Milk in the Mideast Marketing Area; Decision on Proposed Amendments to Marketing Agreement and to Order, 54172-54186 [06-7495]

Download as PDF 54172 Federal Register / Vol. 71, No. 177 / Wednesday, September 13, 2006 / Proposed Rules DEPARTMENT OF AGRICULTURE Agricultural Marketing Service 7 CFR Part 1033 [Docket No. AO–166–A72; DA–05–01–B] Milk in the Mideast Marketing Area; Decision on Proposed Amendments to Marketing Agreement and to Order Agricultural Marketing Service, USDA. ACTION: Proposed rule; final decision. AGENCY: This document is the final decision proposing to adopt amendments to the Mideast order intended to deter the de-pooling of milk. This final decision is subject to producer approval by referendum. FOR FURTHER INFORMATION CONTACT: Gino Tosi, Associate Deputy Administrator, Order Formulation and Enforcement Branch, USDA/AMS/Dairy Programs, STOP 0231—Room 2968, 1400 Independence Avenue, SW., Washington, DC 20250–0231, (202) 690– 1366, e-mail: gino.tosi@usda.gov. SUPPLEMENTARY INFORMATION: This final decision adopts amendments that: (1) Establish a limit on the volume of milk a handler may pool during the months of April through February to 115 percent of the volume of milk pooled in the prior month; and (2) Establish a limit on the volume of milk a handler may pool during the month of March to 120 percent of the volume of milk pooled in the prior month. The proposed amended order is subject to producer approval by referendum. 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. The 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 jlentini on PROD1PC65 with PROPOSALS5 SUMMARY: VerDate Aug<31>2005 16:28 Sep 12, 2006 Jkt 208001 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 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 production guideline of 500,000 pounds per month. Although this guideline does not factor in additional monies that may be received by dairy producers, it should be an inclusive standard for most ‘‘small’’ dairy farmers. For purposes of determining a handler’s size, if the plant is part of a larger company operating multiple plants that collectively exceed the 500-employee limit, the plant will be considered a large business even if the local plant has fewer than 500 employees. During March 2005, the month during which the hearing occurred, there were 9,767 dairy producers pooled on and 36 handlers regulated by the Mideast order. Approximately 9,212 producers, or 94.3 percent, were considered small businesses based on the above criteria. Of the 36 handlers regulated by the Mideast during March 2005, 26 handlers, or 72.2 percent, were considered small businesses. The adopted amendments regarding the pooling standards serve to revise established criteria that determine those producers, producer milk, and plants that have a reasonable association with and consistently serve the fluid needs of the Mideast milk marketing area. Criteria for pooling milk are established on the basis of performance standards that are considered adequate to meet the PO 00000 Frm 00002 Fmt 4701 Sfmt 4702 Class I fluid needs of the market and, by doing so, to determine those producers who are eligible to share in the revenue that arises from the classified pricing of milk. Criteria for pooling are established without regard to the size of any dairy industry organization or entity. Therefore, the proposed amendments will not have a significant economic impact on a substantial number of small entities. The Agricultural Marketing Service is committed to complying with the EGovernment Act, to promote the use of the Internet and other information technologies to provide increased opportunities for citizen access to Government information and services, and for other purposes. This action does not require additional information collection that needs clearance by the Office of Management and Budget (OMB) beyond currently approved information collection. The primary sources of data used to complete the approved forms are routinely used in most business transactions. The 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. No other burdens are expected to fall on the dairy industry as a result of overlapping Federal rules. This rulemaking proceeding does not duplicate, overlap, or conflict with any existing Federal rules. Prior documents in this proceeding: Notice of Hearing: Issued February 14, 2005; published February 17, 2005 (70 FR 8043). Amended Notice of Hearing: Issued March 1, 2005; published March 3, 2005 (70 FR 10337). Tentative Partial Decision: Issued July 21, 2005; published July 27, 2005 (70 FR 43335). Interim Final Rule: Issued September 20, 2005; published September 26, 2005 (70 FR 56111). Final Partial Decision: Issued January 17, 2006; published January 23, 2006 (71 FR 3435). Recommended Decision: Issued February 15, 2006; published February 22, 2006 (71 FR 9033). Final Partial Rule: Issued April 17, 2006; published April 20, 2006 (71 FR 20335). E:\FR\FM\13SEP5.SGM 13SEP5 Federal Register / Vol. 71, No. 177 / Wednesday, September 13, 2006 / Proposed Rules Preliminary Statement 1. Pooling Standards A public hearing was held upon proposed amendments to the marketing agreement and the order regulating the handling of milk in the Mideast marketing area. The hearing was held, pursuant to the provisions of the Agricultural Marketing Agreement Act of 1937 (AMAA), 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). The proposed amendments set forth below are based on the record of a public hearing held at Wooster, Ohio, on March 7–10, 2005, pursuant to a notice of hearing issued February 14, 2005, published February 17, 2005, (70 FR 8043) and an amended notice of hearing issued March 1, 2005, and published March 3, 2005 (70 FR 10337). Upon the basis of the evidence introduced at the hearing and the record thereof, the Administrator, on February 15, 2006, issued a Recommended Decision containing notice of the opportunity to file written exception thereto. The material issues, findings, conclusions and ruling of the Recommended Decision, are hereby approved, adopted and are set forth herein. The material issues on the record of hearing relate to: A. Establishing pooling limits Preliminary Statement. Federal milk marketing orders rely on the tools of classified pricing and marketwide pooling to assure an adequate supply of milk for fluid (Class I) use and to provide for the equitable sharing of the revenues arising from the classified pricing of milk. Classified pricing assigns a value to milk according to how the milk is used. Regulated handlers who buy milk from dairy farmers are charged class prices according to how they use the farmer’s milk. Dairy farmers are then paid a weighted average or ‘‘blend’’ price. The blend price that dairy farmers are paid for their milk is derived through the marketwide pooling of all class uses of milk in a marketing area. Thus each producer receives an equal share of each use class of milk and is indifferent as to the actual class for which the milk was used. The Class I price is usually the highest class price for milk. Historically, the Class I use of milk provides the additional revenue to a marketing area’s total classified use value of milk. The series of class prices that are applicable for any given month are not announced simultaneously. The Class I price and the Class II skim milk price are announced prior to the beginning of the month for which they will be effective. Class prices for milk in all other uses are not determined until on or before the 5th day of the following month. The Class I price is determined by adding a differential value to the higher of either an advanced Class III or Class IV value. These values are calculated based on formulas using the National Agricultural Statistics Service (NASS) survey prices of cheese, butter, and nonfat dried milk powder for the first two weeks of the prior month. For example, the Class I price for August is announced in late July and is based on the higher of the Class III or IV value computed using NASS commodity price surveys for the first two weeks of July. The Class III and IV prices for the month are determined and announced after the end of the month based on the NASS survey prices for the selected dairy commodities during the month. For example, the Class III and IV prices for August are based on NASS survey commodity prices during August. A large increase in the NASS survey price for the selected dairy commodities from one month to the next can result in the Class III or IV price exceeding the Class I price. This occurrence is commonly referred to by the dairy industry as a ‘‘class price inversion.’’ A producer price inversion generally refers to when 1. Pooling standards A. Establish pooling limits B. Producer definition 2. Transportation Credits jlentini on PROD1PC65 with PROPOSALS5 Findings and Conclusions This final decision specifically addresses proposals published in the hearing notice as Proposals 4, 5, 6, 7, and 8 which seek to establish a limit on the volume of milk that can be pooled on the order; Proposal 9 which seeks to establish transportations credits; and features of Proposal 3 intended to clarify the Producer definition by providing a definition of ‘‘temporary loss of Grade A approval.’’ Proposals which sought to change the performance standards of the order, Proposals 1 and 2, were addressed in a tentative partial decision published on July 27, 2005 (70 FR 43335). The portion of Proposal 3 that sought to amend the number of days a producer needs to deliver milk to a distributing plant before the milk of the producer is eligible for diversion was abandoned by the proponents at the hearing. No further reference to that portion of Proposal 3 will be made. The following findings and conclusions on the material issues are based on evidence presented at the hearing and the record thereof: VerDate Aug<31>2005 16:28 Sep 12, 2006 Jkt 208001 PO 00000 Frm 00003 Fmt 4701 Sfmt 4702 54173 the Class III or IV price exceeds the average classified use value, or blend price, of milk for the month. Price inversions have occurred with increasing frequency in Federal milk orders since the current pricing plan was implemented on January 1, 2000, despite efforts made during Federal Order Reform to reduce such occurrences. Price inversions can create an incentive for dairy farmers and manufacturing handlers who voluntarily participate in the marketwide pooling of milk to elect not to pool their milk on the order. Class I handlers do not have this option; their participation in the marketwide pool is mandatory. The producer price differential, or PPD, is the difference between the Class III price and the weighted average value of all Classes. In essence, the PPD is the dairy farmer’s share of the additional/ reduced revenues associated with the Class I, II, and IV milk pooled in the market. If the weighted average price of Class I, II, and IV milk in the pool is greater than the Class III price, then dairy farmers receive a positive PPD. However, a negative PPD can occur if the value of the Class III milk in the pool exceeds the value of the remaining classes of milk in the pool. This can occur as a result of the price inversions discussed above. The Mideast Federal order operates a marketwide pool. The Order contains pooling provisions which specify criteria that, if met, allow dairy farmers to share in the benefits that arise from classified pricing through pooling. The equalization of all class prices among handlers regulated by an order is accomplished through a mechanism known as the producer settlement fund (PSF). Typically, Class I handlers pay the difference between the blend price and their use-value of milk into the PSF. Manufacturing handlers typically receive a draw from the PSF, usually the difference between the Class II, III or IV price and the blend price. In this way, all handlers pay the class value for milk and all dairy farmer suppliers receive at least the order’s blend price. When manufacturing class prices of milk are high enough to result in a usevalue of milk for a handler that is higher than the blend price, handlers of manufacturing milk may choose to not pool their milk receipts. Opting to not pool their milk receipts allows these handlers to avoid the obligation of paying into the PSF. The choice by a manufacturing handler to not pool their milk receipts is commonly referred to in the dairy industry as ‘‘de-pooling.’’ When the blend price rises above the manufacturing class use-values of milk these same handlers again opt to pool E:\FR\FM\13SEP5.SGM 13SEP5 jlentini on PROD1PC65 with PROPOSALS5 54174 Federal Register / Vol. 71, No. 177 / Wednesday, September 13, 2006 / Proposed Rules their milk receipts. This is often referred to as ‘‘re-pooling.’’ The ability of manufacturing handlers to de-pool and re-pool manufacturing milk is viewed by some market participants as being inequitable to both producers and handlers. The ‘‘De-Pooling’’ Proposals. Proponents are in agreement that milk marketing orders should contain provisions that will tend to limit the practice of de-pooling. Five proposals intending to limit the de-pooling of milk were considered in this proceeding. The proposals offered different degrees of deterrence against de-pooling by establishing limits on the amount of milk that can be re-pooled. The proponents of these five proposals are generally of the opinion that de-pooling erodes equity among producers and handlers, undermines the orderly marketing of milk and is detrimental to the Federal order system. Two different approaches on how to best limit de-pooling are represented by these five proposals. The first approach, published in the hearing notice as Proposals 6 and 7, addresses de-pooling by limiting the volume of milk a handler can pool in a month to a specified percentage of what the handler pooled in the prior month. The second approach, published in the hearing notice as Proposals 4, 5 and 8, addresses de-pooling by establishing what is commonly referred to as a ‘‘dairy farmer for other markets’’ provision. These proposals would require milk of a producer that was de-pooled to not be able to be re-pooled by that producer for a defined time period. All proponents agreed that none of the proposals would completely eliminate de-pooling but would likely deter the practice. Of the five proposals received that would limit de-pooling, this final decision adopts Proposal 7, as modified in post-hearing briefs, offered by Dairy Farmers of America and Michigan Milk Producers Association (DFA/MMPA). DFA/MMPA are Capper-Volstead cooperatives who pool milk on the Mideast market. Specifically, adoption of Proposal 7 will limit the volume of milk a handler can pool during the months of April through February to no more than 115 percent of the volume of milk pooled in the prior month, and limit the volume of milk a handler can pool in the month of March to 120 percent of the volume of milk pooled in the month prior. Milk diverted to nonpool plants in excess of these limits will not be pooled. Milk shipped to pool distributing plants and allocated to Class I in excess of the volume allocated to Class I in the prior month will not be subject to the 115 or 120 percent VerDate Aug<31>2005 16:28 Sep 12, 2006 Jkt 208001 limitation. Milk pooled on another Federal order during the previous 3 consecutive months would not be subject to the 115 or 120 percent limitation. The 115 or 120 percent limitation may be waived at the discretion of the Market Administrator for a new handler on the