Milk in the Pacific Northwest and Arizona-Las Vegas Marketing Areas; Final Decision on Proposed Amendments to Marketing Agreement and to Orders, 74166-74191 [05-24024]

Agencies

• Agricultural Marketing Service
• DEPARTMENT OF AGRICULTURE

[Federal Register Volume 70, Number 239 (Wednesday, December 14, 2005)]
[Proposed Rules]
[Pages 74166-74191]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-24024]



[[Page 74165]]

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Part IV





Department of Agriculture





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Agricultural Marketing Service



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7 CFR Parts 1124 and 1131



Milk in the Pacific Northwest and Arizona-Las Vegas Marketing Areas; 
Final Decision on Proposed Amendments to Marketing Agreement and to 
Orders; Proposed Rule

Federal Register / Vol. 70, No. 239 / Wednesday, December 14, 2005 / 
Proposed Rules

[[Page 74166]]


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DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

7 CFR Parts 1124 and 1131

[Docket No. AO-368-A32, AO-271-A37; DA-03-04B]


Milk in the Pacific Northwest and Arizona-Las Vegas Marketing 
Areas; Final Decision on Proposed Amendments to Marketing Agreement and 
to Orders

AGENCY: Agricultural Marketing Service, USDA.

ACTION: Proposed rule.

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SUMMARY: This document is the final decision proposing to adopt changes 
to provisions of the producer-handler definitions of the Pacific 
Northwest and Arizona-Las Vegas orders as contained in a Recommended 
Decision published in the Federal Register on April 13, 2005. This 
document is subject to approval by producers.

FOR FURTHER INFORMATION CONTACT: Jack Rower, Marketing Specialist or 
Gino Tosi, Associate Deputy Administrator for Order Formulation and 
Enforcement, USDA/AMS/Dairy Programs, Order Formulation and Enforcement 
Branch, STOP 0231-Room 2971, 1400 Independence Avenue SW., Washington, 
DC 20250-0231, (202) 720-2357 or (202) 690-1366, e-mail addresses: 
jack.rower@usda.gov or gino.tosi@usda.gov.

SUPPLEMENTARY INFORMATION: This administrative action is governed by 
the provisions of Sections 556 and 557 of Title 5 of the United States 
Code and, therefore, is excluded from the requirements of Executive 
Order 12866.
    The amendments to the rules proposed herein have been reviewed 
under Executive Order 12988, Civil Justice Reform. They are not 
intended to have a retroactive effect. If adopted, the proposed 
amendments would not preempt any state or local laws, regulations, or 
policies, unless they present an irreconcilable conflict with this 
rule.
    The Agricultural Marketing Agreement Act of 1937, as amended (7 
U.S.C. 601-674), provides that administrative proceedings must be 
exhausted before parties may file suit in court. Under Section 
608c(15)(A) of the Act, any handler subject to an order may request 
modification or exemption from such order by filing with the Secretary 
a petition stating that the order, any provision of the order, or any 
obligation imposed in connection with the order is not in accordance 
with the law. A handler is afforded the opportunity for a hearing on 
the petition. After a hearing, the Secretary would rule on the 
petition. The Act provides that the district court of the United States 
in any district in which the handler is an inhabitant, or has its 
principal place of business, has jurisdiction in equity to review the 
Secretary's ruling on the petition, provided a bill in equity is filed 
not later than 20 days after the date of the entry of the ruling.

Regulatory Flexibility Act and Paperwork Reduction Act

    In accordance with the Regulatory Flexibility Act (5 U.S.C. 601 et 
seq.), the Agricultural Marketing Service has considered the economic 
impact of this action on small entities and has certified that this 
final decision will not have a significant economic impact on a 
substantial number of small entities. For the purpose of the Regulatory 
Flexibility Act, a dairy farm is considered a ``small business'' if it 
has an annual gross revenue of less than $750,000, and a dairy products 
manufacturer is a ``small business'' if it has fewer than 500 
employees. For the purposes of determining which dairy farms are 
``small businesses,'' the $750,000 per year criterion was used to 
establish a milk marketing guideline of 500,000 pounds per month. 
Although this guideline does not factor in additional monies that may 
be received by dairy producers, it should be an inclusive standard for 
most ``small'' dairy farmers. For purposes of determining a handler's 
size, if the plant is part of a larger company operating multiple 
plants that collectively exceed the 500 employee limit, the plant will 
be considered a large business even if the local plant has fewer than 
500 employees.
    Producer-handlers are defined as dairy farmers that process only 
their own milk production. These entities must be dairy farmers as a 
pre-condition to operating processing plants as producer-handlers. The 
size of the dairy farm determines the production level of the operation 
and is the controlling factor in the capacity of the processing plant 
and possible sales volume associated with the producer-handler entity. 
Determining whether a producer-handler is considered small or large 
business must depend on its capacity as a dairy farm where a producer-
handler with annual gross revenue in excess of $750,000 is considered a 
large business.
    The amendments would place entities currently considered to be 
producer-handlers under the Pacific Northwest or the Arizona-Las Vegas 
orders on the same terms as all other fully regulated handlers provided 
they meet the criteria for being subject to the pooling and pricing 
provisions of the two orders. Entities currently defined as producer-
handlers under the terms of these orders will be subject to the pooling 
and pricing provisions of the orders if their route disposition of 
fluid milk products is more than 3-million pounds per month.
    Producer-handlers with route disposition of less than 3-million 
pounds during the month will not be subject to the pooling and pricing 
provisions of the orders. To the extent that current producer-handlers 
for each order have route disposition of fluid milk products outside of 
the marketing areas, such route disposition will be subject to an 
order's pooling and pricing provisions if total in-area route 
disposition causes them to become fully regulated.
    Assuming that some current producer-handlers will have route 
disposition of fluid milk products of more than 3-million pounds during 
the month, such producer-handlers will be regulated subject to the 
pooling and pricing provisions of the orders like other handlers. Such 
producer-handlers will account to the pool for their uses of milk at 
the applicable minimum class prices and pay the difference between 
their use-value and the blend price of the order to the order's 
producer-settlement fund.
    While this may cause an economic impact on those entities with more 
than 3-million pounds of route sales who currently are considered 
producer-handlers by the two orders, the impact is offset by the 
benefit to other small businesses. With respect to dairy farmers whose 
milk is pooled on the two marketing orders, such dairy farmers who have 
not heretofore shared in the additional revenue that accrues from the 
marketwide pooling of Class I sales by producer-handlers will share in 
such revenue. This will have a positive impact on 486 small dairy 
farmers in the Pacific Northwest and Arizona-Las Vegas marketing areas. 
Additionally, all handlers who dispose of more than 3-million pounds of 
fluid milk products per month will pay at least the announced Federal 
order Class I price for such use. This will have a positive impact on 
18 small regulated handlers.
    To the extent that current producer-handlers in the Pacific 
Northwest and the Arizona-Las Vegas orders become subject to the 
pooling and pricing provisions, such will be determined in their 
capacity as handlers. Such entities will no longer have restrictions 
applicable to their business operations that were conditions for 
producer-handler status and exemption from the

