[Federal Register: April 13, 2005 (Volume 70, Number 70)]
[Proposed Rules]
[Page 19635-19658]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13ap05-62]
[[Page 19635]]
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Part III
Department of Agriculture
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Agricultural Marketing Service
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7 CFR Parts 1124 and 1131
Milk in the Pacific Northwest and Arizona-Las Vegas Marketing Areas;
Recommended Decision and Opportunity To File Written Exceptions on
Proposed Amendments To Tentative Marketing Agreements and Orders;
Proposed Rule
[[Page 19636]]
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DEPARTMENT OF AGRICULTURE
Agricultural Marketing Service
7 CFR Parts 1124 and 1131
[Docket No. AO-368-A32, AO-271-A37; DA-03-04B]
Milk in the Pacific Northwest and Arizona-Las Vegas Marketing
Areas; Recommended Decision and Opportunity To File Written Exceptions
on Proposed Amendments To Tentative Marketing Agreements and Orders
AGENCY: Agricultural Marketing Service, USDA.
ACTION: Proposed rule.
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SUMMARY: This document recommends that the producer-handler definitions
of the Pacific Northwest and the Arizona-Las Vegas milk marketing
orders be amended to limit producer-handler status to those entities
with route disposition of fluid milk products of less than three
million pounds per month.
DATES: Comments must be submitted on or before June 13, 2005.
ADDRESSES: Comments (six copies) should be filed with the Hearing
Clerk, STOP 9200-Room 1083, United States Department of Agriculture,
1400 Independence Avenue, SW., Washington, DC 20250-9200. You may send
your comments by the electronic process available at Federal
eRulemaking portal at http://www.regulations.gov. or by submitting comments to amsdairycomments@usda.gov. Reference should be made to the
title of action and docket number.
FOR FURTHER INFORMATION CONTACT: Jack Rower or Gino Tosi, Marketing
Specialists, USDA/AMS/Dairy Programs, Order Formulation and Enforcement
Branch, STOP 0231-Room 2971, 1400 Independence Avenue SW., Washington,
DC 20250-0231, (202) 720-2357 or (202) 690-1366, e-mail address:
jack.rower@usda.gov or gino.tosi@usda.gov.
SUPPLEMENTARY INFORMATION: This administrative action is governed by
the provisions of Sections 556 and 557 of Title 5 of the United States
Code and, therefore, is excluded from the requirements of Executive
Order 12866.
The amendments to the rules proposed herein have been reviewed
under Executive Order 12988, Civil Justice Reform. They are not
intended to have a retroactive effect. If adopted, the proposed
amendments would not preempt any state or local laws, regulations, or
policies, unless they present an irreconcilable conflict with this
rule.
The Agricultural Marketing Agreement Act of 1937, as amended (7
U.S.C. 601-674), provides that administrative proceedings must be
exhausted before parties may file suit in court. Under Section
608c(15)(A) of the Act, any handler subject to an order may request
modification or exemption from such order by filing with the Secretary
a petition stating that the order, any provision of the order, or any
obligation imposed in connection with the order is not in accordance
with the law. A handler is afforded the opportunity for a hearing on
the petition. After a hearing, the Secretary would rule on the
petition. The Act provides that the district court of the United States
in any district in which the handler is an inhabitant, or has its
principal place of business, has jurisdiction in equity to review the
Secretary's ruling on the petition, provided a bill in equity is filed
not later than 20 days after the date of the entry of the ruling.
Regulatory Flexibility Act and Paperwork Reduction Act
In accordance with the Regulatory Flexibility Act (5 U.S.C. 601 et
seq.), the Agricultural Marketing Service has considered the economic
impact of this action on small entities and has certified that this
proposed rule will not have a significant economic impact on a
substantial number of small entities. For the purpose of the Regulatory
Flexibility Act, a dairy farm is considered a ``small business'' if it
has an annual gross revenue of less than $750,000, and a dairy products
manufacturer is a ``small business'' if it has fewer than 500
employees. For the purposes of determining which dairy farms are
``small businesses,'' the $750,000 per year criterion was used to
establish a milk marketing 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.
Producer-handlers are defined as dairy farmers that process only
their own milk production. These entities must be dairy farmers as a
pre-condition to operating processing plants as producer-handlers. The
size of the dairy farm determines the production level of the operation
and is the controlling factor in the capacity of the processing plant
and possible sales volume associated with the producer-handler entity.
Determining whether a producer-handler is considered small or large
business must depend on its capacity as a dairy farm, where a producer-
handler with annual gross revenue in excess of $750,000 is considered a
large business.
The amendments would place entities currently considered to be
producer-handlers under the Pacific Northwest or the Arizona-Las Vegas
on the same terms as all other fully regulated handlers of the two
orders provided they meet the criteria for being subject to the pooling
and pricing provisions of the two orders. Entities currently defined as
producer-handlers under the terms of these orders will be subject to
the pooling and pricing provisions of the orders if their route
disposition of fluid milk products is more than 3 million pounds per
month.
Producer-handlers with route disposition of less than 3 million
pounds during the month will not be subject to the pooling and pricing
provisions of the orders. To the extent that current producer-handlers
for each order have route disposition of fluid milk products outside of
the marketing areas, such route disposition will be subject to the
pooling and pricing provisions of the orders if total route disposition
cause them to become fully regulated.
Assuming that some current producer-handlers will have route
disposition of fluid milk products of more than 3 million pounds during
the month, such producer-handlers will be regulated subject to the
pooling and pricing provisions of the orders like other handlers. Such
producer-handlers will account to the pool for their uses of milk at
the applicable minimum class prices and pay the difference between
their use-value and the blend price of the order to the order's
producer-settlement fund.
While this may cause an economic impact on those entities with more
than 3 million pounds of route sales who currently are considered
producer-handlers by the two orders, the impact is offset by the
benefit to other small businesses. With respect to dairy farmers whose
milk is pooled on the two marketing orders, such dairy farmers who have
not heretofore shared in the additional revenue that accrues from the
marketwide pooling of Class I sales by producer-handlers will share in
such revenue. This will have a positive impact on 468 small dairy
farmers in the Pacific Northwest and Arizona--Las Vegas marketing
areas. Additionally, all
[[Page 19637]]
handlers who dispose of more than 3 million pounds of fluid milk
products per month will pay at least the announced Federal order Class
I price for such use. This will have a positive impact on 18 small
regulated handlers.
To the extent that current producer-handlers in the Pacific
Northwest and the Arizona-Las Vegas orders become subject to the
pooling and pricing provisions, such will be determined in their
capacity as handlers. Such entities will no longer have restrictions
applicable to their business operations that were conditions for
producer-handler status and exemption from the pooling and pricing
provisions of the two orders. In general, this includes being able to
buy or acquire any quantity of milk from dairy farmers or other
handlers instead of being limited by the current constraints of the two
orders. Additionally, the burden of balancing their milk production is
relieved. Milk production in excess of what is needed to satisfy their
Class I route disposition needs will receive the minimum price
protection of the order established under the terms of the two orders.
The burden of balancing milk supplies will be borne by all producers
and handlers who are pooled and regulated under the terms of the two
orders.
During September 2003, the Pacific Northwest had 16 pool
distributing plants, one pool supply plant, three cooperative pool
manufacturing plants, seven partially regulated distributing plants,
eight producer-handler plants and two exempt plants. Of the 27
regulated handlers, 16 or 59 percent are considered large businesses.
Of the 691 dairy farmers whose milk was pooled on the order, 241 or 35
percent are considered large businesses. If these amendatory actions
are not undertaken, 65 percent of the dairy farmers (450) in the
Pacific Northwest order who are small businesses will continue to be
adversely affected by the operations of large producer-handlers.
For the Arizona--Las Vegas order, during September 2003 there were
three pool distributing plants, one cooperative pool manufacturing
plant, 18 partially regulated distributing plants, two producer-handler
plants and three exempt plants (including an exempt plant located in
Clark County Nevada) operated by 22 handlers. Of these plants, 15 or 68
percent are considered large businesses. Of the 106 dairy farmers whose
milk was pooled on the order, 88 or 83 percent are considered large
businesses. If these amendatory actions are not undertaken, 17 percent
of the dairy farmers in the Arizona-Las Vegas order who are small
businesses will continue to be adversely affected by large producer-
handler operations.
In their capacity as producers, seven producer-handlers would be
considered as large producers as their annual marketing exceeds 6
million pounds of milk. Record evidence indicates that for the Pacific
Northwest marketing order at the time of the hearing, four producer-
handlers would potentially become subject to the pooling and pricing
provisions of the order because of route disposition of more than 3
million pounds per month. For the Arizona--Las Vegas order, one
producer-handler would be considered a large producer because its
annual marketing exceeds 6 million pounds of milk and potentially
subject to the pooling and pricing provisions of the order because of
route disposition exceeding 3 million pounds per month.
A review of reporting requirements was completed under the
Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35). It was
determined that these proposed amendments would have minimal impact on
reporting, recordkeeping, or other compliance requirements for entities
currently considered producer-handlers under the Pacific Northwest and
the Arizona-Las Vegas marketing orders because they would remain
identical to the current requirements applicable to all other regulated
handlers who are currently subject to the pooling and pricing
provisions of the two orders. No new forms are proposed and no
additional reporting requirements would be necessary.
This notice does not require additional information collection that
requires clearance by the Office of Management and Budget (OMB) beyond
currently approved information collection. The primary sources of data
used to complete the forms are routinely used in most business
transactions. Forms require only a minimal amount of information which
can be supplied without data processing equipment or a trained
statistical staff. Thus, the information collection and reporting
burden is relatively small. Requiring the same reports for all handlers
does not significantly disadvantage any handler that is smaller than
the industry average.
Interested parties are invited to submit comments on the probable
regulatory and informational impact of this proposed rule on small
entities. Also, parties may suggest modifications of this proposal for
the purpose of tailoring their applicability to small businesses.
Prior documents in this proceeding: Notice of Hearing: Issued July
31, 2003; published August 6, 2003 (68 FR 46505).
Correction to Notice of Hearing: Issued August 20, 2003; published
August 26, 2003 (68 FR 51202).
Notice of Reconvened Hearing: Issued October 27, 2003; published
October 31, 2003 (68 FR 62027).
Notice of Reconvened Hearing: Issued December 18, 2003; published
December 29, 2003 (68 FR 74874).
Preliminary Statement
Notice is hereby given of the filing with the Hearing Clerk of this
recommended decision with respect to proposed amendments to the
tentative marketing agreements and the orders regulating the handling
of milk in the Pacific Northwest and the Arizona-Las Vegas marketing
areas. This notice is issued pursuant to the provisions of the
Agricultural Marketing Agreement Act (AMAA) and the applicable rules of
practice and procedure governing the formulation of marketing
agreements and marketing orders (7 CFR part 900).
Interested parties may file written exceptions to this decision
with the Hearing Clerk, U.S. Department of Agriculture, Washington, DC
20250, by the 60th day after publication of this decision in the
Federal Register. Six (6) copies of the exceptions should be filed. All
written submissions made pursuant to this notice will be made available
for public inspection at the office of the Hearing Clerk during regular
business hours (7 CFR 1.27(b)).
The proposed amendments set forth below are based on the record of
a public hearing held at Tempe, Arizona, beginning on September 23,
2003; reconvened, and continuing at Seattle, Washington, on November
17, 2003; and reconvened and concluding at Alexandria, Virginia, on
January 23, 2004, pursuant to a notice of hearing issued July 31, 2003;
published August 6, 2003 (68 FR 46505), and correction to the notice
issued: August 23, 2003, and published August 26, 2003 (68 FR 51202);
and notices of reconvened hearings issued October 27, 2003, and
published October 31, 2003 (68 FR 62027); and December 18, 2003, and
published December 29, 2003 (68 FR 74874).
The material issues on the record of hearing relate to:
1. The regulatory status of producer-handlers.
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 19638]]
1. The Regulatory Status of Producer-Handlers
The producer-handler provision of the Pacific Northwest and the
Arizona-Las Vegas milk marketing orders should be amended to limit
producer-handlers to Class I route disposition of not more than 3
million pounds per month.
Currently, the Pacific Northwest and the Arizona-Las Vegas milk
marketing orders provide separate but similar definitions that describe
and define a special category of handler known as producer-handlers.
While there are specific differences in how each order defines and
describes producer-handlers, both orders, as do all Federal milk
marketing orders, exempt producer-handlers from the pooling and pricing
provisions of the orders.
Exemptions from the pooling and pricing provisions of the orders
essentially means that the minimum class prices established under the
orders that handlers must pay for milk are not applicable to producer-
handlers and producer-handlers receive no minimum price protection for
surplus milk disposed of within either order's marketing area.
Producer-handlers enjoy keeping the entire value of their milk
production disposed of as fluid milk products in the marketing area to
themselves and do not share this value with other dairy farmers whose
milk is pooled on either of the two orders.
However, producer-handlers are subject to strict definitions and
limitations in their business practices. Both orders limit the ability
of producer-handlers to buy or acquire milk that may be needed from
dairy farmers or other handlers. Additionally, producer-handlers bear
the entire burden of balancing their own milk production. Milk
production in excess of what is needed to satisfy their Class I route
disposition needs will receive whatever price they are able to obtain.
Such milk does not receive the minimum price protection of the order.
It is the exemption from the pooling and pricing provisions of the
Pacific Northwest and Arizona-Las Vegas orders that is the central
issue of this proceeding. While producer-handlers are exempt from the
pooling and pricing provisions of the two orders, they are
``regulated'' to the extent that producer-handlers submit reports to
the Market Administrator who monitors producer-handler operations to
ensure that such entities are in compliance with the conditions for
such regulatory status. For the purposes of brevity and convenience,
this decision will refer to those handlers who are subject to the
pooling and pricing provisions of the orders as ``fully regulated
handlers'' in contrast to producer-handlers.
Overview of the Proposals
This proceeding considered three proposals seeking the application
of each order's pooling and pricing provisions, or full regulation, of
producer-handlers when their route disposition of fluid milk products
in the marketing areas exceeded 3 million pounds per month. These
proposals were published in the hearing notice as Proposals 1, 2 and 3.
Proposal 1 is applicable to the Pacific Northwest milk marketing order.
Proposal 3 is applicable to the Arizona-Las Vegas milk marketing order.
Proposal 2, applicable to only the Pacific Northwest, is identical to
Proposal 1 but also seeks to limit a producer-handler from distributing
fluid milk products to a wholesale customer who is served by a fully
regulated or partially regulated distributing plant in the same-sized
package with a similar label during the month. In this regard, Proposal
2 would make the producer-handler definition for the Pacific Northwest
order more like the current Arizona-Las Vegas order.
A fourth proposal, published in the hearing notice as Proposal 4,
seeking to prevent the simultaneous pooling of the same milk on the
Arizona-Las Vegas milk marketing order and on a state-operated order
that provides for marketwide pooling, (commonly referred to as
``double-dipping'') is addressed in a separate tentative final
decision, issued December 23, 2004 and published in the Federal
Register on December 30, 2004 (69 FR 78355).
Summary of Testimony
Proposal 3 received testimony by a witness appearing on behalf of
United Dairymen of Arizona (UDA). UDA is a dairy cooperative supplying
approximately 88 percent of the milk in the Arizona-Las Vegas milk
marketing order (Order 131). The UDA witness testified in support of
establishing a 3-million pound limit in route disposition of fluid milk
products for producer-handlers in the marketing area, which, if
exceeded, would cause the producer-handler to become subject to the
pooling and pricing provisions of the order. The witness was of the
opinion that the current producer-handler definition contradicts the
overall purposes of the Federal milk order program to establish uniform
prices among all handlers and the marketwide sharing of revenue among
all producers who supply the market.
The UDA witness asserted that Sarah Farms is the largest producer-
handler in the Order 131 marketing area and avoids the classified
pricing and pooling requirements applicable to all other handlers. The
witness characterized this as the operation of an individual handler
pool within a marketwide pool. The witness stated that UDA is aware
that historically Federal orders have exempted producer-handler
operations from the pricing and pooling provisions of orders because
they were small and had little impact in the marketplace. The witness
contrasted this historical perspective with Sarah Farms, recognized as
the largest producer-handler in Order 131, by citing a trade journal
article that ranked Sarah Farms as the second largest U.S. dairy farm
with 13,000 cows in 1995.
