[Federal Register: May 20, 2005 (Volume 70, Number 97)]
[Proposed Rules]
[Page 29409-29428]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr20my05-26]
[[Page 29409]]
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Part V
Department of Agriculture
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Agricultural Marketing Service
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7 CFR Parts 1005 and 1007
Milk in the Appalachian and Southeast Marketing Areas; Partial
Recommended Decision and Opportunity To File Written Exceptions on
Proposed Amendments to Tentative Marketing Agreements and to Orders;
Proposed Rule
[[Page 29410]]
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DEPARTMENT OF AGRICULTURE
Agricultural Marketing Service
7 CFR Parts 1005 and 1007
[Docket No. AO-388-A15 and AO-366-A44; DA-03-11]
Milk in the Appalachian and Southeast Marketing Areas; Partial
Recommended Decision and Opportunity To File Written Exceptions on
Proposed Amendments to Tentative Marketing Agreements and to Orders
AGENCY: Agricultural Marketing Service, USDA.
ACTION: Proposed rule; partial recommended decision.
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SUMMARY: This document recommends adoption of provisions that would
expand the Appalachian milk marketing area, eliminate the ability to
simultaneously pool the same milk on the Appalachian or Southeast order
and a State-operated milk order that has marketwide pooling, and amend
the transportation credit provisions of the Southeast and Appalachian
orders. This decision does not recommend adopting a proposal that would
merge the Appalachian and Southeast milk marketing areas and a proposal
that would create a ``Mississippi Valley'' marketing order. Proposals
regarding the producer-handler provisions of the Appalachian and
Southeast orders will be addressed in a separate decision.
DATES: Comments must be submitted on or before July 19, 2005.
Comments (6 copies) should be filed with the Hearing Clerk, United
States Department of Agriculture, STOP 9200-Room 1083, 1400
Independence Avenue, SW., Washington, DC 20250-9200. You may send your
comments by the electronic process available at the Federal eRulemaking
portal: 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: Antoinette M. Carter or Jack Rower or
Gino M. Tosi, Marketing Specialist, USDA/AMS/Dairy Programs, Order
Formulation and Enforcement Branch, STOP 0231-Room 2971, 1400
Independence Avenue, SW., Washington, DC 20250-0231, (202) 690-3465 or
(202) 720-3257 or (202) 690-1366, e-mail address:
antoinette.carter@usda.gov, or 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 Department
a petition stating that the order, any provision of the order, or any
obligation imposed in connection with the order is not in accordance
with the law. A handler is afforded the opportunity for a hearing on
the petition. After a hearing, the Department would rule on the
petition. The Act provides that the district court of the United States
in any district in which the handler is an inhabitant, or has its
principal place of business, has jurisdiction in equity to review the
Department's ruling on the petition, provided a bill in equity is filed
not later than 20 days after the date of the entry of the ruling.
Regulatory Flexibility 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
marketings guideline of 500,000 pounds per month. Although this
guideline does not factor in additional monies that may be received by
dairy producers, it should be an inclusive standard for most ``small''
dairy farmers. For purposes of determining a handler's size, if the
plant is part of a larger company operating multiple plants that
collectively exceed the 500-employee limit, the plant will be
considered a large business even if the local plant has fewer than 500
employees.
During February 2004, the milk of 7,311 dairy farmers was pooled on
the Appalachian (Order 5) and Southeast (Order 7) milk orders (3,395
Order 5 dairy farmers and 3,916 Order 7 dairy farmers). Of the total,
3,252 dairy farmers (or 96 percent) and 3,764 dairy farmers (or 96
percent) were considered small businesses on the Appalachian and
Southeast orders, respectively.
During February 2004, there were a total of 36 plants regulated by
the Appalachian order (25 fully regulated plants, 7 partially regulated
plants, 1 producer-handler, and 3 exempt plants) and a total of 51
plants regulated by the Southeast order (32 fully regulated plants, 6
partially regulated plants, and 13 exempt plants). The number of plants
meeting the small business criteria under the Appalachian and Southeast
orders were 13 (or 36 percent) and 13 (or 25 percent), respectively.
The proposed amendments adopted in this proposed rule would expand
the Appalachian milk marketing area to include 25 counties and 14
cities in the State of Virginia that currently are not in any Federal
milk marketing area. This decision recommends the adoption of a
proposal that would amend the producer milk provisions of the
Appalachian and Southeast milk orders to prevent producers who share in
the proceeds of a state marketwide pool from simultaneously sharing in
the proceeds of a Federal marketwide pool on the same milk. In
addition, this decision recommends adopting proposed amendments to the
transportation credit provisions of the Appalachian and Southeast
orders.
The proposed amendments to expand the Appalachian marketing area
would likely continue to regulate under the Appalachian order two fluid
milk distributing plants located in Roanoke, Virginia, and Lynchburg,
Virginia, and shift the regulation of a distributing plant located in
Mount Crawford, Virginia, from the Northeast order to the Appalachian
order.
The proposed amendments would allow the Kroger Company's (Kroger)
Westover Dairy plant, located in Lynchburg, Virginia, that competes for
a milk supply with other Appalachian order plants to continue to be
regulated under the order if it meets the order's minimum performance
standards. The plant has been regulated by the Appalachian order since
January 2000. In addition, the proposed amendments
[[Page 29411]]
would remove the disruption that occurs as a result of the Dean Foods
Company's (Dean Foods) Morningstar Foods plant, located in Mount
Crawford, Virginia, shifting its regulatory status under the Northeast
order.
The Appalachian order currently contains a ``lock-in'' provision
that provides that a plant located within the marketing area that meets
the order's minimum performance standard will be regulated by the
Appalachian order even if the majority of the plant's Class I route
sales are in another marketing area. The proposed expansion along with
the lock-in provision would regulate fluid milk distributing plants
physically located in the marketing area that meet the order's minimum
performance standard even if the majority of their sales are in another
Federal order marketing area. Accordingly, the proposed amendments
would regulate under the Appalachian order Kroger's Westover Dairy,
located in Lynchburg, Virginia; Dean Foods' Morningstar Foods plant,
located in Mount Crawford, Virginia; and National Dairy Holdings'
Valley Rich Dairy, located in Roanoke, Virginia. Based on Small
Business Administration criteria these are all large businesses.
This decision recommends proposed amendments to the transportation
credit provisions of the Appalachian and Southeast orders. The
Appalachian and Southeast orders contain provisions for a
transportation credit balancing fund from which payments are made to
handlers to partially offset the cost of moving bulk milk into each
marketing area to meet fluid milk demands.
The proposed amendments would increase the maximum rate of the
transportation credit assessment of the Appalachian and Southeast
orders by 3 cents per hundredweight. Specifically, the proposed
amendments would increase the maximum rate of assessment for the
Appalachian order from 6.5 cents per hundredweight to 9.5 cents per
hundredweight while increasing the maximum rate of assessment for the
Southeast order from 7 cents per hundredweight to 10 cents per
hundredweight. Increasing the transportation assessment rates will tend
to minimize the exhaustion of the transportation credit balancing fund
when there is a need to import supplemental milk from outside the
marketing areas to meet Class I needs.
Currently, the Appalachian and Southeast orders provide that
transportation credits shall apply to the milk of a dairy farmer who
was not a ``producer'' under the order during more than two of the
immediately preceding months of February through May but not more than
50 percent of the milk production of the dairy farmer, in aggregate,
was received as producer milk under the order during those two months.
The proposed amendments recommended for adoption in this decision would
provide the Market Administrator of the Appalachian order and the
Market Administrator of the Southeast order the discretionary authority
to adjust the 50 percent milk production standard.
This decision recommends adoption of proposals seeking to prohibit
the simultaneous pooling of the same milk on the Appalachian or
Southeast milk marketing orders and on a State-operated order that
provides for the marketwide pooling of milk. Since the 1960's, the
Federal milk order program has recognized the harm and disorder that
result to both producers and handlers when the same milk of a producer
is simultaneously pooled on more than one Federal order. When this
occurs, producers do not receive uniform minimum prices, and handlers
receive unfair competitive advantages.
The need to prevent ``double pooling'' became critically important
as distribution areas expanded, orders merged, and a national pricing
surface was adopted. Milk already pooled under a State-operated program
and able to simultaneously be pooled under a Federal order has
essentially the same undesirable outcomes that Federal orders once
experienced and subsequently corrected. Accordingly, proposed
amendments to eliminate the ``double pooling'' of the same milk on the
Appalachian or Southeast order and a State-operated milk order that has
marketwide pooling is recommended for adoption.
The proposed amendments would be applied to all Appalachian and
Southeast order participants (producers and handlers), which consist of
both large and small business. Since the proposed amendments
recommended for adoption would be subject to all the orders' producers
and handlers regardless of their size, the provisions are not expected
to provide a competitive advantage to any participant. Accordingly, the
proposed amendments should not have a significant economic impact on a
substantial number of small entities.
A review of reporting requirements was completed under the
Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35). It was
determined that these proposed amendments would have no impact on
reporting, recordkeeping, or other compliance requirements because they
would remain identical to the current requirements. No new forms are
proposed and no additional reporting requirements would be necessary.
This 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 January 16, 2004; published January 23,
2004 (69 FR 3278).
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 Appalachian and Southeast marketing areas. This notice
is issued pursuant to the provisions of the Agricultural Marketing
Agreement Act and the applicable rules of practice and procedure
governing the formulation of marketing agreements and marketing orders
(7 CFR Part 900).
Interested parties may file written exceptions to this decision
with the Hearing Clerk, U.S. Department of Agriculture, Washington, DC
20250-9200, by the 60th day after publication of this decision in the
Federal Register. Six 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 Atlanta, Georgia, on February 23-26, 2004,
pursuant to a notice of hearing issued January 16, 2004 (69 FR 3278).
[[Page 29412]]
The material issues on the hearing record relate to:
1. Merger of the Appalachian and Southeast Marketing Areas.
a. Merging the Appalachian and Southeast milk marketing areas and
remaining fund balances.
b. Expansion of the Appalachian marketing area.
c. Transportation credits provisions.
2. Promulgation of a new ``Mississippi Valley'' milk order.
3. Eliminating the simultaneous pooling of the same milk on a
Federal milk order and a State-operated milk order that provides for
marketwide pooling.
4. Producer-handler provisions.
This partial recommended decision deals only with Issues 1 through
3. Issue No. 4 will be addressed separately in a forthcoming decision.
Findings and Conclusions
The following findings and conclusions on the material issues are
based on evidence presented at the hearing and the record thereof:
1. Merger of the Appalachian and Southeast Marketing Areas
1a. Merging the Appalachian and Southeast Milk Marketing Areas and
Remaining Fund Balances
This decision recommends denial of a proposal that would merge the
current Appalachian marketing area and Southeast milk marketing area
into a single marketing area under a proposed order. Accordingly, a
proposal that would combine the fund balances of the current
Appalachian and Southeast orders is rendered moot and is not
recommended for adoption.
The Appalachian marketing area consists of the States of North
Carolina and South Carolina, parts of eastern Tennessee, Kentucky
excluding southwest counties, 7 counties in northwest/central Georgia,
20 counties in southern Indiana, 8 counties and 2 cities in Virginia,
and 2 counties in West Virginia. The Southeast order marketing area
consists of the entire States of Alabama, Arkansas, Louisiana,
Mississippi, Georgia (excluding 4 northern counties), southern
Missouri, western/central Tennessee, and southern Kentucky.
A witness testifying on behalf of Southern Marketing Agency, Inc.
(SMA), presented testimony in support of Proposals 1 and 2 as contained
in the hearing notice published in the Federal Register (69 FR 3278).