[[Page 74167]]

pooling and pricing provisions of the two orders. In general, this 
includes being able to buy or acquire any quantity of milk from dairy 
farmers or other handlers instead of being limited by the current 
constraints of the two orders. Additionally, the burden of balancing 
their milk production is relieved. Milk production in excess of what is 
needed to satisfy their Class I route disposition needs will receive 
the minimum price protection established under the terms of the two 
orders. The burden of balancing milk supplies will be borne by all 
producers and handlers who are pooled and regulated under the terms of 
the two orders.
    During September 2003, the Pacific Northwest had 16 pool 
distributing plants, 1 pool supply plant, 3 cooperative pool 
manufacturing plants, 7 partially regulated distributing plants, 8 
producer-handler plants and 2 exempt plants. Of the 27 regulated 
handlers, 16 or 59 percent were considered large businesses. Of the 691 
dairy farmers whose milk was pooled on the order, 223 or 32 percent 
were considered large businesses. If these amendatory actions are not 
undertaken, 68 percent of the dairy farmers (468) in the Pacific 
Northwest order who are small businesses will continue to be adversely 
affected by the operations of large producer-handlers.
    For the Arizona-Las Vegas order, during September 2003 there were 3 
pool distributing plants, 1 cooperative pool manufacturing plant, 18 
partially regulated distributing plants, 2 producer-handler plants and 
3 exempt plants (including an exempt plant located in Clark County 
Nevada) operated by 22 handlers. Of these plants, 15 or 68 percent were 
considered large businesses. Of the 106 dairy farmers whose milk was 
pooled on the order, 88 or 83 percent were considered large businesses. 
If these amendatory actions are not undertaken, 17 percent of the dairy 
farmers in the Arizona-Las Vegas order who are small businesses will 
continue to be adversely affected by large producer-handler operations.
    In their capacity as producers, 7 producer-handlers would be 
considered as large producers as their annual marketing exceeds 6-
million pounds of milk. Record evidence indicates that for the Pacific 
Northwest marketing order at the time of the hearing, four producer-
handlers would potentially become subject to the pooling and pricing 
provisions of the order because of route disposition of more than 3-
million pounds per month within the marketing area. For the Arizona-Las 
Vegas order, one producer-handler would be considered a large producer 
because its annual marketing exceeds 6-million pounds of milk and 
potentially subject to the pooling and pricing provisions of the order 
because of route disposition exceeding 3-million pounds per month.
    A review of reporting requirements was completed under the 
Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35). It was 
determined that these proposed amendments would have minimal impact on 
reporting, recordkeeping, or other compliance requirements for entities 
currently considered producer-handlers under the Pacific Northwest and 
the Arizona-Las Vegas marketing orders because they would remain 
identical to the current requirements applicable to all other regulated 
handlers who are currently subject to the pooling and pricing 
provisions of the two orders. No new forms are proposed and no 
additional reporting requirements would be necessary.
    This notice does not require additional information collection that 
requires clearance by the Office of Management and Budget (OMB) beyond 
currently approved information collection. The primary sources of data 
used to complete the forms are routinely used in most business 
transactions. Forms require only a minimal amount of information which 
can be supplied without data processing equipment or a trained 
statistical staff. Thus, the information collection and reporting 
burden is relatively small. Requiring the same reports for all handlers 
does not significantly disadvantage any handler that is smaller than 
the industry average.
    Prior documents in this proceeding:
    Notice of Hearing: Issued July 31, 2003; published August 6, 2003 
(68 FR 46505).
    Correction to Notice of Hearing: Issued August 20, 2003; published 
August 26, 2003 (68 FR 51202).
    Notice of Reconvened Hearing: Issued October 27, 2003; published 
October 31, 2003 (68 FR 62027).
    Notice of Reconvened Hearing: Issued December 18, 2003; published 
December 29, 2003 (68 FR 74874).
    Recommended Decision: Issued April 7, 2005; published April 13, 
2005 (70 FR 19636).

Preliminary Statement

    A public hearing held on proposed amendments to the marketing 
agreement and order regulating the handling of milk in the Pacific 
Northwest and Arizona-Las Vegas marketing areas. The hearing was held 
pursuant to the provisions of the Agricultural Marketing Agreement Act 
of 1937, as amended (7 U.S.C. 601-674), and the applicable rules of 
practice and procedure governing the formulation of marketing 
agreements and marketing orders (7 CFR Part 900), at Tempe, Arizona, 
beginning on September 23, 2003; reconvened, and continuing at Seattle, 
Washington, on November 17, 2003; and reconvened and concluding at 
Alexandria, Virginia, on January 23, 2004, pursuant to a notice of 
hearing issued July 31, 2003, and a correction to the notice issued 
August 23, 2003, and notices of reconvened hearings issued October 27, 
2003, and December 18, 2003.
    Upon the basis of the evidence introduced at the hearing and the 
record thereof, the Administrator, on April 7, 2005, issued a 
Recommended Decision containing notice of the opportunity to file 
written exceptions thereto.
    The material issues, findings, conclusions, and rulings of the 
Recommended Decision are hereby approved and adopted and set forth 
herein. The material issue on the record of hearing relate to:
    1. The regulatory status of producer-handlers.

Findings and Conclusions

    The following findings and conclusions on the material issues are 
based on evidence presented at the hearing and the record thereof:

1. The Regulatory Status of Producer-Handlers

    Amendments to the producer-handler definitions of the Pacific 
Northwest and the Arizona-Las Vegas milk marketing orders are adopted. 
This decision will result in all producer-handlers with in-area route 
disposition of more than 3-million pounds of fluid milk products per 
month being subject to the pooling and pricing provisions of the 
applicable order. This action will cause some current producer-handlers 
to become subject to the pooling and pricing provisions of the orders.
    Currently, the Pacific Northwest and the Arizona-Las Vegas milk 
marketing orders provide separate but similar definitions that describe 
and define a special category of handler known as producer-handlers. 
While there are specific differences in how each order defines and 
describes producer-handlers, both orders--as do all Federal milk 
marketing orders--exempt producer-handlers from the pooling and pricing 
provisions of the orders.
    Exemption from the pooling and pricing provisions of the orders 
essentially means that the minimum class prices established under the 
orders that handlers must pay for milk are not applicable to producer-
handlers and producer-handlers receive no minimum