The witness testified that UDA estimates Sarah Farms' Class I sales
within the Order 131 marketing area are about 12 million pounds per
month. Because of Sarah Farms' exemption from the pooling and pricing
provisions of the order, the witness estimated a loss in revenue to
producers who pool milk on the order at about $11,586,589 over the
period of January 2000 through July 2003, or about a 10-14 cents per
hundredweight (cwt) impact on the order's blend price. In addition, the
witness estimated lost revenue of about $3 million, or about a 10 cent
per cwt lower blend price for the period of September 1997 through
January 1999.
A second witness appearing on behalf of UDA also testified in
support of Proposal 3. This witness explained that the proposed 3
million pound route disposition limit on producer-handlers was partly
based on provisions of the Fluid Milk Promotion Act which requires an
assessment for the promotion of fluid milk when a handler's sales are
greater than 3 million pounds per month. The witness said that
producer-handlers who have the ability to enjoy this level of route
disposition should not be exempted from pooling and pricing provisions
and that their continued exemption poses a serious threat to orderly
marketing and the operation of the Federal milk order program.
The second UDA witness claimed that in December 1994, Sarah Farms
was considered an insignificant factor within the Order 131 marketing
area because their monthly raw milk production was less than 5 million
pounds, of which less than 1.3 million pounds of Class I products were
distributed within the marketing area. Relying on Market Administrator
statistics, the witness added that by 1996, UDA estimated that Sarah
Farms' monthly Class I route disposition had increased to more than 6
million
[[Page 19639]]
pounds. The witness also testified that from late 1998 until this
proceeding, Sarah Farms had been one of only two producer-handlers
selling Class I products in the marketing area. Relying on Market
Administrator statistics, the witness estimated that Sarah Farms' Class
I route sales within Order 131 had increased from about 7 million
pounds per month to as much as 15 million pounds per month by 2002.
A witness appearing on behalf of the Kroger Company (Kroger), a
fully regulated handler under the Pacific Northwest milk marketing
order (Order 124) and Order 131, testified in support of Proposals 1,
2, and 3. The witness said that changes in marketing conditions in both
orders necessitate changes in how the orders define producer-handlers.
In the opinion of the witness, producer-handlers enjoy a competitive
sales advantage by being exempted from the pooling and pricing
provisions of both orders. The witness explained that producer-handlers
have a sales advantage because they have the flexibility to set their
internal raw milk price at a level well below the announced Federal
order minimum Class I price that fully regulated handlers must pay.
The Kroger witness also testified that regulated handlers in Orders
124 and 131 have been forced to respond to competitive situations with
producer-handlers in supplying retail grocery outlets. This was due in
part to the competitive sales advantage producer-handlers have in being
able to lower their price to retailers while still maintaining an
adequate profit margin, the witness explained. The witness said that
Kroger's retail outlets could not do this competitively without eroding
their profit margins. Because of these competitive situations, the
witness concluded that producer-handlers exceeding more than 3 million
pounds per month in Class I sales was a reasonable estimate of when a
producer-handler is in direct competition with fully regulated handlers
and should therefore receive the same regulatory treatment. The same
regulatory treatment of producer-handlers as fully regulated handlers
above this threshold would, according to the witness, re-establish
equity among handlers competing for Class I sales in these two
marketing areas.
The Kroger witness was of the opinion that the volume of producer-
handler route disposition was a key aspect of the disorderly marketing
conditions in Orders 124 and 131. However, the witness indicated that a
producer-handler's processing plant size alone was not necessarily an
accurate indicator of processing plant efficiency. The witness
testified that smaller plants can be very competitive. In this regard,
the witness said that Kroger's largest plant was not its most efficient
bottling plant.
A witness appearing on behalf of Western United Dairymen (WUD), the
largest dairy farmer association in California representing
approximately 1,100 of California's 2,000 dairy farmers, testified in
support of Proposals 1 and 3. The witness expressed the opinion that a
primary reason for the exemption of producer-handlers from the pricing
and pooling provisions of Orders 124 and 131 had been because these
entities were customarily small businesses that operate self-
sufficiently and do not have a significant impact in the marketplace.
The WUD witness testified that the regulatory exemption for producer-
handlers has been largely unchanged in the Federal order system for
more than 50 years. The witness explained that there had been no
significant demonstration of unfair advantages accruing to producer-
handlers because they are responsible for balancing their fluid milk
needs and cannot transfer balancing costs to other pooled market
participants.
The WUD witness also testified that some producer-handlers were
becoming much larger than fully regulated fluid processors in Orders
124 and 131. The witness was of the opinion that large producer-
handlers were effectively taking greater and greater shares of the
Class I market in both orders and caused pooled milk to be forced into
lower-valued manufacturing uses. According to the witness, these
outcomes are having a direct negative impact on handlers and producers
in both orders and are generating instability in the Federal milk
marketing order system.
The WUD witness asserted that when producer-handler sales growth
threatened the sales of fully regulated handlers under California's
State-wide regulatory system, the State acted to maintain and protect
their pooling and pricing system by placing a limit on the volumes of
sales producer-handlers could have within the State before becoming
fully regulated. The witness was of the opinion that the Federal order
program also needs to act by adopting the proposed amendments to
similarly limit the sales volume of producer-handlers.
A witness appearing on behalf of the Alliance of Western Milk
Producers (Alliance), an organization representing California
cooperatives, also testified in support of Proposals 1, 2, and 3. The
witness indicated that how the Federal order program deals with the
producer-handler issue is of interest to California dairy farmers
because changes in Orders 124 and 131, which border California, will
have a direct impact on the State's milk marketing and regulatory
program. The witness was of the opinion that producer-handlers have a
tremendous competitive advantage in the marketplace because they are
not subject to minimum pricing and are thereby able to avoid a pooling
obligation to share their Class I revenue with all pooled market
participants. The witness asserted that unless some limitation is put
on the route sales volume of producer-handlers, it may encourage new
producer-handlers to enter the market and further erode the equitable
pricing principles relied on by the Federal milk order program.
A witness appearing on behalf of Northwest Dairy Association (NDA)
testified in support of Proposals 1 and 2. The witness provided a
business example demonstrating how producer-handlers enjoy a pricing
and marketing advantage by being exempt from the pooling and pricing
provisions of Order 124. Relating past business experiences as a fully
regulated handler known as Sunshine Dairy, the witness explained how
business was lost to a producer-handler competitor. The witness
attributed this loss of business to the competitive sales advantage
enjoyed by producer-handlers resulting from their exemption from the
pooling and pricing provisions of the order.
The NDA witness testified that as a fully regulated handler known
as Sunshine Dairy they had also lost a small customer who, at that
time, was buying about 25,000 gallons of milk per week. The witness
said that this customer grew to constitute more than 10 percent of its
fluid milk sales volume. According to the witness, even though they had
provided great service and products, they lost the account because the
customer could save hundreds of thousands of dollars a year by
procuring milk from a producer-handler. According to the witness,
Sunshine Dairy lost this account because the producer-handler was able
to price its milk at a level below the minimum Federal order Class I
price. The witness also testified that the producer-handler
subsequently lost this account to a fully regulated handler that was of
national scope.
The NDA witness expressed the opinion that the goal of the Federal
Order system is to maintain order in the market. In this regard, the
witness testified that handlers should not be exempt from the pooling
and provisions of an order because they own their cows and produce
their own milk supply
[[Page 19640]]
when other handlers are not exempted. The witness stressed that such an
exemption is unfair, noting that the vast majority of dairy farmers
should not receive smaller paychecks for the same product as producer-
handlers because they lack a processing plant.
A witness appearing on behalf of Maverick Milk Producers
Association (Maverick), a cooperative of dairy farmers located in
Arizona that markets its milk in California and Arizona, testified in
support of Proposal 3. The witness testified that all handlers who
market their milk in Order 131 should be subject to the pooling and
pricing provisions of the order, including producer-handlers. The
witness inferred from Market Administrator statistics that the largest
producer-handler in Order 131, Sarah Farms, had cost Maverick members
in excess of $1.2 million in revenue since 1999 because Sarah Farms had
not been subject to the pooling and pricing provisions of the order.
The witness testified that the estimated loss of revenue to the Order
131 pool was based on an assumption that Sarah Farms produced about 18
million pounds of milk per month that would have been pooled as Class I
milk.
A former executive and co-owner of Vitamilk, an independent handler
no longer operating as a going concern, formerly located in Seattle,
Washington, appeared on behalf of Dairy Farmers of America (DFA) and
testified in support of Proposals 1 and 2. This DFA witness testified
that in seeking alternative markets for its milk products, Vitamilk
began to compete with producer-handlers for school milk supply
contracts through one of its wholesale distributors. However, their bid
attempts were unsuccessful, the witness testified, because the school
district sought fixed-price contracts for packaged fluid milk which
they could not supply in competition with a producer-handler. While
conceding that Vitamilk was inexperienced in bidding for school-lunch
business, the witness asserted that the fixed price contract offered by
the producer-handler was below the combined value of the Federal order
Class I price plus Vitamilk's cost allocations to marketing,
processing, distribution, overhead, distributor profit, and risk.
This DFA witness explained that Vitamilk tried to retain other
customers by lowering their prices in an effort to retain and gain
sales volume even though the price represented no contribution to
covering their indirect costs. The witness testified that prices
offered by a local producer-handler were 11 to 12 cents per gallon
below Vitamilk's best net price to distributors. According to the
witness, even though Vitamilk's customers reported satisfaction with
the company's service and other non-price attributes, the producer-
handler's ability to provide fluid milk products at a lower cost
resulted in the loss of customer accounts. The witness asserted that
the loss of accounts was caused largely by the producer-handler's
ability to price Class I products below what a fully regulated Class I
handler can price its products. In addition, the witness testified that
in 2003, Vitamilk even attempted to sell its Class I products at prices
below breakeven and was still unable to find a price whereby it could
successfully recapture business lost to a producer-handler.
A witness appearing on behalf of Shamrock Foods Company (Shamrock),
a fully regulated handler located in Arizona and Colorado, testified in
support of Proposal 3. The witness maintained that Shamrock is at a
competitive disadvantage with producer-handlers because Shamrock is
required to pay the Federal order Class I price for milk while
producer-handlers are exempt from the pricing and pooling provisions of
Order 131. According to the witness, the price of Class I products
offered to wholesale customers by producer-handlers can be lower than
what Shamrock can offer profitably and that Sarah Farms, a producer-
handler of the order, has been able to raid their customer base.
Furthermore, the witness said that Shamrock's ability to maintain its
policy of equitable pricing among its customers, being able to hold its
prices fairly constant to maintain customer loyalty, and avoid bidding
against itself for its own customers is undermined because of the
producer-handler pricing advantage over fully regulated handlers. The
witness said Shamrock is unable to quickly adjust their business
practices to meet such competition because of their size and because of
different regulatory treatment.
The Shamrock witness was of the opinion that the producer-handler
exemption from minimum pricing and pooling provisions threatens the
economic viability of Order 131. For example, the witness explained
that major customers such as Safeway, Kroger, Wal-Mart and strong
independents like Costco, Bashas and Sam's Club buy milk on a wholesale
basis to resell to retail consumers. The witness noted that these
customers seek the opportunity to buy milk at prices similar to those
offered by the producer-handler--at prices below the Federal order
Class I price. The witness testified that if Proposal 3 or some other
restriction limiting route disposition volume is not adopted, either
there will have to be an expansion of producer-handler supplies by
expanding their farms or existing fully regulated handlers will need to
reorganize their business practices to develop their own-farm
production and become a producer-handler to remain competitive.
The Shamrock witness offered testimony regarding market research
they routinely conduct through on-going surveys of retail grocery
stores in Order 131. The witness explained that Shamrock salespersons
do this to gather market intelligence on their competitors. According
to the witness, Shamrock's marketing research indicated that prices for
bottled fluid milk offered by Sarah Farms was typically six to eight
cents a gallon below their price--equating to about 48 to 64 cents on a
per cwt basis. The witness testified that their market research also
revealed that Sarah Farms' production and route disposition had grown
from approximately 8 million pounds in 1998 to nearly 17.2 million
pounds by 2003.
The Shamrock witness concluded that a sales volume limitation of 3
million pounds per month for producer-handlers was reasonable because a
3 million pound limit would represent about three percent of the total
Class I sales in the Order 131 marketing area. In addition, the witness
testified that a plant which processes 3 million pounds per month is an
indicator of a very efficient plant operation. From these views, the
witness concluded that a producer-handler with route disposition in
excess of 3 million pounds per month is able to fully exploit economies
of size and should therefore be treated the same as fully regulated
handlers.
The Shamrock Foods witness conceded that there are additional
challenges faced by producer-handlers in terms of managing milk
supplies and disposing of surplus milk which fully regulated handlers
do not face. The witness also acknowledged that there are costs
associated with managing marketing risk, including the disposal of
surplus milk production. However, the witness was of the opinion that
these costs are more than covered by the competitive advantages that
exist by being exempt from the pooling and pricing provisions of the
order. One example the witness provided was that a producer-handler can
balance its supply by selling fluid milk products into an unregulated
area such as California.
A witness appearing on behalf of Shamrock Farms, which is
affiliated with Shamrock Foods, testified in
[[Page 19641]]
support of Proposal 3. Shamrock Farms milks 6,500 cows and is located
in Maricopa County, Arizona. The witness testified that Shamrock Farms
has always been a pooled producer on Order 131 and its predecessor
order. The witness asserted that Sarah Farms operates dairy farms with
approximately 10,000 to 12,000 milking cows. While the witness conceded
the lack of hard data to confirm this assertion, the witness arrived at
this estimate of farm size by counting the number of milk tankers per
day that delivered to the Sarah Farms' plant in Yuma, Arizona.
A consultant witness appearing on behalf of Dairy Farmers of
America (DFA), proponents of Proposals 1, 2, and 3, had prepared a
study that analyzed and compared the value of raw milk to a large
producer-handler with the cost of milk to fully regulated handlers and
described the economic impact of competition between these two business
entities. The study conducted by this witness was based on a
proprietary database of 150 milk processing plants owned by businesses
for which this witness' company performed accounting and other
consulting services. According to the witness, 20 plants were selected
as being representative of the costs for six different size classes of
bottling plants. The witness explained that the plant cost data was
adjusted by applying regional consumer price index (CPI) factors as
published by the U.S. Department of Labor. According to the witness,
this method of adjusting data, the selection of relevant plants, the
analytic methods employed in conducting the study, and the
interpretation of the study results were all based on Generally
Accepted Accounting Principles (GAAP).
The DFA consultant witness acknowledged that while the study of
plant costs was based on actual plant data acquired from fully
regulated handlers, the study did not include data from plants located
in either the Order 124 or Order 131 marketing areas. The witness also
acknowledged that the data for the smallest plants in the study were
taken from producer-handler plants located in western Pennsylvania, an
area not regulated by a Federal milk marketing order. The witness also
explained that the study's actual data could not be offered for
inspection and examination in this proceeding because individual plant
cost and related information were proprietary, adding that this also
explained why the data used in the study were averaged. The witness
further testified that the selection of appropriate plants for
inclusion in the study from all of the plants in the witness'
proprietary database was based on professional judgment and experience.
The DFA consultant witness explained that the analysis of the data
derived for the Order 124 and 131 marketing areas suggests that as
plant volumes increase per unit, processing costs decrease and that the
highest per unit processing costs are found at the smallest plant
sizes. At large plant sizes, the witness contrasted, a processor,
regardless of regulatory status, can increase milk processing volume at
a nominal additional per unit cost.
Relating an additional example of the study's findings, the DFA
consultant witness testified that, other things being equal, a
hypothetical plant bottling 3 million pounds of milk per month in 2-
gallon pack containers would have per unit processing costs that were
significantly higher than a plant producing 20 million pounds of milk
per month in the same size container packs. In addition, the witness
testified that the study suggests that where a large producer-handler
and a handler subject to the pooling and pricing provisions of an order
compete for route sales, the producer-handler will always have a price
advantage which could be as large as the difference between the Federal
order Class I price and the order's blend price. The witness also said
that the examination across all types of retail outlets reveals that a
producer-handler will always have a price advantage in competing with
fully regulated handlers.
The consultant witness for DFA provided a comparative cost analysis
of servicing a warehouse store account by a fully regulated fluid milk
plant and a large producer-handler using actual retail prices for 2-
percent milk in Phoenix, Arizona, during January through June of 2003.
The witness testified that based on the study's data and assumptions, a
large producer-handler can service such an account and return a
substantial above-market premium over the producer blend price.