Proposal 1 would merge the current Appalachian and Southeast marketing
areas into a single marketing area (hereafter referred to as the
proposed merged milk order) and Proposal 2 would combine the remaining
balances of funds of the current Appalachian and Southeast orders if
the proposed merged order was adopted. According to the witness, SMA is
a marketing agency whose cooperative members include Arkansas Dairy
Cooperative Association, Inc., Dairy Farmers of America, Inc. (DFA),
Dairymen's Marketing Cooperative, Inc., Lone Star Milk Producers, Inc.,
Maryland & Virginia Milk Producers Cooperative Association, Inc.
(MD&VA), and Southeast Milk, Inc. (SMI) (proponent cooperatives).
The witness for the proponent cooperatives said SMA was created in
response to a changing market structure and is an extension of the
cooperatives' initiative to consolidate and seek enhanced marketing
efficiencies. The witness indicated that SMA pools certain costs and
returns for its cooperative member producers supplying distributing
plants fully regulated under the Appalachian and Southeast milk orders.
SMA considers the Appalachian and Southeast orders one market in terms
of the distribution of revenues, the allocation and pooling of
marketing costs, milk supply and demand, and the development of its
annual budget, the witness explained.
The proponent cooperatives' witness stated that the proposed order
merger would create a milk market which would be commonly supplied and
deserving of a common blend price. The witness testified that the
continued existence of the separate Appalachian and Southeast Federal
milk orders across a functionally single fluid milk marketing area
inhibits market efficiency in supplying and balancing the market,
creates unjustified blend price differences, encourages uneconomic
movements of milk, and results in the inequitable sharing of the Class
I proceeds of what should be a single market.
The proponent cooperatives' witness stated that different blend
prices and different and separate pool qualification requirements
constitute disruptive conditions that would be removed by a merger of
the orders. The witness asserted that the proposed merger would allow
producer milk to flow more freely between pool plants and provide for
the equal sharing of balancing costs across all producers in the
proposed merged order.
The proponent cooperatives' witness stressed that the adoption of
the proposed merged order would assure producers that milk would be
sold at reasonable minimum prices and producers would share pro rata in
the returns from sales of milk including milk not needed for fluid use.
The witness further stated that handlers would be assured that
competitors would pay a single set of minimum prices for milk set by
the established order. The witness stated that a merged order is in the
public interest because it assures that an adequate supply of high
quality milk will be available for consumers.
The proponent cooperatives' witness noted that the adoption of a
new Federal order is contingent upon being able to show that interstate
commerce occurs in the proposed marketing area. It is the opinion of
the witness that ``interstate commerce'' does exist due to the movement
of bulk and packaged milk products within, into, and out of the
Appalachian and the Southeast marketing areas--the proposed marketing
area.
The proponent cooperatives' witness noted a trend of larger
geographical areas being served by fewer Federal milk marketing orders.
Specifically, the witness said between 1996 and 2003 the number of
dairy farmers in the southeastern states of Alabama, Arkansas, Georgia,
Kentucky, Louisiana, Mississippi, Missouri, North Carolina, South
Carolina, Tennessee, and Virginia declined from 11,712 to 7,180. This
decrease, the witness explained, parallels the trend of a drop in the
number of dairy farmers pooled on the current Appalachian and Southeast
orders. The witness stated that based on the final decision for Federal
Order Reform (issued March 12, 1999, and published April 2, 1999 (64 FR
16025)) 8,180 dairy farmers were expected to pool their milk on the
consolidated Appalachian and Southeast orders. However, the witness
noted only 7,243 dairy producers supplied milk to the two orders during
December 2003.
The proponent cooperatives' witness stressed that there is an acute
milk deficit in the Appalachian and Southeast Federal orders.
Referencing data obtained from the USDA National Agricultural
Statistics Service (NASS) for the states of Alabama, Arkansas, Georgia,
Kentucky, Louisiana, Mississippi, Missouri, North Carolina, South
Carolina, Tennessee, and Virginia (southeast region), the witness
testified that a decline in dairy farmers led to a decline in milk
production in the southeast region. The witness noted milk production
decreased from 13,518 million pounds in 1996 to 10,671 million pounds
in 2003 a decline of 21 percent. The witness asserted that this decline
coupled with an increase in population has resulted in a major
[[Page 29413]]
expansion of the milkshed for the southeastern region of the United
States.
According to the proponent cooperatives' witness, 9,071.9 million
pounds of Class I producer milk was pooled on the combined Appalachian
and Southeast orders during 2003. The witness said marketings of milk
produced in the southeastern region was 10,671 million pounds in 2003,
which means 85 percent of Grade A milk production was needed for Class
I use on an annual basis.
In 1996, the proponent witness testified, it was anticipated that
72 fluid milk processing plants were or would become fully regulated
distributing plants on the consolidated Appalachian and Southeast
orders. However, the witness noted, only 52 remained regulated by the
orders during December 2003. The witness indicated that of the fully
regulated pool plants existing in both January 1996 and December 2003,
more than two-thirds have experienced at least one ownership change and
some have experienced several ownership changes.
The proponent cooperatives' witness cited a set of criteria used
for consolidation of orders during the reform process. The witness said
this list included overlapping route sales and areas of milk supply,
the number of handlers within a market, the natural boundaries, the
cooperative associations operating in the service area, provisions
common to the existing orders, milk utilization in common dairy
products, disruptive marketing conditions, and transportation
differences.
The proponent cooperatives' witness testified that significant
competition for sales between plants exists between the Appalachian and
Southeast orders. The witness noted that the ``corridor of
competition'' is the shared border of the Appalachian and Southeast.
The witness testified that Federal milk order data for 2003 shows Class
I disposition on routes inside the Southeast order by Appalachian order
pool plants was 11.25 percent of the total Class I route disposition by
all plants in the Southeast order. According to the witness, Class I
route disposition in the Southeast order by Appalachian order pool
plants has increased in total by 11.1 percentage points since January
2000 (i.e., 5.9 percentage points from 2000 to 2001, 2.1 percentage
points from 2001 to 2002, and 1.9 percentage points from 2002 to 2003).
In addition, the stated record data reveals that Class I route
disposition by Appalachian order pool plants into the Southeast order
was 63.9 percent of the total Class I disposition by all nonpool plants
for the Southeast order during 2003.
According to the proponent cooperatives' witness, all of the
distributing plants currently regulated under the Appalachian and
Southeast orders are expected to be fully regulated by the proposed
merged order. Using December 2003 data, the witness stated that the
proposed merged order would have had a Class I route distribution of
773.4 million pounds. The witness added that 86.58 percent of Class I
sales would have been from milk produced in the proposed marketing
area. The witness stated that the proposed Southeast order would rank
third in the total number of pool plants regulated by a Federal milk
order.
The proponent cooperatives' witness stated that there is
substantial and significant overlap of the supply of producer milk for
the Appalachian and Southeast orders. The witness noted Federal order
data for 2000 through 2003 shows that dairy farmers located in southern
Indiana, central Kentucky, central Tennessee, central North Carolina,
western South Carolina, and central and southern Georgia have supplied
milk to plants regulated under Appalachian or Southeast orders. The
witness said milk of dairy farmers located in the Central marketing
area and Southwest marketing area, and dairy farmers located in
northwestern Indiana and south central Pennsylvania, have supplied
fluid milk plants regulated by the Appalachian and Southeast orders.
In December 2003, the witness stated, dairy farmers located in 28
states supplied milk to handlers under the Appalachian or Southeast
orders. Sixteen of the 28 states supplied milk to both orders and 13
states were located wholly or partially within the proposed merged
order marketing area, the witness noted.
The witness for the proponent cooperatives testified that the
proposed order would rank second in Class I utilization representing
19.5 percent of total Class I sales in all Federal milk orders. Using
annual Federal milk order data, the witness noted that for 2003, Class
I utilization for the Appalachian and Southeast orders was 70.36
percent and 65.47 percent, respectively. The witness said the combined
Class I utilization for the proposed merged order would have been 67.77
percent for 2003 or 9,071.9 million pounds of 13,385.7 million pounds
of producer milk pooled.
The proponent cooperatives' witness noted that milk not needed for
fluid uses in the Appalachian order is primarily used in Class II and
Class IV while milk not needed for fluid uses in the Southeast order is
primarily used in Class III. For 2003, the witness noted that non-fluid
milk utilization for the Appalachian order was 14.41 percent Class II,
7.11 percent Class III, and 8.12 percent Class IV, while the non-fluid
milk utilization for the Southeast order was 9.97 percent Class II,
17.79 percent Class III, and 6.78 percent Class IV. The witness
stressed that these differing uses of milk result in different blend
prices between the Appalachian and Southeast orders which leads to
disorderly marketing conditions. The witness emphasized that
differences in blend prices between the two orders is largely due to
significant differences in uses and prices in the manufacturing classes
and is not necessarily due to significant differences in Class I milk
utilization.
The witness explained that SMA in April 2002 began the common
pooling of the costs and returns to supply the customers of member
cooperatives in the separate orders in an effort to alleviate
disruptive blend price differences. The witness testified that while
this procedure has resolved some blend price differences, their
procedure does not result in removing inequitable blend prices for all
producer milk pooled on the separate orders.
Regarding the commonality of cooperative associations in the two
marketing areas, the proponent cooperatives' witness stated that
cooperative membership is an indication of market association and
provides support for the consolidation of marketing areas. The witness
noted that the six SMA member cooperatives accounted for approximately
734 million pounds of producer milk during November 2003, which
represents about 67 percent of the total producer milk that would be
pooled on the proposed Southeast order. Also, the witness stated these
cooperatives market milk of other cooperatives whose member producers'
milk would be pooled on the proposed Southeast order. Using November
2003, the witness stated approximately 871 million pounds or 79 percent
of the producer milk pooled under the proposed Southeast order would be
represented by these proponent cooperatives.
The witness for the proponent cooperatives pointed out that the
regulatory provisions of the Appalachian and Southeast orders are
similar in most respects except for the qualification standards for
producer milk and a producer. While not a Federal milk order regulatory
provision, the proponent witness stated that the common handling of
cost and returns for milk that would be pooled on the proposed merged
order recognized
[[Page 29414]]
similar marketing conditions within the proposed order marketing area.
The proponent cooperative witness testified that the proposed
merged order should retain the Appalachian order pool plant provisions.
The witness recommended adopting provisions that would allow the
pooling of a supply plant operated by a cooperative association that is
located outside the marketing area but within the State of Virginia.
The witness stated that the proposed merged order should include the
Appalachian order ``split'' pool plant provision which would continue
to provide for defining that portion of a pool plant designated as a
``nonpool plant'' that is physically separate and operates separately
from the pool portion of such plant.
The proponent cooperatives' witness stated that lock-in provisions
be included in the proposed merged order. According to the witness,
distributing plants in the Southeastern markets have been ``locked in''
or fully regulated as pool plants under the order in which they are
physically located since the mid-1980s. The witness testified that unit
pooling distributing plants on the basis of their physical location
should be retained in the merged order. The witness noted that the
Appalachian and Southeast orders currently provide that two or more
plants operated by the same handler that are located within the
marketing area may qualify for pool status as a unit by meeting the in-
area Class I route disposition standards specified for pool
distributing plants.
The witness for the proponent cooperatives explained that lock-in
provisions help to preserve the viability of capital investments in
pool distributing plants. The witness indicated that lock-in provisions
in the Southeast and Appalachian orders adequately provide for
regulatory stability for pool plants on the edge of a market area that
may shift regulatory status between two orders due to changes in route
disposition patterns.
The proponent cooperatives' witness recommended changing the
``touch base'' requirement of the producer milk provision from a
``days'' production standard to a ``percentage'' production standard.
This change, the witness stated, will accommodate pooling the milk of
large producers who ship multiple loads of milk per day. The witness
proposed that individual producers deliver 15 percent of their monthly
milk production (equivalent to approximately 4.5 days of milk
production) to a pool plant during January through June and 33 percent
(equivalent to about 10 days of milk production) of their monthly milk
production during the months of July through December. The witness
stated that the 33 percent production standard is a reasonable minimum
requirement for establishing a producer's association with the market
during the short production months of July through December. Under
their proposal, the milk of a dairy farmer would be eligible for
diversion to a nonpool plant the first day of the month during which
the milk of such dairy farmer meets the order's touch base
requirements.