[[Page 74168]]

price protection for surplus milk disposed of within either order's 
marketing area. Producer-handlers enjoy keeping the entire value of 
their milk production disposed of as fluid milk products in the 
marketing area to themselves and do not share this value with other 
dairy farmers whose milk is pooled on either of the two orders.
    However, producer-handlers are subject to strict definitions and 
limitations in their business practices. Both orders limit the ability 
of producer-handlers to buy or acquire milk that may be needed from 
dairy farmers or other handlers. Additionally, producer-handlers bear 
the entire burden of balancing their own milk production. Milk 
production in excess of what is needed to satisfy their Class I route 
disposition needs will receive whatever price they are able to obtain. 
Such milk does not receive the minimum price protection of the order.
    It is the exemption from the pooling and pricing provisions of the 
Pacific Northwest and Arizona-Las Vegas orders that is the central 
issue of this proceeding. While producer-handlers are exempt from the 
pooling and pricing provisions of the two orders, they are 
``regulated'' to the extent that producer-handlers submit reports to 
the Market Administrator who monitors producer-handler operations to 
ensure that such entities are in compliance with the conditions for 
such regulatory status. For the purposes of brevity and convenience, 
this decision will refer to those handlers who are subject to the 
pooling and pricing provisions of the orders as ``fully regulated 
handlers'' in contrast to producer-handlers.

Overview of the Proposals

    This proceeding considered three proposals seeking the application 
of each order's pooling and pricing provisions, or full regulation, of 
producer-handlers when their route disposition of fluid milk products 
in the marketing areas exceeded 3-million pounds per month. These 
proposals were published in the hearing notice as Proposals 1, 2 and 3. 
Proposal 1 is applicable to the Pacific Northwest milk marketing order. 
Proposal 3 is applicable to the Arizona-Las Vegas milk marketing order. 
Proposal 2, applicable to only the Pacific Northwest order, is 
identical to Proposal 1 but also seeks to limit a producer-handler from 
distributing fluid milk products to a wholesale customer who is served 
by a fully regulated or partially regulated distributing plant in the 
same-sized package with a similar label during the month. In this 
regard, Proposal 2 would make the producer-handler definition for the 
Pacific Northwest order more like the current Arizona-Las Vegas order.
    A fourth proposal, published in the hearing notice as Proposal 4, 
seeking to prevent the simultaneous pooling of the same milk on the 
Arizona-Las Vegas milk marketing order and on a state-operated order 
that provides for marketwide pooling, (commonly referred to a ``double-
dipping'') was addressed in a separate final rule that was issued 
November 18, 2005 (70 FR 70991) and will become effective on January 1, 
2006.

Summary of Testimony

    Proposal 3 received testimony by a witness appearing on behalf of 
United Dairymen of Arizona (UDA). UDA is a dairy cooperative supplying 
approximately 88 percent of the milk in the Arizona-Las Vegas milk 
marketing order (Order 131). The UDA witness testified in support of 
establishing a 3-million pound limit in route disposition of fluid milk 
products for producer-handlers in the marketing area, which, if 
exceeded, would cause the producer-handler to become subject to the 
pooling and pricing provisions of the order. The witness was of the 
opinion that the current producer-handler definition contradicts the 
overall purposes of the Federal milk order program to establish uniform 
prices among all handlers and the marketwide sharing of revenue among 
all producers who supply the market.
    The UDA witness asserted that Sarah Farms is the largest producer-
handler in the Order 131 marketing area and avoids the classified 
pricing and pooling requirements applicable to all other handlers. The 
witness characterized this as the operation of an individual handler 
pool within a marketwide pool. The witness stated that UDA is aware 
that historically Federal orders have exempted producer-handler 
operations from the pricing and pooling provisions of orders because 
they were small and had little impact in the marketplace. The witness 
contrasted this historical perspective with Sarah Farms, recognized as 
the largest producer-handler in Order 131, by citing a trade journal 
article that ranked Sarah Farms as the second largest U. S. dairy farm 
with 13,000 cows in 1995.
    The witness testified that UDA estimates Sarah Farms' Class I sales 
within the Order 131 marketing area are about 12 million pounds per 
month. Because of Sarah Farms' exemption from the pooling and pricing 
provisions of the order, the witness estimated a loss in revenue to 
producers who pool milk on the order at about $11,586,589 over the 
period of January 2000 through July 2003, or about a 10-14 cents per 
hundredweight (cwt) impact on the order's blend price. In addition, the 
witness estimated lost revenue of about $3 million, or about a 10-cent 
per cwt lower blend price for the period of September 1997 through 
January 1999.
    A second witness appearing on behalf of UDA also testified in 
support of Proposal 3. This witness explained that the proposed 3-
million pound route disposition limit on producer-handlers was partly 
based on provisions of the Fluid Milk Promotion Act which requires an 
assessment for the promotion of fluid milk when a handler's sales are 
greater than 3-million pounds per month. The witness said that 
producer-handlers who have the ability to enjoy this level of route 
disposition should not be exempted from pooling and pricing provisions 
and that their continued exemption poses a serious threat to orderly 
marketing and the operation of the Federal milk order program.
    The second UDA witness claimed that in December 1994, Sarah Farms 
was considered an insignificant factor within the Order 131 marketing 
area because their monthly raw milk production was less than 5 million 
pounds, of which less than 1.3 million pounds of Class I products were 
distributed within the marketing area. Relying on Market Administrator 
statistics, the witness added that by 1996, UDA estimated that Sarah 
Farms' monthly Class I route disposition had increased to more than 6 
million pounds. The witness also testified that from late 1998 until 
this proceeding, Sarah Farms had been one of only two producer-handlers 
selling Class I products in the marketing area. Relying on Market 
Administrator statistics, the witness estimated that Sarah Farms' Class 
I route sales within Order 131 had increased from about 7 million 
pounds per month to as much as 15 million pounds per month by 2002.
    A witness appearing on behalf of the Kroger Company (Kroger), a 
fully regulated handler under the Pacific Northwest milk marketing 
order (Order 124) and Order 131, testified in support of Proposals 1, 
2, and 3. The witness said that changes in marketing conditions in both 
orders necessitate changes in how the orders define producer-handlers. 
In the opinion of the witness, producer-handlers enjoy a competitive 
sales advantage by being exempted from the pooling and pricing 
provisions of both orders. The witness explained that producer-handlers 
have a sales advantage because they have the flexibility to set their 
internal raw milk