However, the study reveals that the handler paying the Class I price
for its raw milk supply will have little or no margin, the witness
contrasted. The producer-handler's raw milk cost advantage, the witness
said, allows it to service these stores profitably at a price that
cannot be matched by a fully regulated handler. The witness concluded
that producer-handlers are in a position to acquire any account they
choose to service by offering a price which the regulated plant cannot
meet.
In other testimony, the DFA consultant witness provided a pro-forma
income statement for a regulated handler in Order 124 developed using
certain assumptions about costs, prices and income. The witness
demonstrated through an analysis of the pro-forma income statement that
a large producer-handler would be able to successfully compete with
fully regulated handlers if regulated. The witness concluded from this
analysis that a successful producer-handler would be economically
viable even if it were subject to the order's pooling and pricing
provisions.
The DFA consultant witness testified that the cost data used in the
study's pro-forma income statement example was generated using
statistical methods based on one month's representative data for
similar sized regulated handlers and assumed that producer-handlers and
regulated handlers employed union labor and operated within collective
bargaining agreements. The witness testified that based on own business
experience, the characterization of labor costs would be representative
of large fully regulated handler operations in Order 124 and 131
marketing areas. In contrast, the witness indicated no direct knowledge
of the costs of labor employed by producer-handlers in Orders 124 or
131. The witness did conclude that use of non-union labor by producer-
handlers would provide them with a clear cost advantage over similar or
larger size fully regulated handlers that typically employed unionized
labor.
The DFA consultant witness was of the professional opinion that
current Federal order regulations provide producer-handlers with a
significant cost advantage that cannot be matched by fully regulated
handlers that are subject to pooling and pricing regulations. If the
proposal to place a 3 million pound per month volume limit on a
producer-handlers route disposition is adopted, it will eliminate what
the witness described as an unfair economic advantage for large
producer-handlers while serving to protect a more modest pricing
advantage for small producer-handlers.
In additional testimony, the consultant witness for DFA
acknowledged the difficulty in reconciling the 150,000 pound per month
route disposition limit established for exempt plants with the proposed
3 million pound per month limit for producer-handlers. According to the
witness, the difference in these two limits are for two distinctly
different entities and can be rationalized by the Department by
acknowledging a value commensurate with milk production risks incurred
by a producer-handler that is not incurred by handlers who buy milk
from dairy farmers. A handler who buys milk from
[[Page 19642]]
dairy farmers does not incur the production risks associated with
operating a farm enterprise, the witness said. In this regard, the
witness acknowledged that the study focused only on plant processing
costs and not on the cost of producing milk in the farm enterprise
function of a producer-handler.
A witness representing Dean Foods (Dean) testified in support of
proposals establishing a volume limit on producer-handler route
disposition. The witness testified that while Dean Foods does not
operate bottling plants in either Orders 124 or 131, they do operate
fluid milk plants in many States regulated by Federal milk marketing
orders and in areas not subject to Federal milk order regulation. The
witness testified that where Dean faces competition from plants that do
not pay regulated minimum prices, Dean is affected. The witness
stressed that milk bottling plants need to have equitable raw milk
costs for the Federal milk order system to remain valid.
The Dean witness said that competitiveness and efficiency are not
necessarily a function of processing plant size. On this theme, the
witness provided an example where a small, fully regulated milk bottler
in Bryan, Texas, successfully bid to supply a Texas state prison
against a much larger Dean plant. The witness testified that the Bryan
plant had processing capacity of less than 3 million pounds per month
but was more efficient than the Dean plant and that because of its
management structure, it could adjust more quickly to changing market
conditions.
A witness appearing on behalf of the National Milk Producers
Federation (NMPF) testified in support of Proposals 1 and 3. The
witness was of the opinion that productivity increases resulting from
technological advances and the growth of dairy farms enable large
producers to capture sufficient economies of scale in processing own-
farm milk and thereby compete effectively with established, fully
regulated handlers. In light of this, the witness testified that such
producers can disrupt the orderly marketing of milk in a market, adding
that dairy farmers ``turned producer-handlers'' could grow across a
market causing even greater disruption to orderly marketing in other
Federal milk marketing orders.
The witness asserted that NMPF's own analysis, and a plant study by
Cornell University revealed that larger fluid milk bottling plants have
exhibited decreasing processing costs on a per gallon basis as the size
of processing facilities increase. The witness explained that as the
scale of processing plants increase, average processing costs tend to
remain fairly constant, with the lowest per unit cost levels being
exhibited over a relatively wide range of processing capacities. The
witness testified that the lower per unit processing cost advantages of
larger plant sizes tend to be greatest for very large processing plants
rather than among smaller plants. The witness said that significant
cost and other competitive advantages attributed to economies of scale
in fluid milk processing become evident at about the 3 million pound
per month processing level.
According to the NMPF witness, the exemption of producer-handlers
from the pooling and pricing provisions of Orders 124 and 131 allows
producer-handlers to effectively pay the equivalent of the blend price
for milk at their plants, a price lower than the Class I price that
fully regulated competitors pay. The witness testified that by using
the economic concept of ``transfer pricing,'' the maximum price that a
producer-handler ``pays'' for transferring milk from its farm
production enterprise to its processing enterprise can be estimated
even though the producer-handler does not actually sell raw milk to
itself. According to the witness, transfer pricing in the context of
the producer-handler issue, predicts that the price of milk assigned to
milk from the producer-handler farm enterprise essentially becomes the
price at which milk could be sold to a regulated handler--the Federal
order blend price. Accordingly, the witness asserted that a producer-
handler's advantage in raw milk procurement for processing, as compared
to fully regulated handlers, would be the difference between the
Federal order Class I price and the order's blend price.
The NMPF witness testified that their analysis reinforces the
findings of the consultant witness for DFA regarding the magnitude of
the pricing advantage producers-handlers enjoy over handlers who are
subject to the pooling and pricing provisions of a Federal order. While
noting that the DFA consultant witness' study used aggregated data that
does result in a significant loss of information for analytical
purposes, the witness stressed that even with this limitation it
nevertheless remains the best data available to rely upon.
The NMPF witness was of the opinion that the producer-handler
exemption from an order's pooling and pricing provisions also creates
inequity among producers because it reduces the amount of milk pooled
as a Class I use of milk, which in turn, lowers the total revenue of
the marketwide pool to be shared among pooled producers. According to
the witness, this threatens orderly marketing. The witness related that
farms with over 3 million pounds of monthly production represent about
15 percent of the U.S. milk supply and may represent some 40 percent of
U.S. fluid milk sales. According to the witness, the steadily
increasing number of farms with this magnitude of monthly milk
production suggests that large producers could exploit the producer-
handler provision and thus further erode equity to both producers and
handlers across the entire Federal milk marketing order system.
The NMPF witness stated that the 3 million pound per month route
disposition limit proposed for producer-handlers as part of Proposals 1
and 3 is also consistent with the promotion assessment exemption of the
Fluid Milk Promotion Program. According to the witness, the promotion
exemption limit set by Congress was based on the impact that a handler
had in a marketing area. Below 3 million pounds per month route
disposition, the witness said, the impact of an individual handler is
negligible and therefore rationalizes why smaller handlers are exempt
from fluid milk promotion assessments.
A witness appearing on behalf of DFA testified in support of
Proposals 1, 2, and 3. The witness viewed the exemption of producer-
handlers from the pooling and pricing provisions of Federal orders as a
loophole that threatens the economic viability of the Federal milk
order system and the economic well-being of pooled producers. This
witness, like the NMPF witness, testified that a growing interest by
large dairy farmers in becoming producer-handlers is a major factor in
DFA's interest in seeking to amend the producer-handler definition in
Order 124 and 131. The witness testified that the exemption from the
pooling and pricing provisions of these orders provides producer-
handlers with a competitive advantage over fully regulated handlers by
effectively permitting producer-handlers to purchase milk at an
internal price at or below the Federal order blend price while fully
regulated handlers must pay the usually higher Class I price for milk.
According to this DFA witness, the difference between the Class I price
and the Federal order blend price represents a significant windfall
generated solely by the regulatory exemptions accorded to producer-
handlers.
The DFA witness summarized that the proposed 3 million pound per
month limitation on route disposition is based
[[Page 19643]]
on four considerations. According to the witness, the proposed limit
is: (1) Consistent with the minimum volume of milk sales that triggers
the fluid milk promotion assessment for handlers; (2) the level at
which producer-handlers achieve competitive equity with fully regulated
handlers in terms of plant processing efficiency; (3) the level of
route disposition that has a significant impact on the pool value of
milk; and (4) a significant impact on the order's pooled producers and
fully regulated handlers. The witness indicated that if a producer-
handler's volume is sufficient to reduce a pool's value by a penny
(one-cent) per hundredweight it is significant and is of sufficient
magnitude to warrant ending producer-handler exemption from the pooling
and pricing provisions of the orders. The witness also concluded from
the study conducted by the consultant witness for DFA that when a
producer-handler reaches a 3 million pound per month distribution
level, not only does the producer-handler reach similar plant
processing cost efficiencies but it is also of sufficient size to
service a considerable number of retail outlets on a competitive par
with fully regulated handlers. According to the witness, continuing the
exemption from an order's pooling and pricing provisions beyond the 3
million pound sales volume level causes serious market disruptions.
The DFA witness also testified that the exemption of producer-
handlers from the pooling and pricing provisions of the orders is
encouraging large producers to consider becoming producer-handlers in
both Orders 124 and 131 and in other Federal order marketing areas. As
an example, the witness testified that some retail outlets now seek
packaged fluid milk supplies from producer-handlers in an effort to
obtain lower cost milk supplies. The witness was of the opinion that
without a limit on route disposition volume, producer-handlers will
displace pooled producers and fully regulated handlers as the dominant
suppliers of fluid milk not only in the Order 124 and 131 marketing
areas, but ultimately throughout all other Federal milk marketing
areas. The witness cautioned that the potential for the growth of
producer-handlers gives rise to considering lowering Class I milk
prices as a means to counter the competitive price advantage that
producer-handlers are afforded by regulatory exemption from pooling and
pricing provisions.
The DFA witness testified that the current producer-handler
definition creates market disorder because it disrupts the flow of
Class I milk from pooled producers to regulated handlers. In addition,
the witness testified that pooled producers effectively subsidize the
balancing costs of producer-handlers. In the opinion of the witness,
these outcomes are destabilizing and are producing disorder in both
Orders 124 and 131. In further explanations of these points, the
witness expressed concern about the loss of Class I revenue that would
otherwise accrue to pooled producers. As an example, relying on Market
Administrator data in making professional inferences, the witness
testified that the largest producer-handler in the Order 131 marketing
area, Sarah Farms, had monthly route disposition in the range of 12.1
to 19.1 million pounds. According to the witness, the value of the
sales revenue lost to the Order 131 pool by not subjecting Sarah Farms
to the pooling and pricing provisions of the order averaged some
$317,000 per month, or the equivalent of 12.5 cents per cwt.
The DFA witness testified that the producer-handler price advantage
over fully regulated handlers provides a powerful incentive for
customers to purchase milk from producer-handlers rather than fully
regulated handlers. The witness testified that producer-handlers have
as much as a 15-cent per gallon advantage over fully regulated handlers
in Order 131. According to the witness, the advantage is based on the
difference between the Order 131 Class I price and the order's blend
price which ranged from 15.9 to as much as 18.3 cents per gallon during
the period of January 2000 through July 2003.
The DFA witness related that wholesale milk buyers base procurement
decisions on tenths and even hundredths of a cent difference in the
price per gallon, indicating that price differences of more than 15
cents per gallon overwhelmingly favors the producer-handler in head-to-
head price competition. The witness testified that lower-priced
packaged fluid milk products from producer-handlers is used by
wholesale buyers of milk as leverage in daily price negotiations with
fully regulated handlers and is a form of disorderly marketing. Such
market disorder, the witness said, causes all processors to receive
lower prices for their packaged fluid milk products.
The DFA witness also expressed the opinion that the plant costs
faced by a large producer-handler are similar to those faced by fully
regulated handlers even though the witness had no direct knowledge of
individual producer-handler businesses in Order 124 or 131. While
agreeing with the characterization that producer-handlers are a single
and seamless milk production and processing enterprise, the witness
asserted that higher balancing and operational costs attributable to
producer-handler operations are not significantly different than those
associated with fully regulated handlers of the same processing plant
size. The witness further asserted that the producer-handler price
advantage combined with the ability to increase production volume at
negligible additional costs per unit exaggerates the advantage to a
point where a producer-handler can increase market share nearly at
will.
Through a series of examples depicting scenarios of different plant
sizes, the DFA witness testified that producer-handlers with 80 and 90
percent Class I utilization could operate profitably in spite of higher
balancing costs associated with operating as a producer-handler. The
witness explained that a large producer-handler experiencing increasing
returns to its operation could continue to grow in size until it
controlled a substantial share of the Class I market. The witness
testified that a producer-handler with route disposition of 3 million
pounds per month could supply a small regional grocery chain, but
likely would not be able to diversify its marketing risk with sales to
other customers.
According to the DFA witness, if producer-handlers are allowed to
gain Class I sales without restraint, fully regulated handlers and
pooled producers would likely come to view Federal milk marketing
orders as ineffective. According to the witness, under these conditions
producers possibly would seek to terminate the orders. The DFA witness
characterized this potential scenario as a form of market disorder.
The DFA witness said that rising interest in the producer-handler
option by large dairy farmers challenges the long-term viability of the
entire Federal milk order system. The witness did acknowledge that no
new producer-handler operations have entered either the Order 124 or
131 marketing areas in recent years. The witness also acknowledged that
market information kept by the Department shows that the volume of
sales by producer-handlers had declined nationally from 1.47 billion
pounds per year to 1.16 billion pounds per year between 1988 and 1998.
The DFA witness offered modifications to Proposal 1 that would also
be applicable to Proposal 3. Basically, in addition to limiting a
producer-handlers route disposition to less than 3 million pounds per
month, the modification made extensive
[[Page 19644]]
changes in terminology as to how producer-handlers are defined. The
intent of these modifications, the witness said, is to clarify that the
burden of proof and the responsibility for providing all the details to
substantiate proof to the Market Administrator for producer-handler
status rests with the producer-handler.
The DFA witness testified that Market Administrators will continue
to be relied upon by Federal orders to use their discretion in
determining producer-handler status. According to the witness, the
proposed modifications for the producer-handler definitions are
expected to provide flexibility for a Market Administrator to
investigate and audit proposed producer-handler operations and to
ensure qualification requirements are met. In addition, the witness
said that if Proposals 1 and 3 are adopted, it was reasonable that
existing producer-handlers in Orders 124 and 131 be given a period of
time to adjust their operations to the proposed producer-handler
requirements.
Another witness appearing on behalf of DFA testified in support of
Proposals 1 and 3 on the basis that small and average-sized dairy
farmers, including producer-handlers with milk production below 3
million pounds of milk per month, have higher production costs than
larger dairy farms. The witness said that very large dairy farms tend
to have management expertise and business sophistication, access to
capital, access to veterinary services, and economies of size and scale
that tend to lower their per unit costs of milk production. This DFA
witness testified that a dairy farm would need approximately 1,800 cows
to achieve a 3 million pound per month level of production available
for bottling and route disposition.
The DFA witness did not know if 3 million pounds of route
disposition per month was the precise number above which producer-
handlers should become subject to the pricing and pooling provisions of
Orders 124 and 131. Similarly, the witness did not know what economic
impact adopting Proposals 1 and 3 would have on producer-handlers in
the respective marketing areas. The witness did relate having knowledge
of interest being expressed by dairy farmers who had monthly production
in excess of 3 million pounds per month seeking possible producer-
handler status.
A witness representing Northwest Dairy Association (NDA) testified
that they market the milk of 603 milk producers traditionally
associated with Order 124. The witness said that NDA also is the parent
company of WestFarm Foods, an operator of three distributing plants
located in Seattle, Washington, and Portland and Medford, Oregon. The
witness added that NDA also operates four milk manufacturing plants in
the Order 124 marketing area. The witness testified that while NDA does
not have a direct connection to Order 131, it indirectly shares similar
concerns with the proponents of Proposal 3 in that they share a border
with California and share similar concerns regarding the Federal and
State milk order systems. In addition, the witness noted that Order 124
has the second largest volume of producer-handler milk marketings of
any Federal order--second only to Order 131.