The proponent cooperatives' witness indicated that their proposal
contains current Southeast order language that limits the total amount
of producer milk that may be diverted by a pool plant operator or
cooperative association to 33 percent during the months of July through
December and 50 percent during January through June.
The proponent cooperatives' witness proposed that the reserve
balances of the marketing services, administrative expense, producer-
settlement funds, and the transportation credit balancing funds that
have accrued in the individual Appalachian and Southeast orders, be
merged or combined in their entirety if the proposed merged order is
adopted. The witness explained that the handlers and producers
servicing the milk needs of the individual orders would continue to
furnish the milk needs of the proposed marketing area.
According to the proponent cooperatives' witness, it would be
appropriate to combine the reserve balances of the orders' marketing
service funds since marketing service programs for producers would
continue under the proposed order. In regards to the administrative
expense funds, the witness stated that it would be equitable and more
efficient to combine the remaining administrative funds accumulated
under the individual orders. In addition, the witness indicated that
this would enable the producer-settlement funds and the transportation
credit funds of the proposed merged order to continue without
interruption.
Witnesses for Maryland & Virginia Milk Producers Cooperative, Inc.
(MD&VA), Arkansas Dairy Cooperative, Inc. (ADC), Lone Star Milk
Producers, Inc. (Lone Star), and Dairymen's Marketing Cooperative, Inc.
(DMC), testified in support of consolidating the current Appalachian
and Southeast milk orders into a single milk order. According to
witnesses, MD&VA is comprised of 1,450 to 1,500 dairy farmers, ADC has
160 member dairy farmers, Lone Star is comprised of about 160 member
dairy farmers, and DMC is comprised of 168 member dairy farmers. The
witnesses indicated that all of the cooperatives are members of SMA and
that the milk of their dairy farmer members is shipped to plants
regulated by the Appalachian or Southeast orders.
The MD&VA witness asserted that the consolidation of the current
Appalachian and Southeast orders is necessary due to changes in the
marketing structure (i.e., milk production and processing sectors) in
the southeastern United States. The witness was of the opinion that the
area covered by the two current orders is essentially a single market
and that all of the producers delivering milk to the market should
share a common Federal order blend price.
The witnesses for MD&VA, ADC, Lone Star, and DMC stated the
producer milk requirements under the current Appalachian and Southeast
Orders make it difficult to ensure the pooling of milk on the orders.
The witnesses contended a merger of the Appalachian and Southeast
orders would enhance market equity, allow for increased efficiencies in
supplying a deficit milk region, and eliminate the disruptive and
disorderly marketing conditions that currently exist in the Appalachian
and Southeast orders by eliminating blend price differences.
Witnesses representing Georgia Milk Producers, Inc. (GMP),
testified in opposition to the merger as proposed in Proposals 1 and 2.
The witness was of the opinion that USDA had made a mistake in 2000
when the western part of the current Southeast order, which had a lower
Class I utilization, was added to the Southeast order which had a
higher Class I utilization.
Other testimony presented on behalf of GMP, and relying on 1997
data, indicated that milk production in Georgia fell short of Georgia's
fluid milk demand by about 122 million pounds as compared to only 4 to
11 million pound supply shortfalls in the other states included in the
proposed merged order area. The witness stated that the widening
supply-demand gap will accelerate as population increases and milk
production declines in Georgia. The GMP witness stated that: ``Based on
the decline in production in the region compared to the growth in
demand, USDA has not sufficiently considered the needs of the dairy
farmers in the states covered by the Order.'' According to the witness,
GMP dairy farmers have lost income each time the Southeast Federal
Order has been expanded.
The GMP witness testified that a rejection of the proposed merged
order together with the creation of a new Mississippi Valley Order, as
offered by Proposal 5, would be the first step to
[[Page 29415]]
help rectify the mistake made in Federal milk order reform. The witness
supported raising the utilization in the most deficit areas of the
Southeastern States by creating a Mississippi Valley order and
combining the high utilization areas of the remainder of Order 7 into a
new smaller Southeast Order.
The GMP witness asserted that historically, the larger the
marketing area, the higher the balancing costs in a deficit market. The
witness further asserted that transportation credits shift part of that
cost to the entire market rather than to the dairy farmers in the order
who are members of cooperatives. The witness testified that
transportation credits unintentionally encourage the importation of
milk rather than encourage increased production of local milk.
A witness representing the Kroger Company (Kroger) testified in
support of the proposed merger of the Appalachian and Southeast orders.
According to the witness, Kroger owns and operates Winchester Farms
Dairy, in Winchester, Kentucky, and Westover Dairy, in Lynchburg,
Virginia. The witness stated that both plants are pool distributing
plants regulated on the Appalachian Federal milk order. The witness
stated that Kroger owns and operates Heritage Farms Dairy in
Murfreesboro, Tennessee, and Centennial Farms Dairy in Atlanta,
Georgia, both fully regulated distributing plants under the Southeast
milk order.
According to the Kroger witness, their Winchester, Kentucky, plant
was associated with the Ohio Valley order (now part of the Mideast
order) from 1982 to 1988, with the Louisville-Lexington-Evansville
order from 1988 through 1999, and with the Appalachian order since
2000. The witness indicated that previous decisions by USDA adopted
pool plant provisions that allowed their Winchester, Kentucky, plant to
be regulated under the Appalachian order. According to the witness,
being regulated by the Appalachian order retains that plants ability to
procure milk with a higher blend price when compared with the Mideast
order.
The Kroger witness indicated that with the exception of the
Murfeesboro, Tennessee, plant, which has a minority supply of milk from
independent producers, all of the Kroger pool distributing plants are
supplied by Dairy Farmers of America. The witness indicated that if
their Winchester plant were to again be associated with the Mideast
order, the returns to the milk supplying cooperative would be reduced
due to the lower Mideast order blend price. The witness requested that
the current Appalachian order pool plant definition be included in the
proposed merged order. This request, according to the witness, would
permit their plant located in Winchester, Kentucky, to continue its
association with the proposed merged order rather than with the Mideast
order.
A witness representing Dairy Farmers of America (DFA) testified
that the proponents do not anticipate any difficulties from merging of
the two orders or expanding the proposed merged area to include
additional Virginia counties. According to the witness, the Virginia
State Milk Commission has been able to simultaneously operate a
producer base milk pricing program for producers supplying milk to
plants with Class I sales within the State. The witness indicated that
DFA opposes any change to the proposed merged order provisions that may
cause conflicts between the operations of the Virginia State Milk
Commission and the Federal milk marketing order program.
A witness representing Prairie Farms testified in opposition to
Proposals 1 and 2. The witness indicated that the fluid milk industry
would be better served by more Federal milk marketing orders covering
smaller areas rather than fewer Federal milk marketing orders covering
large areas. The witness indicated that Federal milk order reform left
``dead zones'' in the State of Illinois and Missouri, near St Louis.
According to the witness, this area is not able to attract a fluid milk
supply and experiences weekly fluid milk deficits.
The Prairie Farms witness indicated that the low per capita milk
production in Illinois, in combination with economic incentives to move
the milk produced in Illinois and eastern Missouri into the Appalachian
and Southeast orders, has caused disorderly marketing conditions. The
witness indicated that the blend price differences between the Upper
Midwest order and the Central order are not sufficient to cover the
transportation cost of moving milk to the ``dead zones''. The witness
testified that at an October 31, 2001, meeting, DFA--Prairie Farms'
major supplier--indicated that they would no longer be able to provide
supplemental milk supplies to Prairie Farms due to the lack of
incentives and expenses.
The Prairie Farms witness stated that today's dairy environment
shows that the current order system needs to be reconfigured and
inequities fixed system-wide. The witness asserted that the
consequences for nearby marketing areas and adjacent orders must be
considered when revising or merging orders. The witness indicated that
market efficiency suffers and difficulties occur in supplying and
balancing the market at all Federal milk order borders. The witness
indicated that the lines drawn between marketing areas create
unjustified blend price differences, encourage uneconomic movements of
milk, and result in the inequitable sharing of Class I proceeds.
A witness representing Dean Foods testified in opposition to the
proposed merger of the Appalachian and the Southeast market areas.
According to the witness, more and smaller order areas create more
flexible incentives to deliver milk to Federal order pool plants.
According to the witness, relative blend prices determine where milk is
shipped and pooled. According to the witness the disincentives
associated with increased transportation costs increase faster than the
incentives from the higher location value of the merged order blend
price. The witness cited the St. Louis/southern Illinois area and its
chronic milk deficit as a prime example of these phenomena.
Post-hearing briefs addressing Proposals 1 and 2 were submitted by
SMA, Dean Foods, and Prairie Farms. The proponent cooperatives for the
proposed order merger, submitted a post-hearing brief reiterating their
support for the merger of the Appalachian and Southeast orders. The
brief described conditions existing in the Appalachian and Southeast
orders as disruptive and disorderly, and asserted that these conditions
are symptoms of a market that has changed significantly since the
orders were promulgated by Federal order reform, effective January 1,
2000.
According to the proponent cooperatives' brief, a merger of the
existing orders would bring blend price uniformity, recognize inter-
order competition and integrate Class I sales within the proposed
merged order, recognize common supply areas within the proposed merged
order, and allow producer milk to move more freely between pool plants
within the proposed marketing areas. In addition, proponents contended
it would equalize the costs of balancing within the proposed marketing
area, erase the artificial line that separates a common milk market,
and recognize the common pooling of costs and returns for producer milk
within the proposed merged order. The brief asserts that no additional
parties would become regulated as a result of the proposed merged
order. According to the proponent cooperatives' brief, other options
that forestall a complete merger
[[Page 29416]]
are inadequate to correct the present disruptive and disorderly
conditions in the separate orders.
Opposition to proposal 1 was reiterated by Dean Foods and Prairie
Farms in a joint post-hearing brief. The brief suggested that blend
price differences between orders cause milk to move to where it is most
needed. The Dean Foods and Prairie Farms stated that without blend
price differences milk movements between and within marketing areas are
impaired. The opponents brief suggested a national hearing in order to
consider simultaneously all marketing regions because the results of
one proceeding directly affects other regions. The brief stated that
combining the Appalachian and Southeast marketing areas was considered
but was not adopted under Federal milk order reform.
The Dean Foods and Prairie Farms joint brief stated that market
administrator data demonstrates that moving milk to where it is needed
through blend price differences effectively moves milk from the west to
the east for the Southeast marketing area and from north to south for
the Appalachian marketing area. The brief offered the St. Louis area as
an example of blend price differences that are sometimes too small to
cover additional costs of transporting milk to major metropolitan area
for fluid use. The brief indicated that similar problems could result
elsewhere if the two orders are merged.
In their joint brief, Dean Foods and Prairie Farms suggested that
although a majority of dairy market participants may favor a merger, it
is important to consider the minority opinion. The brief also requested
the inclusion of the Kentucky counties of Ballard, Calloway, Carlisle,
Fulton, Graves, Hickman, Marshall, and McCracken in the Southeast
marketing area if Proposal 1 is denied and Proposal 5 is adopted.
Dean Foods and Prairie Farms' joint brief contended that the
proposal to merger the Appalachian and Southeast orders brings forth a
significant policy and legal question the Department must address prior
to issuing a decision on the merits of the proposal. The proposed
merger, if adopted, would cause the number of Federal orders to fall to
below the minimum number of 10 required by Congress in the 1996 Farm
Bill, they stated.
A written statement submitted on behalf of LuVel Dairy Products,
Inc., requested that the administrative requirements of the producer-
settlement fund be modified to extend the time period in which payments
to the fund are due by one full business day and to allow payments due
to the fund to be submitted overnight instead of through the electronic
wiring of funds. However, this was not a noticed proposal and no
evidence or witness was available to testify regarding this written
request.