[[Page 74169]]

price at a level well below the announced Federal order minimum Class I 
price that fully regulated handlers must pay.
    The Kroger witness also testified that regulated handlers in Orders 
124 and 131 have been forced to respond to competitive situations with 
producer-handlers in supplying retail grocery outlets. This was due in 
part to the competitive sales advantage producer-handlers have in being 
able to lower their price to retailers while still maintaining an 
adequate profit margin, the witness explained. The witness said that 
Kroger's retail outlets could not do this competitively without eroding 
their profit margins. Because of these competitive situations, the 
witness concluded that producer-handlers exceeding more than 3 million 
pounds per month in Class I sales was a reasonable estimate of when 
producer-handlers are in direct competition with fully regulated 
handlers and should therefore receive the same regulatory treatment. 
The same regulatory treatment of producer-handlers as fully regulated 
handlers above this threshold would, according to the witness, re-
establish equity among handlers competing for Class I sales in these 
two marketing areas.
    The Kroger witness was of the opinion that the volume of producer-
handler route disposition was a key aspect of the disorderly marketing 
conditions in Orders 124 and 131. However, the witness indicated that a 
producer-handler's processing plant size alone was not necessarily an 
accurate indicator of processing plant efficiency. The witness 
testified that smaller plants can be very competitive. In this regard, 
the witness said that Kroger's largest plant was not its most efficient 
bottling plant.
    A witness appearing on behalf of Western United Dairymen (WUD), the 
largest dairy farmer association in California representing 
approximately 1,100 of California's 2,000 dairy farmers, testified in 
support of Proposals 1 and 3. The witness expressed the opinion that a 
primary reason for the exemption of producer-handlers from the pricing 
and pooling provisions of Orders 124 and 131 had been because these 
entities were customarily small businesses that operate self-
sufficiently and do not have a significant impact in the marketplace. 
The WUD witness testified that the regulatory exemption for producer-
handlers has been largely unchanged in the Federal order system for 
more than 50 years. The witness explained that there had been no 
significant demonstration of unfair advantages accruing to producer-
handlers because they are responsible for balancing their fluid milk 
needs and cannot transfer balancing costs to other pooled market 
participants.
    The WUD witness also testified that some producer-handlers were 
becoming much larger than fully regulated fluid processors in Orders 
124 and 131. The witness was of the opinion that large producer-
handlers were effectively taking greater and greater shares of the 
Class I market in both orders and caused pooled milk to be forced into 
lower-valued manufacturing uses. According to the witness, these 
outcomes are having a direct negative impact on handlers and producers 
in both orders and are generating instability in the Federal milk 
marketing order system.
    The WUD witness asserted that when producer-handler sales growth 
threatened the sales of fully regulated handlers under California's 
State-wide regulatory system, the State acted to maintain and protect 
their pooling and pricing system by placing a limit on the volumes of 
sales producer-handlers could have within the State before becoming 
fully regulated. The witness was of the opinion that the Federal order 
program also needs to act by adopting the proposed amendments to 
similarly limit the sales volume of producer-handlers.
    A witness appearing on behalf of the Alliance of Western Milk 
Producers (Alliance), an organization representing California 
cooperatives, also testified in support of Proposals 1, 2, and 3. The 
witness indicated that how the Federal order program deals with the 
producer-handler issue is of interest to California dairy farmers 
because changes in Orders 124 and 131, which border California, will 
have a direct impact on the State's milk marketing and regulatory 
program. The witness was of the opinion that producer-handlers have a 
tremendous competitive advantage in the marketplace because they are 
not subject to minimum pricing and are thereby able to avoid a pooling 
obligation to share their Class I revenue with all pooled market 
participants. The witness asserted that unless some limitation is put 
on the route sales volume of producer-handlers, it may encourage new 
producer-handlers to enter the market and further erode the equitable 
pricing principles relied on by the Federal milk order program.
    A witness appearing on behalf of Northwest Dairy Association (NDA) 
testified in support of Proposals 1 and 2. The witness provided a 
business example demonstrating how producer-handlers enjoy a pricing 
and marketing advantage by being exempt from the pooling and pricing 
provisions of Order 124. Relating past business experiences as a fully 
regulated handler known as Sunshine Dairy, the witness explained how 
business was lost to a producer-handler competitor. The witness 
attributed this loss of business to the competitive sales advantage 
enjoyed by producer-handlers resulting from their exemption from the 
pooling and pricing provisions of the order.
    The NDA witness testified that as a fully regulated handler known 
as Sunshine Dairy they had also lost a small customer who, at that 
time, was buying about 25,000 gallons of milk per week. The witness 
said that this customer grew to constitute more than 10 percent of its 
fluid milk sales volume. According to the witness, even though they had 
provided great service and products, they lost the account because the 
customer could save hundreds of thousands of dollars a year by 
procuring milk from a producer-handler. According to the witness, 
Sunshine Dairy lost this account because the producer-handler was able 
to price its milk at a level below the minimum Federal order Class I 
price. The witness also testified that the producer-handler 
subsequently lost this account to a fully regulated handler that was of 
national scope.
    The NDA witness expressed the opinion that the goal of the Federal 
Order system is to maintain order in the market. In this regard, the 
witness testified that handlers should not be exempt from the pooling 
and pricing provisions of an order because they own their cows and 
produce their own milk supply when other handlers are not exempted. The 
witness stressed that such an exemption is unfair, noting that the vast 
majority of dairy farmers should not receive smaller paychecks for the 
same product as producer-handlers because they lack a processing plant.
    A witness appearing on behalf of Maverick Milk Producers 
Association (Maverick), a cooperative of dairy farmers located in 
Arizona that markets its milk in California and Arizona, testified in 
support of Proposal 3. The witness testified that all handlers who 
market their milk in Order 131 should be subject to the pooling and 
pricing provisions of the order, including producer-handlers. The 
witness inferred from Market Administrator statistics that the largest 
producer-handler in Order 131, Sarah Farms, had cost Maverick members 
in excess of $1.2 million in revenue since 1999 because Sarah Farms had 
not been subject to the pooling and pricing provisions of the order. 
The witness testified that the estimated loss of revenue to the Order 
131 pool was based on an assumption