The NDA witness was also appearing on behalf of Tillamook County
Creamery Association, Farmers Cooperative Creamery, Inland Dairy, and
Northwest Independent Milk Producers, herein after collectively
referred to as NDA, in support of Proposals 1, 2, and 3. The witness
testified that the producer-handler exemption from the pooling and
pricing provisions of Order 124 provides an unfair competitive
advantage to producer-handlers at the expense of pooled producers and
fully regulated handlers. According to the witness, the historical
justifications for exempting producer-handlers because such entities
are small operators without significant market impact on prices and
they do not provide significant competition with fully regulated
handlers are no longer warranted. The witness testified that producer-
handlers in Order 124 are now a significant force in the marketing area
and are likely to continue to increase in size and market significance.
The witness noted that Congress had effectively supported the
Department's long-standing producer-handler exemption from pooling and
pricing provisions of Federal orders since the 1960's. The witness
stated that only a few large producer-handlers currently operate in the
Order 124 marketing area.
The witness indicated agreement with other proponent testimony that
a producer-handler's raw milk cost was the Federal order blend price.
According to the witness, the blend price represents an alternative
market price available to a producer-handler. Accordingly, the witness
asserted, the only reason a producer-handler would seek to continue an
exemption from an order's pooling and pricing provisions would be to
maintain a competitive advantage. The witness related that from a
producer viewpoint the competitive advantage is the ability to retain
the entire Class I value and from the handler viewpoint, the
competitive advantage is not accounting to the pool at the order's
Class I price. The witness estimated the producer-handler advantage
over the period of January 2000 through October 2003 to be the
difference between the Order 124 Class I and blend prices which
averaged about 15.4 cents per gallon or $1.79 per cwt.
The NDA witness asserted that during a period of rapidly rising
milk prices, producer-handlers also have a competitive advantage by
being able to enter into long-term fixed price contracts in a way fully
regulated handlers cannot. In the opinion of the witness, by offering
relatively long-term fixed price contracts, a producer-handler may be
able to attract and retain customers using a pricing policy unavailable
to fully regulated handlers. The witness stated that this represents a
form of disorderly marketing.
According to the NDA witness, producer-handlers use pooled
producers and pooled handlers to balance their milk supply. The witness
testified that ``balancing off of the pool'' involves producer-handlers
selling milk to retail outlets until their milk supply is exhausted
with retail outlets buying additional milk supplies from fully
regulated handlers to meet the shortfall. According to the witness, the
fully regulated handler is not only the residual milk supplier but also
effectively has the burden of balancing the Class I needs of the market
not fulfilled by the producer-handler. Consequently, these burdens are
transferred to the market's pooled producers by the regulated handlers.
According to the witness, this tactic allows a producer-handler to
maximize its revenue by obtaining the highest price available while
essentially avoiding any costs of surplus milk disposal in lower-valued
uses. This advantage is amplified, the witness said, when a producer-
handler is able to balance its milk production and sales into areas not
regulated by a Federal milk marketing order.
The NDA witness testified that the proposed 3 million pound per
month route disposition limit for producer-handlers is also based on
political considerations and on an intuitive notion. The witness
explained that processing plants smaller than 3 million pounds per
month are exempted by Congress from the 20-cent per hundredweight
processor-funded fluid milk promotion program. As a result, the witness
related that the proponents are of the opinion that this level would
also prove to be acceptable in the context of its application to
handlers regulated under the terms of a milk
[[Page 19645]]
marketing order. In addition, the witness testified that NDA's
subsidiary's (WestFarm Foods) own study of processing plant size and
costs suggests that the DFA plant size and cost study may actually
understate when plant processing cost efficiencies are gained.
According to the witness, NDA's study suggests that this occurs at
about the 2.5 million pounds per month level indicating that plants of
this size and larger lower their processing costs by about 10 cents per
gallon. The witness related that a plant processing 3 million pounds
per month would have a cost savings of approximately 11.4 cents per
gallon. Accordingly, the witness concluded that producer-handler plants
that dispose of Class I milk products in excess of 3 million pounds per
month should therefore become subject to the pooling and pricing
provisions of Order 124. The witness said this would ensure that all
similar handlers would have the same raw milk costs.
The NDA witness also testified in support of Proposal 2. The
witness viewed this as preventing producer-handlers from expanding the
benefit of their regulatory status by balancing their supply on the
market's pooled producers and at the same time tending to ensure that
fully regulated handlers would not become residual suppliers of fluid
milk products to the market.
The NDA witness speculated that the investment required for a
processing plant to produce only milk packaged in gallons is relatively
small when compared to a very large dairy farmer's existing investment
in land, livestock, and equipment. The witness was of the opinion that
the potentially higher returns on the additional investment for a
processing plant producing only gallon containers of packaged fluid
milk would be attractive to very large dairy farmers such that it would
encourage large producers to become producer-handlers. According to the
witness, such a scenario threatens the economic attractiveness of the
Federal order program and the prevailing structure of the dairy
industry.
While the NDA witness testified only to conditions affecting Order
124, the witness did indicate fluid milk marketing has been undergoing
considerable structural changes for many years that are national in
scope. The structural changes taking place throughout the dairy
industry are most markedly exhibited by consolidation in the
production, processing, marketing, and distribution of dairy products,
the witness said. As an example, the witness illustrated that
Vitamilk's decision to go out of business was a direct result of the
acquisition of its two largest grocery store customers by Safeway and
Kroger. The witness noted that Safeway and Kroger are both national
companies that also process milk as fully regulated handlers for their
own stores and other customers. The witness was of the opinion that
Vitamilk could not find other profitable business because it was unable
to compete effectively with existing producer-handlers and other
competitors in the Pacific Northwest after losing a significant portion
of its business by the Safeway and Kroger acquisition of their
customers. The witness was of the opinion that as consolidation
continues within the dairy industry, a Class I handler may find a
declining number of marketing alternatives and thus give rise to market
disorder. The witness was of the opinion that fully regulated handlers
could be displaced by producer-handlers.
The NDA witness testified that the rise of warehouse and very high
volume ``super stores'' also has contributed to the structural changes
in the dairy industry with packaged fluid milk products being supplied
as cheaply as possible. According to the witness, ``super stores'' and
warehouse stores are able to exert market power in obtaining the lowest
market prices available for fluid milk products at the wholesale level.
The NDA witness testified that there are approximately 800 pooled
producers in the Pacific Northwest order. According to the witness, all
of these producers are small businesses who would receive a benefit in
the range of 2.4-4 cents per hundredweight for their milk if Proposal 1
were adopted. An increase in producer income would result, the witness
said, from the sharing of Class I revenue by pooling the largest
producer-handlers in the marketing area who individually have route
disposition in excess of 3 million pounds per month. According to the
witness, the additional total Class I revenue that would accrue to the
Order 124 pool would be in the range of $2.8-$4.0 million per month.
The NDA witness addressed concerns regarding instances where
handlers and dairy farmers have made investments based on the
provisions of a Federal milk order. In rationalizing concerns about the
impact a change in regulation may have on business decisions using
current order provisions, the witness noted several past Federal order
decisions where regulatory changes had an impact on persons that had
built and designed their business practices on existing order
provisions. For example, the witness noted that the elimination of the
``bulk tank handler'' provision in the Western milk marketing order by
a tentative final decision would have effectively reduced the value
that proprietary bulk tank handlers could assign to their facilities.
In addition, the witness related how the implementation of Federal milk
order reform eliminated individual handler pools and reduced the value
of those investments. According to the witness, these changes occurred
as a matter of course with the operators of those facilities absorbing
the actual costs of the regulatory changes. The witness also testified
that the elimination of ``double dipping'' in the Upper Midwest,
Central, Mideast, Northeast, Pacific Northwest, and Western orders had
negative impacts on the investments made by operators who were able to
take advantage of those regulatory features before they were changed.
These changes were made without compensation to those operators who
engaged in the practice of double dipping.
The NDA witness testified that opponents to placing a route
disposition limit on producer-handlers incorrectly argue that as
vertically integrated enterprises, producer-handlers face more risks
and higher costs than do pooled producers and fully regulated handlers.
The witness asserted that the Federal order program does not
incorporate a value for risk in its regulatory framework. In addition,
the witness noted that some producer-handlers are continuing to stay in
business even as the total number of producer-handlers has declined in
the last several years in the Order 124 marketing area. The witness
related historical data from Market Administrator sources indicating
that 10 of the 11 producer-handlers which have gone out of business in
recent years in the Order 124 marketing area had monthly route
disposition of less than 3 million pounds.
In other testimony, the NDA witness conceded that no handler is
exempt from, or subject to, Federal milk order regulations on the basis
of plant operating costs. In addition, the witness testified that a
Federal milk order which had many producer-handlers supplying 10
percent of the Class I market would not represent a disruptive
influence or create market disorder if the market share of the
producer-handlers was stable (did not grow). Also, the witness
indicated that if the market share supplied by producer-handlers was
stable, but the number of producer-handlers supplying that market
decreased, the impact of producer-handlers on the marketing conditions
in the area would not be considered disorderly.
[[Page 19646]]
The NDA witness testified that a route disposition volume below 3
million pounds per month does not tend to lend a price or cost
advantage to producer-handlers. The witness said that the impact of a
producer-handler on a marketing area's blend price is directly related
to the size of the marketing area. In this regard, the witness related
that a 3 million pound milk bottling plant in the Upper Midwest Federal
order, for example, would have a deminimus impact on that order's blend
price but nevertheless maintained that a 3 million pound route
disposition limit was a reasonable trigger to cause producer-handlers
to become subject to the order's pooling and pricing provisions. The
witness offered that an appropriate limit could be more than 3 million
pounds, possibly as high as 4-million pounds, while still reasonably
meeting the overall objectives sought in Proposal 1. The witness
cautioned that setting a limit that is too low--for example at 500,000
pounds per month--would essentially close the marketing and regulatory
option of market entry as a producer-handler.
In agreeing with other testimony, a 3 million pound limit was
consistent with what the NDA witness characterized as a political
settlement reached with the Department in determining when handlers
would become subject to a fluid milk promotion program assessment.
According to the witness, important consideration was given to the
threat of handlers with route disposition of less than 3 million pounds
per month being able to band together and vote to terminate the fluid
milk promotion program. The witness indicated that a 3 million pound
level is also a coincidentally useful volume as it supports the DFA's
consultant witness' plant size and cost study and analysis.
A witness appearing on behalf of NDA's WestFarm Foods testified in
support of Proposals 1 and 2. The witness provided data comparing the
variable costs of WestFarm's Medford, Oregon, bottling plant that
processes 12 million pounds of milk per month with a hypothetical plant
processing less than 3 million pounds per month. The witness testified
that the results of this comparison were similar to the results of the
DFA's study. The witness testified that WestFarm Food's study similarly
concluded that as plant sizes increase, per unit processing costs tend
to decrease.
The NDA witness testified that WestFarm Foods has lost significant
sales of packaged fluid milk products to grocery stores and school milk
contracts to producer-handler competitors. The witness reported that
WestFarm Foods competed with one producer-handler in the Pacific
Northwest for shelf space in 11 different retail outlets. According to
the witness, the total volume of these sales was approximately 8-
million pounds per year. The witness indicated that the producer-
handlers was able to offer longer term, fixed price contracts to
retailers and thereby remove price volatility. The witness said that
fully regulated handlers, like WestFarm Foods, do not have this ability
because they must pay the Federal order Class I price which fluctuates
every month.
The WestFarm Foods witness asserted that producer-handlers in Order
124 offer prices for fluid milk products that range from 15 to 45 cents
per gallon cheaper than milk offered by fully regulated Class I
handlers, depending on the monthly changes in the order's Class I
price. The witness further asserted that producer-handlers are able to
displace the Class I use of milk on the Order 124 pool by selling fluid
milk products into Alaska, an area not subject to order regulation, at
prices below the Class I price. According to the witness, when a
producer-handler displaces potential fully regulated handler sales in
Alaska, the fully regulated handler's milk is forced to a lower use
value which lowers the blend price paid to pooled producers. The
witness asserted that if producer-handler competition was absent in
Alaska, WestFarm Foods would be the dominant supplier to customers in
that market. While noting that producer-handlers continue to provide
significant competition to WestFarm's bottling operations, the witness
testified that none of the producer-handlers are selling fluid milk
products below the Federal order minimum Class I price.
The WestFarm Foods witness testified that WestFarm Foods must meet
a specified level of Class I sales to qualify all of its milk receipts
for pooling on Order 124. According to the witness, producer-handlers
in the marketing area have become very aggressive sellers of milk and
have increased their sales volume to the point where fully regulated
Class I handlers are having difficulty qualifying all of their producer
milk receipts for pooling on the order. The witness attributed such
pooling difficulties to the lack of growth in the Class I market
combined with growing producer-handler route disposition. In addition,
the witness testified that NDA charges its customers an over-order
premium of between 30 and 45 cents per cwt.
A witness appearing on behalf of Dean Foods offered testimony in
support of Proposals 1, 2, and 3. The witness asserted that exemptions
to pooling and pricing provisions of Federal milk marketing orders
should be few. According to the witness, the basic underlying
objectives of an order are to efficiently assure an adequate supply of
milk for fluid uses and to enhance returns to dairy farmers. The
witness said that the Federal milk orders achieve these objectives by:
Using a classified pricing plan; setting minimum class prices;
marketwide pooling of the classified values of milk which returns a
blend price to dairy farmers; and verifying handler reporting through
audits. The witness stressed that absent uniform and universal
application of an order to market participants, some market
participants will reap competitive advantages due solely to selective
exemption from regulation rather than for business reasons.
According to the Dean witness, only a few types of firms have been
historically exempted from the pooling and pricing provisions of
Federal orders which include government and university facilities,
small processors, and producer-handlers--characterizing the producer-
handler exemption as one of administrative convenience. The witness was
of the opinion that producer-handlers should only be exempt from the
pooling and pricing provisions of Federal orders when the effect of
providing a regulatory exemption has a negligible effect on market
participants. In this regard, the witness was of the opinion that a
penny or more in the order's blend price was significant. Relating this
opinion to conditions in Order 131, the witness determined that the
order's blend price would be affected by a penny when the route
distribution of a producer-handler was at the 950,000 pounds per month
level.
The Dean witness testified that a dairy farmer operating as a
producer-handler can receive a higher price than the alternative of an
order's blend price, depending on the internal transfer price. The
witness explained that a processor operating as a producer-handler
essentially has the ability to ``acquire'' milk at a transfer price as
the milk moves from the farm enterprise to the processing enterprise.
In this regard, the witness related that such a transfer price can be
represented by the difference between the order's blend price and the
Class I price. However, the witness conceded that if the producer-
handler is viewed as a single seamless entity, the application of
transfer pricing may reveal less information than would an evaluation
of all costs and revenues in determining the extent of the competitive
advantage that a producer-
[[Page 19647]]
handler may enjoy by regulatory exemption from the pricing and pooling
provisions of an order.
The Dean witness also noted that using an internal transfer price
may be of limited value as it does not involve price discovery achieved
through arms-length transactions. However, the witness was of the
strong opinion that regardless of a measure of operating performance or
efficiency, a producer-handler would always have a competitive
advantage over a fully regulated handler. The witness asserted that the
competitive advantage which accrues to the producer-handler is the
difference between the order's Class I price and the blend price. In
this regard the witness was of the opinion that producer-handlers would
always be able to compete more effectively than fully regulated
handlers because of their exemption from the pooling and pricing
provisions of an order.
The witness offered an opinion as to why there has not been
significant market entry of new producer-handlers if being exempt from
the pricing and pooling provisions of an order confers significant
competitive advantages over fully regulated handlers. In this regard,
the witness offered that resources do not move easily between different
enterprises within the dairy industry because of cost and regulatory
risk. The witness also offered the opinion that if large companies,
such as Kroger, attempted to become a producer-handler, legislative
changes to prevent such outcomes would quickly result.
The Dean Foods witness was of the opinion that the notion of
disorderly marketing should be seen to exist when the regulatory terms
of trade between competitors are different. Along this theme, the
witness testified that in Order 131, disorderly marketing conditions
exist because the terms of trade between competitors are not the same,
citing specifically the regulatory exemption from pooling and pricing
for producer-handlers and no similar exemption for their fully
regulated competitors. However, the witness contrasted the growing
presence and market share, in the fluid milk distribution by producer-
handlers in Order 131 with the stable market share of producer-handlers
in Order 124.
A witness appearing on behalf of Alan Ritchey, Incorporated (ARI),
a family-owned dairy farm business located in Texas and Oklahoma,
testified in opposition to limiting route disposition of producer-
handlers as advanced in Proposals 1 and 3. The witness testified that
ARI marketed its milk through DFA because DFA is the only available
buyer in the area. The witness testified that ARI opposed Proposals 1
and 3 because it would limit the option of becoming a producer-handler
for those dairy farmers seeking alternative marketing options for their
milk. The witness characterized the dairy industry as consolidating and
forcing dairy farmers to consider abandoning their traditional
relationships with cooperatives. The witness viewed becoming a
producer-handler as a high-risk business venture but an important
alternative that should continue to be available to dairy farmers.
