Southeast marketing areas, the
recommendations concerning order provisions for the proposed merged
milk order are moot.
The proponent cooperatives requested that the proposed merged milk
order contain transportation credit provisions currently applicable to
the Appalachian and Southeast milk orders, with certain modifications.
The proponent cooperatives requested the transportation credit
provisions be modified to increase the maximum rate of assessment to
$0.10 per cwt, change the months a producer's milk is not allowed to be
associated with the market for such producer to be eligible for
transportation credits, and provide the Market Administrator the
authority to adjust the 50-percent production eligibility standard.
They also supported the proposed changes for the individual orders if
their order merger proposal was not adopted.
Proponent cooperatives contended that by adopting transportation
credits provisions of the Appalachian and Southeast orders the
Department established the inextricable and common supply relationship
between the orders. The proponents state that the proposed order merger
simply extends that recognition to provide common uniform prices and
terms of trade for all dairy farmers delivering milk to the market, and
a common set of producer qualification requirements.
This decision finds that the inclusion of transportation credit
provisions of the Appalachian and Southeast orders is not a basis for
merging the two orders. Such provisions were incorporated and
established in the orders based on the prevailing marketing conditions
in each individual order marketing area.
Record indicates that the orders' transportation credit balancing
funds have functioned differently since 2000 with respect to the
assessment rates at which handlers made payments and the payments from
the orders'
[[Page 55470]]
transportation credit balancing funds. The Appalachian order waived the
collection of assessments at least two months of each year from 2001
through 2003. The Southeast order, while collecting assessments at the
maximum rate of $0.07 per cwt, has prorated payments from the
transportation credit balancing fund each year since 2001.
In exceptions to the partial recommended, SMA contends that the
record is replete of evidence of disorder with respect to the payouts
under the Appalachian and Southeast orders' transportation credit
provisions. This decision finds that the different levels of payouts of
transportation credits under the orders do not substantiate the need to
merge the two orders. The payments from the orders' transportation
credit balancing funds and the assessment rates at which handlers made
payments are reflective of the prevailing marketing conditions in the
individual markets.
As discussed later, proposed amendments to the transportation
credit provisions of the Appalachian and Southeast orders are adopted
in this decision. The proposed amendments are warranted due to the
declining milk production within the Appalachian and Southeast
marketing areas and the anticipated growing need of importing milk
produced outside the marketing areas to supply the fluid needs of the
markets.
1b. Expansion of the Appalachian Marketing Area
While the proposal for merging the Appalachian and Southeast milk
marketing areas is not adopted, this decision would expand the current
boundaries of the Appalachian milk marketing area to include certain
unregulated counties and cities in the State of Virginia. (The partial
recommended decision inadvertently noted ``14'' unregulated cities
verses ``15'' and excluded the city of Waynesboro, which is located in
Augusta County, Virginia, from the list of proposed cities.)
Expansion of the marketing area adjoining the Appalachian marketing
area was contained in the proposal published in the hearing notice as
Proposal 3. The proposal would have expanded the proposed merged milk
order marketing area to include 25 currently unregulated counties and
15 currently unregulated cities in the State of Virginia. Similarly, a
proposal published in the notice of hearing as Proposal 4 sought the
expansion of the marketing area by adding an area adjoining the
Appalachian marketing area that includes two unregulated cities and two
unregulated counties in State of Virginia. Proposal 3, which also was
supported by proponents of Proposal 4, is adopted.
Proponent cooperatives of Proposal 3 offered that the merger of the
Appalachian and Southeast marketing areas be expanded to include the
Virginia counties of Allegheny, Amherst, Augusta, Bathe, Bedford,
Bland, Botetourt, Campbell, Carroll, Craig, Floyd, Franklin, Giles,
Grayson, Henry, Highland, Montgomery, Patrick, Pittsylvania, Pulaski,
Roanoke, Rockbridge, Rockingham, Smyth, and Wythe) and Virginia cities
of Bedford, Buena Vista, Clinton Forge, Covington, Danville, Galax,
Harrisonburg, Lexington, Lynchburg, Martinsville, Radford, Roanoke,
Salem, Staunton, and Waynesboro.
The proponent cooperatives' witness testified that the addition of
the 25 counties and the 15 cities would properly change the regulatory
status of a Dean Foods' Morningstar Foods plant located at Mount
Crawford, Virginia, from the Northeast order to the Appalachian order.
Also, the witness stated the proposed expansion would have the effect
of fully and continuously regulating under the Appalachian order two
fluid milk distributing plants (the Kroger Company's Westover Dairy
plant, located in Lynchburg, Virginia, and the National Dairy Holdings'
Valley Rich Dairy plant, located in Roanoke, Virginia) under the
proposed merger.
The witness said the Dean Foods Company's Mount Crawford plant
alternates between partially regulated and fully regulated status under
the Northeast milk order. According to the witness, in order for the
plant to procure an adequate supply of milk, producers delivering to it
must receive a blend price comparable with the blend price generated
under the proposed merged milk order, if adopted.
The proponent cooperatives' witness stated that the milk supply
located near Dean Foods' Mount Crawford, Virginia, plant is an
attractive source of supply for plants that are fully regulated by the
Appalachian order that are located in southern Virginia, North
Carolina, South Carolina, and eastern Tennessee. The witness indicated
that the impact of this proposal on the Virginia State Milk Commission
and Virginia base-holder producers would be insignificant. The witness
was of the opinion that, if there were any impact on Virginia base-
holders producers, it would be positive--reflecting the higher blend
price at Mount Crawford, Virginia, for the plants under the proposed
merged milk order versus the Northeast order.
The proponent cooperatives submitted a post-hearing brief
supporting the expansion of the proposed merged milk order area to
include the additional 25 counties and 15 cities in Virginia.
A witness representing the Kroger Company (Kroger) testified in
support of Proposal 4 to expand the proposed merged milk order to
include two currently unregulated counties (Campbell and Pittsylvania),
and two currently unregulated cities (Lynchburg and Danville) in the
State of Virginia. The witness stated that Kroger owns and operates
four pool distributing plants associated with the Southeast and
Appalachian milk orders, including Westover Dairy located in Lynchburg,
Virginia. The witness also testified in support of adopting the current
Appalachian order pool plant definition.
According to the Kroger witness, the Appalachian order pool
distributing plant provisions require that at least 25 percent of a
plant's total route disposition must be to outlets within the marketing
area. This requirement, explained the witness, has restricted Kroger's
ability to expand its Class I sales into areas outside the Appalachian
marketing area, including the area directly associated with the plant's
physical location (Lynchburg, Virginia).