order or for an existing handler whose milk supply changes due to unusual circumstances. As published in the hearing notice, Proposal 6, offered by Ohio Dairy Producers (ODP) and Ohio Farmers Union (OFU), was virtually identical to Proposal 7. ODP is an organization of independent Ohio dairy farmers and agriculture businesses that work to increase the productivity and profitability of dairy farmers. OFU is an organization whose members include dairy farmers pooled on the Mideast order. Proposal 6 would limit the volume of milk a handler could pool in a month to 115 percent of the volume of milk pooled in the prior month. The proposal does not contain a separate pooling standard for the month of March. Milk shipped to pool distributing plants, or milk pooled on another Federal order during the preceding 6 months, would not be subject to the 115 percent standard. The proposal would grant authority to the Market Administrator to increase or decrease the 115 percent standard. As published in the hearing notice, Proposals 4, 5 and 8 address de-pooling by establishing defined time periods during which de-pooled milk could not be pooled. Proposal 4, also offered by ODP and OFU, would require an annual pooling commitment by a handler to the market. The proposal specified that if the milk of a producer was not pooled during a month, or any of the preceding 11 months, the equivalent of at least 10 day’s milk production of the dairy farmer would need to be delivered to a pool distributing plant during the month in order for all the milk of the dairy farmer for that month to be pooled. Proposal 4 is not adopted. Proposal 5, offered by Continental Dairy Products (Continental), would limit the ability to pool the milk of a producer if such milk had not been pooled during the previous 12 months. Continental is a Capper-Volstead cooperative whose members milk is pooled on the Mideast order. Proposal 5 is not adopted. Proposal 8, offered by Dean Foods Company (Dean), would not permit repooling for a 2 to 7 month period for milk that had been de-pooled. Dean is a handler that distributes fluid milk products within the Mideast marketing area. Under Proposal 8, if a producer’s milk were de-pooled in any of the PO 00000 Frm 00004 Fmt 4701 Sfmt 4702 months of February through June, or during any of the preceding 3 months, or during any of the preceding months of July through January, the equivalent of at least 10 day’s milk production would need to be physically received at a pool distributing plant in the order to pool all of the dairy farmer’s production for the month. Additionally, if the milk of a dairy farmer is de-pooled in any of the months of July through January, or in a preceding month, at least 10 day’s milk production of the dairy farmer would need to be delivered to a pool distributing plant to have all the milk of the dairy farmer pooled for the month. Proposal 8 is not adopted. While Proposals 4, 5 or 8 are not adopted, to the extent that these proposals offered alternative methods to deter the practice of de-pooling, adoption of Proposals 6 and 7 essentially accomplishes this objective. The proponents of Proposals 4, 5, 6, 7 and 8 are all of the opinion that current inadequate pooling standards enable manufacturing handlers to depool milk and immediately re-pool milk the following month and are in need of revision. According to the proponents, the Mideast blend price is lowered when large volumes of higher-valued milk used for manufacturing is depooled as well as when the large volumes of de-pooled milk returns to the pool. Furthermore, the witnesses argued that de-pooling handlers do not have to account to the Mideast pool at classified prices and therefore face different costs than their similarly situated pooling competitors. While all proponents insisted that the pooling standards of the order need to be amended to ensure producer and handler equity, their opinions differed only on how to best meet this end. The current Producer milk provision of the Mideast order considers the milk of a dairy farmer to be producer milk when it has been received at a pool plant of the order. A producer must deliver 2 day’s milk production to a pool plant during each of the months of August through November so that all the milk of a producer will be eligible to be pooled throughout the year. Once the standard has been met, the milk of a producer is eligible to be diverted to nonpool plants and continue to be priced under the terms of the order. A pool plant cannot divert more than 50 percent of its total producer milk receipts to nonpool plants during each of the months of August through February and 60 percent during each of the months of March through July. Milk that is subject to inclusion in another marketwide equalization program operated by another government entity E:\FR\FM\13SEP5.SGM 13SEP5 jlentini on PROD1PC65 with PROPOSALS5 Federal Register / Vol. 71, No. 177 / Wednesday, September 13, 2006 / Proposed Rules is not considered producer milk. The order currently does not limit a handler’s ability to re-pool manufacturing uses of milk. A witness appearing on behalf of Continental testified in support of Proposal 5. The witness was of the opinion that pooling provisions should limit a handler’s ability to de-pool their milk receipts at will and with little consequence. The witness testified that Proposal 5 would prohibit a handler from pooling the milk of a producer that had been de-pooled during the previous 11 months. The witness characterized Proposal 5 as an adequate deterrent to handlers de-pooling large volumes of milk for short term financial gain. The witness added that adoption of Proposal 5 would provide adequate safeguards for new producers on the order or producers who may temporarily lose Grade A status to pool their milk without penalty. A post-hearing brief submitted on behalf of Continental reiterated their support for the adoption of Proposal 5. The brief stressed that de-pooling leads to the inequitable sharing of revenues amongst producers and therefore should be dealt with in the most stringent manner. Continental argued that adoption of any proposal that would allow handlers to continue to de-pool any percentage of their milk receipts supports the concept that de-pooling is an acceptable practice. Continental vigorously opposed any level of depooling and insisted that adoption of Proposal 5 was the only appropriate proposal to re-establish equity in the marketplace. A witness appearing on behalf of ODP testified in support of Proposals 4 and 6. According to the witness, over 1.3 billion pounds of milk was de-pooled during April and May 2004 reducing the value of the marketwide pool by $21.3 million. The ODP witness insisted that pooling standards should ensure that producer milk which regularly supplies the needs of the fluid market does not receive a lower blend price when manufacturing handlers opt to not pool their milk receipts. The witness noted that Federal order hearings have been held in the Central and Upper Midwest markets to address de-pooling. The witness stressed that if the ability of manufacturing handlers to not pool their milk receipts is eliminated in the Central and Upper Midwest markets, it may add to the volume of de-pooled milk in the Mideast market. The witness was of the opinion that adoption of either Proposal 4 or Proposal 6 would best solve the inequities created from de-pooling. VerDate Aug<31>2005 16:28 Sep 12, 2006 Jkt 208001 A witness appearing on behalf of Dean testified in support of Proposal 4. The witness asserted that the intent of the Federal order system is to ensure a sufficient supply of milk for fluid use and provide for uniform payments to producers who stand ready, willing, and able to serve the fluid market regardless of how the milk of any individual is utilized. The Dean witness testified that provisions allowing manufacturing handlers the option to participate or not participate in the pool causes inequities between handlers. The Dean witness was of the opinion that de-pooling causes inequities between handlers and undermines the order’s ability to provide for a stable milk supply to meet Class I demand. The inequity, the witness said, is that all handlers do not have the same ability to pool and de-pool; fluid handlers are required to pool their milk receipts while manufacturing handlers have the option of pooling their milk receipts. The witness was of the opinion that this difference in pooling options creates cost inequities between handlers since a fluid handler must always account to the pool at classified use values while manufacturing handlers may not. The Dean witness also explained how de-pooling leads to inequities between producers. The witness used a hypothetical example of two cooperatives—Cooperative A that delivers 50 percent of its milk receipts to distributing plants and Cooperative B who delivers 30 percent of its milk receipts to distributing plants. Cooperative A, the witness said, is always at a disadvantage when a price inversion occurs because they can only de-pool 50 percent of their milk receipts because the milk delivered to distributing plants must be pooled. However, the witness said, Cooperative B can de-pool 70 percent of their milk receipts because only 30 percent is delivered to distributing plants. Therefore, the witness concluded, Cooperative B is able to pay a higher price to its dairy farmer suppliers since it is able to de-pool an additional 20 percent of its total milk receipts that Cooperative A cannot. The Dean witness stressed that hearings have been held in other Federal orders to consider proposals seeking to deter de-pooling and urged the Department to adopt provisions to prevent milk from opportunistically pooling on the Mideast order. In the opinion of the Dean witness, Proposal 4 is the most appropriate solution to deter the de-pooling of milk because it creates large and long-term consequences to handlers who opt to de-pool. The Dean witness believed that should the PO 00000 Frm 00005 Fmt 4701 Sfmt 4702 54175 Department determine that Proposal 4 is not appropriate, Proposal 8 would be the best alternative. A post-hearing brief submitted on behalf of Dean reiterated support for the adoption of Proposal 4 with a modification. Dean proposed granting the Market Administrator the ability to waive a producer’s de-pooled status if the producer was de-pooled after informing its pooling handler that it intended to deliver its milk to another handler. The brief stressed that the intention of Proposal 4 is not to prevent a producer from being pooled because of circumstances out of their control and believed their modification would remedy this potential situation. Dean’s brief reiterated that de-pooling results in inequities between both handlers and producers. The brief noted that a provision similar to Proposal 4 is in place in the Northeast order and asserted that it has been very effective in limiting de-pooling. Comments filed on behalf of Dean in response to the Recommended Decision supported the Department’s decision to deter the practice of de-pooling. However, Dean expressed reservations that adoption of Proposal 7 would be sufficient to adequately deter the practice of de-pooling in the Mideast marketing area. Dean also commented that the re-pooling standard for the month of February should be modified to 110 percent to account for additional days in January much like the repooling standard for the month of March was modified to account for the fewer days in February. A witness appearing on behalf of Superior Dairy (Superior) testified in support of Proposal 4. Superior is a pool distributing plant regulated by the Mideast order. The witness said that Proposal 4 should be adopted because the de-pooling actions of some handlers are reducing the blend price paid to producers who regularly and consistently service the needs of the Class I market. A witness appearing on behalf of OFU testified in support of Proposal 6. The witness said that current regulations allow handlers to take advantage of the Federal order program and not share income generated in the market with pooled producers. The witness supported adoption of Proposal 6 and stressed that adoption of the proposal would discourage manufacturing handlers from not pooling their milk receipts when it is to their financial advantage. A second witness appearing on behalf of Dean testified in support of Proposals 4, 6, 7, and 8. The witness testified that Proposal 4 would encourage handlers to E:\FR\FM\13SEP5.SGM 13SEP5 jlentini on PROD1PC65 with PROPOSALS5 54176 Federal Register / Vol. 71, No. 177 / Wednesday, September 13, 2006 / Proposed Rules pool their milk receipts in times of a price inversion since the decision to depool would result in a 12-month penalty. The witness said that adoption of Proposal 4 would also ensure that the de-pooled producer provided service to the Class I market by making substantial and consistent service to fluid distributing plants. The second Dean witness characterized Proposal 8 as a less desirable alternative to Proposal 4. The difference in the two proposals, the witness said, is the number of months a producer must meet the 10-day touch base standard to be re-pooled—it is fewer under Proposal 8 and varies depending on the month in which the milk was de-pooled. In general, emphasized the witness, the effects of both proposals would be the same except that if Proposal 8 were adopted, the cost to a de-pooling handler and the benefit to continuously pooled producers would be less. The second Dean witness testified that Proposal 7 and Proposal 6 are less desirable options to Proposals 4 and 8. According to the witness, if a 115 percent re-pooling standard were adopted it would take a handler who opted to de-pool 90 percent of its milk 17 months to re-pool all the handler’s milk receipts. If a handler opted to depool 30 percent of its milk receipts, the witness added, it would only take 3 months to again pool all of its milk receipts. The witness emphasized that the larger the volume of milk a handler opted to de-pool, the longer the length of time a handler would need to requalify all its milk receipts and the more money it would cost the depooling handler. The witness concluded that Proposals 6 and 7 offered a different method for limiting de-pooling that would not be as effective as the method contained in Proposals 4 and 8. A dairy farmer whose milk is pooled on the Mideast order testified in support of Proposals 4, 5, and 6. The witness testified that in April 2004 their farm lost $9,000 because of the reduced PPD that resulted from de-pooling. The witness urged the Department to adopt either Proposal 4, 5, or 6 to remedy depooling and to do so on an emergency basis. A witness appearing on behalf of DFA/MMPA testified in support of Proposal 7. The witness said that Proposal 7 was designed to limit depooling by creating financial consequences for manufacturing handlers who de-pool their milk receipts. The witness testified that members of DFA/MMPA currently depool milk when it is to their advantage but emphasized that de-pooling causes VerDate Aug<31>2005 16:28 Sep 12, 2006 Jkt 208001 market disorder and should be prohibited. The DFA/MMPA witness said that depooling is not a new occurrence; however, the volatility of milk prices in recent years has caused more frequent price inversions and subsequent opportunities to de-pool. The witness referenced data presented at a similar proceeding held in the Central order that during the 84 month period from 