The ARI witness also testified that cooperatives with membership
and market presence which is national in scope have market power that
may be reducing the revenue of individual dairy farmers who have no
other milk marketing alternatives than through a cooperative. In the
opinion of the witness, preserving the existing producer-handler
definition provides dairy farmers with an alternative mechanism to
market their milk directly and retain all of the revenue earned. In
this regard, the witness indicated that ARI could see no reason why the
route disposition of a producer-handler should be limited to 3 million
pounds per month while regulated handlers have no limitations on route
disposition.
A witness appearing on behalf of Baum's Dairy (Braum's), a
producer-handler located in Tuttle, Oklahoma, testified in opposition
to Proposals 1 and 3. The witness testified that Braum's milks
approximately 10,000 cows and processes its milk production into fluid
milk, and cultured and ice cream products. The witness said that all of
the milk and milk products produced by Braum's Dairy are marketed
exclusively through its own retail outlets. The witness further
testified that Braum's does not have sales to wholesale customers and
maintained that they do not directly compete with fully regulated
handlers.
The Braum's witness is of the opinion that Proposals 1 and 3 seek
to eliminate competition by producer-handlers for the benefit of fully
regulated handlers and will result in many producer-handlers becoming
fully regulated. The witness also was of the opinion that Proposals 1
and 3 were advanced as a means to ultimately seek amending the
producer-handler provision in all Federal milk orders even though the
provision has worked well for the past 66 years.
The witness indicated that Braum's had not always been a producer-
handler but due to Federal order pooling rules for out-of-area milk
that were detrimental to Braum's interests, the decision was made to
become a producer-handler. The witness said that in addition to the
problems posed by pooling rules when the company was a fully regulated
handler, Braum's also attributed difficulty acquiring a reliable and
sufficient quantity of high-quality milk on a timely basis as a reason
for becoming a producer-handler.
A witness appeared in opposition to Proposals 1 and 3, on behalf of
Mallorie's Dairy, Edalene Dairy, and Smith Brothers Dairy, all
producers-handlers in the Order 124 marketing area. The witness was the
owner of the Pure Milk and Ice Cream Company (Pure Milk), a large Texas
producer-handler that is no longer in operation. This witness,
hereinafter referred to as the SBEDMD witness, testified that Pure Milk
was located in Waco, Texas, and had route disposition across a large
part of Texas that is now part of the Southwest milk marketing area.
According to the witness, Pure Milk was the combination of a profitable
dairy farm whose milk was pooled on the Texas order and a profitable
fluid distributing and manufacturing plant that produced an array of
various fluid milk products, ice cream and ice cream mixes. The witness
was of the opinion that limiting route disposition would render the
option of becoming a producer-handler an unattractive business option
under any circumstances. The witness stressed that without the ability
to grow or otherwise attain economies of size and scale, the producer-
handler business model could never be successful.
The SBEDMD witness testified to participating in a Federal milk
order hearing that similarly sought to limit the route disposition of
producer-handlers under the Texas order in 1989. According to the
witness, the argument advanced at that time was that the competitive
advantage of being exempt from the order's pooling and pricing
provisions enjoyed by large producer-handlers would undermine the
economic viability of the Federal milk order program by causing harm to
pooled producers and fully regulated handlers. The witness indicated
that Pure Milk, operating as a producer-handler, failed not as a result
of any competitive advantage arising from exemptions from pooling and
pricing provisions but from the unique risks and costs associated with
operating as a producer-handler.
The SBEDMD witness testified that for a time, Pure Milk was
convinced that there was an advantage to operating as a producer-
handler instead of operating as a pooled producer or a fully regulated
handler. The witness related that this
[[Page 19648]]
view was held until Pure Milk lost a major customer that caused it to
become consistently unprofitable. In this regard, the witness testified
that Pure Milk had an account with a very large grocery chain in Texas
and explained that when the large grocery chain customer learned of
Pure Milk's involvement in the 1989 milk order hearing the account was
lost. The witness characterized and described this business loss as an
example of the regulatory risk of being a producer-handler.
The SBEDMD witness also testified that Pure Milk was unable to
obtain and retain significant long-term contracts except for some
school business and prison sales. The witness said that as a producer-
handler, there was simply too much marketing risk and insufficient
long-term contract business to justify the additional required
investment in plant and equipment to operate profitably. The witness
testified that as a result of losing a large retail account after being
its supplier for two years to a fully regulated handler, Pure Milk lost
sufficient revenue and decided to end operations as a producer-handler.
The SBEDMD witness also related that in order to operate its plant
profitably, Pure Milk would have had to achieve a volume of 1.2 million
pounds per month, a level it never attained. In addition, the witness
said, the company was never able to contain costs to a level at which
it could compete effectively with large fully regulated handlers in the
marketing area. The witness testified that Pure Milk's fully regulated
competitors had larger plants and operated 24 hours a day, 7 days a
week, while Pure Milk's plant, in contrast, operated about 17 hours a
day, 5 days a week. The witness concluded that because their
competitors operated at a higher capacity, they had plant efficiencies
Pure Milk could not achieve. The witness attributed Pure Milk's
inability to achieve the desired level of plant efficiency to the
producer-handler definition which limited and constrained their ability
to purchase additional milk supplies from others during their low
production seasons. The witness also attributed Pure Milk's inability
to achieve desired plant efficiencies to their inability to market
surplus milk production at a profit during high milk production
seasons. The witness described these as other examples of regulatory
risk faced by a producer-handler.
At the closing of the Pure Milk plant, the witness indicated that
he then managed Promised Land Dairy which operated as a small producer-
handler from 1996-1999 supplying specialty packaged fluid milk products
to health food and grocery stores. The witness said that Promised Land
Dairy's specialty operation, selling Jersey cow milk in glass bottles,
also failed to be profitable for the same reasons as the Pure Milk
Company--the inability to balance supplies, the inability to achieve
plant operating efficiencies, and the inability to obtain and retain a
long-term customer base. The witness testified that Promised Land Dairy
ended its operation as a producer-handler because it could not achieve
profitability.
In additional testimony, the SBEDMD witness was of the opinion that
relying on the concept of transfer pricing as a means for demonstrating
that a pricing advantage accrues to producer-handlers by being exempt
from the order's pooling and pricing provisions was misplaced. The
witness maintained that as a producer-handler, the only measure of
success is the profitability of the entire operation. However, the
witness said that Pure Milk used the marketing order's blend price as a
transfer price for the limited purpose of conducting internal
evaluations of its production performance and to derive a measure of
its plant's operating efficiency. The witness testified that the
company did use Federal order minimum class prices as a basis for
pricing milk to its customers and as a basis for making contract bids.
A second witness appearing on behalf of Smith Brothers Farms,
Edalene Dairy, and Mallorie's Dairy, testified in opposition to
Proposals 1, 2, and 3. This witness, herein after referred to as the
SBEDMD second witness, was of the opinion that these proposals would
adversely restrain competition in the dairy industry in both the Order
124 and 131 marketing areas. The witness testified that the producer-
handler exemption from pooling and pricing in Orders 124 and 131 serve
a needed and useful purpose by providing market niches and marketing
alternatives for operators with dairy production and processing
expertise as a means to remain competitive in an era of otherwise
increasing industry consolidation. The witness was of the opinion that
the best measure of orderliness in dairy markets should be on results
rather than on the mechanics and operations of a milk marketing order.
According to the witness, orderly marketing implies protecting the
rights of producers to choose their market outlet freely without
coercion or unreasonable barriers to market entry.
The SBEDMD second witness criticized the proponent's use of the
Cornell University processing plant study, also relied upon by the NMPF
witness, as a basis to support the proposed 3 million pound per month
route disposition limit for producer-handlers. The witness was critical
of the Cornell study, in part, because the minimum plant sizes
considered in the study were four times or 12 million pounds larger
than the 3 million pound limit contained as part of Proposals 1 and 3.
The witness also was of the opinion that the Cornell plant study
yielded results that were statistically insignificant because the
number of plants used in the study was too small to reveal useful
information. The witness explained that the sample of plants used in
the study was not applicable to considerations regarding marketing
conditions in Orders 124 and 131 because: (1) The data were improperly
grouped into regions using the Consumer Price Index rather than the
Producer Price Index, (2) the sample of plants did not include any
plants located in the two marketing order areas, and (3) the sample of
plants could not demonstrate any similarity to producer-handlers in
either of the two marketing order areas.
The SBEDMD second witness also testified that DFA's plant cost
study results were similarly based on faulty data. According to the
witness, the statistical analyses used in the DFA plant cost study
should have been based on observations of individual plant costs rather
than by averaging plant cost across the various classes of plant sizes
selected for inclusion in the study. In addition, the witness testified
that the analyses should have considered all plant costs by region,
labor type, and type of regulated handler rather than relying only on
selected costs.
The SBEDMD second witness was of the opinion that the interest in
advancing Proposals 1 and 3 stems from what the witness characterized
as the arbitrary setting of higher than needed Class I differentials in
all Federal milk orders. According to the witness, higher than needed
Class I differential levels were set because of proponent lobbying
efforts during Federal milk order reform. According to the witness,
lowering Class I differential levels would effectively reduce the
incentive for further business expansion of producer-handlers.
In addition, the SBEDMD second witness was of the opinion that
producer-handlers add much needed competition in the Order 124 and 131
marketing areas. According to the witness, the high concentration ratio
of handlers-to-dairy farmers in both orders has created a near
monopsony of milk buyers that has negative implications for prices
received by dairy farmers. The
[[Page 19649]]
witness also characterized the high concentration ratio of handlers-to-
dairy farmers as contrary to the public interest because it may result
in higher prices to consumers.
The SBEDMD second witness pointed to other changes in marketing
conditions that warrant not changing the current regulatory exemptions
of producer-handlers. The witness testified that the consolidation of
cooperatives through mergers into fewer and larger cooperatives,
together with full-supply marketing contracts, has reduced dairy farmer
income because cooperatives can re-blend and re-distribute revenue to
their members at a value below the order's blend price. The witness
also testified that cooperatives that are national in scope may not be
meeting the local needs of their dairy farmer members in markets where
such cooperatives are the dominant buyer of milk because it leaves
producers without alternative marketing options except to sell their
milk through the dominant cooperative. With such changes to marketing
conditions, the witness concluded that becoming a producer-handler
provides dairy farmers a useful and needed alternative to limited
marketing options resulting from dairy industry consolidations.
The SBEDMD second witness characterized the application of the
pooling and pricing provisions of Orders 124 and 131 as essentially an
imposition of a tax on producer-handlers. The witness said that the
pooling and pricing provisions of the orders should apply only to those
handlers that purchase milk from producers. Along this theme, while
acknowledging that producer-handlers are also handlers, the witness did
not view an intra-firm transfer of milk from the farm production
enterprise to the processing plant enterprise as equivalent to a
purchase of milk by a handler from a dairy farmer. The witness
testified to awareness of a court ruling equating intra-firm transfers
of milk as identical to purchases of milk but considered such rulings
not being relevant to the context of this proceeding for limiting the
route disposition volume of a producer-handler.
A third witness appearing on behalf of Smith Brothers Farms,
Edalene Dairy, and Mallorie's Dairy, also testified in opposition to
Proposals 1 and 2. The witness provided financial information regarding
efficient dairy processing plant size and costs. The witness indicated
that successful long-term operators in the fluid processing business
must operate their plants efficiently and process sufficient volumes to
achieve a competitive cost structure. The witness said that
establishing a maximum monthly processing limit of 3 million pounds for
producer-handlers limits them to operating plants that would be unable
to capitalize on the economies of scale required to further reduce per
unit costs to more competitive levels.
A former Market Administrator of the pre-reform Central Arizona
milk marketing order testified in opposition to Proposal 1, 2, and 3.
The witness explained that if regulated, producer-handlers would be
subject to the pooling and pricing provisions of an order by being
required to pay into the producer-settlement fund of the order on the
basis of their Class I sales in the marketing area.
A witness appearing on behalf of Smith Brothers Dairy (Smith
Brothers), a producer-handler located in the Order 124 marketing area,
testified in opposition to Proposals 1 and 2. According to the witness,
Smith Brothers has been operating as a producer-handler for some 43
years. The witness testified that Smith Brothers is a family owned and
operated enterprise that survives by serving niche markets not well
served by other market participants, including fully regulated
handlers. The witness testified that the largest single market niche
served by Smith Brothers is home delivery, representing approximately
70 percent of its fluid milk sales. According to the witness, Smith
Brothers purposely pursued this market niche beginning in 1980 when
home delivery represented only a third of their fluid milk sales. The
witness was of the opinion that the goal of the proponents advancing
the adoption of Proposal 1 is to eliminate producer-handlers as
competitors in the Order 124 marketing area.
The witness maintained that Smith Brothers has not been a
disruptive factor in the Order 124 marketing area. The witness
testified that Smith Brothers does not directly compete for customers
with large fully regulated handlers as it does not have sales to
grocery chains, convenience stores, or large commercial retailers in
the marketing area. Relying on Market Administrator statistics for
Order 124, the witness related the decline in the number of producer-
handlers from 73 in 1997 to 11 in 2000, and a decline in route
disposition by all producer-handlers of nearly 6 percent between 2000
and mid-2003 as evidence that clearly demonstrates that producer-
handlers are not a source of market disorder. The witness also
discounted the notion that producer-handlers enjoy a competitive
advantage by noting the lack of entry of new producer-handlers in the
Order 124 marketing area.
The Smith Brothers witness testified that the majority of regulated
handlers in Order 124 are much larger, more diversified, and not
interested in the niche market of home delivery that Smith Brothers
serves. The witness testified that limiting a producer-handler's route
disposition to less than 3 million pounds per month would cause them to
not only lose their status as a producer-handler but may even result in
Smith Brothers terminating operations altogether.
The Smith Brothers witness explained that producer-handlers face
different costs and risks than do pooled producers and fully regulated
handlers. According to the witness, producer-handlers have balancing
risks, farm production risks, and processing risks that, when combined
into a single business enterprise, are greater than those borne by
either pooled producers or fully regulated handlers. The witness
asserted that any pricing advantage the producer-handler may have is
offset by the combination of these costs and by the loss of opportunity
to produce, acquire and market other dairy products.
The witness testified that Smith Brothers, in part, balances its
own milk production by selling surplus milk into Alaska, an area not
regulated by a Federal milk order, and characterized Alaska as an
underserved market.
A second witness, an independent milk distributor appearing on
behalf of Smith Brothers, also testified in opposition to Proposals 1
and 2. The witness testified to operating a milk distribution business
for more than 26 years and was one of approximately 60 other
independent distributors selling Smith Brothers dairy products to
market niches including coffee shops, independent convenience stores,
the home delivery market, and daycare operations that larger market
participants do not serve. The witness attributed long-term business
success as a distributor to personal service, nostalgia, and product
quality. The witness also attributed sales success by advertising that
the milk distributed is produced without growth hormones and that the
milk is produced and processed by a family farm business.
A third witness for Smith Brothers Dairy also testified in
opposition to Proposals 1 and 2. The witness was of the opinion that
these proposals are designed to eliminate producer-handlers as
competitors of fully regulated handlers. The witness was also of the
opinion that both proposals are intended to serve as an intentional
[[Page 19650]]
market entry barrier for other large producers who may seek to become
producer-handlers as a means to re-gain control of their milk
marketings.
The witness related that Smith Brothers evaluates itself as a
single integrated enterprise. The witness testified that as the person
responsible for measuring the efficiency of the operation, Smith
Brothers does not rely on the concept of transfer pricing as a means to
measure the efficiency or market value of their milk production. The
witness testified that Smith Brothers does not compare its cost of
production to the Federal order Class I price or the blend price in
measuring the efficiency of its operations. According to the witness,
Smith Brothers compares their total costs to the prices the company
receives for its products (total receipts).
A witness appearing on behalf of Edalene Dairy, a producer-handler
located in the Order 124 marketing area, testified in opposition to
Proposals 1 and 2. The witness stated that as the milk production
manager and co-owner of Edalene Dairy, their cost of milk production is
higher than that estimated by those proposing a limit on the route
dispositions of producer-handlers. The witness testified that Edalene
Dairy's milk production costs exceeded a recent Order 124 blend price
of $10.50 per cwt.