[[Page 74170]]

that Sarah Farms produced about 18 million pounds of milk per month 
that would have been pooled as Class I milk.
    A former executive and co-owner of Vitamilk, an independent handler 
no longer operating as a going concern, formerly located in Seattle, 
Washington, appeared on behalf of Dairy Farmers of America (DFA) and 
testified in support of Proposals 1 and 2. This DFA witness testified 
that in seeking alternative markets for its milk products, Vitamilk 
began to compete with producer-handlers for school milk supply 
contracts through one of its wholesale distributors. However, their bid 
attempts were unsuccessful, the witness testified, because the school 
district sought fixed-price contracts for packaged fluid milk which 
they could not supply in competition with a producer-handler. While 
conceding that Vitamilk was inexperienced in bidding for school-lunch 
business, the witness asserted that the fixed price contract offered by 
the producer-handler was below the combined value of the Federal order 
Class I price plus Vitamilk's cost allocations to marketing, 
processing, distribution, overhead, distributor profit, and risk.
    This DFA witness explained that Vitamilk tried to retain other 
customers by lowering their prices in an effort to keep and gain sales 
volume even though the price represented no contribution to covering 
their indirect costs. The witness testified that prices offered by a 
local producer-handler were 11 to 12 cents per gallon below Vitamilk's 
best net price to distributors. According to the witness, even though 
Vitamilk's customers reported satisfaction with the company's service 
and other non-price attributes, the producer-handler's ability to 
provide fluid milk products at a lower cost resulted in the loss of 
customer accounts. The witness asserted that the loss of accounts was 
caused largely by the producer-handler's inability to price Class I 
products below what a fully regulated Class I handler could price its 
products. In addition, the witness testified that in 2003 Vitamilk even 
attempted to sell its Class I products at prices below breakeven and 
was still unable to find a price whereby it could successfully 
recapture business lost to a producer-handler.
    A witness appearing on behalf of Shamrock Foods Company (Shamrock), 
a fully regulated handler located in Arizona and Colorado, testified in 
support of Proposal 3. The witness maintained that Shamrock is at a 
competitive disadvantage with producer-handlers because Shamrock is 
required to pay the Federal order Class I price for milk while 
producer-handlers are exempt from the pricing and pooling provisions of 
Order 131. According to the witness, the price of Class I products 
offered to wholesale customers by producer-handlers can be lower than 
what Shamrock can offer profitably and that Sarah Farms, a producer-
handler of the order, has been able to raid their customer base. 
Furthermore, the witness said that Shamrock's ability to maintain its 
policy of equitable pricing among its customers, be able to hold its 
prices fairly constant to maintain customer loyalty, and avoid bidding 
against itself for its own customers is undermined because of the 
producer-handler pricing advantage over fully regulated handlers. The 
witness said Shamrock is unable to quickly adjust their business 
practices to meet such competition because of their size and because of 
different regulatory treatment.
    The Shamrock witness was of the opinion that the producer-handler 
exemption from minimum pricing and pooling provisions threatens the 
economic viability of Order 131. For example, the witness explained 
that major customers such as Safeway, Kroger, Wal-Mart and strong 
independents like Costco, Bashas and Sam's Club buy milk on a wholesale 
basis to resell to retail consumers. The witness noted that these 
customers seek the opportunity to buy milk at prices similar to those 
offered by the producer-handler--at prices below the Federal order 
Class I price. The witness testified that if Proposal 3 or some other 
restriction limiting route disposition volume is not adopted, either 
there will have to be an expansion of producer-handler supplies by 
expanding their farms or existing fully regulated handlers will need to 
reorganize their business practices to develop their own-farm 
production and become a producer-handler to remain competitive.
    The Shamrock witness offered testimony regarding market research 
they routinely conduct through on-going surveys of retail grocery 
stores in Order 131. The witness explained that Shamrock salespersons 
do this to gather market intelligence on their competitors. According 
to the witness, Shamrock's marketing research indicated that prices for 
bottled fluid milk offered by Sarah Farms was typically 6 to 8 cents a 
gallon below their price--equating to about 48 to 64 cents on a per cwt 
basis. The witness testified that their market research also revealed 
that Sarah Farms' production and route disposition had grown from 
approximately 8 million pounds in 1998 to nearly 17.2 million pounds by 
2003.
    The Shamrock witness concluded that a sales volume limitation of 3 
million pounds per month for producer-handlers was reasonable because a 
3 million pound limit would represent about three percent of the total 
Class I sales in the Order 131 marketing area. In addition, the witness 
testified that a plant which processes 3 million pounds per month is an 
indicator of a very efficient plant operation. From these views, the 
witness concluded that a producer-handler with route disposition in 
excess of 3 million pounds per month is able to fully exploit economies 
of size and should therefore be treated the same as fully regulated 
handlers.
    The Shamrock Foods witness conceded that there are additional 
challenges faced by producer-handlers in terms of managing milk 
supplies and disposing of surplus milk which fully regulated handlers 
do not face. The witness also acknowledged that there are costs 
associated with managing marketing risk, including the disposal of 
surplus milk production. However, the witness was of the opinion that 
these costs are more than covered by the competitive advantages that 
exist by being exempt from the pooling and pricing provisions of the 
order. One example the witness provided was that a producer-handler can 
balance its supply by selling fluid milk products into an unregulated 
area such as California.
    A witness appearing on behalf of Shamrock Farms, which is 
affiliated with Shamrock Foods, testified in support of Proposal 3. 
Shamrock Farms milks 6,500 cows and is located in Maricopa County, 
Arizona. The witness testified that Shamrock Farms has always been a 
pooled producer on Order 131 and its predecessor order. The witness 
asserted that Sarah Farms operates dairy farms with approximately 
10,000 to 12,000 milking cows. While the witness conceded the lack of 
hard data to confirm this assertion, the witness arrived at this 
estimate of farm size by counting the number of milk tankers per day 
that delivered to the Sarah Farms' plant in Yuma, Arizona.
    A consultant witness appearing on behalf of Dairy Farmers of 
America (DFA), proponents of Proposals 1, 2, and 3, had prepared a 
study that analyzed and compared the value of raw milk to a large 
producer-handler with the cost of milk to fully regulated handlers and 
described the economic impact of competition between these two business 
entities. The study conducted by this witness was based on a 
proprietary database of 150 milk processing plants owned by businesses 
for which this witness' company performed accounting

[[Page 74171]]