The 1996 Farm Bill mandated that Federal milk orders be
consolidated to not less than 10 or more than 14. The Federal order
reform final decision issued March 12, 1999 and published in the
Federal Register April 2, 1999, (64 FR 16026) meet the requirements set
forth in the 1996 Farm Bill through the consolidation of the 31 Federal
milk orders into 11 orders. The Agricultural Marketing Agreement Act of
1937 (AMAA), as amended, provides the Department the authority to issue
and amend orders. Accordingly, the merger proposal may be considered by
the Department.
This decision does not recommend merging the Southeast and
Appalachian marketing areas. Record evidence of this proceeding does
not substantiate the need for merging these two separate marketing
order areas. Overlap of Class I route disposition between the two
orders is relatively unchanged since the separate orders were created
in 2000. The overlap in milk supply areas for plants in the Appalachian
and Southeast orders remains minimal and unchanged since 2000. Blend
price differences and other marketing conditions of the two orders
raised by the proponents are not significantly different from
conditions existing in 2000. The proponents have not demonstrated that
the current marketing conditions are disorderly. The proponents have
not made a convincing case that the current marketing conditions are
disorderly.
The AMAA provides that milk orders may be issued where the
marketing of milk is in the current of interstate or foreign commerce
or where it directly burdens, obstructs, or affects interstate or
foreign commerce. Federal milk orders define the terms under which
handlers in a specified market purchase milk from dairy farmers. The
orders are designed to promote the orderly exchange of milk between
dairy farmers (producers) and the first buyers (handlers) of milk.
Record evidence of this proceeding does not support a finding that the
current Appalachian and Southeast milk orders are not achieving the
goal of orderly marketing.
In determining whether Federal milk order marketing areas should be
merged, the Department generally has considered the extent to which
Federal order markets share common characteristics such as overlapping
sales and procurement areas, and other commonly shared structural
relationships. The most important of these factors are evidence of
overlapping sales patterns among handlers of Class I milk and
overlapping milk procurement area. The measures of association between
the Appalachian and Southeast milk order marketing areas in terms of
overlapping route sales and milk procurement have not change
significantly since the consolidated orders became effective in January
2000.
Several criteria were used by the Department in determining which
of the 31 milk order marketing areas exhibited a sufficient measure of
association in terms of sales, procurement area, and other structural
relationships to warrant consolidation or mandated by the 1996 Farm
Bill into the current 10 milk marketing areas. These criteria included
overlapping route disposition, overlapping areas of milk supply, number
of handlers within a market, natural boundaries, cooperative
associations, common regulatory provisions, and milk utilization in
common dairy products.
The primary factors during reform that supported the creation of
the consolidated Appalachian milk order and the consolidated Southeast
milk order were overlapping route sales and milk procurement areas
between the marketing areas. The determinations were based on an
analysis of milk sales and procurement area overlap between the pre-
reform orders using 1997 data. Specifically, the Federal order reform
final decision issued March 1999, stated that the primary factors for
the consolidation of the (1) Tennessee Valley, (2) Louisville-
Lexington-Evansville, and the (3) Carolina marketing areas into the
current Appalachian milk order were commonality of overlapping route
disposition and milk procurement between the two marketing areas. The
decision found that there was ``a stronger relationship between the
three marketing areas involved than between any one of them and any
other marketing area on the basis of both criteria.'' (64 FR 16059)
For the Southeast order, the Federal order reform final decision
stated that the basis for the adopted Southeast marketing area which
consolidated the former Southeast marketing area with additional
counties in Arkansas, Kentucky, and Missouri was ``overlapping route
dispositions within the marketing area to a greater extent than with
other marketing areas. Procurement of producer milk also overlaps
between the states within the market.'' (64 FR 16064)
[[Page 29417]]
Proposals to merge the Appalachian and Southeast order marketing
areas into a single marketing area were considered during the Federal
order reform process. Dairy Farmers of America, Inc., and Carolina-
Virginia Milk Producers Association submitted comments requesting that
the proposed consolidated Appalachian order marketing area and the
proposed consolidated Southeast order marketing area be combined into a
single consolidated Southeast marketing area. Also, the Kentucky Farm
Bureau Federation requested a single Federal order consisting of the
proposed consolidated Appalachian and Southeast marketing areas
including all of the State of Kentucky.
The proponents for merging the two consolidated marketing areas
contended that common procurement areas between the orders would result
in different blend prices paid to producers if the orders were not
consolidated. The Federal order reform final decision rejected this
assertion stating that ``As discussed in the proposed rule,
consolidating the Carolina and Tennessee Valley markets with the
Southeast does not represent the most appropriate consolidation option
because of the minor degree of overlapping route disposition and
producer milk between these areas.'' Accordingly, the merger proposals
were not adopted during Federal order reform.
Record evidence indicates that the Appalachian and Southeast order
marketing areas share minor and unchanged commonality in sources of
milk supply, fluid milk route sales, and market participants
(cooperative associations and handlers). However, as discussed later in
this decision, such measures of association between the Appalachian and
Southeast orders can only support a finding to maintain two separate
Federal orders with some minor modifications.
Overlapping Route Sales and Milk Supply. Current proponents of
merging the Appalachian and Southeast marketing areas contend that
there is substantial overlap in route sales and milk supply areas
between the orders. The movements of packaged fluid milk between
Federal milk order marketing areas provide evidence that plants from
more than one Federal milk order are in competition with each other for
fluid milk sales. Overlapping sales patterns can result in the
regulatory shifting of handlers between orders and tends to cause
disorderly marketing conditions by the changed price relationships
between competing handlers and neighboring dairy farmers. As discussed
later in this decision, there is no evidence of disorder occurring
within the Appalachian and Southeast order marketing areas as a result
of plants shifting regulation to other orders.
Overlapping milk supply principally applies when the major
proportions of a market's milk is supplied by the same area. The cost
of a handler's milk is influenced by the location of the milk supply
which affects other competitive factors. The common pooling of milk
produced within the same procurement area facilitates the uniform
pricing of producer milk among dairy farmers. However, all marketing
areas having overlapping procurement areas do not warrant
consolidation. An area that supplies a minor proportion of an adjoining
area's milk needs from minor proportions of its own total milk supply
and has minimal competition among handlers in the adjacent marketing
area for fluid sales, supports concluding that the two marketing areas
are clearly separate and distinct.
Based on record evidence of Federal milk order data, Table 1
illustrates that the Appalachian and Southeast milk orders have
experienced no significant change in overlapping route disposition or
milk procurement since the orders were consolidated.
[[Page 29418]]
[GRAPHIC] [TIFF OMITTED] TP20MY05.000
For the 2000 through 2003 period, route sales by distributing
plants regulated by the Appalachian order into the Southeast marketing
area averaged about 12 percent, while the route sales from plants
regulated by the Southeast order into the Appalachian marketing area
averaged about 2 percent. Record data also indicates that the majority
of the Class I sales by distributing plants regulated by the
Appalachian and Southeast orders are within each of the respective
orders. For the 4-year period, Appalachian order handlers accounted for
about 75 percent of the total Class I sales within the order's
marketing area and plants regulated by the Southeast order accounted
for about 85 percent of the order's total Class I sales.
Of the total producer milk pooled on the Appalachian order, the
amount of producer milk produced in the Southeast marketing area
decreased from 8.5 percent in 2000 to 4.3 percent in 2003. The milk
produced in the Appalachian marketing area that was pooled on the
Southeast order accounted for about 3.2 percent of the total producer
milk pooled on the Appalachian order for the same 4-year period.
In summary, the Table 1 data illustrates that route sales from
Appalachian order handlers into the Southeast marketing area increased
slightly (1 percentage point) from 2000 to 2003, while route sales from
the Southeast order regulated plants into the Appalachian marketing
area remained relatively unchanged for the 4-year period. Likewise, the
data in Table 1 shows that producer milk pooled on the Appalachian
order that originated from the Southeast marketing area declined each
year since 2000, while the producer milk pooled on the Southeast order
that originated from the Appalachian marketing area has remained
unchanged since the orders were consolidated in January 2000.
Table 2, which is based on Federal milk order record data, further
details the source of producer milk pooled on the Appalachian and
Southeast orders.
[[Page 29419]]
[GRAPHIC] [TIFF OMITTED] TP20MY05.001
The Table 2 data illustrates that the share of total producer milk
pooled on the Appalachian order produced within the marketing area
during 2000 through 2003 has declined from about 51 percent to about 45
percent. The amount of producer milk produced in the Southeast
marketing area as a share of the total amount of producer milk pooled
on the Appalachian order also has declined from 8.5 percent in 2000 to
4.3 percent in 2003. At the same time, the amount of producer milk
produced in the Mideast marketing area that was pooled on the
Appalachian order increased from 9.1 percent in 2000 to 19.2 percent in
2003.
During 2000 through 2003, the Northeast, Southeast, and Mideast
marketing areas accounted for about 27 percent of the total producer
milk pooled on the Appalachian order. Of the total producer milk pooled
on the Appalachian order that was produced outside the Appalachian
marketing area during this period, 12.7 percent was produced in the
Southeast marketing area and 12.8 percent in the Northeast marketing
area, and 26 percent in the Mideast marketing area. In addition, record
data indicates that approximately half of the pooled milk on the
Appalachian order is produced in counties within the marketing area and
20 percent to 25 percent of the total pooled milk is supplied by
Federally unregulated areas, mainly from counties in the State of
Virginia, Pennsylvania and New York.
For the 4-year period of 2000 through 2003, record data reveals the
share of the total Southeast order producer milk produced within the
marketing area declined from about 67 percent in 2000 to about 58
percent in 2003. However, this decline was not supplied by producer
milk that was produced in the Appalachian marketing area which remained
relatively unchanged at about 3 percent from 2000 through 2003. Record
data reveals that the supplemental milk for the Southeast order is
produced primarily in the Central and Southwest marketing areas.
Specifically, the share of producer milk produced in the Central
marketing area that was pooled on the Southeast order increased from
8.9 percent in 2000 to 14.2 percent in 2003. In addition, producer milk
produced in the Southwest marketing area that was pooled on the
Southeast order was about 17 percent in 2000, increased to about 22
percent in 2002, and declined to about 17 percent in 2003.
The record data clearly reveals the degree of overlap in milk
supply between the Appalachian and Southeast milk order marketing areas
has
[[Page 29420]]
decreased over the 4-year period since Federal order reform while the
degree of overlap between the Appalachian and Mideast orders has
increased each year. The data further reveals that the primary out-of-
area sources of supplemental milk for the Appalachian order marketing
area are the Northeast and Mideast regions. In contrast, the primary
out-of-area sources of milk supply for the Southeast order marketing
area are the Southwest and Central marketing areas.
Record data reveals that the minimal overlap in milk supply areas
that exists between the Appalachian and Southeast milk order marketing
areas is primarily concentrated along the Tennessee and Kentucky
borders. Such overlap is typical for adjoining marketing areas. The
Federal order reform final decision addressed the issue of overlapping
milk supply areas among adjacent orders by stating that ``an area that
supplies a minor proportion of an adjoining area's milk supply with a
minor proportion of its own total milk production while handlers
located in the area are engaged in minimal competition with handlers
located in the adjoining area likely does not have a strong enough
association with the adjoining area to require consolidation. For a
number of the consolidated areas it would be very difficult, if not
impossible, to find a boundary across which significant quantities of
milk are not procured for other marketing areas.'' (64 FR 16045)
Accordingly, the overlap existing between the Appalachian and Southeast
milk order marketing areas does not warrant an order merger.
Based on the record data, this decision finds that the overlap in
route sales and milk procurement areas between the Appalachian and
Southeast milk order marketing areas does not support merging the two
orders.