The Kroger witness noted that Westover Dairy has been a fully
regulated plant on the Appalachian order since January 2000, and prior
to reform, the plant was regulated on the Carolina order--one of the
former orders combined to form the Appalachian order. According to the
Kroger witness, the total in-area route disposition standard increased
from 15 percent to 25 percent when the consolidated and reformed
Appalachian order became effective in January 2000. This change, the
witness contended, has created an undue hardship on Westover Dairy and
has forced it to relinquish sales in areas outside of the Appalachian
market to maintain its pool status under the order. The witness
concluded by stating that Kroger prefers Proposal 3--the larger
expansion--which would not only expand the order area to include their
plant located at Lynchburg, Virginia, but would allow a further
expansion of Class I sales into other surrounding areas.
The witnesses for MD&VA, ADCA, Lone Star, and DMC testified in
support of Proposal 3 to expand the proposed Southeast milk order area
to include certain unregulated counties and cities in the State of
Virginia as proposed by the proponent cooperatives. The witnesses
stated that the cooperatives were not opposed to the expansion of the
proposed Southeast milk marketing
[[Page 55471]]
area into the smaller territory in the State of Virginia as proposed by
Kroger but stated the larger expanded area in Proposal 3 was
preferable.
The MD&VA witness explained that some of its member producers are
located in the proposed expanded area and that the cooperative delivers
the milk of producers holding Virginia Milk Commission base to plants
fully regulated under the Appalachian milk order. According to the
witness, the milk of MD&VA member producers is marketed to Dean Foods'
Morningstar Foods plant located in Mount Crawford, Virginia, which
would become a pool distributing plant if the proposed merged milk
order and the expansion to Virginia counties and cities are adopted.
Witness appearing on behalf of Dean Foods and Prairie Farms stated
they were not opposed to Proposals 3 and 4. Thus, there was no
opposition expressed at the hearing or in post-hearing briefs to the
adoption of these proposals.
In response to the partial recommended decision, Kroger, Dairy
Farmers of America, Inc. (DFA), MD&VA, and ADCA filed comments in
support of expanding the Appalachian marketing area to include certain
unregulated counties and cities in the State of Virginia. Kroger stated
the proposed expansion is supported by the hearing record. According to
DFA, the current Appalachian order configuration makes it difficult for
plants to establish supply patterns and pricing terms since the
potential exists for plants to shift their regulatory status from month
to month. Thus, DFA asserted the proposed expansion is beneficial
because it will assure full and regular pool plant status for the
affected bottling plants.
MD&VA and ADCA asserted that the proposed expansion of the
Appalachian marketing area will enhance producer and handler equity,
provide for orderly marketing, and improve marketing efficiencies.
Under the current Appalachian order, MD&VA and ADCA noted that the
Kroger's Westover Dairy plant, located in Lynchburg, Virginia, has
limited expansion of sales area to preserve its regulatory status as a
pool distribution plant on the order. The cooperatives stated the
proposed marketing area expansion will allow the plant to operate more
efficiently, perpetuate the plant's regulatory status as a pool plant,
and eliminate the disorder that could occur if the plant's regulatory
status changes.
According to MD&VA and ADCA, the Dean Foods' Morningstar Foods
plant, located in Mount Crawford, Virginia, has been plagued with
issues of regulatory status. MD&VA and ADCA asserted that the proposed
expansion should correct actual and perceived handler inequities
between partially regulated and fully regulated handlers that result
from different blend prices, and bring forth order and stability in the
marketing area. The cooperatives explained that the continual shifting
of regulatory status between, or in and out of a Federal milk order is
disorderly. They stated the proposed expansion will remove the disorder
associated with the plant's continuous change in regulatory status.
This decision adopts proposed amendments to the Appalachian order
that would expand the marketing area to include 25 currently
unregulated counties and 15 cities in the State of Virginia. The
proposed amendments would cause the full and regular regulation under
the Appalachian order of three fluid milk distributing plants--one of
which has been shifting regulatory status under the Northeast order--
provided the plants meet the order's minimum performance standard. The
plants are located in Lynchburg, Virginia, Roanoke, Virginia, and Mount
Crawford, Virginia. Because of Appalachian order's lock-in provision,
these plants, which would be physically located within the Appalachian
marketing area, would continue to be regulated under the Appalachian
order even if the majority of their sales are in another Federal order
marketing area.
The proposed expansion would continue the regulation of two fluid
milk distributing plants (Kroger's Westover Dairy plant, Lynchburg,
Virginia, and National Dairy Holdings' Valley Rich Dairy plant,
Roanoke, Virginia) under the Appalachian order. The proposed expansion
also would shift the regulation of the Dean Foods' Morningstar Foods
plant, Mount Crawford, Virginia, from the Northeast order to the
Appalachian order.
The Kroger's Westover Dairy plant has been regulated by the
Appalachian order since the order was consolidated in January 2000.
Current Appalachian order pool plant provisions require that at least
25 percent of a distributing plant's total Class I sales be to outlets
within the marketing area. Prior to the reform of Federal milk orders,
the former order marketing areas that were combined into the
Appalachian order marketing area contained a 15 percent in-area route
disposition standard for pool distributing plants.
Record evidence indicates that the current in-area Class I route
sales standard likely is limiting the growth potential of Kroger's
Westover Dairy plant, located in Lynchburg, Virginia. It is not the
intent of Federal milk orders to inhibit the growth of handlers.
Federal orders are designed to provide for the orderly exchange of milk
from the dairy farmer to the first buyer (handler). The orders also
provide minimum performance standards to ensure that the fluid needs of
the market are satisfied. Accordingly, the adoption of the expansion
proposal would allow the Kroger Westover Dairy plant to maintain a milk
supply in competition with nearby Appalachian order plants, and
eliminate any disorder that is resulting from current Appalachian order
provisions.
In the case of Dean Foods' Morningstar Foods plant in Mount
Crawford, Virginia, the proposed amendments would eliminate the current
disruption and disorder caused by the plant shifting its regulatory
status from fully to partially regulated status under the Northeast
order. Such shifting from fully to partially regulated status under an
order may cause financial harm to producers supplying. The proposed
expansion should result in more order and stability in the marketing
area.