1993 to 1999, there were 16 months with negative PPD’s, 6 of which were in excess of a negative 50 cents per cwt. However, the witness noted that during the 60 month period from January 2000 through December 2004 the opportunity to de-pool had occurred 51 times. The DFA/MMPA witness contended that de-pooling causes inequities because similarly situated handlers face different costs in procuring a milk supply. Class I milk is required to be pooled, the witness said, and distributing plants always have to share the additional value of their Class I milk sales with all pooled producers. However, the witness said, a manufacturing handler is not required to account to the pool at classified prices and can therefore retain the revenue generated from not pooling milk when price inversions occur. The witness asserted that manufacturing handlers use the additional revenue generated from de-pooling to pay a higher price to their producers while fluid handlers must use money from their profit margins to pay a competitive price. In this regard, the witness said, Class I handlers are at a disadvantage in competing with manufacturing handlers for a producer milk supply. Relying on Market Administrator statistics, the DFA/MMPA witness illustrated that in April 2004 manufacturing handlers that may have chosen to not pool their milk receipts were able to keep $3.78 more per hundredweight than a fluid handler on all their de-pooled milk and could use the proceeds to pay dairy farmers. The witness showed how a supplying handler that delivered one load of milk a day for a month to a Class I plant, would have received $56,700 less than a manufacturing handler who could opt to de-pool their milk receipts. Relying on Market Administrator statistics, the witness testified that 649.3 million pounds of milk was de-pooled in April 2004. According to the witness, if that milk had been pooled the PPD paid to all producers would have been $1.66 per cwt higher. The DFA/MMPA witness testified that Proposal 7 would limit the amount of milk a handler could pool to 115 percent of the handler’s prior month PO 00000 Frm 00006 Fmt 4701 Sfmt 4702 pooled milk volume. The witness insisted that the 115 percent standard would create the economic incentive necessary to keep an adequate reserve supply of milk pooled on the order while accommodating reasonable levels of growth in a handler’s month-tomonth production and other seasonal production fluctuations. The witness noted that the Market Administrator should be given the discretion to disqualify de-pooled milk from pooling if the Market Administrator believes that the handler was trying to circumvent the pooling standards. The DFA/MMPA witness testified that emergency marketing conditions exist without a deterrent to de-pooling that warrant the omission of a recommended decision. The witness was of the opinion that the volatile dairy product markets that gave rise to rapid price increases and price inversions will continue and therefore, should be addressed in an expedited manner. A post-hearing brief submitted on behalf of DFA/MMPA reiterated their support of Proposal 7. The brief stressed that adoption of Proposal 7, while not completely eliminating a handler’s ability to de-pool, would reduce the total volume of de-pooled milk. DFA/ MMPA suggested a modification to Proposal 7 in their post-hearing brief to establish a limit on the volume of milk a handler could pool in March to 120 percent of the their total volume of milk pooled during the prior month. DFA/ MMPA believed that this modification would better accommodate and account for the fewer number of days in the month of February. The DFA/MMPA brief argued that Proposals 4 and 5 are not appropriate for the Mideast order because they call for stringent and unnecessary changes in the order’s pooling provisions. The brief stressed that the intention of Proposal 7 was to improve the pooling standards of the order but not in a manner that would necessitate a change to a handler’s business operations. Comments filed on behalf of DFA/ MMPA; Dairylea; National Farmers Organization, Inc.; and Land O’Lakes, hereinafter referred to as DFA, et al., expressed their support of the proposed re-pooling standards. DFA, et al., clarified that the intent of Proposal 7 was to constrain the practice of depooling while still encouraging additional milk shipments for Class I use. DFA, et al., proposed that the repooling standard be amended to exempt milk delivered to distributing plants in excess of the previous month’s pooled volume instead of the proposed standard that exempts milk delivered to distributing plants in excess of the E:\FR\FM\13SEP5.SGM 13SEP5 jlentini on PROD1PC65 with PROPOSALS5 Federal Register / Vol. 71, No. 177 / Wednesday, September 13, 2006 / Proposed Rules volume classified as Class I in the prior month. A witness appearing on behalf of Ohio Farm Bureau Federation testified in support of Proposal 7. The witness was of the opinion that if the current pooling provisions are not amended to deter the practice of de-pooling, prices received by farmers who reliably service the Class I market would decrease. The witness claimed that handlers who depool milk do not share the revenues generated from de-pooling with all pooled producers which lowers returns to producers who are consistently serving the Class I market. The witness added that Federal order hearings concerning de-pooling have been held in other Federal orders. The witness claimed that if de-pooling is not addressed in the Mideast order, milk from other Federal orders may seek to be pooled on the Mideast order. In this regard, the witness said that adoption of Proposal 7 is necessary to ensure that blend prices received by producers who are consistently pooled are not further eroded. A witness appearing on behalf of Prairie Farms Dairy (Prairie Farms) testified in support of Proposal 7. Prairie Farms is a member owned CapperVolstead cooperative that pools milk on the Mideast order. The witness testified that since Prairie Farms is required to pool all milk utilized at their distributing plants, all revenues generated from their Class I sales are shared with all pooled producers. The witness noted that Prairie Farms does de-pool its manufacturing milk when it is advantageous but emphasized that this practice is detrimental to producers who are consistently serving the Class I market. The witness urged adoption of Proposal 7 but also offered support for Proposal 6. Seven dairy farmers whose milk is pooled on the Mideast order testified in support of Proposal 7. The dairy farmers testified that the purpose of the Federal order system is to ensure that pooled producers receive an equitable share of the revenue generated from all classes of milk. The witnesses were of the opinion that the practice of de-pooling caused them to lose a substantial amount of potential income. These witnesses stressed that if manufacturing handlers choose to pool their milk receipts in months when the PPD is positive, it is only equitable for them to pool their milk receipts when the PPD is negative. The witnesses believed that de-pooling results in producers who consistently service the Class I needs of the market receiving a lower blend price than they otherwise would have if all milk had been pooled. The witnesses maintained that because de-pooling erodes revenues VerDate Aug<31>2005 16:28 Sep 12, 2006 Jkt 208001 received by pooled producers, the Department should address de-pooling on an emergency basis. Another dairy farmer witness whose milk is pooled on the Mideast order testified in support of limiting depooling but did not offer support for any specific proposal. The witness said that as a result of de-pooling in the months of April and May 2004, their farm lost over $6,000. The witness was of the opinion that the Department should act on an emergency basis since the ability for manufacturing handlers to de-pool milk will continue to lower the proceeds received by producers that service the needs of the Class I market. A witness appearing on behalf of Smith Dairy Products Company testified in support of proposals limiting depooling. Smith operates two distributing plants located in the Mideast marketing area. The witness said that the practice of de-pooling manipulates the intent of the Federal milk order system and results in the lowering of the blend prices paid to producers that service the needs of the Class I market. The witness did not offer support for a specific proposal but urged the Department to eliminate the ability to de-pool milk on the Mideast order on an emergency basis. A witness appearing on behalf of Continental testified in opposition to Proposals 4, 6, 7, and 8. The witness opposed adoption of these proposals because they would allow milk delivered to a distributing plant to be immediately re-pooled and maintained that Proposal 5 would be a better option for the marketing area. A witness appearing on behalf of White Eagle Cooperative Federation (White Eagle) testified neither in support of or opposition to Proposal 7. White Eagle is a federation of cooperatives and independent producers that markets approximately 150 million pounds of milk per month on the Mideast order. The witness asserted that adoption of the 115 percent pooling standard could limit smaller cooperatives from increasing their dairy farmer membership. The witness testified that adoption of Proposal 7 would allow for an increase in the volume of milk pooled above 115 percent if a producer who was pooled on another Federal order sought to become pooled on the Mideast order but would not make the same exception for a producer continually pooled on the Mideast order who increases production. The witness said that if depooling were limited on the Mideast order, de-pooled milk would seek to be pooled on other Federal orders where there are no de-pooling restrictions. The PO 00000 Frm 00007 Fmt 4701 Sfmt 4702 54177 witness was of the opinion that the depooling issue should be handled on a national basis and with a recommended decision where the public could submit comments. These positions were reiterated in their post-hearing brief filed on behalf of White Eagle, Superior Dairy, United Dairy, Guggisberg Cheese, Brewster Dairy, and Dairy Support, Inc. A post-hearing reply brief submitted on behalf of Dean expressed opposition to Proposal 5. Dean argued that Proposal 5 was too restrictive because it contained no provision to enable depooled milk to become immediately repooled if it was truly needed to service the fluid market later in the month. Comments filed on behalf of Foremost Farms USA Cooperative (Foremost) and Alto Dairy Cooperative (Alto), hereinafter, referred to as ‘‘Foremost, et al.’’, took exception to the Recommended Decision. Foremost, et al., are member owned Capper-Volstead cooperatives that market milk and supply distributing plants in the Mideast marketing area. Foremost, et al., took exception to the proposed regulations that would require a producer to be continuously pooled on another Federal order for the previous 3 months to be exempted from the repooling standards. Their exception asserted that a producer should be allowed to have some de-pooled milk receipts during the previous 3 months and still be exempted from the repooling standards of the Mideast order. Comments filed on behalf of Family Dairies USA took exception with amendments proposed in the Recommended Decision. Family Dairies is a member owned Capper-Volstead cooperative whose milk is pooled on the Mideast order. Family Dairies wrote that the Recommended Decision did not address the cause of negative PPD’s— class price inversions—and therefore opposed the adoption of the proposed amendments. Comments were filed on behalf of Associated Milk Producers, Inc.; Bongards’ Creameries; Ellsworth Cooperative Creamery; Family Dairies USA; First District Association; Davisco Foods; Valley Queen Cheese Company; and Wisconsin Cheese Makers Association, hereinafter referred to as the ‘‘AMPI Group.’’ The AMPI Group took exception to the re-pooling standard proposed by the Department and asserted that the proposed standard did not solve the underlying cause of de-pooling. The AMPI Group asserted that the Department arbitrarily refused to consider proposals that would end the time lag in classified price announcements as a remedy to depooling and did not consider alternative E:\FR\FM\13SEP5.SGM 13SEP5 jlentini on PROD1PC65 with PROPOSALS5 54178 Federal Register / Vol. 71, No. 177 / Wednesday, September 13, 2006 / Proposed Rules proposals that would be less burdensome to handlers or requests to address the practice of de-pooling on a national basis. The AMPI Group commented that provisions which allow the Market Administrator to waive the re-pooling standard for handlers that experience a significant change in their milk supply due to unusual circumstances should be more specific as to what constitutes an unusual circumstance. The AMPI Group argued that small manufacturers may experience a growth in their milk supply that would not be considered an unusual circumstance and that such a situation should not cause a handler to be penalized under the re-pooling standard. The AMPI Group also cited various legal issues as reasons why the Department should not adopt the repooling standards. All Federal milk marketing orders require the pooling of milk received at pooled distributing plants—which is predominately Class I milk—and all pooled producers and handlers on an order share in the additional revenue arising from higher valued Class I sales. Manufacturing handlers and cooperatives of Class II, III and IV uses of milk who meet the pooling and performance standards make all of their milk receipts eligible to be pooled and usually find it advantageous. Manufacturing handlers and cooperatives who supply a portion of their total milk receipts to Class I distributing plants receive the difference between their use-value of milk and the order’s blend price. Federal milk orders, including the Mideast order, establish limits on the volume of milk eligible to be pooled that is not for fluid uses primarily through diversion limit standards. However, manufacturing handlers and cooperatives are not required, as are Class I handlers, to pool all their eligible milk receipts. According to the record, manufacturing handlers and cooperatives have opted to not pool their milk receipts when the manufacturing class prices of milk are higher than the order’s blend price— commonly referred to as being ‘‘inverted.’’ During such months, manufacturing handlers and cooperatives have elected to not pool all of their eligible milk receipts because doing so would require them to pay into the PSF of the order, the mechanism through which handler and producer prices are equalized. When prices are not inverted, these handlers would pool all of their eligible receipts and receive a payment or draw from the PSF. In receiving a draw from the PSF, such handlers have sufficient money to pay at VerDate Aug<31>2005 16:28 Sep 12, 2006 Jkt 208001 least the order’s blend price to their supplying dairy farmers. When manufacturing handlers and cooperatives opt to not pool all of their eligible milk receipts in a month, they are essentially avoiding a payment to the PSF. This, in turn, enables them to avoid the marketwide sharing of the additional value of milk that accrues in the higher-valued uses of milk other than Class I. When the Class I price again becomes the highest valued use of milk, or when other class-price relationships become favorable, the record reveals that these same handlers opt to again pool their eligible milk receipts and draw money from the PSF. It is the ability of manufacturing handlers and cooperatives opting to not pool milk and thereby avoid the marketwide sharing of the revenue accruing from non-Class I milk sales that is viewed by proponents as giving rise to disorderly marketing conditions. According to proponents, producers and handlers who cannot escape being pooled and priced under the order are not assured of equitable prices. The record reveals that since the implementation of Federal milk marketing order reform in January 2000, and especially in more recent years, large and rapid increases in manufactured product prices during certain months have provided the economic incentives for manufacturing handlers to opt not to pool eligible milk on the Mideast order. For example, during the 3-month period of February to April 2004, the Class III price increased over 65 percent from $11.89 cwt to $19.66 cwt. During the same time period, total producer milk pooled on the Mideast order decreased by nearly 40 percent from 1.4 billion pounds to 873 million pounds. When milk volumes of this magnitude are not pooled the impacts on producer blend prices are significant. Producers who incur the additional costs of consistently servicing the Class I needs of the market receive a lower return than would otherwise have been received if they did not continue to service the Class I market. Prices received by dairy farmers who supplied the other milk needs of the market are not known. However, it is reasonable to conclude that prices received by dairy farmers were not equitable or uniform. The record reveals that ‘‘inverted’’ prices of milk are generally the result of the timing of Class price announcements. Despite changes made as part of Federal milk order reform to shorten the time period of setting and announcing Class I milk prices and basing the Class I price on the higher of the Class III or Class IV price to avoid PO 00000 Frm 00008 Fmt 4701 Sfmt 4702 price inversions, large month-to-month price increases in Class III and Class IV product prices sometimes trumped the intent of better assuring that the Class I price for the month would be the highest-valued use of milk. In all orders, the Class I price (and the Class II skim price) is announced prior to or in advance of the month for which it will apply. The Class I price is calculated by using the National Agricultural Statistics Service (NASS) surveyed cheese, butter, nonfat dry milk and dry whey prices for the two most current weeks prior to the 24th day of the preceding month and then adding a differential value to the higher of either the advanced Class III or Class IV price. Historically, the advance pricing of Class I milk has been used in all Federal orders because Class I handlers cannot avoid regulation and since they are required to pool all of their Class I milk receipts they should know their product costs in advance of notifying their customers of price changes. However, milk receipts for Class III and IV uses are not required to be pooled; thus, Class III and IV product prices (and the Class II butterfat value) are not announced in advance. These prices are announced on or before the 5th of the following month. Of importance here is that manufacturing plant operators and cooperatives have the benefit of knowing all the classified prices of milk before making a decision to pool or not pool eligible receipts. The record reveals that the decision of manufacturing handlers or cooperatives to pool or not pool milk is made on a month-to-month basis and is generally independent of past pooling decisions. Manufacturing handlers and cooperatives that elected to not pool their milk receipts did so to avoid making payments to the PSF and they anticipated that all other manufacturing handlers and cooperatives would do the same. However, the record indicates that normally pooled manufacturing handlers and cooperatives met the pooling standards of the order to ensure that the Class I market was adequately supplied and that they established eligibility to pool their physical receipts including diversions to nonpool plants. Opponents to proposals to deter depooling are of the view that meeting the pooling standards of the order and deciding how much milk to pool are unrelated events. Proponents took the view that participation in the marketwide pool should be based on a long-term commitment to supply the market because in the long-term it is the sales of higher priced Class I milk that adds additional revenue to the pool. E:\FR\FM\13SEP5.SGM 13SEP5 jlentini on PROD1PC65 with PROPOSALS5 Federal Register / Vol. 71, No. 177 / Wednesday, September 13, 2006 / Proposed Rules The producer price differential, or PPD, is the difference between the Class III price and the weighted average value of all Class I, II and IV milk pooled. In essence, the PPD is the residual revenue remaining after all butterfat, protein and other solids values are paid to producers. If the pooled value of Class I, II and IV milk is greater than the Class III value, dairy farmers receive a positive PPD. While the PPD is usually positive, a negative PPD can occur when class prices rise rapidly during the 6week period between the time the Class I price is announced and the time the Class II butterfat and III and IV milk prices are announced. When manufacturing prices fall, this same lag in the announcement of class prices yields a positive PPD. As revealed by the record, when manufacturing plants and cooperatives opted to not pool milk because of inverted price relationships, PPD’s were much more negative. When this milk is not pooled, a larger percentage of the milk remaining pooled will be the ‘‘lower’’ priced Class I milk. When manufacturing milk is not pooled the weighted average value of milk decreases relative to the Class II, III or IV value making the PPD more negative. For example, record evidence demonstrated that in April 2004, a month when a sizeable volume of milk was not pooled, the PPD was a negative $3.78 per cwt. If all eligible milk had been pooled, the PPD would have been $1.66 per cwt higher or a negative $2.12 per cwt. This $1.66 per cwt represents the additional burden borne by those producers who remain pooled. The record reveals that when manufacturing handlers and cooperatives opt to not pool milk, unequal pay prices may result to similarly located dairy farmers. For example, Dean noted that when a cooperative delivers a high percentage of their milk receipts to a distributing plant, it lessens their ability to not pool milk and makes them less competitive in the marketplace relative to other producers and handlers. Other evidence in the record supports conclusions identical to Dean that when a dairy farmer or cooperative is able to receive increased returns from shipping milk to a manufacturing handler during times of price inversions, other dairy farmers or cooperatives who may have shipped more milk to a pool distributing plant are competitively disadvantaged. The record of this proceeding reveals that the ability of manufacturing handlers and cooperatives to not pool all of their eligible milk receipts gives rise to disorderly marketing conditions and warrants the establishment of VerDate Aug<31>2005 16:28 Sep 12, 2006 Jkt 208001 additional pooling standards to safeguard marketwide pooling. Current pooling provisions do not require or prohibit handlers and cooperatives from pooling all eligible milk receipts. However, the record reveals that when handlers and cooperatives opt to not pool milk, inequities arise among producers and handlers that are contrary to the intent of the Federal milk marketing order program— maintaining orderly marketing conditions. The record contains extensive testimony regarding the effects on the milk order program resulting from advance pricing and the priority the milk order program has placed on the Class I price being the highest valued use of milk. It remains true that the Class I use of milk is still the highest valued use of milk notwithstanding those occasional months when milk used in usually lower-valued classes may be higher. This has been demonstrated by an analysis of the effective Class I differential values—the difference in the Class I price at the base zone of Cuyahoga County, Ohio, and the higher of the Class III or Class IV price— for the 65-month period of January 2000 through May 2005 performed by USDA.1 These computations reveal that the effective monthly Class I differential averaged $1.97 per cwt. Accordingly, it can only be concluded that if the longerterm Class I sales continue to be the source of additional revenue accruing to the pool even when, in some months, the effective differential is negative. Price inversions occur when the wholesale price for manufactured products rises rapidly indicating a tightening of milk supplies to produce those products. It is for this reason that the Department chose the higher of the Class III or Class IV prices as the mover of the Class I price. Distributing plants must have a price high enough to attract milk away from manufacturing uses to meet Class I demands. As revealed by the record, this method has not been sufficient to provide the appropriate price signals to assure an adequate supply of milk for the Class I market. Accordingly, additional measures are needed as a means of assuring that milk remains pooled and thus available to the Class I market. Adoption of Proposal 7 is a reasonable measure to meet the objectives of orderly marketing. This final decision does find that disorderly marketing conditions are present when producers do not receive 1 Official notice is taken of data and information published in Market Administrator Bulletins, as posted on individual Market Administrator Web sites. PO 00000 Frm 00009 Fmt 4701 Sfmt 4702 54179 uniform prices. Handlers and cooperatives opting to not pool milk do not account to the pool at the classified use value of those milk receipts. They do not share in all the additional costs and burdens with those producers who are pooled and who are incurring the costs of servicing the Class I needs of the market. This is not a desired or reasonable outcome especially when the same handlers and cooperatives will again pool all of their eligible receipts when class-price relationships change in a subsequent month. These inequities borne by the market’s producers are contrary to the intent of the Federal order program’s reliance on marketwide pooling—ensuring that all producers supplying the market are paid uniform prices for their milk regardless of how the milk of any single producer is used. Exceptions filed by the AMPI Group and Foremost, et al., asserting that the re-pooling standards do not address the cause of de-pooling—price inversions— are unpersuasive. It is reasonable that the order contain pooling provisions intended to deter the disorderly conditions that arise when de-pooling occurs. Such provisions maintain and enhance orderly marketing. Accordingly, this final decision finds it reasonable to adopt provisions that limit the volume of milk a handler or cooperative may pool during the months of April through February to 115 percent of the total volume pooled by the handler or cooperative in the prior month and to 120 percent of the prior month’s pooled volume during March. Adoption of this standard will not prevent manufacturing handlers or cooperatives from electing to not pool milk. However, it should serve to maintain and enhance orderly marketing by encouraging participation in the marketwide pooling of all classified uses of milk. A modification proposed by Dean in their exceptions to the Recommended Decision to lower the re-pooling standard in February to 110 percent is denied. This modification was not discussed at the hearing. The 115 percent re-pooling standard should adequately deter excessive de-pooling. However, should de-pooling abuses continue under the new re-pooling standards the Department can be petitioned to adjust the standards. Despite exceptions filed by the AMPI Group, this decision continues to adopt provisions that grant authority to the Market Administrator to waive the repooling standard for a bloc of milk due to unusual circumstances. This discretion has been previously granted to the Market Administrator to amend or waive other pooling standards and it is E:\FR\FM\13SEP5.SGM 13SEP5 jlentini on PROD1PC65 with PROPOSALS5 54180 Federal Register / Vol. 71, No. 177 / Wednesday, September 13, 2006 / Proposed Rules reasonable to make a similar accommodation here. Consideration was given on whether de-pooling should be considered at a national hearing with other, broader national issues of milk marketing. However, each marketing area has unique marketing conditions and characteristics that have areaspecific pooling provisions to address those specific conditions. Because of this, pooling issues are considered unique to each order. Historically, pooling issues have been addressed on an order by order basis and, despite exceptions filed by the AMPI Group, this final decision continues to find that it would be unreasonable to address pooling issues, including de-pooling, on a national basis. Other objections by the AMPI Group that the Department should take into account a manufacturers cost of production are irrelevant in regards to the pooling standards of the order. The record does not support finding that manufacturers de-pool milk to recoup manufacturing costs that they otherwise cannot. The record clearly establishes that manufacturers de-pool their milk supply to avoid making a payment into the order’s PSF. Nevertheless, manufacturing allowances, which are uniform in all Federal orders, are currently being addressed by the Department on a national basis (71 FR 545). Some manufacturing handlers and cooperatives argued at the hearing and noted in exceptions to the Recommended Decision that their milk did perform in meeting the Class I needs during the month and this occurred before making their pooling decisions. They argue that the Class I market is therefore not harmed and that the intents and goals of the order program are satisfied. In response to these arguments, this decision finds that the practice of de-pooling undermines the intent of the Federal order program to assure producers uniform prices across all uses of milk normally associated with the market as a critical indicator of orderly marketing conditions. Exceptions filed by Foremost, et al., arguing that a producer should be allowed to de-pool some milk in each month and still be allowed to utilize the exception for producers or blocs of producers moving between orders is contrary to the goal of the re-pooling provision. If a producer were allowed to de-pool milk in one Federal order and subsequently re-pool in a second Federal order without limitation, the repooling standard would be severely undermined. As a matter of clarification, a producer can be depooled in one order and re-pooled in the VerDate Aug<31>2005 16:28 Sep 12, 2006 Jkt 208001 Mideast order as part of the 115 percent re-pooling limitation, but no further exemption from the limitation would apply to this producer. Handlers and cooperatives who depool purposefully do so to gain a momentary financial benefit (by avoiding making payments to the PSF) which would otherwise be equitably shared among all market participants. While the order’s performance standards tend to assure that distributing plants