and other consulting services. According to the witness, 20 plants were 
selected as being representative of the costs for 6 different size 
classes of bottling plants. The witness explained that the plant cost 
data was adjusted by applying regional consumer price index (CPI) 
factors as published by the U.S. Department of Labor. According to the 
witness, this method of adjusting data, the selection of relevant 
plants, the analytic methods employed in conducting the study, and the 
interpretation of the study results were all based on Generally 
Accepted Accounting Principles (GAAP).
    The DFA consultant witness acknowledged that while the study of 
plant costs was based on actual plant data acquired from fully 
regulated handlers, the study did not include data from plants located 
in either the Pacific Northwest or the Arizona-Las Vegas marketing 
areas. The witness also acknowledged that the data for the smallest 
plants in the study were taken from producer-handler plants located in 
western Pennsylvania, an area not regulated by a Federal milk marketing 
order. The witness also explained that the study's actual data could 
not be offered for inspection and examination in this proceeding 
because individual plant cost and related information were proprietary, 
adding that this also explained why the data used in the study were 
averaged. The witness further testified that the selection of 
appropriate plants for inclusion in the study from all of the plants in 
the witness' proprietary database was based on professional judgment 
and experience.
    The DFA consultant witness explained that the analysis of the data 
derived for the Northwest or the Arizona-Las Vegas marketing areas 
suggests that as plant volumes increase per unit processing costs 
decrease and that the highest per unit processing costs are found at 
the smallest plant sizes. At large plant sizes, the witness contrasted, 
a processor, regardless of regulatory status, can increase milk 
processing volume at a nominal additional per unit cost.
    Relating an additional example of the study's findings, the DFA 
consultant witness testified that, other things being equal, a 
hypothetical plant bottling 3 million pounds of milk per month in 2-
gallon pack containers would have per unit processing costs that were 
significantly higher than a plant producing 20 million pounds of milk 
per month in the same size container packs. In addition, the witness 
testified that the study suggests that where a large producer-handler 
and a handler subject to the pooling and pricing provisions of an order 
compete for route sales, the producer-handler will always have a price 
advantage which could be as large as the difference between the Federal 
order Class I price and the order's blend price. The witness also said 
that the examination across all types of retail outlets reveals that a 
producer-handler will always have a price advantage in competing with 
fully regulated handlers.
    The consultant witness for DFA provided a comparative cost analysis 
of servicing a warehouse store account by a fully regulated fluid milk 
plant and a large producer-handler using actual retail prices for 2-
percent milk in Phoenix, Arizona, during January through June 2003. The 
witness testified that based on the study's data and assumptions, a 
large producer-handler can service such an account and return a 
substantial above-market premium over the producer blend price. 
However, the study reveals that the handler paying the Class I price 
for its raw milk supply will have little or no margin, the witness 
contrasted. The producer-handler's raw milk cost advantage, the witness 
said, allows it to service these stores profitably at a price that 
cannot be matched by a fully regulated handler. The witness concluded 
that producer-handlers are in a position to acquire any account they 
choose to service by offering a price which the regulated plant cannot 
meet.
    In other testimony, the DFA consultant witness provided a pro-forma 
income statement for a regulated handler in Order 124 developed using 
certain assumptions about costs, prices and income. The witness 
demonstrated through an analysis of the pro-forma income statement that 
a large producer-handler would be able to successfully compete with 
fully regulated handlers if regulated. The witness concluded from this 
analysis that a successful producer-handler would be economically 
viable even if it were subject to the order's pooling and pricing 
provisions.
    The DFA consultant witness testified that the cost data used in the 
study's pro-forma income statement example was generated using 
statistical methods based on one month's representative data for 
similar sized regulated handlers and assumed that producer-handlers and 
regulated handlers employed union labor and operated within collective 
bargaining agreements. The witness testified that based on own business 
experience, the characterization of labor costs would be representative 
of large fully regulated handler operations in the Pacific Northwest or 
the Arizona-Las Vegas marketing areas. In contrast, the witness 
indicated no direct knowledge of the costs of labor employed by 
producer-handlers in Orders 124 or 131. The witness did conclude that 
use of non-union labor by producer-handlers would provide them with a 
clear cost advantage over similar or larger size fully regulated 
handlers that typically employed unionized labor.
    The DFA consultant witness was of the professional opinion that 
current Federal order regulations provide producer-handlers with a 
significant cost advantage that cannot be matched by fully regulated 
handlers that are subject to pooling and pricing regulations. If the 
proposal to place a 3 million pound per month volume limit on producer-
handlers route disposition is adopted, it will eliminate what the 
witness described as an unfair economic advantage for large producer-
handlers while serving to protect a more modest pricing advantage for 
small producer-handlers.
    In additional testimony, the consultant witness for DFA 
acknowledged the difficulty in reconciling the 150,000 pound per month 
route disposition limit established for exempt plants with the proposed 
3 million pound per month limit for producer-handlers. According to the 
witness, the difference in these two limits are for two distinctly 
different entities and can be rationalized by the Department by 
acknowledging a value commensurate with milk production risks incurred 
by a producer-handler that are not incurred by handlers who buy milk 
from dairy farmers. A handler who buys milk from dairy farmers does not 
incur the production risks associated with operating a farm enterprise, 
the witness said. In this regard, the witness acknowledged that the 
study focused only on plant processing costs and not on the cost of 
producing milk in the farm enterprise function of a producer-handler.
    A witness representing Dean Foods (Dean) testified in support of 
proposals establishing a volume limit on producer-handler route 
disposition. The witness testified that while Dean Foods does not 
operate bottling plants in either Orders 124 or 131, they do operate 
fluid milk plants in many States regulated by Federal milk marketing 
orders and in areas not subject to Federal milk order regulation. The 
witness testified that where Dean faces competition from plants that do 
not pay regulated minimum prices, Dean is affected. The witness 
stressed that milk bottling plants need to have equitable raw milk 
costs for the Federal milk order system to remain valid.

[[Page 74172]]