The record indicates that the Kroger's Westover Dairy plant and
Dean Foods' Morningstar plant are supplied by producers located near
the plants and that the plants compete with other Appalachian order
plants in milk procurement. This decision finds that orderly market
conditions would be preserved by the adoption of the proposed expansion
amendments. The regulation of no other plants should be affected by the
adoption of these proposed amendments. In addition, the proposed
expansion of the Appalachian marketing area is not expected to have a
negative impact on the blend price paid to producers.
If the proposed marketing area expansion for the Appalachian order
becomes effective, milk originating from any of the 25 counties or 15
cities in the State of Virginia would not be eligible to receive
transportation credits under the Appalachian and Southeast orders.
1c. Transportation Credits Provisions
As proposed in the partial recommended decision, this decision
finds that the maximum rates of the transportation credit assessment
for the Appalachian and Southeast orders should each be increased by 3
cents per hundredweight. Increasing the transportation assessment rates
will tend to minimize the exhaustion of the transportation credit
balancing fund when the need for importing supplemental bulk milk from
outside of the marketing areas to meet Class I
[[Page 55472]]
needs occurs. Additionally, this decision provides the Market
Administrators of the orders the discretionary authority to increase or
decrease the 50 percent production standard for determining the milk of
a dairy farmer that is eligible for transportation credits. Such dairy
farmer should not have been a producer under the order during more than
two of the immediately preceding months of February through May for the
milk of the dairy farmer to be eligible for receipt of a transportation
credit.
The Appalachian and Southeast orders each contain a transportation
credit balancing fund from which a payment is made to partially offset
the cost of moving milk into each marketing area to meet fluid milk
demands. The fund is the mechanism by which handlers deposit, on a
monthly basis, payments at specified rates for eventual payout as
defined by a specified formula. The orders' transportation credit
provisions provide payments typically during the short production
months of July through December to handlers who incur hauling costs
importing supplemental milk to meet the fluid demands of the market.
Transportation credit payments are restricted to bulk milk received
from plants regulated by other Federal orders or shipped directly from
farms of dairy farmers located outside the marketing areas and who are
not regularly associated with the market. The handler payments into the
funds are applicable to the Class I milk of producers who supply the
market throughout the year. The Market Administrators of the orders are
authorized to adjust payments to and from the relevant transportation
credit balancing fund.
The transportation credit provisions of the Appalachian and
Southeast orders differ by the assessment rate at which handlers make
payments to the transportation credit balancing fund. The maximum rate
of assessment for the Appalachian order is $0.065 per cwt while the
maximum rate of assessment for the Southeast order is $0.07 per cwt.
A feature of the proposal for merging the Appalachian and Southeast
marketing areas and orders was providing for a maximum transportation
assessment rate of 10 cents for the proposed Southeast order. This
would essentially represent a 3-cent per cwt increase from the current
Southeast order, and a 3.5-cent increase from the Appalachian order.
While there was no separate proposal for increasing the assessment rate
for the transportation credit fund, it was made clear by the proponents
that in the absence of adopting the proposed merger an increase in the
transportation credit assessment rate was warranted and supported for
the current orders.
With regard to the transportation credit issue, the proponent
cooperatives' witness testified that the maximum transportation credit
assessment rate should be increased to $0.10 per cwt. According to the
witness, the increase is necessary to eliminate insufficient funding
for transportation credit claims that would likely have been paid had
sufficient funds been available. According to the witness, the
transportation credit rate of $0.07 per cwt for the current Southeast
order has been at the maximum rate since the inception of the order,
but that payments from the transportation credit balancing fund were
exhausted in 2001, 2002, and 2003 resulting in prorating dollars from
the transportation credit balancing fund to the amount of
transportation claims submitted for receipt of the credit. In contrast,
the witness noted, the transportation credit fund for the Appalachian
order has been sufficiently funded since 2000 thus enabling the payment
of all claims.
The proponent cooperatives' witness was of the opinion that the
exhaustion of transportation credit funding in the Southeast order
resulted in inequitable supplemental milk costs to handlers between the
two orders. The witness testified that handlers procuring supplemental
milk supplies for the Appalachian order were reimbursed at 100 percent
of their claimed credits while handlers procuring supplemental milk
supplies for the Southeast order were reimbursed at approximately 50
percent of their claimed credits. According to the witness, the unequal
payout between the two orders results in disorderly marketing
conditions exhibited by inequitable costs for producer milk among
handlers.
Dean Foods and Prairie Farms voiced opposition to the proponents'
proposed amendments to increase the maximum rate of assessments and
increase the amount of milk that would be eligible of for
transportation credits. Dean Foods and Prairie Farms pointed out that
the proposals to incorporate transportation credit provisions into the
southeastern orders were strongly opposed by some fluid milk processors
and some dairy farmers. They noted that the intent and purpose of
transportation credit provisions were to only pay a portion of the cost
associated with hauling supplemental milk to the markets to meet fluid
needs.
In their post-hearing brief, Dean Foods and Prairie Farms stated
there is no reason to increase the rate of assessment. Changing the
rate of assessment, they contended, would effectively change the system
of pricing without considering the impact on other marketing orders.
In opposition to any change in the rate of transportation credits,
a witness for Georgia Milk Producers, Inc. (GMP), testified that
increasing the assessment rate would generate more revenue to be paid
to truck drivers instead of paying higher prices to local dairy
farmers. According to the witness, the price of milk paid to local
dairy farmers should be increased rather than subsidizing additional
outlays for transportation costs.
The GMP witness suggested that instead of increasing the
transportation credit assessment rate, a financial incentive should be
initiated for dairy farmers to encourage milk production during the
fall months when fluid milk demands are highest. According to the
witness, if the incentive plan still does not cover the local milk
production deficits, only then should the assessment rate for
transportation credits be increased. The witness was of the opinion
that an incentive plan encouraging local milk production would reduce
hauling costs because less milk would be imported into the Southeast
market. The witness also was of the opinion that a financial incentive
plan would lower balancing costs by encouraging the movement of milk
supplies located near processing plants.
Three comments were filed in support of the proposed amendments to
the transportation credit provisions as contained in the partial
recommended decision.
Dairy Farmers of America, Inc. (DFA), supported the decision to
increase by 3 cents per cwt the maximum transportation credit
assessment rates to fund the existing transportation credit funds of
the Appalachian and Southeast orders. According to DFA, costs are
exceeding the reimbursement as provided by the transportation credits
due to declining milk production in the southeastern region and
increasing costs of procuring and transporting supplemental milk
supplies. DFA asserted that the increase in the orders' maximum
assessment rates will provide additional money to offset costs and
allow processors and consumers to bear an increased share of the market
supply cost.