are adequately supplied with fresh, fluid milk, the goals of marketwide pooling are undermined by the practice of depooling. Producers and handlers who regularly and consistently bear the costs of serving the Class I needs of the market will not equitably share in the additional value arising momentarily from non-fluid uses of milk. These same producers and handlers will, in turn, be required to share the additional revenue arising from higher-valued Class I sales in a subsequent month when class-price relationships change. The five proposals considered in this proceeding to deter the practice of depooling in the Mideast order have differences. They all seek to address market disorder arising from the practice of de-pooling. However, this final decision does not find adoption of the three ‘‘dairy farmer for other market’’ proposals—Proposals 4, 5 and 8—reasonable because they would make it needlessly difficult for milk to be repooled and because their adoption may disrupt prevailing marketing channels or cause the inefficient movement of milk. Likewise, Proposal 6, which suggests restricting pooling in a month to 115 percent of the prior month’s volume pooled by the handler, is not adopted. Adoption of this proposal would disrupt current marketing conditions beyond what the record justifies. A request submitted by DFA, et al., in their exceptions to the Recommended Decision to exempt all milk delivered to distributing plants in excess of the previous month’s pooled volume regardless of its allocation is denied. Such a provision could result in the uneconomical movement of milk to circumvent the re-pooling standard. Therefore, this final decision adopts Proposal 7 to limit the pooling of milk by a handler during the months of April through February to 115 percent of the total milk receipts the handler pooled in the prior month and to 120 percent of the prior month’s pooled volume during March because it provides the most reasonable measure to deter the practice of de-pooling. PO 00000 Frm 00010 Fmt 4701 Sfmt 4702 B. Producer Definition A proposal published in the hearing notice as Proposal 3, seeking to specify the length of time a dairy farmer may lose Grade A status before losing producer status on the order, is not adopted. Proposal 3, offered by Dean, seeks to amend the Producer milk definition by explicitly stating that a dairy farmer may lose Grade A status for up to 21 calendar days per year before needing to requalify as a producer on the order. The Mideast order does not specify the length of time a dairy farmer may lose Grade A status before needing to requalify as a producer on the order. Two witnesses appearing on behalf of Dean testified in support of Proposal 3. The Dean witnesses supported adoption of Proposal 3 to provide for 21 days in a year that a producer could lose Grade A approval before needing to reassociate with the Mideast order by making a delivery to a Mideast pool plant. By providing for an exact number of days, the witnesses emphasized, a loss of Grade A status could not be used as a method to de-pool or to circumvent the pooling standards. The witnesses believed that the Market Administrator should be granted the authority to extend the length of time a producer could lose Grade A status before they would have to requalify if the loss of status was due to circumstances beyond the producers control. A post-hearing brief submitted on behalf of Dean reiterated their belief that this change was necessary to ensure that the repooling standards would not be circumvented. Comments filed on behalf of Dean took exception to the Department’s denial of Proposal 3 to define the term ‘‘temporary’’ in the producer milk definition. Dean maintained that a producer should bear the burden of establishing that their temporary loss of Grade A approval was not designed to avoid the new re-pooling standards. The Producer definition of the Mideast order currently does not define the length of time a producer may lose Grade A status before needing to requalify for producer status on the order. The issue of qualifying for producer status is important since it determines which producers and which producer milk is entitled to share in the revenues arising from the marketwide pooling of milk on the Mideast order. The definition of ‘‘temporary’’ used by the Market Administrator has accommodated the Mideast market by giving producers a reasonable amount of time to regain Grade A status without burdening the market with excessive touch-base shipments or recordkeeping E:\FR\FM\13SEP5.SGM 13SEP5 Federal Register / Vol. 71, No. 177 / Wednesday, September 13, 2006 / Proposed Rules jlentini on PROD1PC65 with PROPOSALS5 requirements. Limiting the time period a producer can lose Grade A status would require handlers and the Market Administrator to track the producer’s loss of Grade A status throughout the year to determine when the 21 day limit is reached. Despite exceptions filed by Dean requesting an exact definition of ‘‘temporary’’, this decision continues to find that the additional touch-base shipments that would be required for a dairy farmer to requalify for producer status on the order would cause uneconomic shipments of milk. Additionally, the increased recordkeeping requirements would burden not only the handlers but also the Market Administrator’s office without contributing to the goals and application of the proposed amendments to the pooling standards contained in this decision. Other amendments adopted in this decision that grant the Market Administrator authority to disqualify milk for pooling if it is found that the handler attempted to circumvent the re-pooling standards provide an adequate safeguard against pooling abuses. Accordingly, Proposal 3 is not adopted. 2. Transportation Credits A proposal offered by DFA, published in the hearing notice as Proposal 9 and modified at the hearing, seeking to establish a transportation credit provision is not adopted. Proposal 9 seeks to establish a year-round transportation credit on shipments of milk from farms to distributing plants at a rate of $0.0031 per cwt per mile. A separate rate of $0.0024 per cwt per mile for eligible milk movements in the State of Michigan was offered as a modification by MMPA. The credit would not be applicable on the first 75 miles of movement and would be limited to 350 miles. The Mideast order does not currently provide for transportation credits. A witness appearing on behalf of DFA/MMPA testified that the establishment of a transportation credit in the Mideast order is warranted because the cost of supplying the Class I market is not being equitably borne by all pooled producers. The witness testified that all producers benefit from Class I sales because the revenue generated is distributed through the marketwide pool. In particular, the witness said that all pooled producers were not equitably sharing in the costs of transporting supplemental supplies to meet Class I demand. The witness was of the opinion that Federal order prices should reimburse producers for the cost of transporting milk supplies to Class I VerDate Aug<31>2005 16:28 Sep 12, 2006 Jkt 208001 plants when needed. The witness emphasized that Proposal 9 is designed to equitably distribute some of the cost of transporting those Class I milk supplies with all pooled producers. The DFA/MMPA witness explained that the proposed exemption of the first 75 miles of eligible milk movement recognizes the producer’s responsibility to deliver their milk to the market. The 75 mile exclusion was appropriate, the witness contended, because in the two northern reserve supply regions of Michigan and northern Ohio, the average distance milk travels to a distributing plant is 71 and 74 miles, respectively. The witness also said that a maximum applicable milk movement of 350 miles is a reasonable safeguard to prevent milk from traveling great distances solely to receive the transportation credit. The DFA/MMPA witness also noted that the Market Administrator should be given the discretion to adjust the transportation credit rate if market conditions warrant. The witness asserted that the market’s blend price would be reduced by approximately $0.0297 per cwt per month if Proposal 9 was adopted. The witness maintained that a small reduction in the blend price received by farmers to cover a transportation credit was justified because of the benefit they would receive from having Class I plants fully supplied. The DFA/MMPA witness contended that the northern region of the Mideast marketing area is a milk surplus region while the southern portion of the marketing area is usually a milk deficit region. The witness said that often surplus milk from the northern region of the marketing area must be transported long distances to supply the southern region for Class I use. Before Federal order reform, the witness asserted, the pricing structure of the Federal order program provided location adjustments that encouraged milk to move to Class I plants because the difference in the Class I differentials between the surplus and deficit areas provided producers sufficient reimbursement for the transportation costs incurred. However, the witness stressed, the Mideast order’s current Class I differential values between surplus and deficit areas do not provide sufficient incentive to encourage this north to south movement of milk. According to the DFA/MMPA witness, the cost to move a load of milk within the Mideast marketing area from a $1.80 Class I differential zone to a $2.20 Class I differential zone is $0.66 per cwt. However, the order’s Class I differential’s only provided a $0.40 per cwt incentive to transport that milk. The PO 00000 Frm 00011 Fmt 4701 Sfmt 4702 54181 result, said the witness, is that Class I handlers have to pay additional money to fulfill their Class I needs although all pooled producers benefit from the higher returns generated from those Class I sales. The witness maintained that Federal order prices should cover all transportation costs for supplemental milk supplies and stressed that the proposed transportation credit only seeks to recoup 66 percent of that cost. The DFA/MMPA witness provided over-order premium and cost information experienced by DFA when delivering supplemental milk supplies. The witness said that the average overorder premium charged for supplemental milk in 2004 was $1.72 per cwt. The witness explained that after subtracting out various customer credits, transportation costs, zone adjustments and give up charges, the net return, on average, was $0.71 per cwt to pay producers and cover the operating costs of the cooperative. The witness discussed the marketing decisions of DFA for October 2004, a month when supplemental supplies are historically needed. The witness said that in October 2004 DFA purchased over 21 million pounds of supplemental milk for delivery to distributing plants in the Mideast marketing area. After subtracting costs from the over-order premium, there was an average of $0.45 per cwt to pay producers and cover operating costs. The witness estimated that if Proposal 9 had been in place during October 2004, DFA would have received an $0.08 per cwt transportation credit on its supplemental supplies of Class I milk. A post-hearing brief submitted on behalf of DFA/MMPA reiterated their position that transportation credits for the Mideast order are appropriate to ensure that all pooled producers will more equitably bear some costs in servicing the Class I market. The brief also argued that Proposal 9, as modified at the hearing, contained appropriate mileage limits to safeguard against handlers seeking to pool milk on the order solely for the purpose of receiving the credit. The DFA/MMPA brief contended that the Mideast marketing area lacks sufficient supplemental supplies within the marketing area to service the Class I needs of the market. The brief reiterated that DFA/MMPA members are currently bearing a disproportionate share of the cost of supplying the Class I market because they have to transport milk long distances but are not reimbursed for the additional transportation costs incurred. The brief reiterated that while there are reserve supplies of milk in northern regions of E:\FR\FM\13SEP5.SGM 13SEP5 jlentini on PROD1PC65 with PROPOSALS5 54182 Federal Register / Vol. 71, No. 177 / Wednesday, September 13, 2006 / Proposed Rules the marketing area that could be delivered to the deficit southern regions, the Class I differential does not sufficiently reimburse the additional transportation cost. Comments filed on behalf of DFA, et al., took exception to the Department’s denial of establishing transportation credits in the Mideast order. DFA, et al., argued that record evidence demonstrates that the Mideast order has clear deficit and surplus milk supply regions and asserted that despite only submitting data for October 2004, the testimony given at the hearing shows that the supplemental milk supplies are needed year-round in the Mideast marketing area. DFA, et al., took exception to the assertion that cooperatives should be able to recoup their additional transportation costs in the marketplace. DFA, et al., concluded that the record is replete with data demonstrating that producers supplying distant Class I plants do not receive uniform prices and requested that the Department establish a transportation credit provision to remedy this disorderly marketing condition. A witness appearing on behalf of Foremost, et al., was of the opinion that a transportation credit on producer milk delivered to distributing plants was warranted because of the high cost of servicing Class I plants in the Mideast marketing area. The witness explained that on average, the distance from farms to distributing plants in the Mideast marketing area is longer than the distance between farms and manufacturing plants. Therefore, the witness was of the opinion that since producers pay the transportation cost for their milk, a producer delivering to a distributing plant will always receive a lower price for their milk because their transportation costs will be greater. The Foremost, et al., witness also offered a modification to Proposal 9 that the proposed transportation credit should apply to milk transfers from pool supply plants to pool distributing plants. The witness testified that from 2002 through 2004, Foremost delivered approximately 20 million pounds of milk from their pool supply plants to pool distributing plants during the months of August through November. However, the witness said, under the provision as proposed by DFA/MMPA, these milk transfers would not have received the transportation credit. The witness noted that the Upper Midwest order provides for transportation and assembly credits for milk transferred from supply plants to distributing plants and that a transportation credit provision for the Mideast order should VerDate Aug<31>2005 16:28 Sep 12, 2006 Jkt 208001 also be applicable for plant-to-plant milk movements. The Foremost, et al., witness explained that the Mideast Milk Marketing Agency (MEMMA), of which Foremost is a member, markets the milk of its members and charges Class I handlers an over-order premium for milk delivered to their plants. The premium charges are negotiated between MEMMA and the individual distributing plants, the witness explained. The witness was of the opinion that to remain competitive with other suppliers and for their customers to remain competitive in the market, MEMMA cannot increase their overorder premiums to a rate that would