The witness testified that Edalene Dairy once held a milk supply
contract with Starbucks by replacing Sunshine Dairy, a fully regulated
handler. According to the witness, the contract provided more than a
year's lead time for Edalene Dairy to develop additional milk
production and processing capacities. The witness said that the
Starbucks account was offered to Edalene Dairy on the basis of its
customer service, product quality and price.
The witness testified that Edalene Dairy eventually lost its
Starbucks contract to Safeway, a fully regulated handler, noting that
Starbucks phased out Edalene Dairy as a supplier over a six-month
period. The witness said that reasons given for the loss of the account
was that Safeway offered to supply milk at a lower price and Starbucks'
rapid growth gave rise to geographical supply needs that Edalene Dairy
could not meet. The witness explained that the six-month phase-out of
Edalene Dairy as a milk supplier to Starbucks was unusual in the dairy
business. The witness said that more typically, account terminations
are given with a month's notice or less.
The witness testified that Edalene Dairy's balancing costs are
greater than that of the pooled producers of Order 124. The witness
also testified that during periods of low market prices for milk,
balancing costs are particularly difficult to manage. The witness
related that Edalene Dairy's surplus milk production is sold to fully
regulated handlers but they are paid $1.50 per cwt less than the Class
III price.
The Edalene Dairy witness testified that there are several factors
that tend to restrain the growth of producer-handlers. According to the
witness, environmental regulations, marketing and production risks, and
management risks all act to limit the ability for business expansion.
The witness said that the size of potential customers also can
constrain a producer-handler's operational flexibility and ability to
expand the business. The witness said, for example, that a very large
customer, such as a warehouse customer, may be such a large part of a
producer-handler's capacity that losing such a customer can risk
continued economic viability of the entire operation because it is so
difficult to absorb the loss of revenue and to find new customers.
The Edalene Dairy witness testified that producer-handlers also
serve market niches that fully regulated handlers do not service. The
witness said that if a limit on producer-handler route disposition had
been in place when the Starbucks account became available, for example,
the opportunity to service that account would not have been possible.
The witness asserted that limiting the sales volume of producer-
handlers also would effectively eliminate servicing new market niches
that might arise in the future. In this regard, the witness cited the
example of coffee-kiosk shops that were not of interest to fully
regulated handlers until the mid-1990's.
The Edalene Dairy witness testified that an important element of
why their producer-handler operation is valued by their customers is
because they have complete and total control of the production and
processing of their milk. The witness testified that without the
producer-handler exemption from the pooling and pricing provisions of
Order 124, Edalene Dairy would not be able to offer such a
differentiated fluid milk product to its customers.
A second witness, also appearing on behalf of Edalene Dairy,
testified in opposition to Proposals 1, 2, and 3. The witness testified
that Edalene Dairy operates an efficient dairy farm operation and
processing plant as a producer-handler. The witness was of the opinion
that a producer-handler operates a farm and a plant with risks that
differ from the risks faced by dairy farmers and processing plant
operators. According to the witness, a producer-handler differs from
pooled dairy farmers in three different ways: (1) Pooled producers are
guaranteed the minimum Federal order blend price, (2) pooled producers
do not bear the marketing risk and additional costs involved in selling
their milk, and (3) pooled producers do not bear the risks and costs of
operating a processing plant. With regard to how a producer-handler
differs from fully regulated handlers, the witness cited three
important differences: (1) Fully regulated handlers purchase their milk
supply and therefore do not incur the risk of production, (2) fully
regulated handlers know the cost of raw milk before buying it from
dairy farmers, and (3) a producer-handler bears the risk and cost of
balancing its milk supply and operates at its sole risk and enterprise,
a regulatory constraint not applicable to fully regulated handlers.
The Edalene Dairy witness amplified the above differences between
producers-handlers, dairy farmers, and fully regulated handlers. With
respect to dairy farmer and producer-handler differences, the witness
noted that a pooled producer can deliver milk to alternative buyers if
its primary buyer is not available but that a producer-handler can only
deliver milk to its own plant and a dairy farmer has no legal
requirement or economic responsibility for the viability of any
particular processing plant or handler. With respect to the fully
regulated handler and producer-handler differences, the witness noted
that a fully regulated handler can acquire any quantity of milk from
any number of dairy farmers and the business failure of any individual
dairy farmer does not have an overwhelming impact on the economic
viability of a fully regulated handler's operation.
The Edalene Dairy witness testified that combined risks--as a
producer and as a handler--are not incurred by either a pooled producer
or a fully regulated handler. The witness testified for example, that
if a producer-handler loses a sale, it continues to have milk
production that must be disposed of and the costs of that milk
production must be paid regardless of whether a market exists for that
milk. According to the witness, the risks and costs of production,
processing, and marketing accrue to the entire operation because
producer-handlers are a single operating enterprise.
Additionally, the Edalene Dairy witness said, there are inseparable
links between the production and processing portions of the producer-
handler because if either the milk production
[[Page 19651]]
process fails or the processing process fails, both processes affect
the single operating entity. The witness testified that the regulation
of the processing and marketing operations of a producer-handler
coincidentally regulates the dairy farm portion of the producer-handler
enterprise. According to the witness, the most important benchmark for
a producer-handler is whether in the long-run the total revenue
received for its milk exceeds the total costs of its operation.
The Edalene Dairy witness testified that the Federal order blend
price is irrelevant to a successful producer-handler and bears no
relation to the prices received from its milk sales. The witness
expressed the irony of testimony concerning the importance of the blend
price to producer-handlers by parties who do not operate as producer-
handlers. The witness said that Edalene Dairy ignores what the Federal
order blend price may be for the month and seeks to sell milk at the
highest possible price, but never intentionally below the Federal order
Class I price. The witness noted that during the past several years
there have been times when the Class I price fell below the cost of
production. During such times, the witness was of the opinion that
fully regulated handlers have a distinct advantage over producer-
handlers.
The Edalene Dairy witness testified that cooperatives have certain
regulatory advantages by being able to re-blend pool proceeds and
actually pay their members less than the order blend price. The witness
claimed that re-blending allows cooperatives to use their bottling
operations to essentially subsidize their processing operations. The
witness testified that if a producer-handler's route disposition was
more than 3 million pounds per month, the required payment into the
producer-settlement fund would return no benefit to the producer-
handler. According to the witness, the proceeds paid to the producer-
settlement fund would simply be distributed to other pooled producers.
This would, according to the witness, have an adverse impact on small
businesses such as Edalene Dairy, a business with fewer than 500
employees.
In addition, the Edalene Dairy witness saw no justification for
limiting the route disposition of producer-handlers in Order 124
because Market Administrator statistics indicate a declining market
share of the Class I market by producer-handlers. The witness also
asserted that limiting the route distribution of producer-handlers
would essentially close the marketing option that becoming a producer-
handler offers to large producers. The witness viewed such restrictions
as acting to reduce competition among handlers rather than enhancing
it.
A third witness, the founder of Edalene Dairy, also testified in
opposition to Proposals 1, 2, and 3. The witness related that when
acquiring financing, bank loan officers will only consider Edalene
Dairy's cows as appropriate collateral for financing. The witness
testified that bankers place no asset value for loan collateralization
on Edalene Dairy's processing plant facilities.
A witness appearing on behalf of Mallorie's Dairy, a producer-
handler located in the Order 124 marketing area, testified in
opposition to Proposals 1 and 2. The witness said that Mallorie's Dairy
markets its milk on a wholesale basis directly and through independent
distributors and small independent retailing establishments ranging
from grocery stores to coffee shops. According to the witness, the milk
production enterprise of their producer-handler operation is very
efficient, producing an average of 80 pounds of milk per day per cow.
The witness testified that Mallorie's Dairy's largest customer is an
independent distributor who has developed a niche market by supplying
small companies that other fully regulated handlers do not serve.
According to the witness, Mallorie's Dairy lost a grocery store
chain account which had been one of its large long-term customers to a
fully regulated handler. The witness stressed that any price advantage
that Mallorie's Dairy derives from the existing producer-handler
exemption from the pooling and pricing provisions of Order 124 is
offset by the cost of balancing its milk supply, about 20 percent of
its production. The witness said that Mallorie's Dairy performs its
balancing requirements by selling its surplus milk to a local
cooperative at the lower of the Class III or Class IV price minus a
substantial discount. According to the witness, balancing sales
represents about 10 percent of Mallorie's' total sales, while specialty
milk sales to commercial food processors represent the remainder.
The Mallorie's Dairy witness was unsure of the full impact that
adoption of Proposals 1 and 2 would have on Mallorie's Dairy. However,
the witness said that Mallorie's Dairy would lose its producer-handler
status and thus be forced to expand its plant size in order to continue
operating, to remain competitive and to exploit their current marketing
strengths while seeking new business from warehouse stores such as
Costco and Walmart.
The founder of Sarah Farms, a producer-handler located in the Order
131 marketing area, testified in opposition to Proposals 1, 2, and 3.
The witness was of the opinion that the purpose of the public hearing
was to eliminate Sarah Farms as a competitor in the Order 131 marketing
area. The witness said that imposing a 3 million pound per month route
disposition limit on producer-handlers would restrict the growth of
Sarah Farms while leaving competing cooperatives and proprietary
handlers free to compete without additional restraints. The witness was
of the opinion that imposing a route disposition limit on producer-
handlers as advanced in Proposal 3, was based on projected future
conditions and was therefore both unjustified and speculative.
According to the witness, a restriction on sales volume would force a
dramatic change to Sarah Farms' business structure and practices when
there was no evidence of an unfair regulatory advantage by being exempt
from the Order 131 pooling and pricing provisions.
The witness testified that Sarah Farms' sales exceed 3 million
pounds per month, noting that the majority of its current sales and
sales since becoming a produce-handler in 1995 are in Arizona. The
witness said that some major customers include Sam's Club, Basha's (a
grocery store chain), Costco, and other smaller independent retailers.
The witness said that Sarah Farms' growth was directly related to its
ability to fill a market void left by competitors who exited the dairy
business leaving an opportunity that others could not completely fill.
The witness asserted that Sarah Farms produces a differentiated
product from that of its competitors by marketing its fluid milk
products with tamper resistant caps and by delivering their fluid milk
products to customers within 24 hours of milking which, according to
the witness, adds up to 7 days to the shelf life of its products. The
witness also said that Sarah Farms' gallon-sized fluid milk products
are shipped in cardboard containers, which further differentiates these
products from their competitors.
The Sarah Farms witness testified that being a producer-handler is
a high-risk undertaking. Relying on Market Administrator data, the
witness noted that the number of producer-handlers in Order 131 has
declined from six in 1980 to only two in 2003, an important indicator
of the high-risk nature of being a producer-handler.
The witness testified that Sarah Farms pays its own balancing costs
and does not transfer these costs to other fully
[[Page 19652]]
regulated handlers or pooled producers of Order 131. In addition, the
witness testified that as a producer-handler, Sarah Farms
simultaneously bears all of its own production, marketing, and
processing costs and risks unlike pooled producers and fully regulated
handlers. The witness also was of the opinion that a fluid milk
processing plant under construction in Clark County, Nevada, an area
exempt from Federal milk regulation, poses a greater competitive threat
to producers and fully regulated handlers than any other entity. The
witness also testified that Sarah Farms does not sell its milk below
the Order 131 Class I price plus the cost of transportation, packaging,
and processing.
A witness representing Food City, a retail grocery chain, testified
on behalf of Sarah Farms. The witness testified that Food City, and its
parent company, the Basha's; operate some 144 stores in Arizona, New
Mexico, and California. The witness said that Food City buys milk from
Sarah Farms and from a fully regulated handler. The witness indicated
that Food City's opposition to Proposal 3 was to help assure that Food
City continues to have more than a single supplier for its fluid milk
needs. The witness indicated that in the longer term, the availability
of multiple suppliers tends to assure competitive pricing, reliable
service, and product quality. The witness said that Food City's
interest in multiple suppliers transcended the issue of whether the
supplier is a fully regulated handler or a producer-handler.
Post Hearing Briefs and Motions
Post hearing briefs filed on behalf of proponents and opponents
made extensive arguments as they relate to case law, arguing legal
contexts for why large producer-handlers should or should not become
subject to the pooling and pricing provisions of the Pacific Northwest
and the Arizona-Las Vegas marketing orders. Presented herein are
discussions of the briefs as they relate to the economic and marketing
conditions of the two orders.
A brief filed on behalf of NDA reiterated its support for the
adoption of Proposals 1, 2, and 3. They noted that both Orders 124 and
131 have fully regulated handlers operating plants whose route
disposition of Class I milk are smaller than the largest producer-
handlers in the two orders. NDA stressed that the Department cannot
ignore a situation where the smallest regulated handlers in the market
are not provided equitable minimum prices as intended by Congress when
the AMAA established the requirement that classified pricing be uniform
to all handlers.
In brief, NDA took issue with the notion by opponents that
producer-handler balancing costs are greater than that of fully
regulated handlers. NDA argued that the milk order program does not
attempt to consider all costs or address issues of profitability. They
noted that balancing costs are typically borne by regulated handlers
over and above the minimum cost structure reflected in the orders. In
this regard, NDA noted that opponents expanded on the burden of their
own balancing costs but did not consider balancing costs incurred by
fully regulated handlers. They further explained that balancing costs
may also be absorbed by marketwide pooling through the mechanism of
Class III and Class IV pricing, which stressed NDA, is not applicable
to producer-handlers.
The rapid and extensive growth of Sarah Farms was also noted by NDA
who claimed that Sarah Farms now has captured 15 to 20 percent of all
the Class I sales in Order 131. This equates, the NDA brief said, to a
reduction in Class I premium dollars by at least $2.5 million per year.
In the Order 124 area, added NDA, producer-handlers account for about
10 percent of total in-area Class I sales and similarly reduce Class I
premium dollars. A brief filed on behalf of DFA reiterated their
support for the adoption of proposals 1, 2, and 3 stressing those small
dairies that do not impact total pool value should be the only exempted
producer-handlers. DFA noted that in Order 124 the three largest
producer-handlers, which average nearly 5.0 million pounds of Class I
sales each per month, are larger in size than one-third of the order's
fully regulated distributing plants. According to the DFA brief, in
Order 131, Sarah Farms has captured more than 15 million pounds of
Class I sales per month. DFA was of the opinion that orderly marketing
conditions can only be maintained if any exceptions to classified
pricing are limited and justified. DFA emphasized that large producer-
handlers in the two orders have captured a significant share of the
Class I sales which thereby reduces returns to all producers while
retaining substantial Class I proceeds for each producer-handler on an
individual handler pool basis.
The DFA brief also reiterated reasons why 3 million pounds of Class
I route distribution should be established as the cap for producer-
handler exemption from full regulation. They stated that there is a
similar benchmark applicable in the Fluid Milk Promotion Act of 1990.
They also indicated that volumes of milk sales from stores in the
marketing areas indicate that at the 3 million pound level, a handler
could supply a number of small stores. They noted that at this
threshold size, producer-handlers' economies of scale are sufficient
enough that as handlers, producer-handlers can be competitive with
fully regulated handlers. Lastly, DFA maintained that, as producers,
producer-handlers have substantial economies of scale in on-farm milk
production that if exempt from pooling, gives producer-handlers a
significant advantage in the marketplace for fluid milk sales.
A brief filed on behalf of UDA continued to iterate its support for
the adoption of Proposal 3. They indicated that they did not support
limiting producer-handlers sales to 3 million pounds per month on the
basis that it was the same benchmark as in the Fluid Milk Promotion Act
of 1990. Rather, UDA finds merit in regulating large producer-handlers
above 3 million pounds per month in route sales because at such a size
they are able to achieve economies of scale that enable them to be
competitive factors in the market and able to compete with fully
regulated handlers.
A brief was filed on behalf of Shamrock Foods Company, Shamrock
Farms Company and the Dean Foods Company in continued support of the
adoption of Proposal 3. They emphasized that Sarah Farms' doubling of
Class I sales between 1998 and 2003 was not known and could not have
been known during the time of adopting the consolidated orders as a
part of Federal milk order reform. In this regard, they also noted that
at the time of Federal milk order reform, the Department could not have
known of the growing importance to integrated operations such as Kroger
and Safeway of price competition from large warehouse box stores such
as Costco caused by large producer-handler sales. Lastly, they
indicated that no limit had been placed on producer-handlers during
Federal milk order reform because it could not have been known that
losses to pooled participants would increase by a multiple of nearly
four from before to after implementation of order reform.