MD&VA and ADCA expressed support for the proposed amendments to the
transportation credit provision of the Appalachian and Southeast
orders. Specifically, the cooperative associations support increasing
the maximum assessment rates under both orders by 3 cents per cwt, and
proposed
[[Page 55473]]
amendments that provide the Market Administrator of each of the orders
the discretionary authority to set the milk production standard for
determining which producer milk meets the performance standard.
MD&VA and ADCA stated the current maximum rates provided in the
individual orders are insufficient to cover transportation credit
claims. The cooperatives noted that the Market Administrators for the
Appalachian and Southeast orders prorated payments during several
months of the 2004 payout period. MD&VA and ADCA stated the record
indicates that milk production continues the declining trend while
Class I sales is projected to increase. The increase in the maximum
assessment rate for the Appalachian and Southeast orders is necessary
to correct shortages and lessen handler inequities, the cooperatives
asserted. They maintained that insufficiency in the funds has worsened
and created an increased burden on the marketers of raw milk to find
other ways to help cover the costs associated with the transport of
milk.
MD&VA and ADCA expressed support for greater Market Administrator
discretion in setting limits and minimum performance standards in
Federal Orders. The cooperative indicated that defining under the order
what milk is ``supplemental milk'' by limiting the portion of milk
pooled from a dairy farmer in the spring months is a prime example of
an Order provision which needs flexibility. They asserted that overly
rigid provisions in the Appalachian and Southeast areas can cause
inefficiencies in the marketing of milk, disorderly marketing, or
uneconomic movements of milk.
MD&VA explained that unexpected declines in milk production in the
spring months may signal the need for additional shipments of milk into
the order areas over historic levels. In such a case, the cooperatives
indicated that it is highly desirable for the Market Administrator to
have discretionary authority to adjust the delivery standard. The order
requirement that prior to making any change in the provision a Market
Administrator must seek views, data and argument from the industry
assures openness in decision-making, inclusiveness, and fairness, the
cooperatives asserted.
Current Appalachian and Southeast order transportation credit
provisions have been a feature of the orders, or predecessor orders,
since 1996. The need for transportation credits arose from the
consistent need to import milk from many areas outside of these
marketing areas during certain months of the year when milk production
in the areas is not sufficient to meet Class I demands. The
transportation credit provisions provide payments to handlers and
cooperative associations in their capacity as handlers to cover some of
the costs of importing supplemental milk supplies into the Appalachian
and Southeast marketing areas during the short production months of
July through December. The provisions also are designed to limit the
ability of producers who are not normally pooled on these orders from
pooling their milk on the Appalachian and Southeast orders during the
flush production months when such milk is not needed to supply fluid
needs.
While Federal milk order reform made modifications to certain
features of the transportation credit fund provisions of the
Appalachian and Southeast orders, the maximum assessment rate at which
payments are collected was not modified. The current maximum rate of
$0.065 per cwt for the Appalachian order has been sufficient to meet
most of the claims made by handlers applying for transportation credit.
The record reveals that since implementation of milk order reform in
January 2000, the Market Administrator for the Appalachian order waived
assessing handlers in at least two months of each year from 2001
through 2003.
For the current Southeast order, the current maximum transportation
credit rate of $0.07 per cwt has not been sufficient to cover hauling
cost claims by handlers. As a result, the Market Administrator of the
Southeast order has prorated payments from the transportation credit
balancing fund since 2001.
Even though this decision does not adopt the merger of the current
Southeast and Appalachian marketing areas, the fundamental purpose of
the transportation credit fund provisions of the orders are strongly
supported by the proponent cooperatives. This support is independent of
providing for a new and larger Southeast milk marketing order.
An increase in the maximum transportation credit assessment rate
for the Appalachian and Southeast orders is warranted on the basis of
declining milk production within the Appalachian and Southeast
marketing areas. For example, the final decision of Federal milk order
reform anticipated that about two-thirds of the milk supply for the
Appalachian order would be produced within the marketing area, with
supplemental milk supplies from unregulated areas to the north in
Virginia and Pennsylvania (based on 1997 data). Since implementation of
Federal order reform in January 2000, record evidence reveals that only
50 percent of the Appalachian milk supply is produced within the
marketing area. The trend of lower in-area milk production strongly
suggests that the anticipated future needs of relying on milk supplies
from outside the marketing area will only grow and that steps should be
taken to assure a continuing adequate supply of milk for handlers
servicing the marketing area. An increase in the Appalachian order
maximum transportation credit assessment rate is a means of assuring
and adequate milk supply for fluid use for the area. The Southeast
marketing area exhibits the same trend.
To the extent that assessments are not needed to meet expected
transportation credit claims, this decision adopts provisions that
provide discretionary authority to the Market Administrator to set the
assessment rate at a level deemed sufficient or to waive assessments.
Additionally, the transportation credit provisions of the Appalachian
and Southeast orders prevent the accumulation of funds beyond actual
handler claims. In this regard, increasing the transportation credit
rate will not result in an unwarranted accumulation of funds beyond
what is needed to pay handler claims.
As part of the proposed merged marketing areas and orders, the
proponent cooperatives' witness proposed that any producer that is
located outside of the marketing area would be eligible for
transportation credits if that producer did not pool more than 50
percent of the producer's own milk production during the months of
March and April. The witness testified that the Market Administrator
should also be given the discretionary authority to adjust the 50
percent limit based on the prevailing supply and demand conditions for
milk in the area.
The current transportation credit provisions of the Appalachian and
Southeast orders specify that transportation credits will apply to the
milk of a dairy farmer who was not a ``producer'' under the order
during more than 2 of the immediately preceding months of February
through May, and not more than 50 percent of the production of the
dairy farmer during those two months, in aggregate, was received as
producer milk under the orders during those two months. These
provisions provide the basis for determining the milk of a dairy farmer
that is truly supplemental to the market's fluid needs. The provision
specifies the months of February through May--the period when milk
production is greatest--as the months
[[Page 55474]]
used to determine the eligibility of a producer whose milk is needed on
the market.
The Market Administrators of the orders should be given
discretionary authority to adjust the 50 percent eligibility standard
for producer milk receiving transportation credits based on the
prevailing marketing conditions within the marketing area. The Market
Administrator should have the authority to increase or decrease this
requirement because it is consistent with authorities already provided
for supply plant performance standards and diversion limit standards.
Accordingly, the proposed change to the transportation credit
provisions of the Appalachian and Southeast orders is recommended for
adoption.