Milk Utilization. During 2000 through 2003, the 4-year weighted
average Class I utilizations for the Appalachian and Southeast orders
were 66.9 percent and 63.1 percent, respectively. The level of Class I
utilization is a factor considered in determining whether orders should
be merged but does not form the basis for adopting a merger because it
is a function of how much milk is pooled on an order.
From 2000 through 2004, the non-Class I use of milk (Class II,
Class III, and Class IV) of the Appalachian and Southeast marketing
areas have been different. During this 5-year period, Appalachian order
Class II, Class III and Class IV utilization rates averaged 14.5
percent, 7.30 percent, and 10.1 percent, respectively. For the same
period, the Class II, Class III, and Class IV utilization rates for the
Southeast order averaged 10.8 percent, 17.3 percent, and 8.5 percent,
respectively. This data illustrates that the Appalachian marketing area
is balanced primarily by Class II and Class IV while in the Southeast
marketing area is balanced by Class II and Class III.
Blend Prices. Proponent cooperatives contend that the differences
in blend prices between the Appalachian and Southeast milk orders
result in disruptive marketing conditions. The blend price of an order
is a function of the utilization of milk in the respective classes
(Class I, Class II, Class III, and Class IV) at the corresponding class
prices. The blend prices for the Appalachian and Southeast order have
differed due to the Orders' different class utilization of milk. The
magnitude of the blend price differences is primarily attributed to the
differences between the class prices since the Appalachian marketing
area is mainly balanced by Class II and Class IV and the Southeast
marketing area by Class II and Class III. The blend price difference
further illustrates that the Appalachian and Southeast milk orders have
separate and distinct market characteristics.
For the 5-year period of 2000 to 2004, the annual average blend
price of the Appalachian order has been higher than that of the
Southeast order blend price. This is in part due to the Appalachian
order having a greater percentage of milk utilized in Class I compared
to the Southeast order over the past five years. The range of the blend
price differences for the Appalachian and Southeast orders is mainly
due to differences in the Class III and Class IV prices (i.e., the
``balancing'' class of milk). When the Class III price goes up relative
to the Class IV price, the blend price difference between the two
orders narrows due to the predominance of milk utilized in Class III
among the non-Class I uses in the Southeast marketing area.
Blend price differences between the Appalachian and Southeast
orders have narrowed since the orders were consolidated in 2000. The
differences in the weighted average blend prices for the two orders was
$0.36 per cwt in 2000, $0.24 per cwt in 2001, $0.21 per cwt in 2002,
$0.09 per cwt in 2003, and $0.08 per cwt in 2004. Over the 2000 to 2004
period, the Appalachian order blend price exceeded the Southeast order
blend price by an average of $0.20 per cwt.
A 1995 final decision that consolidated five former Southeastern
orders (Georgia, Alabama-West Florida, New Orleans-Mississippi, Greater
Louisiana, and Central Arkansas) with unregulated counties of four
states to form the Southeast order addressed the issue of blend price
differences among orders (60 FR 25014). The decision stated that blend
price differences between orders may be caused by a number of factors
including order provisions, institutional factors, the location of
surplus milk and differences in class prices. The decision concluded
that the five separate orders were encouraging plants to shift
regulation among the orders which resulted in disorderly marketing
conditions as producers and handler inequity greatly increased.
The current Southeast and Appalachian orders do not experience
disorderly marketing conditions as a result of plants shifting
regulation between orders. This may be attributed to the current lock-
in and unit pooling provisions contained in the Appalachian and
Southeast orders' pooling provisions. The lock-in provisions provide
that a plant located within a marketing area that meets the minimum
performance standards of the order will be regulated by that order even
if the majority of its sales occur in another marketing area. Also, the
unit pooling provisions allow two or more plants located in the
marketing area and operated by the same handler to qualify for pool
status as a unit by meeting the order's total and in-area route
disposition standards as if they were a single distributing plant.
A plant shifting regulation to an order with a lower blend price
could jeopardize the plant's ability to maintain a milk supply. Current
Appalachian and Southeast order provisions allow a plant that meets the
performance standards of the order and is physically located within the
order marketing area to be regulated by the order even if the majority
of its sales are in another marketing area. The provisions were adopted
into the southeastern orders and retained in the consolidated
Appalachian and Southeast orders to allow plants that are associated
with the market and are servicing the market's fluid needs to be
regulated under the order in which they are physically located.
If these provisions were not present in the Appalachian and
Southeast orders, then plants could shift regulation between orders
because of blend price differences which could cause disorderly
marketing conditions to occur. Since record data indicates that the
Appalachian and Southeast orders' blend price differences are
continuing to decrease and there are provisions that prevent plants
from shifting regulation among orders, this decision finds that
[[Page 29421]]
the blend price differences between the two orders do not form a
contributing basis for merging the two marketing areas.
An analysis of the record data reveals that the proposed order
merger would likely lower the blend price paid to dairy farmers of the
Appalachian milk order and increase the blend price paid to dairy
farmers of the Southeast order. The gains to Southeast order dairy
farmers would be offset by losses to Appalachian order dairy farmers by
a similar magnitude.
If the two orders are merged and assuming no significant depooling
in the Federal order system, it is projected that for the period of
2005 through 2009 the blend price paid to dairy farmers of the current
Appalachian order would be reduced by about $0.07 per cwt on average,
while the blend price paid to dairy farmers of the current Southeast
order would be increased by $0.07 per cwt on average. The $0.07 per cwt
decline in the current Appalachian order blend price would cause
average order pool receipts to decline by about 11 million pounds and
average order pool revenues to fall by $6.6 million. For the current
Southeast order, the $0.07 per cwt blend price increase would increase
average order pool receipts by an average of 11 million pounds,
resulting in an average gross pool revenue increase of $6.5 million per
year.
Record testimony by proponent cooperatives indicates that SMA has,
through its pooling of costs and returns, reduced their pay price
differences to their member producers. Thus, a merger of the
Appalachian and Southeast orders would merely increase the blend price
for Southeast order nonmember producers while reducing the blend price
received by Appalachian order nonmember producers. In effect, while
benefiting certain producers, the proposed merged order would
negatively affect certain other dairy farmers.
Based on this analysis, the absence of disorderly marketing
conditions, together with the minimal and unchanged overlap between the
Appalachian and Southeast orders in Class I sales and milk procurement
area, the two orders should not be merged.
Cooperative Associations. Record evidence clearly demonstrates that
there is a strong cooperative association commonality between the
Appalachian and Southeast order marketing areas. During December 2003,
there were a total of 14 cooperatives marketing the milk of members on
the Appalachian and Southeast orders and 9 of these cooperatives
marketed milk on both orders. A number of these cooperatives are
members of SMA and others cooperatives have the milk of their members
that is pooled on the Appalachian and Southeast orders marketed by SMA.
The evidence indicates that proponent cooperatives market the
majority of the milk pooled on the Appalachian and Southeast orders.
For example, for December 2003, proponent cooperatives marketed 62.23
percent of the total producer milk pooled on the Appalachian order and
69.68 percent of the total producer milk pooled on the Southeast order.
While commonality of cooperative associations can be significant it is
not a primary criteria used to determine whether orders should be
merged.
The record indicates that the proposed merger could likely provide
some administrative relief to SMA in marketing the milk of their
cooperative members. However, this outcome is at the expense of
independent dairy farmers who are currently associated with the
Appalachian order.
Market and Structural Changes. Record evidence indicates that there
have been several market and structural changes in the Southeast and
Appalachian markets since the Federal Order Reform process began in
1996 and the implementation of the consolidated orders in January 2000.
These changes include fewer and larger producers and producer
organizations, handler consolidations, and other plant ownership
changes.
From January 2000 through December 2003, the number of dairy
farmers pooled on the Appalachian and Southeast milk orders decreased.
For the Southeast, the decline was 13.6 percent from 4,213 to 3,658,
and the number of dairy farmers pooled on the Appalachian order
decrease by 15.6 percent from 4,974 to 4,200. Milk production in the
Appalachian and Southeast marketing areas has decreased since the
Federal orders were consolidated. This decrease in milk production has
caused additional supplemental milk to be imported into these deficit
milk production markets.
The record reveals that producer organizations associated with the
Appalachian and Southeast order marketing areas changed since the
Federal order reform process. In 1996, there were 14 cooperative
associations marketing the milk of their members on what is now the
Appalachian order and nine Southeast order cooperatives. During
December 2003, the number of cooperative associations marketing
members' milk on the Appalachian and Southeast orders was 12 and 11,
respectively. In 2002, five cooperative associations formed SMA, which
markets the majority of the raw milk supplied to plants regulated by
the Appalachian and Southeast orders.
The number of pool distributing plants on the Appalachian and
Southeast orders for 1996 was 29 and 36, respectively. For December
2003 the number of pool distributing plants for the orders was 24 and
27, respectively. The plant changes that have occurred include
ownership changes, new plant openings, as well as plant closings.
Taken singularly or as a whole, the structural changes that have
occurred from 1996 to present have had no significant impact on
overlapping route disposition and overlapping procurement patterns of
the Appalachian and Southeast orders.
Other order provisions. Proponent cooperatives' proposal to combine
the balances of the Producer Settlement Funds, the Transportation
Credit Balancing Funds, the Administrative Assessment Funds, and the
Marketing Service Funds of the Appalachian and Southeast milk orders
for the proposed merged order is not adopted in this decision. The
proposal is moot since this decision does not recommend merging the two
orders.
Proponent cooperatives offered order provisions for inclusion in
the proposed merged order. These recommendations included adopting for
the proposed merged order provisions that currently are included in the
Appalachian order and/or the Southeast order. The proponent
cooperatives recommended that the proposed merged order include pool
plant provisions currently in the Appalachian order, and proposed the
``touch-base'' requirement of the producer milk provisions include a
``percentage'' production standard instead of a ``days'' production
standard. Since this decision does not recommend adopting the proposal
to merge the Appalachian and Southeast marketing areas, the
recommendations concerning order provisions for the proposed merged
order are moot.
The proponent cooperatives requested that the proposed merged order
contain transportation credit provisions currently applicable to the
Appalachian and Southeast milk orders, with certain modifications. The
proponent cooperatives requested the transportation credit provisions
be modified to increase the maximum rate of assessment to $0.10 per
cwt, change the months a producer's milk is not allowed to be
associated with the market for such producer to be eligible for
transportation credits, and provide the Market Administrator the
authority
[[Page 29422]]
to adjust the 50-percent production eligibility standard. They also
supported the proposed changes for the individual orders if their order
merger proposal was not adopted.
Proponent cooperatives contended that by adopting transportation
credits provisions in the Appalachian and Southeast orders the
Secretary established the inextricable and common supply relationship
between the orders. The proponents state that the proposed merger
simply extends that recognition to provide common uniform prices and
terms of trade for all dairy farmers delivering milk to the market, and
a common set of producer qualification requirements.
This decision finds that the inclusion of transportation credit
provisions in the Appalachian and Southeast orders is not a basis for
merging the two orders. Such provisions were incorporated and
established in the orders based on the prevailing marketing conditions
of each individual order. Also, record indicates that the orders'
transportation credit balancing funds have functioned differently since
2000 with respect to the assessment rates at which handlers made
payments and the payments from the orders' transportation credit
balancing fund for each year since 2001. The Appalachian order waived
the collection of assessments at least two months of each year from
2001 through 2003. The Southeast order, while collecting assessments at
the maximum rate of $0.07 per cwt, has prorated payments from the fund
each year since 2001.
As discussed later in this decision, proposed amendments to the
transportation credit provision of the Appalachian and Southeast orders
are recommended for adoption. The proposed amendments are warranted due
to the declining milk production within the Appalachian and Southeast
marketing areas and the anticipated growing need of importing milk
produced outside the marketing areas to supply the fluid needs of the
markets.