compensate the costs of moving milk as would a transportation credit. A post-hearing brief submitted on behalf of Foremost, et al., maintained their support of Proposal 9 with their modification to include plant-to-plant milk movements as eligible for a transportation credit. The brief contended including credits for plantto-plant transfers is appropriate because, in their opinion, all Class I milk shipments to distributing plants should be eligible for a transportation credit. A witness appearing on behalf of Michigan Milk Producers Association (MMPA) testified in support of establishing a transportation credit for Class I milk with a modification. The witness proposed that a lower rate be applicable for milk movements within the State of Michigan. According to the MMPA witness, trucks used to haul milk within the State of Michigan are often larger because of higher gross weight limits allowed by the State. Typically, a trailer that can hold up to 90,000 pounds of milk, results in transportation costs of approximately $0.0036 per loaded mile, the witness noted. However, in keeping with testimony offered by DFA/MMPA for partial reimbursement of transportation cost, the witness said, Michigan distributing plants receiving milk from Michigan farms should receive a lower credit rate of $0.0024 per loaded mile. Otherwise, the witness said, Michigan handlers would recoup more than 67 percent of their actual transportation cost. The witness was of the opinion that the gain to producers from having all Class I needs satisfied outweighed the small reduction that a transportation credit would have on the blend price. The MMPA witness testified that the Producer Equalization Committee (PEC), which was identified as the over-order pricing agency in Michigan, charges an over-order premium for Class I and II milk. According to the witness, these PO 00000 Frm 00012 Fmt 4701 Sfmt 4702 premiums over the previous 2 years have ranged from $1.40 to $1.65 per cwt. The witness explained that PEC pools its over-order revenue and equitably distributes it among participating producers. According to the witness, individual producers who incurred higher transportation costs for shipping milk a long distance will sometimes receive a larger share of the over-order revenue. The MMPA witness testified in opposition to the Foremost, et al., modification to provide transportation credits on plant-to-plant milk movements. The witness argued that transportation credits should be used to promote efficient movements of milk and that shipping milk directly from farms to distributing plants in the Mideast marketing area is the most efficient movement. The witness was of the opinion that data provided by the Market Administrator demonstrated that there are adequate reserve supplies located within reasonable distances for farm-to-distributing plant deliveries. The witness asserted that providing a transportation credit on milk transfers between plants would encourage milk to be pooled from plant locations far from the marketing area and would inappropriately qualify producers—who would not be reliable suppliers of milk for the Class I needs of the Mideast market—to be pooled on the order. A post-hearing brief submitted on behalf of MMPA reiterated their support for establishing a transportation credit for Class I milk as they modified it during the hearing and opposition to including milk delivered from pool supply plants to pool distributing plants. A brief submitted on behalf of Dean expressed support for adopting a transportation credit provision with a modification. The brief said that providing a transportation credit to reimburse the cost of supplying the Class I market is appropriate, but expressed concern with exempting the proposed first 75 miles of milk movement from receiving the credit. Dean believed that such an exemption discriminates against local farmers that supply Class I plants. The Dean brief also asserted that if producer milk receives a transportation credit for supplying the Class I market, milk from that same farm should not be permitted to divert to a plant that is located outside the Mideast marketing area. The brief explained that milk diverted to plants outside the marketing area should be viewed as ‘‘dairy farmer for other markets’’ milk. While Dean acknowledged that such treatment of out-of-area diverted milk is a major change to Proposal 9, their brief E:\FR\FM\13SEP5.SGM 13SEP5 jlentini on PROD1PC65 with PROPOSALS5 Federal Register / Vol. 71, No. 177 / Wednesday, September 13, 2006 / Proposed Rules nevertheless proposed that for milk diverted to out-of-area plants from the same farm that milk receives a transportation credit, such milk should not count as shipments for the purpose of meeting the order’s touch-base standard. Seven dairy farmers whose milk is pooled on the Mideast order testified in support of establishing a transportation credit for Class I milk. Five of the dairy farmers were members of cooperatives and two were independent dairy farmers. The dairy farmers were of the opinion that the entire market should bear the costs associated with serving the Mideast Class I market, not solely the cooperatives that provide supplemental supplies to the order’s distributing plants. A witness appearing on behalf of OFU testified in opposition to adopting transportation credits. The witness said that a transportation credit would discourage the use of local milk to supply Mideast order pool plants. A witness appearing on behalf of Prairie Farms testified in opposition to adopting transportation credits for Class I milk. The witness said that the modified transportation credit proposals would provide no benefit to Prairie Farms members who supply distributing plants because most of their producers are located less than 75 miles from the plant. The witness contended that transportation credits in the Mideast order would lead to inefficient milk movements for the sole purpose of receiving a credit. A witness appearing on behalf of Smith Dairies testified in opposition to adopting transportation credits for Class I milk. The witness was of the opinion that providing a transportation credit would reduce the blend price paid to pooled producers who consistently supply distributing plants. The witness stressed that handlers who have supply agreements with distributing plants should account for their transportation costs of supplemental supplies and not ask the government for regulatory relief. The witness also asserted that the handler’s business model should account for all transportation costs of milk from the farm to the retail customer. The witness was of the opinion that transportation credits could give a competitive advantage to those handlers that receive the credit. The witness said that when Smith Dairies purchases supplemental supplies, the price negotiated for the supplemental supplies does cover transportation costs and a transportation credit would be additional reimbursement. VerDate Aug<31>2005 16:28 Sep 12, 2006 Jkt 208001 A brief submitted on behalf of Continental expressed opposition to the transportation credit provision. Continental believed that adopting Proposal 9 would only benefit the proponents of the proposal and would reduce the blend price paid to close-in producers who supply a distributing plant. The brief stated that Continental’s major concern was that the credit would be paid by the handlers with no guarantee that the credit would be transferred to a non-cooperative producer who incurred hauling costs. Continental was of the opinion that adoption of the proposal could pressure non-members into joining a cooperative and thereby limit producer choices as to where they can market their milk. The Agricultural Marketing Agreement Act of 1937 (AMAA), as amended, provides authority for milk marketing orders to contain provisions for making payments to handlers for performing services that are of marketwide benefit. In this context, a marketwide service payment is a charge to all producers whose milk is pooled on the order, regardless of the use classification of such milk. The payment, in the form of a credit, is deducted from the total value of all milk pooled before computing the order’s blend price. The AMAA identifies services that may be of marketwide benefit to include, but are not limited to: (1) Providing facilities to furnish additional supplies of milk needed by handlers and to handle and dispose of milk supplies in excess of quantities needed by handlers; (2) handling on specific days quantities of milk that exceed quantities needed by handlers; and (3) transporting milk from one location to another for the purpose of fulfilling requirements for milk of a higher use classification or for providing a market outlet for milk of any use classification. Proposal 9, as proposed and modified by DFA/MMPA seeks to establish a transportation credit as a marketwide service payment for milk shipped directly from dairy farms to distributing plants. The credit would only be applicable to milk classified as Class I and would be paid at a rate of $0.0031 per cwt per mile. The credit would not apply to the first 75 miles of applicable milk movements because this is the typical distance milk moves from farm to distributing plants in the marketing area. Receipt of the credit would be limited to not more than 350 miles because the Class I needs of the marketing area are satisfied without the need to reach further for a supply. In light of testimony that higher gross vehicle weight limits are provided in PO 00000 Frm 00013 Fmt 4701 Sfmt 4702 54183 the State of Michigan, MMPA proposed a modification to establish a separate and lower transportation credit rate of $0.0024 per cwt per mile for intra-state milk movements from farms to distributing plants in the State of Michigan. Foremost, et al., sought to expand the adoption of transportation credits for milk transfers between supply plants and distributing plants because milk transferred from supply plants, like direct-shipped milk, also serves the Class I market and should therefore be eligible for a transportation credit. This modification was not supported by DFA or MMPA, the proponents of Proposal 9. An example of a Federal milk marketing order that currently provides for a marketwide service payment is the transportation and assembly credits employed in the Upper Midwest milk marketing order. The transportation and assembly credit provisions of the Chicago Regional order were carried into the provisions of the current Upper Midwest order as part of Federal order reform. The transportation credit feature of the provision provides transporting handlers with a credit of $0.028 per cwt per mile for milk transfers from pool supply plants to pool distributing plants. The credit is deducted from the total value of all milk pooled on the order. Because the transportation credit reduces the total dollar value of the milk pooled, it results in a lower blend price paid to all producers. These provisions were first implemented in 1987 to ensure that the costs of serving the Class I market of the Chicago Regional marketing area were more equitably shared among all market participants that benefited from the additional revenue generated from Class I sales. Because of the very liberal pooling standards of the Upper Midwest order, much of the milk is pooled through the diversion process by having delivered 1 day’s production to a pool plant. Since such milk is then pooled on a continuing basis, it is considered equitable that such milk bears some of the cost of supplying the Class I market on a continual basis. The credit was maintained in the larger consolidated Upper Midwest order for the same reasons. The transportation credit, as proposed and modified by proponents in this proceeding, differs from the transportation credit provision of the Upper Midwest order. The principal difference is that as proposed, the credit would be paid to the receiving handler for milk delivered direct from farms to distributing plants. The dairy-farmer cooperative proponents argue that in their capacity as producers they are bearing an E:\FR\FM\13SEP5.SGM 13SEP5 jlentini on PROD1PC65 with PROPOSALS5 54184 Federal Register / Vol. 71, No. 177 / Wednesday, September 13, 2006 / Proposed Rules inequitable share of the cost of supplying the supplemental needs of the marketing area’s Class I market. In this regard, they assert that while all pooled producers are benefiting from Class I sales in the market, cooperative member producers supply a greater percentage of supplemental milk to Class I plants, and thus conclude that they are inequitably bearing the cost of providing supplemental supplies during certain times of the year. The cooperative witnesses contend that when independently supplied distributing plants need supplemental supplies, such supplemental supplies are acquired from cooperatives. However, the cooperatives over-order premiums have been determined well before the start of the months when supplemental milk supplies are needed without adjusting for the generally farther distance any given particular load of milk must be transported. Even though proponents seek transportation credits year-round, the evidence reveals that it is the additional cost burden they bear providing supplemental milk supplies in the fall months, using October 2004 as a representative month, which Proposal 9 seeks to address. The basis of the argument advanced by the proponents was that without a transportation credit, meaningful cost recovery is not otherwise obtainable from receiving handlers. The record evidence does not support concluding that this burden is experienced in every month of the year. The proponent cooperatives also asserted that the Class I differentials of the Mideast marketing area do not offer sufficient incentive to attract Class I milk to distributing plants in certain portions of the Mideast area. This failure, the proponent cooperatives say, places them as Class I suppliers at a competitive disadvantage relative to other Class I suppliers who are not supplying supplemental needs. The cooperatives proposed the establishment of a transportation credit provision as a means of offsetting a portion of the total additional cost of supplying Class I plants that the Class I differentials do not adequately compensate. The proponents noted that the structure of the Mideast market, namely plant consolidation, diminished milk supplies in certain areas and transportation costs have increased since the Class I differentials were implemented in 2000. Amending the Class I differentials to more equitably reimburse Class I suppliers for transportation costs was another option considered but rejected by the proponents. They were of the opinion VerDate Aug<31>2005 16:28 Sep 12, 2006 Jkt 208001 that changing the Class I price surface would have been very difficult and concluded that providing for transportation credits would be a satisfactory alternative to pricing problems. Proponents estimated that the impact of the proposed transportation credit on the Mideast order blend price per month, if adopted, would be a reduction of approximately $0.0297 per cwt. Despite exceptions filed by DFA, et al., this final decision continues to find that the record of this proceeding does not support the adoption of a transportation credit provision in the Mideast marketing area. The proponents requested a year-round transportation credit for Class I milk deliveries but did not offer sufficient evidence to justify establishment of the credit. Evidence presented at the hearing for the volume and cost of milk deliveries was limited to the fall month of October 2004. Testimony offered in support of the establishment of a transportation credit spoke primarily of the need for partial cost recovery for the transportation of supplemental supplies in the fall months. Because the record contains no data for other months it is difficult to determine to what extent distant milk is moving to the Mideast market as supplemental supplies. Additionally, it is not possible to determine what portion of the distant supplies revealed in the October data are displacing local milk at distributing plants for producer qualification purposes only. The proponents did provide average cost and revenue data regarding supplemental milk supplies for 2004. The DFA witness testimony compared average milk procurement costs for October 2004 with average annual procurement costs. The two largest changes in procurement costs during the month of October, when compared to the annual average, were for ‘‘give-up charges’’ and for ‘‘supplemental hauling costs.’’ If the annual average procurement costs are adjusted to remove the impact of supplemental procurement costs calculated for August through November, it is estimated that supplemental hauling costs increased $0.27 and give-up charges increased $0.22 on average in the fall when compared to the average cost as extrapolated for the remainder of the year. This analysis concludes that the give-up charges are a major portion of the costs associated with the supplemental supply. This may indicate that the performance standards for the order are too low. It should be noted that the diversion limits were reduced and the supply plant shipping standards PO 00000 Frm 00014 Fmt 4701 Sfmt 4702 were increased on an interim emergency basis as a result of this proceeding. Due to the lack of data detailing the total cost of procuring supplemental supplies of milk and an estimate of the annual revenue generated by the transportation credit, no finding can be made that Proposal 9 should be adopted. Of particular concern is the possibility that the credit could be applicable to current and customary supply arrangements. This would result in a producer financed hauling subsidy on a year-round basis that is not related to any supplemental supplies or marketwide services. Additionally, it is unclear why government intervention is needed to essentially require producers to supplement the milk procurement costs of handlers located in milk deficit sections of the marketing area. Such a transportation credit would disadvantage handlers located in nondeficit regions of the marketing area that wish to distribute packaged milk products in the deficit regions. The full cost of transporting packaged Class I milk into the deficit regions would be borne by the distributing handler but the cost of transporting bulk milk into the deficit region for subsequent processing would be partially funded by all producers through the transportation credit. The proponents’ testimony throughout the proceeding stressed that they are unable to recoup their transportation costs from the marketplace. However, the evidence does not support these assertions. Both DFA and MMPA witnesses revealed that they are able to charge Class I handlers adequate over-order premiums to cover their transportation costs. The proponents asserted that these transportation costs should instead be recouped through marketwide pooling so that they can return a greater portion of the over-order premium to their members. The additional transportation cost of supplemental milk supplies is recovered from handlers who benefit by having such milk made available to satisfy demands. Cooperatives who deliver supplemental supplies to distributing plants are providing those handlers with the benefit of a supply to meet their demands. However, in return the cooperative receives the benefit of an over-order premium to cover any additional costs it may incur and, if possible, return a higher price to its members. The cooperative also benefits in that these supplemental deliveries are used to satisfy the cooperative’s longterm performance standards. It is not reasonable to lower the blend prices received by all dairy farmers when E:\FR\FM\13SEP5.SGM 13SEP5 Federal Register / Vol. 71, No. 177 / Wednesday, September 13, 2006 / Proposed Rules transportation costs are adequately recovered from the Class I handler who needs the milk to meet demands. This final decision continues to find that government intervention through the adoption of the proposed year-round transportation credit provision is not warranted. The record of this proceeding does reveal that additional costs can be recouped in the marketplace without such intervention. 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. jlentini on PROD1PC65 with PROPOSALS5 General Findings The findings and determinations hereinafter set forth supplement those that were made when the Mideast order was first issued and when it was amended. The previous findings and determinations are hereby ratified and confirmed, except where they may conflict with those set forth herein. (a) The tentative marketing agreement and the order, as hereby proposed to be amended, and all of the terms and conditions thereof, will tend to effectuate the declared policy of the Act; (b) The parity prices of milk as determined pursuant to section 2 of the Act are not reasonable in view of the price of feeds, available supplies of feeds, and other economic conditions which affect market supply and demand for milk in the marketing area, and the minimum prices specified in the tentative marketing agreement and the order, as hereby proposed to be amended, are such prices as will reflect the aforesaid factors, insure a sufficient quantity of pure and wholesome milk, and be in the public interest; and (c) The tentative marketing agreement and the order, as hereby proposed to be amended, will regulate the handling of milk in the same manner as, and will be applicable only to persons in the respective classes of industrial and commercial activity specified in, the marketing agreement upon which a hearing has been held. VerDate Aug<31>2005 16:28 Sep 12, 2006 Jkt 208001 Rulings on Exceptions In arriving at the findings and conclusions, and the regulatory provisions of this decision, each of the exceptions received was carefully and fully considered in conjunction with the record evidence. To the extent that the findings and conclusions and the regulatory provisions of this decision are at variance with any of the exceptions, such exceptions are hereby overruled for the reasons previously stated in this decision. Marketing Agreement and Order Annexed hereto and made a part hereof are two documents, a Marketing Agreement regulating the handling of milk, and an Order amending the order regulating the handling of milk in the Mideast marketing area, which has been decided upon as the detailed and appropriate means of effectuating the foregoing conclusions. It is hereby ordered that this entire decision and the two documents annexed hereto be published in the Federal Register. Referendum Order To Determine Producer Approval; Determination of Representative Period; and Designation of Referendum Agent It is hereby directed that a referendum be conducted and completed on or before the 30th day from the date this decision is published in the Federal Register, in accordance with the procedures for the conduct of referenda [7 CFR 900.300–311], to determine whether the issuance of the order as amended and hereby proposed to be amended, regulating the handling of milk in the Mideast marketing area is approved or favored by producers, as defined under the terms of the order, as amended and as hereby proposed to be amended, who during such representative period were engaged in the production of milk for sale within the aforesaid marketing area. The representative period for the conduct of such referendum is hereby determined to be March 2006. The agent of the Secretary to conduct such referendum is hereby designated to be David Z. Walker, Mideast Market Administrator. List of Subjects in 7 CFR Part 1033 Milk marketing orders. PO 00000 Frm 00015 Fmt 4701 Sfmt 4702 54185 Dated: September 1, 2006. Lloyd C. Day, Administrator, Agricultural Marketing Service. Order Amending the Order Regulating the Handling of Milk in the Mideast Marketing Area This order shall not become effective unless and until the requirements of § 900.14 of the rules of practice and procedure governing proceedings to formulate marketing agreements and marketing orders have been met. Findings and Determinations The findings and determinations hereinafter set forth supplement those that were made when the order was first issued and when it was amended. The previous findings and determinations are hereby ratified and confirmed, except where they may conflict with those set forth herein. (a) Findings. A public hearing was held upon certain proposed amendments to the tentative marketing agreement and to the order regulating the handling of milk in the Mideast marketing area. The hearing was held pursuant to the provisions of the Agricultural Marketing Agreement Act of 1937, as amended (7 U.S.C. 601–674), and the applicable rules of practice and procedure (7 CFR part 900). Upon the basis of the evidence introduced at such hearing and the record thereof, it is found that: (1) The said order as hereby amended, and all of the terms and conditions thereof, will tend to effectuate the declared policy of the Act; (2) The parity prices of milk, as determined pursuant to Section 2 of the Act, are not reasonable in view of the price of feeds, available supplies of feeds, and other economic conditions which affect market supply and demand for milk in the aforesaid marketing area. The minimum prices specified in the order as hereby amended are such prices as will reflect the aforesaid factors, insure a sufficient quantity of pure and wholesome milk, and be in the public interest; and (3) The said order as hereby amended regulates the handling of milk in the same manner as, and is applicable only to persons in the respective classes of industrial or commercial activity specified in, a marketing agreement upon which a hearing has been held. Order Relative to Handling It is therefore ordered, that on and after the effective date hereof, the handling of milk in the Mideast marketing area shall be in conformity to and in compliance with the terms and E:\FR\FM\13SEP5.SGM 13SEP5 54186 Federal Register / Vol. 71, No. 177 / Wednesday, September 13, 2006 / Proposed Rules conditions of the order, as amended, and as hereby amended, as follows: The provisions of the order amending the order contained in the Recommended Decision issued by the Administrator, Agricultural Marketing Service, on February 15, 2006, and published in the Federal Register on February 22, 2006 (71 FR 9033), are adopted without change and shall be the terms and provisions of this order. The order follows. PART 1033—MILK IN THE MIDEAST MARKETING AREA 1. The authority citation for 7 CFR part 1033 is amended to read as follows: Authority: 7 U.S.C. 601–674, and 7253. 2. Section 1033.13 is amended by adding a new paragraph (f), to read as follows: § 1033.13 Producer milk. * * * * (f) Producer milk of a handler shall not exceed the limits as established in § 1033.13(f)(1) through § 1033.13(f)(3). (1) Producer milk for the months of April through February may not exceed 115 percent of the producer milk receipts of the prior month. Producer milk for March may not exceed 120 percent of producer receipts of the prior month; plus (2) Milk shipped to and physically received at pool distributing plants and allocated to Class I use in excess of the volume allocated to Class I in the prior month; plus (3) If a producer did not have any milk delivered to any plant as other than producer milk as defined under the order in this part or any other Federal milk order for the preceding three months; and the producer had milk qualified as producer milk on any other jlentini on PROD1PC65 with PROPOSALS5 * VerDate Aug<31>2005 16:28 Sep 12, 2006 Jkt 208001 Federal order in the previous month, add the lesser of the following: (i) Any positive difference of the volume of milk qualified as producer milk on any other Federal order in the previous month, less the volume of milk qualified as producer milk on any other Federal order in the current month, or (ii) Any positive difference of the volume of milk qualified as producer milk under the order in this part in the current month, less the volume of milk qualified as producer milk under the order in this part in the previous month. (4) Milk received at pool plants in excess of these limits shall be classified pursuant to § 1000.44(a)(3)(v) and § 1000.44(b). Milk diverted to nonpool plants reported in excess of this limit shall not be producer milk. The handler must designate, by producer pick-up, which milk shall not be producer milk. If the handler fails to provide this information the provisions of § 1033.13(d)(6) shall apply. (5) The market administrator may waive these limitations: (i) For a new handler on the order, subject to the provisions of § 1033.13(f)(6), or (ii) For an existing handler with significantly changed milk supply conditions due to unusual circumstances; (6) Milk may not be considered producer milk if the market administrator determines that handlers altered the reporting of such milk for the purpose of evading the provisions of this paragraph. Marketing Agreement Regulating the Handling of Milk in the Mideast Marketing Area The parties hereto, in order to effectuate the declared policy of the Act, and in accordance with the rules of practice and PO 00000 Frm 00016 Fmt 4701 Sfmt 4702 procedure effective thereunder (7 CFR part 900), desire to enter into this marketing agreement and do hereby agree that the provisions referred to in paragraph I hereof as augmented by the provisions specified in paragraph II hereof, shall be and are the provisions of this marketing agreement as if set out in full herein. I. The findings and determinations, order relative to handling, and the provisions of §§ 1033.1 to 1033.86 all inclusive, of the order regulating the handling of milk in the Mideast marketing area (7 CFR Part 1033 which is annexed hereto); and II. The following provisions: Record of milk handled and authorization to correct typographical errors. (a) Record of milk handled. The undersigned certifies that he/she handled during the month of March 2006,llhundredweight of milk covered by this marketing agreement. (b) Authorization to correct typographical errors. The undersigned hereby authorizes the Deputy Administrator, or Acting Deputy Administrator, Dairy Programs, Agricultural Marketing Service, to correct any typographical errors which may have been made in this marketing agreement. Effective date. This marketing agreement shall become effective upon the execution of a counterpart hereof by the Department in accordance with Section 900.14(a) of the aforesaid rules of practice and procedure. In witness whereof, the contracting handlers, acting under the provisions of the Act, for the purposes and subject to the limitations herein contained and not otherwise, have hereunto set their respective hands and seals. Signature By (Name) lllllllllllllll (Title) lllllllllllllllll (Address) llllllllllllllll (Seal) Attest [FR Doc. 06–7495 Filed 9–6–06; 8:45 am] BILLING CODE 3410–02–P E:\FR\FM\13SEP5.SGM 13SEP5