This decision does not recommend changing the period the milk of a
dairy farmer is not allowed to be associated with the market for such
dairy farmer's milk to be eligible for transportation credits. If the
months were modified from February through May to March and April, the
definition of supplemental milk under the transportation credit
provisions would effectively change. Supplemental milk for purposes of
determining the eligibility of transportation credits is that milk that
is not regularly associated with the market. The proposed change would
allow supplemental milk to be delivered to a pool plant all twelve
months, potentially lowering the uniform price during those high
production months by pooling additional milk when is not needed for
fluid use.
By retaining the months of February through May and allowing the
Market Administrators of the Appalachian and Southeast orders to adjust
the 50 percent production standard, the current definition of
supplemental milk remains intact. The orders' Market Administrator
would be allowed to increase or decrease the 50 percent production
standard, if warranted, based on current marketing conditions.
2. Promulgation of a New ``Mississippi Valley'' Milk Order
A proposal, published in the hearing notice as Proposal 5, seeking
to split from the current Southeast marketing area and forming a new
Mississippi Valley milk marketing area and order was not proposed for
adoption in the partial recommended decision and is not adopted in this
final decision.
A witness appearing on behalf of Dean Foods and Prairie Farms
testified in support of Proposal 5. In splitting the current Southeast
marketing area, a new marketing area, to be named the Mississippi
Valley order, would include the area of the existing Southeast
marketing area west of the Alabama-Mississippi borderline including the
States of Mississippi, Louisiana, Arkansas. According to the witness,
this new marketing area would extend northward through the relevant
portions of Tennessee and Kentucky, and would include southern
Missouri. The second order, according to the witness, would consist of
the remainder of the current Southeast marketing area, i.e., Georgia, a
portion of the western panhandle of Florida, and Alabama.
The Dean Foods-Prairie Farms witness, and others supporting the
adoption of Proposal 5, asserted that increasing the number of Federal
milk marketing areas and orders would provide the economic incentives
for more efficient movement of milk and increase the blend price
received by producers who supply the needs of the Class I market.
According to the witnesses, splitting the Southeast order into two
orders would reduce transportation costs and improve the efficient
operation of the transportation credit balancing fund in each proposed
new marketing area by more efficiently attracting milk to the Class I
market and decreasing the need for hauling milk from longer distances.
The Dean Foods-Prairie Farms witness testified that there are two
major incentives to ship milk to distributing plants--the blend price
paid by pool distributing plants and the blend price paid for diverted
milk. According to the witness, there are two disincentives to ship
milk to a pool distributing plant under any order--the net
transportation cost of shipping milk and the alternative blend prices
in other markets that may attract milk to plants in those other
markets. The witnesses cited milk deficit areas in southern Illinois
and St. Louis, Missouri, as examples of areas where, in the opinion of
the witnesses, blend price differences result in a failure to attract
enough milk to adequately serve the Class I market. The witness
asserted that the establishment of a Mississippi Valley order would
likely result in blend price differences between the new areas which
would provide producers the economic incentives of receiving higher
blend prices while incurring lower transportation costs.
The Dean Foods-Prairie Farms witness testified that a national
hearing may be justified to more fully consider the border, pricing,
and milk deficit issues and alternatives to proposals (like Proposals 1
and 5) advanced to merge or to split the Southeast marketing area.
According to the witness, when marketing area borders are changed, such
change affects all marketing areas in the Federal order milk order
system. The witness was of the opinion that considering border issues
would necessarily require a broad rethinking of the marketing areas of
the entire Federal order program and that a national hearing may be the
most appropriate venue to consider these affects.
A witness for GMP testified that the expansions of the Southeast
marketing area prior to Federal milk order reform, and as a result of
Federal order reform, have successively reduced income to Georgia
producers. The witness explained that the expansions of the marketing
area have discouraged local milk production and encouraged movements of
milk from outside the marketing area. According to the witness, the
declining ability of local production to meet the Class I needs of the
market, and the increased balancing requirements of an expanded
marketing area, have increased costs while reducing revenues to Georgia
dairy farmers.
In the opinion of the GMP witness, the establishment of a separate
Mississippi Valley marketing area and order and a smaller Southeast
marketing area would have positive benefits for Georgia milk producers.
The witness explained that as a smaller Southeast marketing area, the
Georgia market would likely experience lower balancing costs and
expanded local production to meet the growing Class I needs of the
market.
A witness for proponents of Proposal 1 testified in opposition to
adopting a new Mississippi Valley marketing area by splitting it from
the current Southeast marketing area. According to the witness, the
proposed new marketing area would not lead to lower transportation
costs but instead may lead to increased administrative difficulties
with transportation credit balancing funds. The witness was of the
opinion that blend price enhancement for the proposed smaller Southeast
marketing area would be achieved at the expense of producers pooled on
the proposed new Mississippi Valley order.
The opposition witness was of the opinion that blend prices for the
proposed smaller Southeast marketing area may increase to levels that
would exacerbate differences between the blend prices of the new
smaller Southeast and the Appalachian order and may give rise to
unintended market disruptions. The witness was of the opinion that a
smaller Southeast marketing area and order also may result in
administrative difficulties in the operation of transportation credit
[[Page 55475]]
balancing funds among the three orders and may lead to the inefficient
movements of milk. The witness expressed the opinion that splitting the
Southeast marketing area would not address the concerns that proponents
of Proposal 1 have raised regarding overlapping sales and inefficient
milk movement issues between the Appalachian and Southeast marketing
areas. The witness indicated that these issues would remain unresolved
if the Southeast marketing area was split and if the Southeast and
Appalachian marketing areas were not merged.
A post hearing brief by the proponents of Proposal 5 reiterated
their position that creating more, rather than fewer, blend price
differences will provide incentives to ship milk to markets where the
milk is demanded. In addition, the brief reiterated that splitting the
Southeast marketing area will reduce transportation costs and result in
more efficient movement of milk in a smaller Southeast marketing area
and a Mississippi Valley marketing area. The brief also called for the
including the Kentucky counties of Ballard, Calloway, Carlisle, Fulton,
Graves, Hickman, Marshall, and McCracken into the smaller Southeast
order if Proposal 5 is adopted.
Southern Marketing Agency, Inc., and Dairy Farmers of America, Inc.
(DFA), filed comments to the partial recommended decision supporting
the denial of the proposed split of the Southeast order marketing area.
DFA stated that for proponents of the proposed order merger adoption of
Proposal 5 would have exacerbated their milk supply issues--made it
more expensive to service the markets--and would have been of no
corresponding benefit to milk suppliers.