A brief filed on behalf of NMPF continued to iterate its support
for adoption of proposals that would limit the size of producer-
handlers. NMPF was of the opinion that the exemption for producer-
handlers violates the principles of producer equity upon which the milk
order program relies. In addition, they were of the opinion that
producer-handler exemption threatens orderly marketing. They explained
that
[[Page 19653]]
farms with over three million pounds of monthly production account for
about 15 percent of the total U.S. milk supply which equates to about
40 percent of fluid milk sales. Continued exemption of producer-
handlers from pooling and pricing, the NMPF maintained, threatens both
producer and handlers.
A Statement of Interest was filed on behalf of two cooperatives,
Select Milk Producers and Continental Dairy Products, indicating
support for adoption of Proposal 3 as submitted by UDA. Select Milk
Producers is a New Mexico milk marketing cooperative and Continental
Dairy Products is an Ohio milk marketing cooperative.
A consolidated brief filed on behalf of Edalene Dairy, Mallorie's
Dairy, Smith Brothers Farms, and Sarah Farms stressed that as producer-
handlers who have sales in excess of three million pounds per month,
adoption of any proposal that would subject them to the pooling and
pricing provisions of the orders would cause their organizations to be
severely affected. They stressed that if they become required to make
equalization payments to the producer-settlement funds, this would take
millions of dollars per year away from their operations and
redistribute it to other producers with no return benefit to their
operations.
In brief, Edalene Dairy, Mallorie's Dairy, Smith Brothers Farms,
and Sarah Farms indicated that the advantages producer-handlers have as
alleged by proponents, vanish when the financial benefits of not having
to pay minimum prices and avoiding equalization payments to the
producer-settlement fund are offset by their balancing costs. Any
remaining advantage should be viewed as acceptable given the increased
risks producer-handlers incur in the marketplace. They indicated that
rational persons would not take on additional risk without the prospect
of additional rewards.
In brief, Edalene Dairy, Mallorie's Dairy, Smith Brothers Farms,
and Sarah Farms stressed that in their opinion, neither milk supply or
prices for milk in the two marketing areas had fluctuated unreasonably,
noting that milk was in such sufficient supply that with or without
producer-handlers, supplies are plentiful. They did not view their
fluid milk sales in the marketing area as contributing to the erosion
of classified prices or blend prices. They cited hearing record
statistics to assert that they are not a cause of market disorder or
cause the inefficient movement of milk. They cited the reduction in the
number of producer-handlers, emphasizing that between 1975 and 2000,
Order 124 producer-handler numbers fell from 73 to 11 with average
daily pounds of production increasing only 4.7 percent between 1985 and
2000. For Order 131, they noted that since 1982 to present, the number
of producer-handlers fell from seven to two. According to the brief, on
the basis of such statistics, there can be no finding that producer-
handlers have unabated growth or that they are a source of market
disruption.
A motion was filed on behalf of Edalene Dairy, Mallorie's Dairy,
Smith Brothers Farms and Sarah Farms, all of whom are producer-
handlers, to strike from the hearing record the testimony and related
exhibits concerning plant costs offered by DFA's consultant witness.
The presiding Administrative Law Judge received this motion after the
certification of the hearing record on June 1, 2004. Given that the
objection goes to the weight to be given to the testimony and exhibits
and not to the their admissibility, the motion is denied.
Findings
Although producer-handlers have not been fully regulated as a
general practice, the AMAA provides the authority to regulate handlers
of milk to carry out the purposes of the AMAA. With respect to
producer-handlers, the legislative history indicates that there is
authority to regulate such operations if they are so large as to
disrupt the market for producers. In the past, during other rulemaking
proceedings, producer-handlers have been found not to disrupt the
marketing of milk and milk products.
Nevertheless, restrictions have been placed on producer-handlers.
Both the Pacific Northwest and the Arizona-Las Vegas orders currently
permit producer-handlers to only purchase supplemental milk only from
pool sources up to 150,000 pounds per month. In addition, the Arizona-
Las Vegas order, prohibits the disposition of Class I products by a
producer-handler to a wholesale customer who is also serviced by a pool
distributing plant that supplies the same product in a same-sized
package with a similar label in the same month. While each order has
its own unique definition, it is accurate to say that in general,
producer-handlers are required to operate their businesses at their own
enterprise and risk, meaning that the care and management of the dairy
animals and other resources necessary for the production, processing,
and distribution of their Class I products are the sole responsibility
of the producer-handlers.
Producer-handler exclusion from pooling and pricing provisions also
has been historically based on the premise that the objectives of the
AMAA (orderly marketing) could be achieved without extending regulation
to this category of handler. The Department has articulated its
authority to subject producer-handlers to further regulation, including
being subject to marketwide pooling and minimum pricing provisions, if
they singularly or collectively have an impact on the market in
previous rulemakings. For example, in a Final Decision (31 FR 7062-
7064; May 13, 1966) for the Puget Sound order, a predecessor to the
Pacific Northwest order, the Department found that producer-handlers
should continue to be exempt from pooling and pricing provisions of the
order with the caveat that the producer-handlers could be subject to
further regulation if justified by prevailing market conditions. This
position was amplified in a subsequent Puget Sound Final Decision (32
FR 1073-10747; July 21, 1967) where the Department found that a hearing
should be held to consider the regulation of producer-handlers if the
marketing area is susceptible to being affected by producer-handlers or
if producer-handler sales could disrupt or operate to the detriment of
other producers in the market. Such policy was also articulated in
another recommended decision concerning producer-handlers (Texas and
Southwest Plains, Recommended Decision, 54 FR 27179, June 28, 1989).
That decision concluded that subjecting producer-handlers to the
pooling and pricing provisions of the order would be appropriate if it
could be shown that producer-handlers cause market disruption to the
market's dairy farmers or regulated handlers.
The proposals for fully regulating producer-handlers in this
proceeding, specifically making them subject to the order's pooling and
pricing provisions, are based primarily on issues relating to producer-
handler size, specifically the volume of Class I route disposition. The
producer-handler exemption from pooling and pricing provisions is
proposed to end when the volume of Class I route disposition in the
marketing area exceeds 3 million pounds per month.
In considering issues relating to size, producer-handlers are dairy
farmers that generally process and sell only their own milk production.
These entities are dairy farmers as a pre-condition to operating a
processing plant as producer-handlers. Consequently, the size of the
dairy farm determines the production level of the operation and is the
controlling factor in the capacity of the processing plant and possible
sales
[[Page 19654]]
volume. Accordingly, the major consideration in determining whether a
producer-handler is a large or small business focuses on its capacity
as a dairy farm. Under SBA criteria, a dairy farm is considered large
if its gross revenue exceeds $750,000 per year with a production
guideline of 500,000 pounds of milk per month. Accordingly, a dairy
farm with sales of its own milk that exceeds 3 million pounds per month
is considered a large business.
Another factor to consider regarding the size of producer-handlers
is their ability to have an impact on the market's pooled participants.
Indicators of market affect dairy farmers who pool their milk on the
orders and by the orders' fully regulated handlers should be determined
on the basis of prices that are uniform to producers and equitable
among handlers. When these price conditions are present, milk marketing
orders are considered to be exhibiting orderly marketing--a key
objective of the AMAA that relies on the tools of classified pricing
and marketwide pooling. In the absence of equity among producers and
handlers, such conditions should be deemed to be disorderly.
As already discussed above, producer-handler exemptions from the
pooling and pricing provisions of the orders are based upon the premise
that the burden of surplus disposal of their milk production was borne
by them alone. Consequently, they have not shared the additional value
of their production that arose from Class I sales with pooled dairy
farmers. In this regard, to the extent that producer-handlers are no
longer bearing the burden of surplus disposal, specifically disposal of
milk production in some form other than Class I, gives rise to
considering regulatory measures that would tend to provide price equity
among producers and handlers that arises when producer-handlers are
permitted to retain the entire additional value of milk accruing from
Class I sales.
The record supports finding that producer-handlers with more than 3
million pounds of route disposition per month in both the Pacific
Northwest and the Arizona-Las Vegas marketing areas are the primary
source of disruption to the orderly marketing of milk. This disorder is
evidenced by significantly inequitable minimum prices that handlers pay
and reduced blend prices that dairy farmers receive under the terms of
each area's marketing order. Accordingly, producer-handler status under
the Pacific Northwest and the Arizona-Las Vegas orders should end when
a producer-handler exceeds 3 million pounds per month of in-area Class
I route disposition.
Review of the intent of the producer-handler provision and the
marketing conditions arising from this provision in these orders could
warrant finding that the original producer-handler exemption is no
longer valid or should be limited to 150,000 pounds per month Class I
route disposition limit. However, the hearing notice for this
proceeding constrains such a finding to a level of not less than 3
million pounds per month of Class I route dispositions.
Adopting a 3 million pound Class I route disposition limit on
producer-handlers is supported in direct testimony by proponent
witnesses and other marketing data, most notably the volume of Class I
route disposition relative to the total volume of Class I sales, and
structural changes in the markets. Producer-handlers with more than 3
million pounds of Class I route disposition significantly affect the
blend price received by producers. This decision finds merit in DFA's
and Dean's testimony that a blend price impact of one cent per cwt is
significant. The negative affects on the blend prices received by
producers in the Pacific Northwest and Arizona-Las Vegas orders,
attributable to producer-handler route disposition are significant and
greater than one cent per cwt. The record evidence supports a
conclusion that the exemption of producer-handlers from pooling and
pricing has reduced the blend price between $0.04 to $0.06 per cwt per
month in the Arizona-Las Vegas marketing area and between $0.02 to
$0.04 per cwt per month for the Pacific Northwest marketing area since
implementation of Federal milk order reform in January 2000. The causes
of the blend price reduction arises from a producer-handler's ability
to price fluid milk at an amount between the blend price and the
order's Class I price combined with the producer-handler's size
relative to the total volume of Class I milk disposition in the
respective marketing areas.
In general, the difference between the Class I price and the blend
price not paid into the producer-settlement fund that is the pricing
advantage enjoyed by producer-handlers over fully regulated handlers.
While this has always been the case for producer-handlers, those with
route disposition of more than 3 million pounds of milk per month or
more in these 2 orders are large enough to have a negative impact on
the prices received by pooled dairy farmers resulting from an iniquity
exists with regard to prices paid for milk among similarly situated
handlers. Since fully regulated handlers do not have the ability to
escape payment into the producer-settlement fund of the difference in
their use-value of milk and the order's blend price like producer-
handlers, regulated handlers competing against large producer-handlers
are at a competitive price disadvantage.
Even though producer-handlers argue otherwise, this decision agrees
with proponent arguments, most notably by the NMPF witness, that the
difference between the Class I price and the blend price is a
reasonable estimate of the pricing advantage producer-handlers enjoy
even if it is not possible to determine the precise pricing advantage
of any individual producer-handler. This pricing advantage is
compounded as producer-handler size, and the accompanying increase in
the volume of Class I sales in the marketing area, begins to
increasingly affect the blend price received by pooled producers.
The record contains specific examples that demonstrate that
producer-handlers with route disposition of more than 3 million pounds
per month have and are placing their fully regulated competitors at a
comparative sales disadvantage. For example, Shamrock Foods, a
regulated handler with substantial sales in the Arizona-Las Vegas
marketing area is constrained in competing on a price basis for
customers by the order's minimum prices that they must pay for milk
procurement. Meanwhile the large producer-handler is able to compete
for commercial customers at prices that a regulated handler is unable
to match. The competitive pricing advantage of producer-handlers is
clearly attributable to their exemption from paying the difference
between the Class I and blend price into the producer-settlement fund.
While this competitive pricing advantage has been recognized previously
by the Department (Milk in the Texas Southwest Plains Marketing Area,
54 FR 27182) and determined not to cause disorderly marketing
conditions. Marketing conditions and the overall dairy industry
marketing structure have changed significantly in these orders
resulting in disorderly marketing conditions. The producer-handlers are
significantly larger in these two orders and while they are solely
responsible for their production and processing facilities, they are
not assuming the entire burden of balancing their production with their
fluid milk requirements as will discussed later in this decision.
The record evidence supports concluding that the one large
producer-handler represents between 12-18 percent of the total Class I
sales volume in the Arizona-Las Vegas marketing area. The record
evidence supports a
[[Page 19655]]
conclusion that the exemption of this producer-handler has reduced the
blend price between $0.04 and $0.06 per cwt per month in the Arizona-
Las Vegas marketing area. Similarly, record evidence reveals that
producer-handler exemption from pooling and pricing in the Pacific
Northwest reduces the blend price to all other dairy farmers by $.02-
$.04 per cwt. The Pacific Northwest marketing area has eight producer-
handlers, with four having Class I route disposition exceeding 3
million pounds per month. In the aggregate, all producer-handlers in
the Pacific Northwest account for nearly 10 percent of the total Class
I sales in the marketing area. Importantly, the impact on the marketing
area's blend price by the exemption from the pooling and pricing
provision by any of the individual producer-handlers whose sales exceed
3 million pounds per month on average exceeds $0.01, a level that found
to be significant and disruptive to the orderly marketing. While the
marketing conditions of the Pacific Northwest area differ from the
Arizona-Las Vegas marketing area in the number of producer-handlers and
the relative market share of producer-handlers, evidence of market
disruption by producer-handlers resulting in lower blend prices is a
common factor of both orders.
As in the Arizona-Las Vegas marketing area, producer-handlers in
the Pacific Northwest similarly enjoy a competitive sales advantage
because they do not procure milk at the order's Class I price as
required of fully regulated handlers. This has resulted in fully
regulated handlers not being able to compete with producer-handlers for
Class I route sales. For example, Vitamilk testified that as regional
grocery chains were acquired by national handlers in the Pacific
Northwest marketing area, independent regulated handlers such as
Vitamilk found themselves unable to compete for sales with large
producer-handlers in the changed marketing environment of fewer
wholesale customers on a price basis. Vitamilk demonstrated that the
pricing advantages that accrue to producer-handlers from their
exemption from pooling and pricing provisions created an insurmountable
marketing situation that eliminated Vitamilk's ability to compete for
available customers in the marketing area on the basis of minimum Class
I prices established by the order.
For both the Pacific Northwest and the Arizona-Las Vegas marketing
areas, record evidence demonstrates that producer-handlers have a
comparative pricing advantage over fully regulated handlers that does
not ensure equitable minimum prices to similarly situated handlers.
Such an advantage has resulted in fully regulated handlers losing sales
to producer-handlers. Producer-handlers have similarly lost accounts to
fully regulated handlers, but for reasons other than price.
The record supports concluding that producer-handlers with more
than 3 million pounds of route dispositions per month have gained the
ability to no longer bear the burden of the surplus disposal of their
milk production. This represents a significant development that
warrants the need for regulatory action because producer-handler
exemption from the pooling and pricing provisions of the orders has
been rationalized on the basis that producer-handlers bear the entire
burden of balancing their own production. A producer-handler not
bearing the burden of balancing their milk production essentially
shifts such burden to the market's pooled producers while
simultaneously retaining the full value of Class I sales for
themselves.
A changing retail environment gives rise to the potential of
producer-handlers entering into sales agreements with retailers to
furnish the retailer with as much milk as the producer-handler can
deliver. Marketing milk to national grocery discounters creates an
environment in which the producer-handlers are given the ability to
sell nearly their entire production to such a retailer, bypassing the
need to balance supplies. In such a marketing environment, the
regulated market's pooled producers essentially become the residual
suppliers of Class I milk to the market when a producer-handler's
production is not able to satisfy the fluid milk demands of their
customer. The retailer need only purchase milk from fully regulated
handlers to offset what a producer-handler is not able to supply. This
is of growing concern to both producer and regulated handler interests
in the Pacific Northwest and the Arizona-Las Vegas marketing areas
because consumers are buying an increasing share of their grocery needs
from discount outlets.
The record evidence also reveals that producer-handlers in both the
Pacific Northwest and the Arizona-Las Vegas marketing areas with route
disposition of more than 3 million pounds per month enjoy sales of
fluid milk products into unregulated areas such as Alaska and
California. These examples contribute in demonstrating a shifting of
the burden of balancing milk supplies onto the order's pooled
producers. This outcome has the compounded disadvantage for regulated
handlers and their producer-suppliers because fully regulated handlers
must account to the marketwide pool for Class I sales outside of the
marketing area at the Class I price. This yields a two-fold advantage
to producer-handlers; the ability to eliminate balancing their milk
production through Class I sales at the expense of the regulated
market, and the ability to compete on a consistent basis at prices that
fully regulated handlers are unable to meet.