    The Dean witness said that competitiveness and efficiency are not 
necessarily a function of processing plant size. On this theme, the 
witness provided an example where a small, fully regulated milk bottler 
in Bryan, Texas, successfully bid to supply a Texas state prison 
against a much larger Dean plant. The witness testified that the Bryan 
plant had processing capacity of less than 3 million pounds per month 
but was more efficient than the Dean plant and that because of its 
management structure, it could adjust more quickly to changing market 
conditions.
    A witness appearing on behalf of the National Milk Producers 
Federation (NMPF) testified in support of Proposals 1 and 3. The 
witness was of the opinion that productivity increases resulting from 
technological advances and the growth of dairy farms enable large 
producers to capture sufficient economies of scale in processing own-
farm milk and thereby compete effectively with established, fully 
regulated handlers. In light of this, the witness testified that such 
producers can disrupt the orderly marketing of milk in a market, adding 
that dairy farmers ``turned producer-handlers'' could grow across a 
market causing even greater disruption to orderly marketing in other 
Federal milk marketing orders.
    The witness asserted that NMPF's own analysis, and a plant study by 
Cornell University revealed that larger fluid milk bottling plants have 
exhibited decreasing processing costs on a per gallon basis as the size 
of processing facilities increase. The witness explained that as the 
scale of processing plants increase, average processing costs tend to 
remain fairly constant, with the lowest per unit cost levels being 
exhibited over a relatively wide range of processing capacities. The 
witness testified that the lower per unit processing cost advantages of 
larger plant sizes tend to be greatest for very large processing plants 
rather than among smaller plants. The witness said that significant 
cost and other competitive advantages attributed to economies of scale 
in fluid milk processing become evident at about the 3-million pound 
per month processing level.
    According to the NMPF witness, the exemption of producer-handlers 
from the pooling and pricing provisions of Orders 124 and 131 allows 
producer-handlers to effectively pay the equivalent of the blend price 
for milk at their plants, a price lower than the Class I price that 
fully regulated competitors pay. The witness testified that by using 
the economic concept of ``transfer pricing,'' the maximum price that a 
producer-handler ``pays'' for transferring milk from its farm 
production enterprise to its processing enterprise can be estimated 
even though the producer-handler does not actually sell raw milk to 
itself. According to the witness, transfer pricing in the context of 
the producer-handler issue, predicts that the price of milk assigned to 
milk from the producer-handler farm enterprise essentially becomes the 
price at which milk could be sold to a regulated handler--the Federal 
order blend price. Accordingly, the witness asserted that a producer-
handler's advantage in raw milk procurement for processing, as compared 
to fully regulated handlers, would be the difference between the 
Federal order Class I price and the order's blend price.
    The NMPF witness testified that their analysis reinforces the 
findings of the consultant witness for DFA regarding the magnitude of 
the pricing advantage producers-handlers enjoy over handlers who are 
subject to the pooling and pricing provisions of a Federal order. While 
noting that the DFA consultant witness' study used aggregated data that 
does result in a significant loss of information for analytical 
purposes, the witness stressed that even with this limitation it 
nevertheless remains the best data available to rely upon.
    The NMPF witness was of the opinion that the producer-handler 
exemption from an order's pooling and pricing provisions also creates 
inequity among producers because it reduces the amount of milk pooled 
as a Class I use of milk, which in turn, lowers the total revenue of 
the marketwide pool to be shared among pooled producers. According to 
the witness, this threatens orderly marketing. The witness related that 
farms with over 3 million pounds of monthly production represent about 
15 percent of the U.S. milk supply and may represent some 40 percent of 
U.S. fluid milk sales. According to the witness, the steadily 
increasing number of farms with this magnitude of monthly milk 
production suggests that large producers could exploit the producer-
handler provision and thus further erode equity to both producers and 
handlers across the entire Federal milk marketing order system.
    The NMPF witness stated that the 3 million pound per month route 
disposition limit proposed for producer-handlers as part of Proposals 1 
and 3 is also consistent with the promotion assessment exemption of the 
Fluid Milk Promotion Program. According to the witness, the promotion 
exemption limit set by Congress was based on the impact that a handler 
had in a marketing area. Below 3 million pounds per month route 
disposition, the witness said, the impact of an individual handler is 
negligible and therefore rationalizes why smaller handlers are exempt 
from fluid milk promotion assessments.
    A witness appearing on behalf of DFA testified in support of 
Proposals 1, 2, and 3. The witness viewed the exemption of producer-
handlers from the pooling and pricing provisions of Federal orders as a 
loophole that threatens the economic viability of the Federal milk 
order system and the economic well-being of pooled producers. This 
witness, like the NMPF witness, testified that a growing interest by 
large dairy farmers in becoming producer-handlers is a major factor in 
DFA's interest in seeking to amend the producer-handler definition in 
the Pacific Northwest or the Arizona-Las Vegas orders. The witness 
testified that the exemption from the pooling and pricing provisions of 
these orders provides producer-handlers with a competitive advantage 
over fully regulated handlers by effectively permitting producer-
handlers to purchase milk at an internal price at or below the Federal 
order blend price while fully regulated handlers must pay the usually 
higher Class I price for milk. According to this DFA witness, the 
difference between the Class I price and the Federal order blend price 
represents a significant windfall generated solely by the regulatory 
exemptions accorded to producer-handlers.
    The DFA witness summarized that the proposed 3 million pound per 
month limitation on route disposition is based on four considerations. 
According to the witness, the proposed limit is: (1) Consistent with 
the minimum volume of milk sales that triggers the fluid milk promotion 
assessment for handlers; (2) the level at which producer-handlers 
achieve competitive equity with fully regulated handlers in terms of 
plant processing efficiency; (3) the level of route disposition that 
has a significant impact on the pool value of milk; and (4) the level 
of route disposition that has a significant impact on the order's 
pooled producers and fully regulated handlers. The witness indicated 
that if a producer-handler's volume is sufficient to reduce a pool's 
value by a penny (1 cent) per hundredweight it is significant and is of 
sufficient magnitude to warrant ending producer-handler exemption from 
the pooling and pricing provisions of the orders. The witness also 
concluded from the study conducted by the consultant witness for DFA 
that when a producer-handler reaches a 3 million pound per month

[[Page 74173]]