The proposal to split the current Southeast marketing area hinges
on the assertions that geographically smaller marketing areas tend to
reduce transportation and balancing costs and increase blend prices for
pooled producers in each of the newly defined marketing areas. The
record does not contain specific evidence to support these conclusions.
The record lacks evidence to support concluding that the adoption of
Proposal 5 would lower transportation costs, increase local milk
production, and reduce balancing costs. The same is true for concluding
that local milk production would be encouraged and increased to the
extent that transportation expenses, and the need for continued
transportation credit fund payments, would be significantly reduced
while bringing forth a sufficient supply of milk to meet the Class I
needs of the proposed marketing areas.
Opponents of Proposal 5 argued that blend price increases from
splitting the Southeast marketing area may not occur and that lower
transportation cost may not be realized.
This decision does not adopt Proposal 5. The record is insufficient
in demonstrating the marketing efficiencies advanced by the proponents.
3. Eliminating the Simultaneous Pooling of the Same Milk on a Federal
Milk Order and a State-Operated Milk Order That Provides for Marketwide
Pooling
A proposal, published in the hearing notice as Proposal 6, seeking
to prohibit the simultaneous pooling of the same milk on the
Appalachian or Southeast milk marketing orders and on a State-operated
order that provides for the marketwide pooling of milk is adopted in
this partial final decision. Currently, neither the Appalachian or
Southeast orders have a provision that would prevent the simultaneous
pooling of the same milk on the order and on a State-operated order
that provides for marketwide pooling.
The proponents of Proposal 6, Deans Foods and Prairie Farms
testified that the simultaneous pooling of milk on more than one
marketing order was prohibited between all Federal milk orders.
According to the Dean Food-Prairie Farms' witnesses, a loophole was
inadvertently created during the consolidation of Federal orders
permitting double pooling of the same milk on a Federal milk marketing
order and on a State-operated order that, like a Federal order,
provides for the marketwide pooling of producer milk. (The double
pooling of milk has become known as ``double dipping.'')
According to the Dean Foods/Prairie Farms'' witnesses, this
loophole has been exploited for financial gain by some parties at the
expense of pooled producers in other Federal orders until prohibited by
subsequent milk order amendments. The proponents testified that
proposals similar to Proposal 6 have been adopted in the Upper Midwest,
Pacific Northwest, and Central Federal milk orders.
Proponents testified that prohibition of double dipping in the
Southeast and Appalachian orders would close a potential loophole in
these orders or in a successor order if these orders were merged. The
witnesses testified that the pooling of milk regulated by Virginia and
Pennsylvania milk programs would not be affected by the prohibition of
double pooling. According to the witnesses, milk that is pooled on
these State milk programs does not receive extraordinary benefits that
would have an impact on Federal milk order pools. No opposition
testimony was presented.
Dairy Farmers of America, Inc., Maryland and Virginia Milk
Producers Cooperative Association, Inc. (MD&VA), and Arkansas Dairy
Cooperative Association, Inc. (ADCA), filed comments to the partial
recommended decision supporting findings to eliminate the simultaneous
pooling of the same milk on the Appalachian and Southeast milk order
and a State-operated order that provides marketwide pooling.
MD&VA and ADCA noted that the hearing record indicates that the
Virginia State Milk Commission does not operate a producer revenue
pool. Accordingly, the cooperatives asserted, the proposed amendments
that would eliminate the pooling of milk under the Appalachian or
Southeast orders of a dairy farmer that shares simultaneously in the
revenues of a State-operated marketwide pool must not pertain to
Virginia Milk Commission Base-holder dairy farmers.
According to MD&VA and ADCA, the ability for milk to be
simultaneously pooled on a State-operated marketwide pool and a Federal
order pool violates the premises established for the pooling of milk.
The cooperatives stated milk may serve one market only at a time, and
thus, must not be allowed to be pooled on multiple pools at one time.
They noted that recommended and final decisions for other orders
rightfully implemented amendments to prohibit the simultaneously
pooling of milk on multiple orders, and assert that the Appalachian and
Southeast orders should be amended likewise.
Since the 1960s the Federal milk order program has recognized the
harm and disorder that resulted to both producers and handlers when the
same milk of a producer was simultaneously pooled on more than one
Federal order. When this occurs, producers do not receive uniform
minimum prices, and some handlers receive unfair competitive
advantages. The need to prevent ``double pooling'' became critically
important as distribution areas expanded, orders merged, and a national
pricing system was adopted. Milk already pooled under a State-operated
program and able to simultaneously be pooled under a Federal order
creates the same undesirable outcomes that allowing milk to be pooled
on two Federal orders used to cause and subsequently corrected.
There are other State-operated milk order programs that provide for
marketwide pooling. For example, New York operates a milk order program
for
[[Page 55476]]
the western region of that State. A key feature explaining why this
State-operated program has operated for years alongside the Federal
milk order program is the provision in the State pool that excludes
milk from the State pool when the same milk is already pooled under a
Federal order. Other States with marketwide pooling similarly do not
allow double-pooling of Federal order milk.
The record supports that the Appalachian, Southeast, and possible
successor orders should be amended to preclude the ability to
simultaneously pool the same milk on the order if the milk is already
pooled on a State-operated order that provides for marketwide pooling.
Although no record evidence was presented illustrating or documenting
current double pooling of milk in the Appalachian and Southeast orders,
the adoption of Proposal 6 offers a reasonable solution for prohibiting
the same milk to draw pool funds from Federal and State marketwide
pools simultaneously. It is consistent with the current prohibition
against allowing the same milk to participate simultaneously in more
than one Federal order pool.
Evidence presented at the hearing establishes that milk that can be
pooled simultaneously on a State-operated order and a Federal order
would render the Appalachian and Southeast milk orders unable to
establish prices that are uniform to producers and to handlers. This
shortcoming of the pooling provisions allows milk which was pooled on a
State order to be pooled milk on a Federal order. Such milk therefore
could not provide a reasonable or consistent service to meet the needs
of the Class I market because it was committed to the State order.
Adoption of Proposal 6 will not establish any barrier to the
pooling of milk from any source that actually demonstrates performance
in supplying the Appalachian and Southeast markets' Class I needs.
Accordingly, Proposal 6 is included as part of this partial final
decision.
4. Producer-Handler Provisions
Proposals considered at the hearing regarding the regulatory status
of producer-handlers will be addressed in a separate decision.
Dairy Farmers of America, Inc. (DFA), filed a comment response to
the partial recommended decision expressing disappointment in the lack
of decision regarding the producer-handler issue and expects a decision
on these provisions to be issued soon.