1b. Expansion of the Appalachian Marketing Area
While the proposal for merging the Appalachian and Southeast milk
marketing area is not recommended for adoption, this decision
recommends expanding the current boundaries of the Appalachian milk
marketing area to include certain unregulated counties and cities in
the State of Virginia.
Expansion of the marketing area adjoining the Appalachian marketing
area was contained in the proposal published in the hearing notice as
Proposal 3. The proposal would have expanded the proposed merged order
to included 25 currently unregulated counties and 14 currently
unregulated cities in the State of Virginia. Similarly, a proposal
published in the notice of hearing as Proposal 4 sought the expansion
of the marketing area by adding an area adjoining the Appalachian
marketing area that includes two unregulated cities and two unregulated
counties in State of Virginia. Proposal 3, which also was supported by
proponents of Proposal 4, is adopted.
Proponent cooperatives of Proposal 3 offered that the merger of the
Appalachian and Southeast marketing area be expanded to include the
Virginia counties of Allegheny, Amherst, Augusta, Bathe, Bedford,
Bland, Botetourt, Campbell, Carroll, Craig, Floyd, Franklin, Giles,
Grayson, Henry, Highland, Montgomery, Patrick, Pittsylvania, Pulaski,
Roanoke, Rockbridge, Rockingham, Smyth, and Wythe) and Virginia cities
of Bedford, Buena Vista, Clinton Forge, Covington, Danville, Galax,
Harrisonburg, Lexington, Lynchburg, Martinsville, Radford, Roanoke,
Salem and Staunton.
The proponent cooperatives' witness testified that the addition of
the 25 counties and the 14 cities would properly change the regulatory
status of a Dean Foods' Morningstar Foods plant located at Mount
Crawford, Virginia, from the Northeast order to the Appalachian order.
Also, the witness stated the proposed expansion would have the effect
of fully and continuously regulating under the Appalachian order two
fluid milk distributing plants (the Kroger Company's Westover Dairy
plant, located in Lynchburg, Virginia, and the National Dairy Holdings'
Valley Rich Dairy plant, located in Roanoke, Virginia) under the
proposed merged order.
The witness said the Dean Foods Company's Mount Crawford plant
alternates between partially regulated and fully regulated status under
the Northeast milk order. According to the witness, in order for the
plant to procure an adequate supply of milk, producers delivering to it
must receive a blend price comparable with the blend price generated
under the proposed merged order, if adopted.
The proponent cooperatives' witness stated that the milk supply
located near Dean Foods' Mount Crawford, Virginia, plant is an
attractive source of supply for plants that are fully regulated by the
Appalachian order that are located in southern Virginia, North
Carolina, South Carolina, and eastern Tennessee. The witness indicated
that the impact of this proposal on the Virginia State Milk Commission
and Virginia base-holder producers would be insignificant. The witness
was of the opinion that, if there were any impact on Virginia base-
holders producers, it would be positive--reflecting the higher blend
price at Mount Crawford, Virginia, for the plants under the proposed
merged order versus the Northeast order.
The proponent cooperatives submitted a post-hearing brief
supporting the expansion of the proposed merged order area to include
the additional 25 counties and 14 cities in Virginia.
A witness representing the Kroger Company (Kroger) testified in
support of Proposal 4 to expand the proposed merged order to include
two currently unregulated counties (Campbell and Pittsylvania), and two
currently unregulated cities (Lynchburg and Danville) in the State of
Virginia. The witness stated that Kroger owns and operates four pool
distributing plants associated with the Southeast and Appalachian milk
orders, including Westover Dairy located in Lynchburg, Virginia. The
witness also testified in support of adopting the current Appalachian
order pool plant definition.
According to the Kroger witness, the Appalachian order pool
distributing plant provisions require that at least 25 percent of a
plant's total route disposition must be to outlets within the marketing
area. This requirement, explained the witness, has restricted Kroger's
ability to expand its Class I sales into areas outside the Appalachian
marketing area, including the area directly associated with the plant's
physical location (Lynchburg, Virginia).
The Kroger witness noted that Westover Dairy has been a fully
regulated plant on the Appalachian order since January 2000, and prior
to reform, the plant was regulated on the Carolina order--one of the
former orders combined to form the Appalachian order. According to the
Kroger witness, the total in-area route disposition standard increased
from 15 percent to 25 percent when the consolidated and reformed
Appalachian order became effective in January 2000. This change, the
witness contended, has created an undue hardship on Westover Dairy and
has force it to relinquish sales in areas outside of the Appalachian
market to maintain its pool status under the order.
The witness concluded by stating that Kroger prefers Proposal 3--
the larger expansion--which would not only expand the order area to
include their plant located at Lynchburg, Virginia, but would allow a
further expansion of
[[Page 29423]]
Class I sales into other surrounding areas.
The witnesses for MD&VA, ADC, Lone Star, and DMC testified in
support of Proposal 3 to expand the proposed Southeast milk order area
to include certain unregulated counties and cities in the State of
Virginia as proposed by the proponent cooperatives. The witnesses
stated that the cooperatives were not opposed to the expansion of the
proposed Southeast milk marketing area into the smaller territory in
the State of Virginia as proposed by Kroger but stated the larger
expanded area in Proposal 3 was preferable.
The MD&VA witness explained that some of the its member producers
are located in the proposed expanded area and that the cooperative
delivers the milk of producers holding Virginia Milk Commission base to
plants fully regulated under the Appalachian milk order. According to
the witness, the milk of MD&VA member producers is marketed to Dean
Foods' Morningstar Foods plant located in Mount Crawford, Virginia,
which would become a pool distributing plant if the proposed merged
order and the expansion to Virginia counties and cities are adopted.
Witness appearing on behalf of Dean Foods and Prairie Farms stated
they were not opposed to Proposals 3 and 4. Thus, there was no
opposition to the adoption of these proposals.
This decision recommends adopting proposed amendments to the
Appalachian order that would expand the marketing area to include 25
currently unregulated counties and 14 cities in the State of Virginia.
The proposed amendments would cause the full and continuous regulation
under the Appalachian order of three fluid milk distributing plants,
one of which has been shifting regulatory status under the Northeast
order. The plants are located in Lynchburg, Virginia, Roanoke,
Virginia, and Mount, Crawford, Virginia. Because of Appalachian order's
lock-in provision, these plants, which would be physically located
within the Appalachian marketing area, would continue to be regulated
under the Appalachian order even if the majority of their sales are in
another Federal order marketing area.
The proposed expansion would continue the regulation of two fluid
milk distributing plants (Kroger's Westover Dairy plant, Lynchburg,
Virginia, and National Dairy Holdings' Valley Rich Dairy plant,
Roanoke, Virginia) under the Appalachian order. The proposed expansion
also would shift the regulation of the Dean Foods' Morningstar Foods
plant, Mount Crawford, Virginia, from the Northeast order to the
Appalachian order.
The Kroger's Westover Dairy plant has been regulated by the
Appalachian order since the order was consolidated in January 2000.
Current Appalachian order pool plant provisions require that at least
25 percent of a distributing plant's total Class I sales be to outlets
within the marketing area. Prior to the reform of Federal milk orders,
the former orders that were combined into the Appalachian order
contained a 15 percent in-area route disposition standard for pool
distributing plants.
Record evidence indicates that the current in-area Class I route
sales standard likely is limiting the growth potential of Kroger's
Westover Dairy plant, located in Lynchburg, Virginia. It is not the
intent of Federal milk orders to inhibit the growth of handlers.
Federal orders are designed to provide for the orderly exchange of milk
from the dairy farmer to the first buyer (handler). The orders also
provide minimum performance standards to ensure that the fluid needs of
the market are satisfied. Accordingly, the adoption of the expansion
proposal should ensure that Kroger's Westover Dairy plant is able to
maintain a milk supply in competition with nearby Appalachian order
plants.
In the case of Dean Foods' Morningstar Foods plant in Mount
Crawford, Virginia, the proposed amendments would eliminate the current
disruption and disorder caused by the plant shifting its regulatory
status from fully to partially regulated under the Northeast order.
Such shifting from fully to partially regulated status under an order
may cause financial harm to producers supplying that plant.
The record indicates that the Kroger's Westover Dairy plant and
Dean Foods' Morningstar plant are supplied by producers located near
the plants and that the plants compete with other Appalachian order
plants in milk procurement. This decision finds that orderly market
conditions would be preserved by the adoption of the proposed expansion
amendments. The regulation of no other plants should be affected by the
adoption of these proposed amendments. In addition, the proposed
expansion of the Appalachian marketing area is not expected to have a
negative impact on the blend price paid to producers.
1c. Transportation Credits Provisions
The maximum rates of the transportation credit assessment for the
Appalachian and Southeast orders should each be increased by 3-cents
per hundredweight. Increasing the transportation assessment rates will
tend to minimize the exhaustion of the transportation credit balancing
fund when the need for importing supplemental bulk milk from outside of
the marketing areas to meet Class I needs occurs. Additionally, the
Market Administrators of the orders should be given the discretionary
authority to increase or decrease the 50 percent production standard
for determining the milk of a dairy farmer that is eligible for
transportation credits. Such dairy farmer should not have been a
producer under the order during more than two of the immediately
preceding months of February through May for the milk of the dairy
farmer to be eligible for receipt of a transportation credit.
The Appalachian and Southeast orders each contain a transportation
credit balancing fund from which a payment is made to partially offset
the cost of moving milk into each marketing area to meet fluid milk
demands. The fund is the mechanism through which handlers deposit on a
monthly basis payment at specified rates for eventual payout as defined
by a specified formula. The orders' transportation credit provisions
provide payments typically during the short production months of July
through December to handlers who incur hauling costs importing
supplemental milk to meet the fluid demands of the market.
Transportation credit payments are restricted to bulk milk received
from plants regulated by other Federal orders or shipped directly from
farms of dairy farmers located outside the marketing areas and who are
not regularly associated with the market. The handler payments into the
funds are applicable to the Class I milk of producers who supply the
market throughout the year. The Market Administrators of the orders are
authorized to adjust payments to and from the relevant transportation
credit balancing fund.
The transportation credit provisions of the Appalachian and
Southeast orders differ by the assessment rate at which handlers make
payments to the transportation credit balancing fund. The maximum rate
of assessment for the Appalachian order is $0.06 per cwt while the
maximum rate of assessment for the Southeast order is $0.07 per cwt.
A feature of the proposal for merging the Appalachian and Southeast
orders was providing for a maximum transportation assessment rate of
10-cents for the proposed Southeast order. This would essentially
represent a 3-cent per cwt increase from the current Southeast order,
and a 3.5-cent increase from the Appalachian order. While there was no
separate proposal for
[[Page 29424]]
increasing the assessment rate for the transportation credit fund, it
was made clear by the proponents that in the absence of adopting the
proposed merger an increase in the transportation credit assessment
rate was warranted and supported for the current orders.
With regard to the transportation credit issue, the proponent
cooperatives' witness testified that the maximum transportation credit
assessment rate should be increased to $0.10 per cwt. According to the
witness, the increase is necessary to eliminate insufficient funding
for transportation credit claims that would likely have been paid had
sufficient funds been available. According to the witness, that the
transportation credit rate of $0.07 per cwt for the current Southeast
order has been at the maximum rate since the inception of the order,
but that payments from the transportation credit balancing fund were
exhausted in 2001, 2002, and 2003 resulting in a prorating of dollars
from the transportation credit balancing fund to the amount of
transportation claims submitted for receipt of the credit. In contrast,
the witness noted, the transportation credit fund for the Appalachian
order has been sufficiently funded since 2000 thus enabling the payment
of all claims.