This evidence contradicts the notion that balancing of their milk
production is a burden borne exclusively by the producer-handler. Thus
it is reasonable to find that producer-handlers with Class I route
distribution in excess of 3 million pounds per month in the Pacific
Northwest and the Arizona marketing areas are not truly balancing their
production. Accordingly, this decision finds that as the burden of
balancing has been essentially shifted to the market's pooled
participants and producer-handler status should be limited.
This decision considered the relevance of a 3 million pound route
disposition threshold for producer-handlers. The relative impact on the
market's pooled participants by producer-handlers having more than 3
million pounds of route disposition in the market is measurable and
significant in both the Pacific Northwest and Arizona-Las Vegas
marketing areas. When considered in the aggregate, producer-handlers in
the Pacific Northwest with over 3 million pounds of route disposition
are able to have a compound impact on the market because they represent
an even more significant share of the Class I market which negatively
affects the blend price received by dairy farmers.
All handlers have different production and processing costs. These
differences may be due to differing levels of plant operating
efficiencies related to their size or to that portion of their milk
supply that may be produced and supplied from their own farms. Whatever
the cost differences, all fully regulated handlers must pay their use-
value of milk (generally, the difference between the Class I price and
the blend price) into the order's producer-settlement fund. Similarly,
all producers have differing milk production costs. Producer cost
differences, for example, may be the result of farm size or differing
milk production levels attributable to management ability.
Nevertheless, producers, regardless of their costs, receive the same
blend price.
The record supports finding that disorderly marketing conditions
exist in the Pacific Northwest and Arizona-Las Vegas marketing areas.
The source of the
[[Page 19656]]
disorder is directly attributable to the producer-handler exemption
from the pooling and pricing provisions of the orders. The record
evidence for full regulation of producer-handlers in excess of 3
million pounds per month of route disposition support finding that
market disruption is present because the blend price paid to producers
in both orders are measurably and significantly lowered.
Additionally, this recommended decision finds that producer-
handlers with route disposition in excess of 3 million pounds per month
enjoy significant competitive sales advantages because they do not pay
the Class I price for raw milk procurement. This clearly gives
producer-handlers a pricing advantage over fully regulated handlers
when competing for sales. This pricing advantage becomes amplified when
producer-handler size increases and further affects the minimum price
producers receive. Adoption of a 3 million pound per month threshold
for producer-handlers should tend to significantly reduce disorderly
marketing conditions that arise from inequitable Class I prices to
handlers. It should also increase the blend prices to producers whose
milk is pooled under the orders.
A 3 million pound per month limitation on route disposition will
result in the full regulation of a current producer-handler in the
Arizona-Las Vegas marketing area. Of the producer-handlers operating in
the Pacific Northwest marketing area, four producer-handlers will
become regulated by adopting the 3 million pound per month limitation
on route disposition. Adoption of this limitation will not completely
eliminate the impact of the other producer-handlers in the Pacific
Northwest marketing area, but should nevertheless result in a
significant and immediate reduction in market disruption.
The hearing notice contained a proposal that for all intents and
purposes would make the producer-handler definition of the Pacific
Northwest order the same as that for the Arizona-Las Vegas order, most
notably the requirement that would not permit a producer-handler to
market to the same client the same product in a similar package with a
similar label in the same month as a regulated handler. The record does
not contain sufficient evidence of disorderly marketing conditions that
would support recommending a prohibition on producer-handlers in
marketing to the same client the same product in a similar package with
a similar label in the same month as a regulated handler.
Additionally, the proposals contained in the hearing notice seeking
the full regulation of producer-handlers when they surpass a 3 million
pound per month threshold in Class I route dispositions in the
marketing area were substantially modified during the hearing. The
modifications re-describe producer-handlers and harmonize the producer-
handler definitions between the two orders with changed terminology.
The record evidence does not support finding that a compelling need to
make the Pacific Northwest producer-handler definition the same as that
for the Arizona-Las Vegas order. The current producer-handler
definitions of both orders adequately describe those entities that
qualify as producer-handlers.
General Findings
The findings and determinations hereinafter set forth supplement
those that were made when the Pacific Northwest and the Arizona-Las
Vegas 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 agreement and the order, as hereby
proposed to be amended, and all of the terms and conditions thereof,
will tend to effectuate the declared policy of the Act;
(B) The parity prices of milk as determined pursuant to Section 2
of the Act are not reasonable in view of the price of feeds, available
supplies of feeds, and other economic conditions which affect market
supply and demand for milk in the marketing area(s), 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 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 as 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.
Recommended Marketing Agreements and Order Amending the Orders
The recommended marketing agreements are not included in this
decision because the regulatory provisions thereof would be the same as
those contained in the orders, as hereby proposed to be amended. The
following order amending the orders, as amended, regulating the
handling of milk in the Pacific Northwest and the Arizona-Las Vegas
marketing areas is recommended as the detailed and appropriate means by
which the foregoing conclusions may be carried out.
List of Subjects in 7 CFR Parts 1124 and 1131
Milk marketing orders.
For the reasons set forth in the preamble 7 CFR parts 1124 and 1131
are amended as follows:
1. The authority citation for 7 CFR parts 1124 and 1131 continues
to read as follows:
Authority: 7 U.S.C. 601-674.
PART 1124--MILK IN THE PACIFIC NORTHWEST MARKETING AREA
2. Section 1124.10 is revised to read as follows:
Sec. 1124.10 Producer-handler.
Producer-handler means a person who operates a dairy farm and a
distributing plant from which there is route distribution within the
marketing area during the month not to exceed 3 million pounds and who
the market administrator has designated a producer-handler after
determining that all of the requirements of this section have been met.
(a) Requirements for designation. Designation of any person as a
producer-handler by the market administrator shall be contingent upon
meeting the conditions set forth in paragraphs (a)(1) through (a)(5) of
this section. Following the cancellation of a previous producer-handler
designation, a person seeking to have their producer-handler
designation reinstated must demonstrate that these conditions have been
met for the preceding month.
(1) The care and management of the dairy animals and the other
resources and facilities designated in paragraph (b)(1) of this section
necessary to produce all Class I milk handled (excluding receipts from
handlers fully regulated under any Federal order) are under the
complete and exclusive control, ownership and management of the
producer-handler and are operated as the producer-handler's own
enterprise and its own risk.
[[Page 19657]]
(2) The plant operation designated in paragraph (b)(2) of this
section at which the producer-handler processes and packages, and from
which it distributes, its own milk production is under the complete and
exclusive control, ownership and management of the producer-handler and
is operated as the producer-handler's own enterprise and at its sole
risk.
(3) The producer-handler neither receives at its designated milk
production resources and facilities nor receives, handles, processes,
or distributes at or through any of its designated milk handling,
processing, or distributing resources and facilities other source milk
products for reconstitution into fluid milk products or fluid milk
products derived from any source other than:
(i) Its designated milk production resources and facilities (own
farm production);
(ii) Pool handlers and plants regulated under any Federal order
within the limitation specified in paragraph (c)(2) of this section; or
(iii) Nonfat milk solids which are used to fortify fluid milk
products.
(4) The producer-handler is neither directly nor indirectly
associated with the business control or management of, nor has a
financial interest in, another handler's operation; nor is any other
handler so associated with the producer-handler's operation.
(5) No milk produced by the herd(s) or on the farm(s) that supply
milk to the producer-handler's plant operation is:
(i) Subject to inclusion and participation in a marketwide
equalization pool under a milk classification and pricing program under
the authority of a State government maintaining marketwide pooling of
returns, or
(ii) Marketed in any part as Class I milk to the non-pool
distributing plant of any other handler.
(b) Designation of resources and facilities. Designation of a
person as a producer-handler shall include the determination of what
shall constitute milk production, handling, processing, and
distribution resources and facilities, all of which shall be considered
an integrated operation, under the sole and exclusive ownership of the
producer-handler.
(1) Milk production resources and facilities shall include all
resources and facilities (milking herd(s), buildings housing such
herd(s), and the land on which such buildings are located) used for the
production of milk which are solely owned, operated, and which the
producer-handler has designated as a source of milk supply for the
producer-handler's plant operation. However, for purposes of this
paragraph, any such milk production resources and facilities which do
not constitute an actual or potential source of milk supply for the
producer-handler's operation shall not be considered a part of the
producer-handler's milk production resources and facilities.
(2) Milk handling, processing, and distribution resources and
facilities shall include all resources and facilities (including store
outlets) used for handling, processing, and distributing fluid milk
products which are solely owned by, and directly operated or controlled
by the producer-handler or in which the producer-handler in any way has
an interest, including any contractual arrangement, or over which the
producer-handler directly or indirectly exercises any degree of
management control.
(3) All designations shall remain in effect until canceled,
pursuant to paragraph (c) of this section.
(c) Cancellation. The designation as a producer-handler shall be
canceled upon determination by the market administrator that any of the
requirements of paragraphs (a)(1) through (a)(5) of this section are
not continuing to be met, or under any of the conditions described in
paragraphs (c)(1), (c)(2) or (c)(3) of this section. Cancellation of a
producer-handler's status pursuant to this paragraph shall be effective
on the first day of the month following the month in which the
requirements were not met or the conditions for cancellation occurred.
(1) Milk from the milk production resources and facilities of the
producer-handler, designated in paragraph (b)(1) of this section, is
delivered in the name of another person as producer milk to another
handler.
(2) The producer-handler handles fluid milk products derived from
sources other than the milk production facilities and resources
designated in paragraph (b)(1) of this section, except that it may
receive at its plant, or acquire for route disposition, fluid milk
products from fully regulated plants and handlers under any Federal
order if such receipts do not exceed 150,000 pounds monthly. This
limitation shall not apply if the producer-handler's own-farm
production is less than 150,000 pounds during the month.
(3) Milk from the milk production resources and facilities of the
producer-handler is subject to inclusion and participation in a
marketwide equalization pool under a milk classification and pricing
plan operating under the authority of a State government.
(d) Public announcement. The market administrator shall publically
announce:
(1) The name, plant location(s), and farm location(s) of persons
designated as producer-handlers;
(2) The names of those persons whose designations have been
cancelled; and
(3) The effective dates of producer-handler status or loss of
producer-handler status for each. Such announcements shall be
controlling with respect to the accounting at plants of other handlers
for fluid milk products received from any producer-handler.
(e) Burden of establishing and maintaining producer-handler status.
The burden rests upon the handler who is designated as a producer-
handler to establish through records required pursuant to Sec. 1000.27
that the requirements set forth in paragraph (a) of this section have
been and are continuing to be met, and that the conditions set forth in
paragraph (c) of this section for cancellation of the designation do
not exist.
PART 1131--MILK IN THE ARIZONA-LAS VEGAS MARKETING AREA
3. Section 1131.10 is revised to read as follows:
Sec. 1131.10 Producer-handler.
Producer-handler means a person who operates a dairy farm and a
distributing plant from which there is route distribution within the
marketing area during the month not to exceed 3 million pounds and who
the market administrator has designated a producer-handler after
determining that all of the requirements of this section have been met.
(a) Requirements for designation. Designation of any person as a
producer-handler by the market administrator shall be contingent upon
meeting the conditions set forth in paragraphs (a)(1) through (a)(5) of
this section. Following the cancellation of a previous producer-handler
designation, a person seeking to have their producer-handler
designation reinstated must demonstrate that these conditions have been
met for the preceding month.
(1) The care and management of the dairy animals and the other
resources and facilities designated in paragraph (b)(1) of this section
necessary to produce all Class I milk handled (excluding receipts from
handlers fully regulated under any Federal order) are under the
complete and exclusive control, ownership and management of the
producer-handler and are operated as the producer-handler's own
enterprise and its own risk.
[[Page 19658]]
(2) The plant operation designated in paragraph (b)(2) of this
section at which the producer-handler processes and packages, and from
which it distributes, its own milk production is under the complete and
exclusive control, ownership and management of the producer-handler and
is operated as the producer-handler's own enterprise and at its sole
risk.
(3) The producer-handler neither receives at its designated milk
production resources and facilities nor receives, handles, processes,
or distributes at or through any of its designated milk handling,
processing, or distributing resources and facilities other source milk
products for reconstitution into fluid milk products or fluid milk
products derived from any source other than:
(i) Its designated milk production resources and facilities (own
farm production);
(ii) Pool handlers and plants regulated under any Federal order
within the limitation specified in paragraph (c)(2) of this section; or
(iii) Nonfat milk solids which are used to fortify fluid milk
products.
(4) The producer-handler is neither directly nor indirectly
associated with the business control or management of, nor has a
financial interest in, another handler's operation; nor is any other
handler so associated with the producer-handler's operation.
(5) No milk produced by the herd(s) or on the farm(s) that supply
milk to the producer-handler's plant operation is:
(i) Subject to inclusion and participation in a marketwide
equalization pool under a milk classification and pricing program under
the authority of a State government maintaining marketwide pooling of
returns, or
(ii) Marketed in any part as Class I milk to the non-pool
distributing plant of any other handler.
(6) The producer-handler does not distribute fluid milk products to
a wholesale customer who is served by a plant described in Sec.
1131.7(a), (b), or (e), or a handler described in Sec. 1000.8(c) that
supplied the same product in the same-sized package with a similar
label to a wholesale customer during the month.
(b) Designation of resources and facilities. Designation of a
person as a producer-handler shall include the determination of what
shall constitute milk production, handling, processing, and
distribution resources and facilities, all of which shall be considered
an integrated operation, under the sole and exclusive ownership of the
producer-handler.
(1) Milk production resources and facilities shall include all
resources and facilities (milking herd(s), buildings housing such
herd(s), and the land on which such buildings are located) used for the
production of milk which are solely owned, operated, and which the
producer-handler has designated as a source of milk supply for the
producer-handler's plant operation. However, for purposes of this
paragraph, any such milk production resources and facilities which do
not constitute an actual or potential source of milk supply for the
producer-handler's operation shall not be considered a part of the
producer-handler's milk production resources and facilities.
(2) Milk handling, processing, and distribution resources and
facilities shall include all resources and facilities (including store
outlets) used for handling, processing, and distributing fluid milk
products which are solely owned by, and directly operated or controlled
by the producer-handler or in which the producer-handler in any way has
an interest, including any contractual arrangement, or over which the
producer-handler directly or indirectly exercises any degree of
management control.
(3) All designations shall remain in effect until canceled pursuant
to paragraph (c) of this section.
(c) Cancellation. The designation as a producer-handler shall be
canceled upon determination by the market administrator that any of the
requirements of paragraphs (a)(1) through (a)(5) of this section are
not continuing to be met, or under any of the conditions described in
paragraphs (c)(1), (c)(2) or (c)(3) of this section. Cancellation of a
producer-handler's status pursuant to this paragraph shall be effective
on the first day of the month following the month in which the
requirements were not met or the conditions for cancellation occurred.
(1) Milk from the milk production resources and facilities of the
producer-handler, designated in paragraph (b)(1) of this section, is
delivered in the name of another person as producer milk to another
handler.
(2) The producer-handler handles fluid milk products derived from
sources other than the milk production facilities and resources
designated in paragraph (b)(1) of this section, except that it may
receive at its plant, or acquire for route disposition, fluid milk
products from fully regulated plants and handlers under any Federal
order if such receipts do not exceed 150,000 pounds monthly. This
limitation shall not apply if the producer-handler's own-farm
production is less than 150,000 pounds during the month.
(3) Milk from the milk production resources and facilities of the
producer-handler is subject to inclusion and participation in a
marketwide equalization pool under a milk classification and pricing
plan operating under the authority of a State government.
(d) Public announcement. The market administrator shall publicly
announce:
(1) The name, plant location(s), and farm location(s) of persons
designated as producer-handlers;
(2) The names of those persons whose designations have been
cancelled; and
(3) The effective dates of producer-handler status or loss of
producer-handler status for each. Such announcements shall be
controlling with respect to the accounting at plants of other handlers
for fluid milk products received from any producer-handler.
(e) Burden of establishing and maintaining producer-handler status.
The burden rests upon the handler who is designated as a producer-
handler to establish through records required pursuant to Sec. 1000.27
that the requirements set forth in paragraph (a) of this section have
been and are continuing to be met, and that the conditions set forth in
paragraph (c) of this section for cancellation of the designation do
not exist.
Dated: April 7, 2005.
Kenneth C. Clayton,
Acting Administrator, Agricultural Marketing Service.
[FR Doc. 05-7295 Filed 4-12-05; 8:45 am]
BILLING CODE 3410-02-P