As stated previously in this decision, Issue No. 4 regarding the
producer-handler provisions of the Appalachian and Southeast orders
will be addressed separately in a forthcoming decision.
Requests for Expedited Issuance of Final Decision
Comments submitted by Dairy Farmers of America, Inc., Maryland and
Virginia Milk Producers Cooperative Association, Inc. (MD&VA), Arkansas
Dairy Cooperative Association, Inc. (ADCA), and Southern Marketing
Agency, Inc. (SMA), in response to the partial recommended decision
requested the expedited issuance of a final decision on proposed
amendments contained in the partial recommended decision.
Conforming Change
This decision amends the Appalachian and Southeast orders to
appropriately reference the Deputy Administrator of Dairy Programs to
reflect changes in a position and program name within the Agricultural
Marketing Service.
Rulings on Proposed Findings and Conclusions
Briefs and proposed findings and conclusions were filed on behalf
of certain interested parties. These briefs, proposed findings and
conclusions, and the evidence in the record were considered in making
the findings and conclusions set forth above. To the extent that the
suggested findings and conclusions filed by interested parties are
inconsistent with the findings and conclusions set forth herein, the
requests to make such findings or reach such conclusions are denied for
the reasons previously stated in this decision.
General Findings
The findings and determinations hereinafter set forth supplement
those that were made when the Appalachian and Southeast orders were
first issued and when they were amended. The previous findings and
determinations are hereby ratified and confirmed, except where they may
conflict with those set forth herein.
(a) The tentative marketing agreements and the orders, as hereby
proposed to be amended, and all of the terms and conditions thereof,
will tend to effectuate the declared policy of the Act;
(b) The parity prices of milk as determined pursuant to section 2
of the Act are not reasonable in view of the price of feeds, available
supplies of feeds, and other economic conditions which affect market
supply and demand for milk in the marketing areas, and the minimum
prices specified in the tentative marketing agreements and the orders,
as hereby proposed to be amended, are such prices as will reflect the
aforesaid factors, insure a sufficient quantity of pure and wholesome
milk, and be in the public interest;
(c) The tentative marketing agreements and the orders, as hereby
proposed to be amended, will regulate the handling of milk in the same
manner as, and will be applicable only to persons in the respective
classes of industrial and commercial activity specified in, the
marketing agreements upon which a hearing has been held; and
(d) All milk and milk products handled by handlers, as defined in
the tentative marketing agreement and the order for Appalachian
marketing area, and hereby proposed to be amended, are in the current
of interstate commerce or directly burden, obstruct, or affect
interstate commerce in milk or its products.
Rulings on Exceptions
In arriving at the findings and conclusions, and the regulatory
provisions of this decision, each of the exceptions received was
carefully and fully considered in conjunction with the record evidence.
To the extent that the findings and conclusions and the regulatory
provisions of this decision are at variance with any of the exceptions,
such exceptions are hereby overruled for the reasons previously stated
in this decision.
Marketing Agreement and Order
Annexed hereto and made a part hereof are two documents, a
Marketing Agreement regulating the handling of milk, and an Order
amending the order regulating the handling of milk in the Appalachian
and Southeast marketing areas, which have been decided upon as the
detailed and appropriate means of effectuating the foregoing
conclusions.
It is hereby ordered that this entire decision and the two
documents annexed hereto be published in the Federal Register.
Determination of Producer Approval and Representative Period
June 2005 is hereby determined to be the representative period for
the purpose of ascertaining whether the issuance of the orders, as
amended and as hereby proposed to be amended, regulating the handling
of milk in the Appalachian, and Southeast marketing areas is approved
or favored by producers, as defined under the terms of the orders (as
amended and as hereby proposed to be amended), who during
[[Page 55477]]
such representative period were engaged in the production of milk for
sale within the aforesaid marketing areas.
List of Subjects in 7 CFR Parts 1005 and 1007
Milk marketing orders.
Dated: September 15, 2005.
Lloyd C. Day,
Administrator, Agricultural Marketing Service.
Order Amending the Order Regulating the Handling of Milk in the
Appalachian and Southeast Marketing Areas
(This order shall not become effective unless and until the
requirements of Sec. 900.14 of the rules of practice and procedure
governing proceedings to formulate marketing agreements and marketing
orders have been met.)
Findings and Determinations
The findings and determinations hereinafter set forth supplement
those that were made when the orders were first issued and when they
were amended. The previous findings and determinations are hereby
ratified and confirmed, except where they may conflict with those set
forth herein.
(a) Findings. A public hearing was held upon certain proposed
amendments to the tentative marketing agreements and to the orders
regulating the handling of milk in the Appalachian and Southeast
marketing areas. The hearing was held pursuant to the provisions of the
Agricultural Marketing Agreement Act of 1937, as amended (7 U.S.C. 601-
674), and the applicable rules of practice and procedure (7 CFR part
900).
Upon the basis of the evidence introduced at such hearing and the
record thereof, it is found that:
(1) The said orders as hereby amended, and all of the terms and
conditions thereof, will tend to effectuate the declared policy of the
Act;
(2) The parity prices of milk, as determined pursuant to Section 2
of the Act, are not reasonable in view of the price of feeds, available
supplies of feeds, and other economic conditions which affect market
supply and demand for milk in the aforesaid marketing areas. The
minimum prices specified in the 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 orders as hereby amended regulate 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,
marketing agreements upon which a hearing has been held; and
(4) All milk and milk products handled by handlers, as defined in
the order as hereby amended, are in the current of interstate commerce
or directly burden, obstruct, or affect interstate commerce in milk or
its products.
Order Relative to Handling
It is therefore ordered, that on and after the effective date
hereof, the handling of milk in the Appalachian and Southeast marketing
areas shall be in conformity to and in compliance with the terms and
conditions of the orders, as amended, and as hereby amended, as
follows:
The provisions of the proposed marketing agreements and orders
amending each of the specified orders contained in the Recommended
Decision issued by the Administrator, Agricultural Marketing Service,
on May 13, 2005, and published in the Federal Register on May 20, 2005
(70 FR 29410), shall be and are the terms and provisions of this order,
amending the orders, and are set forth in full herein.
PART 1005--MILK IN THE APPALACHIAN MARKETING AREA
1. The authority citation for 7 CFR part 1005 continues to read as
follows:
Authority: 7 U.S.C. 601-674.
2. Section 1005.2 is amended by revising the Virginia counties and
cities to read as follows:
Sec. 1005.2 Appalachian marketing area.