The proponent cooperatives' witness was of the opinion that the
exhaustion of transportation credit funding in the Southeast order
resulted in inequitable supplemental milk costs to handlers between the
two orders. The witness testified that handlers procuring supplemental
milk supplies for the Appalachian order were reimbursed at 100 percent
of their claimed credits while handlers procuring supplemental milk
supplies for the Southeast order were reimbursed at approximately 50
percent of their claimed credits. According to the witness, the unequal
payout between the two orders results in disorderly marketing
conditions exhibited by inequitable costs for producer milk among
handlers.
Dean Foods and Prairie Farms voiced opposition to the proponents'
proposed amendments to increase the maximum rate of assessments and
increase the amount of milk that would be eligible for transportation
credits. Dean Foods and Prairie Farms pointed out that the proposals to
incorporate transportation credit provisions into the Southeastern
orders were strongly opposed by some fluid milk processors and some
dairy farmers. They noted that the intent and purpose of transportation
credit provisions was to only pay a portion of the cost associated with
hauling supplemental milk to the markets to meet fluid needs.
In their brief, Dean Foods and Prairie Farms stated there is no
reason to increase the rate of assessment. Changing the rate of
assessment, they contended, would effectively change the system of
pricing without considering the impact on other marketing orders.
In opposition to any change in the rate of transportation credits,
a witness for Georgia Milk Producers, Inc. (GMP), testified that
increasing the assessment rate would generate more revenue to be paid
to truck drivers instead of paying higher prices to local dairy
farmers. According to the witness, the price of milk paid to local
dairy farmers should be increased rather than subsidizing additional
outlays for transportation costs.
The GMP witness suggested that instead of increasing the
transportation credit assessment rate, a financial incentive should be
initiated for dairy farmers to encourage milk production during the
fall months when fluid milk demands are highest. According to the
witness, if the incentive plan still does not cover the local milk
production deficits, only then should the assessment rate for
transportation credits be increased. The witness was of the opinion
that an incentive plan encouraging local milk production would reduce
hauling costs because less milk would be imported into the Southeast
market. The witness also was of the opinion that a financial incentive
plan would lower balancing costs by encouraging the movement of milk
supplies located near processing plants.
Current Appalachian and Southeast order transportation credit
provisions have been a feature of the orders, or predecessor orders,
since 1996. The need for transportation credits arose from the
consistent need to import milk from many areas outside of these
marketing areas during certain months of the year when milk production
in the areas is not sufficient to meet Class I demands. The
transportation credit provisions provide payments to handlers to cover
some of the costs of importing supplemental milk supplies into the
Appalachian and Southeast marketing areas need during the short
production months of July through December. The provisions also are
designed to limit the ability of producers who are not normally pooled
on these orders from pooling their milk on the Appalachian and
Southeast orders during the flush production months when such milk is
not needed to supply fluid needs.
While Federal milk order reform made modifications to certain
features of the transportation credit fund provisions of the
Appalachian and Southeast orders, the maximum assessment rate at which
payments are collected was not modified. The current maximum rate of
$0.065 cents per cwt for the Appalachian order has been sufficient to
meet most of the claims made by handlers applying for transportation
credit. The record reveals that since implementation of milk order
reform in January 2000, the market administrator for the Appalachian
order waived assessing handlers in at least two months of each year
from 2001 through 2003.
For the current Southeast order, the current maximum transportation
credit rate of $0.07 per cwt has not been sufficient to cover hauling
cost claims by handlers. As a result, the market administrator of the
Southeast order has prorated payments from the transportation credit
balancing fund since 2001.
Even though this decision does not recommend the merging of the
current Southeast and Appalachian marketing area, the fundamental
purposed of the transportation credit fund provisions of the orders are
strongly supported by the proponent cooperatives. This support is
independent of providing for a new and larger Southeast milk marketing
order.
An increase in the maximum transportation credit assessment rate
for the Appalachian and Southeast orders is warranted on the basis of
declining milk production within the Appalachian and Southeast
marketing areas. For example, the final decision of Federal milk order
reform anticipated that the about two-thirds of the milk supply for the
Appalachian order would be produced within the marketing areas, with
supplemental milk supplies from unregulated area to the north in
Virginia and Pennsylvania (based on 1997 data). Since implementation of
order reform in January 2000, record evidence reveals that only 50
percent of the Appalachian milk supply is produced within the marketing
area. The trend of lower in-area milk production strongly suggests that
the anticipated future needs of relying on milk supplies from outside
the marketing area will only grow and that such growth necessarily
warrants an increase in the Appalachian transportation credit
assessment rate. The Southeast marketing area exhibits the same trend.
To the extent that assessments are not needed to meet expected
transportation credit claims, provisions that provide authority to the
market administrator to set the assessment rate at a level deemed
sufficient or to waive assessments should be allowed. Additionally, the
transportation credit provisions of the Appalachian and Southeast
orders
[[Page 29425]]
prevent the accumulation of funds beyond actual handler claims. In this
regard, increasing the transportation credit rate will not result in an
unwarranted accumulation of funds beyond what is needed to pay handler
claims.
As part of the proposed merged marketing areas and orders, the
proponent cooperatives' witness proposed that any producer that is
located outside of the marketing area, would be eligible for
transportation credits if that producer did not pool more than 50
percent of the producers farm milk production during the months of
March and April. The witness testified that the market administrator
should also be given the discretionary authority to adjust the 50
percent limit based on the prevailing supply and demand conditions for
milk in the area.
The current transportation credit provisions of the Appalachian and
Southeast orders specify that transportation credits will apply to the
milk of a dairy farmer who was not a ``producer'' under the order
during more than 2 of the immediately preceding months of February
through May, and not more than 50 percent of the production of the
dairy farmer during those two months, in aggregate, was received as
producer milk under the orders during those two months. These
provisions provide the basis for determining the milk of a dairy farmer
that is truly supplemental to the market's fluid needs. The provision
specifies the months of February through May--the period when milk
production is greatest--as the months used to determine the eligibility
of a producer whose milk is needed on the market.
The market administrators of the orders should be given
discretional authority to adjust the 50 percent eligibility standard
for producer milk receiving transportation credits based on the
prevailing marketing conditions within the marketing area. The market
administrator should have the authority to increase or decrease this
requirement because it is consistent with authorities already provided
for supply plant performance standards and diversion limit standards.
Accordingly, the proposed change to the transportation credit
provisions of the Appalachian and Southeast orders is recommended for
adoption.
This decision does not recommend changing the period the milk of a
dairy farmer is not allowed to be associated with the market for such
dairy farmer's milk to be eligible for transportation credits. If the
months were modified from February through May to March and April, the
definition of supplemental milk under the transportation credit
provisions would effectively change. Supplemental milk for purposes of
determining the eligibility of transportation credits is that milk that
is not regularly associated with the market. The proposed change would
allow supplemental milk to be delivered to a pool plant all twelve
months, potentially lowering the uniform price during those high
production months by pooling additional milk when is not needed for
fluid use.
By retaining the months of February through May and allowing the
Market Administrators of the Appalachian and Southeast orders to adjust
the 50 percent production standard, the current definition of
supplemental milk remains intact. The orders' market administrator
would be allowed to increase or decrease the 50 percent production
standard, if warranted, based on current marketing conditions.
2. Promulgation of a New ``Mississippi Valley'' Milk Order
A proposal, published in the hearing notice as Proposal 5, seeking
to split from the current Southeast marketing area and forming a new
Mississippi Valley milk marketing area and order is not recommended for
adoption.
A witness appearing on behalf of Dean Foods and Prairie Farms
testified in support of Proposal 5. In splitting the current Southeast
marketing area, a new marketing area, to be named the Mississippi
Valley order, would include the area of the existing Southeast
marketing area west of the Alabama-Mississippi borderline including the
States of Mississippi, Louisiana, Arkansas. According to the witness,
this new marketing area would extend northward through the relevant
portions of Tennessee and Kentucky, and would include southern
Missouri. The second order, according to the witness, would consist of
the remainder of the current Southeast marketing area, i.e., Georgia, a
portion of the western panhandle of Florida, and Alabama.
The Dean Foods-Prairie Farms witness, and others supporting the
adoption of Proposal 5, asserted that increasing the number of Federal
milk marketing areas and orders would provide the economic incentives
for more efficient movement of milk and increase the blend price
received by producers who supply the needs of the Class I market.
According to the witnesses, splitting the Southeast order into two
orders would reduce transportation costs and improve the efficient
operation of the transportation credit balancing fund in each proposed
new marketing area by more efficiently attracting milk to the Class I
market and decreasing the need for hauling milk from longer distances.
The Dean Foods-Prairie Farms witness testified that there are two
major incentives to ship milk to distributing plants--the blend price
paid by pool distributing plants and the blend price paid for diverted
milk. According to the witness, there are two disincentives to ship
milk to a pool distributing plant under any order--the net
transportation cost of shipping milk and the alternative blend prices
in other markets that may attract milk to plants in those other
markets. The witnesses cited milk deficit areas in southern Illinois
and St. Louis, Missouri, as examples of areas where, in the opinion of
the witnesses, blend price differences result in a failure to attract
enough milk to adequately serve the Class I market. The witness
asserted that the establishment of a Mississippi Valley order would
likely result in blend price differences between the new areas which
would provide producers the economic incentives of receiving higher
blend prices while incurring lower transportation costs.
The Dean Foods-Prairie Farms witness testified that a national
hearing may be justified to more fully consider the border, pricing,
and milk deficit issues and alternatives to proposals (like Proposals 1
and 5) advanced to merge or to split the Southeast marketing area.
According to the witness, when marketing area borders are changed, such
change affects all marketing areas in the Federal order milk order
system. The witness was of the opinion that considering border issues
would necessarily require a broad rethinking of the marketing areas of
the entire Federal order program and that a national hearing may be the
most appropriate venue to consider these affects.
A witness for GMP testified that the expansions of the Southeast
marketing area prior to Federal milk order reform, and as a result of
Federal order reform, have successively reduced income to Georgia
producers. The witness explained that the expansions of the marketing
area have discouraged local milk production and encouraged movements of
milk from outside the marketing area. According to the witness, the
declining ability of local production to meet the Class I needs of the
market, and the increased balancing requirements of an expanded
marketing area, have increased costs while reducing revenues to Georgia
dairy farmers.
[[Page 29426]]
In the opinion of the GMP witness, the establishment of a separate
Mississippi Valley marketing area and order and a smaller Southeast
marketing area would have positive benefits for Georgia milk producers.
The witness explained that as a smaller Southeast marketing area, the
Georgia market would likely experience lower balancing costs and
expanded local production to meet the growing Class I needs of the
market.
A witness for proponents of Proposal 1 testified in opposition to
adopting a new Mississippi Valley marketing area by splitting it from
the current Southeast marketing area. According to the witness, the
proposed new marketing area would not lead to lower transportation
costs but instead may lead to increased administrative difficulties
with transportation credit balancing funds. The witness was of the
opinion that blend price enhancement for the proposed smaller Southeast
marketing area would be achieved at the expense of producers pooled on
the proposed new Mississippi Valley order.
The opposition witness was of the opinion that blend prices for the
proposed smaller Southeast marketing area may increase to levels that
would exacerbate differences between the blend prices of the new
smaller Southeast and the Appalachian order and may give rise to
unintended market disruptions. The witness was of the opinion that a
smaller Southeast marketing area and order also may result in
administrative difficulties in the operation of transportation credit
balancing funds among the three orders and may lead to the inefficient
movements of milk. The witness expressed the opinion that splitting the
Southeast marketing area would not address the concerns that proponents
of Proposal 1 have raised regarding overlapping sales and inefficient
milk movement issues between the Appalachian and Southeast marketing
areas. The witness indicated that these issues would remain unresolved
if the Southeast marketing area was split and if the Southeast and
Appalachian marketing areas were not merged.