distribution level, not only does the producer-handler reach similar 
plant processing cost efficiencies but it is also of sufficient size to 
service a considerable number of retail outlets on a competitive par 
with fully regulated handlers. According to the witness, continuing the 
exemption from an order's pooling and pricing provisions beyond the 3 
million pound sales volume level causes serious market disruptions.
    The DFA witness also testified that the exemption of producer-
handlers from the pooling and pricing provisions of the orders is 
encouraging large producers to consider becoming producer-handlers in 
both Orders 124 and 131 and in other Federal order marketing areas. As 
an example, the witness testified that some retail outlets now seek 
packaged fluid milk supplies from producer-handlers in an effort to 
obtain lower cost milk supplies. The witness was of the opinion that 
without a limit on route disposition volume, producer-handlers will 
displace pooled producers and fully regulated handlers as the dominant 
suppliers of fluid milk not only in the Pacific Northwest and Arizona-
Las Vegas marketing areas, but ultimately throughout all other Federal 
milk marketing areas. The witness cautioned that the potential for the 
growth of producer-handlers gives rise to considering lowering Class I 
milk prices as a means to counter the competitive price advantage that 
producer-handlers are afforded by regulatory exemption from pooling and 
pricing provisions.
    The DFA witness testified that the current producer-handler 
definition creates market disorder because it disrupts the flow of 
Class I milk from pooled producers to regulated handlers. In addition, 
the witness testified that pooled producers effectively subsidize the 
balancing costs of producer-handlers. In the opinion of the witness, 
these outcomes are destabilizing and are producing disorder in both the 
Pacific Northwest and Arizona-Las Vegas marketing areas. In further 
explanation of these points, the witness expressed concern about the 
loss of Class I revenue that would otherwise accrue to pooled 
producers. As an example, relying on Market Administrator data in 
making professional inferences, the witness testified that the largest 
producer-handler in the Order 131 marketing area, Sarah Farms, had 
monthly route disposition in the range of 12.1 to 19.1 million pounds. 
According to the witness, the value of the sales revenue lost to the 
Order 131 pool by not subjecting Sarah Farms to the pooling and pricing 
provisions of the order averaged some $317,000 per month, or the 
equivalent of 12.5 cents per cwt.
    The DFA witness testified that the producer-handler price advantage 
over fully regulated handlers provides a powerful incentive for 
customers to purchase milk from producer-handlers rather than fully 
regulated handlers. The witness testified that producer-handlers have 
as much as a 15-cent per gallon advantage over fully regulated handlers 
in Order 131. According to the witness, the advantage is based on the 
difference between the Order 131 Class I price and the order's blend 
price which ranged from 15.9 to as much as 18.3 cents per gallon during 
the period of January 2000 through July 2003.
    The DFA witness related that wholesale milk buyers base procurement 
decisions on tenths and even hundredths of a cent differences in the 
price per gallon, indicating that price differences of more than 15 
cents per gallon overwhelmingly favors the producer-handler in head-to-
head price competition. The witness testified that lower-priced 
packaged fluid milk products from producer-handlers is used by 
wholesale buyers of milk as leverage in daily price negotiations with 
fully regulated handlers and is a form of disorderly marketing. Such 
market disorder, the witness said, causes all processors to receive 
lower prices for their packaged fluid milk products.
    The DFA witness also expressed the opinion that the plant costs 
faced by a large producer-handler are similar to those faced by fully 
regulated handlers even though the witness had no direct knowledge of 
individual producer-handler businesses in Order 124 or 131. While 
agreeing with the characterization that producer-handlers are a single 
and seamless milk production and processing enterprise, the witness 
asserted that higher balancing and operational costs attributable to 
producer-handler operations are not significantly different than those 
associated with fully regulated handlers of the same processing plant 
size. The witness further asserted that the producer-handler price 
advantage combined with the ability to increase production volume at 
negligible additional costs per unit exaggerates the advantage to a 
point where a producer-handler can increase market share nearly at 
will.
    Through a series of examples depicting scenarios of different plant 
sizes, the DFA witness testified that producer-handlers with 80 and 90 
percent Class I utilization could operate profitably in spite of higher 
balancing costs associated with operating as a producer-handler. The 
witness explained that a large producer-handler experiencing increasing 
returns to its operation could continue to grow in size until it 
controlled a substantial share of the Class I market. The witness 
testified that a producer-handler with route disposition of 3 million 
pounds per month could supply a small regional grocery chain but likely 
would not be able to diversify its marketing risk with sales to other 
customers.
    According to the DFA witness, if producer-handlers are allowed to 
gain Class I sales without restraint, fully regulated handlers and 
pooled producers would likely come to view Federal milk marketing 
orders as ineffective. According to the witness, under these conditions 
producers possibly would seek to terminate the orders. The DFA witness 
characterized this potential scenario as a form of market disorder.
    The DFA witness said that rising interest in the producer-handler 
option by large dairy farmers challenges the long-term viability of the 
entire Federal milk order system. The witness did acknowledge that no 
new producer-handler operations have entered either the Order 124 or 
131 marketing areas in recent years. The witness also acknowledged that 
market information kept by the Department shows that the volume of 
sales by producer-handlers had declined nationally from 1.47 billion 
pounds per year to 1.16 billion pounds per year between 1988 and 1998.
    The DFA witness offered modifications to Proposal 1 that would also 
be applicable to Proposal 3. Basically, in addition to limiting a 
producer-handlers route disposition to less than 3 million pounds per 
month, the modification made extensive changes in terminology as to how 
producer-handlers are defined. The intent of these modifications, the 
witness said, is to clarify that the burden of proof and the 
responsibility for providing all the details to substantiate proof to 
the Market Administrator for producer-handler status rests with the 
producer-handler.
    The DFA witness testified that Market Administrators will continue 
to be relied upon by Federal orders to use their discretion in 
determining producer-handler status. According to the witness, the 
proposed modifications for the producer-handler definitions are 
expected to provide flexibility for a Market Administrator to 
investigate and audit proposed producer-handler operations and to 
ensure qualification requirements are met. In addition, the witness 
said that if Proposals 1 and 3 are adopted, it was reasonable that

[[Page 74174]]

existing producer-handlers in Orders 124 and 131 be given a period of 
time to adjust their operations to the proposed producer-handler 
requirements.
    Another witness appearing on behalf of DFA testified in support of 
Proposals 1 and 3 on the basis that small and average-sized dairy 
farmers, including producer-handlers with milk production below 3 
million pounds of milk per month, have higher production costs than 
larger dairy farms. The witness said that very large dairy farms tend 
to have management expertise and business sophistication, access to 
capital, access to veterinary services, and economies of size and scale 
that tend to lower their per unit costs of milk production. This DFA 
witness testified that a dairy farm would need approximately 1,800 cows 
to achieve a 3 million pound per month level of production available 
for bottling and route disposition.
    The DFA witness did not know if 3 million pounds of route 
disposition per month was the precise number above which producer-
handlers should become subject to the pricing and pooling provisions of 
Orders 124 and 131. Similarly, the witness did not know what economic 
impact adopting Proposals 1 and 3 would have on producer-handlers in 
the respective marketing areas. The witness did relate having knowledge 
of interest being expressed by dairy farmers who had monthly production 
in excess of 3 million pounds per month seeking possible producer-
handler status.
    A witness representing Northwest Dairy Association (NDA) testified 
that they market the milk of 603 milk producers traditionally 
associated with Order 124. The witness said that NDA also is the parent 
company of WestFarm Foods, an operator of three distributing plants 
located in Seattle, Washington, and Portland and Medford, Oregon. The 
witness added that NDA also operates four milk manufacturing plants in 
the Order 124 marketing area. The witness testified that while NDA does 
not have a direct connection to Order 131, it indirectly shares similar 
concerns with the proponents of Proposal 3 in that they share a border 
with California and share similar concerns regarding the Federal and 
State milk order systems. In addition, the witness noted that Order 124 
has the second largest volume of producer-handler milk marketings of 
any Federal order--second only to Order 131.
    The NDA witness was also appearing on behalf of Tillamook County 
Creamery Association, Farmers Cooperative Creamery, Inland Dairy, and 
Northwest Independent Milk Producers, hereinafter collectively referred 
to as NDA, in support of Proposals 1, 2, and 3. The witness testified 
that the producer-handler exemption from the pooling and pricing 
provisions of Order 124 provides an unfair competitive advantage to 
producer-handlers at the expense of pooled producers and fully 
regulated handlers. According to the witness, the historical 
justifications for exempting producer-handlers because such entities 
are small operators without significant market impact on prices and 
they do not provide significant competition with fully regulated 
handlers are no longer warranted. The witness testified that producer-
handlers in Order 124 are now a significant force in the marketing area 
and are likely to continue to increase in size and market significance. 
The witness noted that Congress had effectively supported th