* * * * *
Virginia Counties and Cities
Alleghany, Amherst, Augusta, Bath, Bedford, Bland, Botetourt,
Buchanan, Campbell, Carroll, Craig, Dickenson, Floyd, Franklin, Giles,
Grayson, Henry, Highland, Lee, Montgomery, Patrick, Pittsylvania,
Pulaski, Roanoke, Rockbridge, Rockingham, Russell, Scott, Smyth,
Tazewell, Washington, Wise, and Wythe; and the cities of Bedford,
Bristol, Buena Vista, Clifton Forge, Covington, Danville, Galax,
Harrisonburg, Lexington, Lynchburg, Martinsville, Norton, Radford,
Roanoke, Salem, Staunton, and Waynesboro.
* * * * *
3. Section 1005.13 is amended by revising the introductory text and
adding a new paragraph (e) to read as follows:
Sec. 1005.13 Producer milk.
Except as provided for in paragraph (e) of this section, Producer
milk means the skim milk (or the skim equivalent of components of skim
milk) and butterfat contained in milk of a producer that is:
* * * * *
(e) Producer milk shall not include milk of a producer that is
subject to inclusion and participation in a marketwide equalization
pool under a milk classification and pricing program imposed under the
authority of a State government maintaining marketwide pooling of
returns.
* * * * *
Sec. 1005.81 [Amended]
4. In Sec. 1005.81(a), remove ``$0.065'' and add, in its place,
``$0.095''.
Sec. 1005.82 [Amended]
5. In Sec. 1005.82, paragraph (b) is amended by removing the words
``Director of the Dairy Division'' and adding, in their place, the
words ``Deputy Administrator of Dairy Programs'' and adding a new
paragraph (c)(2)(iv) to read as follows:
Sec. 1005.82 Payments from the transportation credit balancing fund.
* * * * *
(c) * * *
(2) * * *
(iv) The market administrator may increase or decrease the milk
production standard specified in paragraph (c)(2)(ii) of this section
if the market administrator finds that such revision is necessary to
assure orderly marketing and efficient handling of milk in the
marketing area. Before making such a finding, the market administrator
shall investigate the need for the revision either on the market
administrator's own initiative or at the request of interested persons.
If the investigation shows that a revision might be appropriate, the
market administrator shall issue a notice stating that the revision is
being considered and inviting written data, views, and arguments. Any
decision to revise an applicable percentage must be issued in writing
at least one day before the effective date.
* * * * *
PART 1007--MILK IN THE SOUTHEAST MARKETING AREA
6. The authority citation for part 1007 continues to read as
follows:
Authority: 7 U.S.C. 601-674, and 7253.
7. Section 1007.13 is amended by revising the introductory text and
adding a new paragraph (e) to read as follows:
[[Page 55478]]
Sec. 1007.13 Producer milk.
Except as provided for in paragraph (e) of this section, Producer
milk means the skim milk (or the skim equivalent of components of skim
milk) and butterfat contained in milk of a producer that is:
* * * * *
(e) Producer milk shall not include milk of a producer that is
subject to inclusion and participation in a marketwide equalization
pool under a milk classification and pricing program imposed under the
authority of a State government maintaining marketwide pooling of
returns.
* * * * *
Sec. 1007.81 [Amended]
8. In Sec. 1007.81(a), remove ``$0.07'' and add, in its place,
``$0.10''.
Sec. 1007.82 [Amended]
9. In Sec. 1007.82, paragraph (b) is amended by removing the words
``Director of the Dairy Division'' and adding, in their place, the
words ``Deputy Administrator of Dairy Programs'' and adding a new
paragraph (c)(2)(iv) to read as follows:
Sec. 1007.82 Payments from the transportation credit balancing fund.
* * * * *
(c) * * *
(2) * * *
(iv) The market administrator may increase or decrease the milk
production standard specified in paragraph (c)(2)(ii) of this section
if the market administrator finds that such revision is necessary to
assure orderly marketing and efficient handling of milk in the
marketing area. Before making such a finding, the market administrator
shall investigate the need for the revision either on the market
administrator's own initiative or at the request of interested persons.
If the investigation shows that a revision might be appropriate, the
market administrator shall issue a notice stating that the revision is
being considered and inviting written data, views, and arguments. Any
decision to revise an applicable percentage must be issued in writing
at least one day before the effective date.
* * * * *
[This marketing agreement will not appear in the Code of Federal
Regulations]
Marketing Agreement Regulating the Handling of Milk in Certain
Marketing Areas
The parties hereto, in order to effectuate the declared policy of
the Act, and in accordance with the rules of practice and procedure
effective thereunder (7 CFR part 900), desire to enter into this
marketing agreement and do hereby agree that the provisions referred to
in paragraph I hereof as augmented by the provisions specified in
paragraph II hereof, shall be and are the provisions of this marketing
agreement as if set out in full herein.
I. The findings and determinations, order relative to handling, and
the provisions of Sec. Sec. ----------\1\ to, all inclusive, of the
order regulating the handling of milk in the (------Name of order------
) marketing area (7 CFR PART ------\2\) which is annexed hereto; and
---------------------------------------------------------------------------
\1\ First and last sections of order.
\2\ Appropriate Part number.
---------------------------------------------------------------------------
II. The following provisions: Sec. ----------\3\ Record of milk
handled and authorization to correct typographical errors.
(a) Record of milk handled. The undersigned certifies that he/she
handled during the month of ----------\4\, hundredweight of milk
covered by this marketing agreement.
---------------------------------------------------------------------------
\3\ Next consecutive section number.
\4\ Appropriate representative period for the order.
---------------------------------------------------------------------------
(b) Authorization to correct typographical errors. The undersigned
hereby authorizes the Deputy Administrator, or Acting Deputy
Administrator, Dairy Programs, Agricultural Marketing Service, to
correct any typographical errors which may have been made in this
marketing agreement.
Sec. ----------\3\ Effective date. This marketing agreement shall
become effective upon the execution of a counterpart hereof by the
Secretary in accordance with Section 900.14(a) of the aforesaid rules
of practice and procedure.
In Witness Whereof, The contracting handlers, acting under the
provisions of the Act, for the purposes and subject to the limitations
herein contained and not otherwise, have hereunto set their respective
hands and seals.
Signature
By (Name) --------------------
(Title) --------------------
(Address) --------------------
(Seal)
Attest
[FR Doc. 05-18758 Filed 9-20-05; 8:45 am]
BILLING CODE 3410-02-P