A post hearing brief by the proponents of Proposal 5 reiterated
their position that creating more, rather than fewer, blend price
differences will provide incentives to ship milk to markets where the
milk is demanded. In addition, the brief reiterated that splitting the
Southeast marketing area will reduce transportation costs and result in
more efficient movement of milk in a smaller Southeast marketing area
and a Mississippi Valley marketing area. The brief also called for the
including the Kentucky counties of Ballard, Calloway, Carlisle, Fulton,
Graves, Hickman, Marshall, and McCracken into the smaller Southeast
order if Proposal 5 is adopted.
The proposal to split the current Southeast marketing area hinges
on the assertions that geographically smaller marketing areas tend to
reduce transportation and balancing costs and increase blend prices for
pooled producers in each of the newly defined marketing areas. The
record does not contain specific evidence to support these conclusions.
The record lacks evidence to support concluding that the adoption of
Proposal 5 would lower transportation costs, increase local milk
production, and reduce balancing costs. The same is true for concluding
that local milk production would be encouraged and increased to the
extent that transportation expenses, and the need for continued
transportation credit fund payments, would be significantly reduced
while bringing forth a sufficient supply of milk to meet the Class I
needs of the proposed marketing areas.
Opponents of Proposal 5 argued that blend price increases from
splitting the Southeast marketing area may not occur and that lower
transportation cost may not be realized. However, the record does not
contain information necessary for determining if either the positions
of the proponents or opponents of Proposal 5 are valid.
This decision does not recommend the adoption of Proposal 5. The
record is insufficiently persuasive in demonstrating the efficiencies
in milk movements for handlers as advanced by its proponents.
3. Eliminating the Simultaneous Pooling of the Same Milk on a Federal
Milk Order and a State-operated Milk Order that Provides for Marketwide
Pooling
A proposal, published in the hearing notice as Proposal 6, seeking
to prohibit the simultaneous pooling of the same milk on the
Appalachian or Southeast milk marketing orders and on a State-operated
order that provides for the marketwide pooling of milk is recommended
for adoption. Currently, neither the Appalachian or Southeast orders
have a provision that would prevent the simultaneous pooling of the
same milk on the order and on a State-operated order that provides for
marketwide pooling.
The proponents of Proposal 6, Deans Foods and Prairie Farms
testified that the simultaneous pooling of milk on more than one
marketing order was prohibited between all Federal milk orders.
According to the Dean Food-Prairie Farms' witnesses, a loophole was
inadvertently created during the consolidation of Federal orders
permitting double pooling of the same milk on a Federal milk marketing
order and on a State-operated order that, like a Federal order,
provides for the marketwide pooling of producer milk. (The double
pooling of milk has become known as ``double dipping'')
According to the Dean Food-Prairie Farms' witnesses, this loophole
has been exploited for financial gain by some parties at the expense of
pooled producers in other Federal orders until prohibited by subsequent
milk order amendments. The proponents testified that proposals similar
to Proposal 6 have been adopted in the Upper Midwest, Pacific
Northwest, and Central Federal milk orders.
Proponents testified that prohibition of double dipping in the
Southeast and Appalachian orders would close a potential loophole in
these orders or in a successor order if these orders were merged. The
witnesses testified that the pooling of milk regulated by Virginia and
Pennsylvania milk programs would not be affected by the prohibition of
double pooling. According to the witnesses, milk that is pooled on
these State milk programs does not receive extraordinary benefits that
would have an impact on Federal milk order pools. No opposition
testimony was presented.
Since the 1960's the Federal milk order program has recognized the
harm and disorder that resulted to both producers and handlers when the
same milk of a producer was simultaneously pooled on more than one
Federal order. When this occurs, producers do not receive uniform
minimum prices, and some handlers receive unfair competitive
advantages. The need to prevent ``double pooling'' became critically
important as distribution areas expanded, orders merged, and a national
pricing system was adopted. Milk already pooled under a State-operated
program and able to simultaneously be pooled under a Federal order
creates the same undesirable outcomes that allowing milk to be pooled
on two Federal orders used to cause and subsequently corrected.
There are other State-operated milk order programs that provide for
marketwide pooling. For example, New York operates a milk order program
for the western region of that State. A key feature explaining why this
State-operated program has operated for years alongside the Federal
milk order program is the provision in the State pool that excludes
milk from the State pool when the same milk is already pooled under a
Federal order. Other
[[Page 29427]]
States with marketwide pooling similarly do not allow double-pooling of
Federal order milk.
The record supports that the Appalachian, Southeast, and possible
successor orders should be amended to preclude the ability to
simultaneously pool the same milk on the order if the milk is already
pooled on a State-operated order that provides for marketwide pooling.
Proposal 6 offers a reasonable solution for prohibiting the same milk
to draw pool funds from Federal and State marketwide pools
simultaneously. It is consistent with the current prohibition against
allowing the same milk to participate simultaneously in more than one
Federal order pool. Adoption of Proposal 6 will not establish any
barrier to the pooling of milk from any source that actually
demonstrates performance in supplying the Appalachian and Southeast
markets' Class I needs.
Evidence presented at the hearing establishes that milk that can be
pooled simultaneously on a State-operated order and a Federal order,
would render the Appalachian and Southeast milk orders unable to
establish prices that are uniform to producers and to handlers. This
shortcoming of the pooling provisions allows milk which was pooled on a
state order to be pooled milk on a Federal order. Such milk therefore
could not provide a reasonable or consistent service to meet the needs
of the Class I market because it was committed to the State order.
No record evidence was presented illustrating or documenting
current double pooling of milk in the Appalachian and Southeast orders.
Consequently, it is determined that emergency marketing conditions do
not exist and the adoption of Proposal 6 should be included as part of
the issuance of a recommended decision.
4. Producer-Handler Provisions
A decision considered at the hearing regarding the regulatory
status of producer-handlers will be addressed in a separate decision.
Conforming Change
This decision recommends amending the Appalachian and Southeast
orders to appropriately reference the Deputy Administrator of Dairy
Programs.
Rulings on Proposed Findings and Conclusions
Briefs and proposed findings and conclusions were filed on behalf
of certain interested parties. These briefs, proposed findings and
conclusions, and the evidence in the record were considered in making
the findings and conclusions set forth above. To the extent that the
suggested findings and conclusions filed by interested parties are
inconsistent with the findings and conclusions set forth herein, the
requests to make such findings or reach such conclusions are denied for
the reasons previously stated in this decision.
General Findings
The findings and determinations hereinafter set forth supplement
those that were made when the Appalachian and Southeast orders were
first issued and when they were amended. The previous findings and
determinations are hereby ratified and confirmed, except where they may
conflict with those set forth herein.
(a) The tentative marketing agreements and the orders, as hereby
proposed to be amended, and all of the terms and conditions thereof,
will tend to effectuate the declared policy of the Act;
(b) The parity prices of milk as determined pursuant to section 2
of the Act are not reasonable in view of the price of feeds, available
supplies of feeds, and other economic conditions which affect market
supply and demand for milk in the marketing areas, and the minimum
prices specified in the tentative marketing agreements and the orders,
as hereby proposed to be amended, are such prices as will reflect the
aforesaid factors, insure a sufficient quantity of pure and wholesome
milk, and be in the public interest; and
(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.
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 Appalachian and Southeast 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 Part 1005 and 1007
Milk marketing orders.
For the reasons set forth in the preamble 7 CFR Parts 1005 and 1007
are amended as follows:
PART 1005--MILK IN THE APPALACHIAN MARKETING AREA
1. The authority citation for 7 CFR part 1005 continues to read as
follows:
Authority: 7 U.S.C. 601-674.
2. Section 1005.2 is amended by revising the Virginia counties and
cities to read as follows:
Sec. 1005.2 Appalachian marketing area.
* * * * *
Virginia Counties and Cities
Alleghany, Amherst, Augusta, Bath, Bedford, Bland, Botetourt,
Buchanan, Campbell, Carroll, Craig, Dickenson, Floyd, Franklin, Giles,
Grayson, Henry, Highland, Lee, Montgomery, Patrick, Pittsylvania,
Pulaski, Roanoke, Rockbridge, Rockingham, Russell, Scott, Smyth,
Tazewell, Washington, Wise, and Wythe; and the cities of Bedford,
Bristol, Buena Vista, Clifton Forge, Covington, Danville, Galax,
Harrisonburg, Lexington, Lynchburg, Martinsville, Norton, Radford,
Roanoke, Salem, Staunton, and Waynesboro.
* * * * *
3. Section 1005.13 is amended by revising the introductory text and
adding a new paragraph (e), to read as follows:
Sec. 1005.13 Producer milk.
Except as provided for in paragraph (e) of this section, Producer
milk means the skim milk (of the skim equivalent of components of skim
milk) and butterfat contained in milk of a producer that is:
* * * * *
(e) Producer milk shall not include milk of a producer that is
subject to inclusion and participation in a marketwide equalization
pool under a milk classification and pricing program imposed under the
authority of a State government maintaining marketwide pooling of
returns.
* * * * *
Sec. 1005.81 [Amended]
4. In Sec. 1005.81(a), remove ``$0.065'' and add, in its place,
``$0.095''.
Sec. 1005.82 [Amended]
5. In Sec. 1005.82, paragraph (b) is revised by removing the words
``Director of the Dairy Division'' and adding, in their place, the
words ``Deputy Administrator of Dairy Programs'' and adding a new
paragraph (c)(2)(iv) to read as follows:
[[Page 29428]]
Sec. 1005.82 Payments from the transportation credit balancing fund.
* * * * *
(c) * * *
(2) * * *
(iv) The market administrator may increase or decrease the milk
production standard specified in paragraph (c)(2)(ii) of this section
if the market administrator finds that such revision is necessary to
assure orderly marketing and efficient handling of milk in the
marketing area. Before making such a finding, the market administrator
shall investigate the need for the revision either on the market
administrator's own initiative or at the request of interested persons.
If the investigation shows that a revision might be appropriate, the
market administrator shall issue a notice stating that the revision is
being considered and inviting written data, views, and arguments. Any
decision to revise an applicable percentage must be issued in writing
at least one day before the effective date.
* * * * *
PART 1007--MILK IN THE SOUTHEAST MARKETING AREA
6. Section 1007.13 is amended by revising the introductory text and
adding a new paragraph (e), to read as follows:
Sec. 1007.13 Producer milk.
Except as provided for in paragraph (e) of this section, Producer
milk means the skim milk (of the skim equivalent of components of skim
milk) and butterfat contained in milk of a producer that is:
* * * * *
(e) Producer milk shall not include milk of a producer that is
subject to inclusion and participation in a marketwide equalization
pool under a milk classification and pricing program imposed under the
authority of a State government maintaining marketwide pooling of
returns.
* * * * *
Sec. 1007.81 [Amended]
7. In Sec. 1007.81(a), remove ``$0.07'' and add, in its place,
``$0.10''.
Sec. 1007.82 [Amended]
8. In Sec. 1007.82, paragraph (b) is revised by removing the words
``Director of the Dairy Division'' and adding, in their place, the
words ``Deputy Administrator of Dairy Programs'' and adding a new
paragraph (c)(2)(iv) to read as follows:
Sec. 1007.82 Payments from the transportation credit balancing fund.
* * * * *
(c) * * *
(2) * * *
(iv) The market administrator may increase or decrease the milk
production standard specified in paragraph (c)(2)(ii) of this section
if the market administrator finds that such revision is necessary to
assure orderly marketing and efficient handling of milk in the
marketing area. Before making such a finding, the market administrator
shall investigate the need for the revision either on the market
administrator's own initiative or at the request of interested persons.
If the investigation shows that a revision might be appropriate, the
market administrator shall issue a notice stating that the revision is
being considered and inviting written data, views, and arguments. Any
decision to revise an applicable percentage must be issued in writing
at least one day before the effective date.
* * * * *
Dated: May 13, 2005.
Kenneth C. Clayton,
Acting Administrator, Agricultural Marketing Service.
[FR Doc. 05-9962 Filed 5-19-05; 8:45 am]
BILLING CODE 3410-02-P