Agencies

[Federal Register Volume 71, Number 177 (Wednesday, September 13, 2006)]
[Proposed Rules]
[Pages 54172-54186]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-7495]



[[Page 54171]]

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Part V





Department of Agriculture





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Agricultural Marketing Service



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7 CFR Part 1033



Milk in the Mideast Marketing Area; Decision on Proposed Amendments to 
Marketing Agreement and to Order; Proposed Rule

Federal Register / Vol. 71, No. 177 / Wednesday, September 13, 2006 / 
Proposed Rules

[[Page 54172]]


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DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

7 CFR Part 1033

[Docket No. AO-166-A72; DA-05-01-B]


Milk in the Mideast Marketing Area; Decision on Proposed 
Amendments to Marketing Agreement and to Order

AGENCY: Agricultural Marketing Service, USDA.

ACTION: Proposed rule; final decision.

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SUMMARY: This document is the final decision proposing to adopt 
amendments to the Mideast order intended to deter the de-pooling of 
milk. This final decision is subject to producer approval by 
referendum.

FOR FURTHER INFORMATION CONTACT: Gino Tosi, Associate Deputy 
Administrator, Order Formulation and Enforcement Branch, USDA/AMS/Dairy 
Programs, STOP 0231--Room 2968, 1400 Independence Avenue, SW., 
Washington, DC 20250-0231, (202) 690-1366, e-mail: gino.tosi@usda.gov.

SUPPLEMENTARY INFORMATION: This final decision adopts amendments that: 
(1) Establish a limit on the volume of milk a handler may pool during 
the months of April through February to 115 percent of the volume of 
milk pooled in the prior month; and (2) Establish a limit on the volume 
of milk a handler may pool during the month of March to 120 percent of 
the volume of milk pooled in the prior month. The proposed amended 
order is subject to producer approval by referendum.
    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. The 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 
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 
production guideline of 500,000 pounds per month. Although this 
guideline does not factor in additional monies that may be received by 
dairy producers, it should be an inclusive standard for most ``small'' 
dairy farmers. For purposes of determining a handler's size, if the 
plant is part of a larger company operating multiple plants that 
collectively exceed the 500-employee limit, the plant will be 
considered a large business even if the local plant has fewer than 500 
employees.
    During March 2005, the month during which the hearing occurred, 
there were 9,767 dairy producers pooled on and 36 handlers regulated by 
the Mideast order. Approximately 9,212 producers, or 94.3 percent, were 
considered small businesses based on the above criteria. Of the 36 
handlers regulated by the Mideast during March 2005, 26 handlers, or 
72.2 percent, were considered small businesses.
    The adopted amendments regarding the pooling standards serve to 
revise established criteria that determine those producers, producer 
milk, and plants that have a reasonable association with and 
consistently serve the fluid needs of the Mideast milk marketing area. 
Criteria for pooling milk are established on the basis of performance 
standards that are considered adequate to meet the Class I fluid needs 
of the market and, by doing so, to determine those producers who are 
eligible to share in the revenue that arises from the classified 
pricing of milk.
    Criteria for pooling are established without regard to the size of 
any dairy industry organization or entity. Therefore, the proposed 
amendments will not have a significant economic impact on a substantial 
number of small entities.
    The Agricultural Marketing Service is committed to complying with 
the E-Government Act, to promote the use of the Internet and other 
information technologies to provide increased opportunities for citizen 
access to Government information and services, and for other purposes.
    This action does not require additional information collection that 
needs clearance by the Office of Management and Budget (OMB) beyond 
currently approved information collection. The primary sources of data 
used to complete the approved forms are routinely used in most business 
transactions. The 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.
    No other burdens are expected to fall on the dairy industry as a 
result of overlapping Federal rules. This rulemaking proceeding does 
not duplicate, overlap, or conflict with any existing Federal rules.
    Prior documents in this proceeding:
    Notice of Hearing: Issued February 14, 2005; published February 17, 
2005 (70 FR 8043).
    Amended Notice of Hearing: Issued March 1, 2005; published March 3, 
2005 (70 FR 10337).
    Tentative Partial Decision: Issued July 21, 2005; published July 
27, 2005 (70 FR 43335).
    Interim Final Rule: Issued September 20, 2005; published September 
26, 2005 (70 FR 56111).
    Final Partial Decision: Issued January 17, 2006; published January 
23, 2006 (71 FR 3435).
    Recommended Decision: Issued February 15, 2006; published February 
22, 2006 (71 FR 9033).
    Final Partial Rule: Issued April 17, 2006; published April 20, 2006 
(71 FR 20335).

[[Page 54173]]

Preliminary Statement

    A public hearing was held upon proposed amendments to the marketing 
agreement and the order regulating the handling of milk in the Mideast 
marketing area. The hearing was held, pursuant to the provisions of the 
Agricultural Marketing Agreement Act of 1937 (AMAA), 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).
    The proposed amendments set forth below are based on the record of 
a public hearing held at Wooster, Ohio, on March 7-10, 2005, pursuant 
to a notice of hearing issued February 14, 2005, published February 17, 
2005, (70 FR 8043) and an amended notice of hearing issued March 1, 
2005, and published March 3, 2005 (70 FR 10337).
    Upon the basis of the evidence introduced at the hearing and the 
record thereof, the Administrator, on February 15, 2006, issued a 
Recommended Decision containing notice of the opportunity to file 
written exception thereto.
    The material issues, findings, conclusions and ruling of the 
Recommended Decision, are hereby approved, adopted and are set forth 
herein. The material issues on the record of hearing relate to:

1. Pooling standards
A. Establish pooling limits
B. Producer definition
2. Transportation Credits

Findings and Conclusions

    This final decision specifically addresses proposals published in 
the hearing notice as Proposals 4, 5, 6, 7, and 8 which seek to 
establish a limit on the volume of milk that can be pooled on the 
order; Proposal 9 which seeks to establish transportations credits; and 
features of Proposal 3 intended to clarify the Producer definition by 
providing a definition of ``temporary loss of Grade A approval.'' 
Proposals which sought to change the performance standards of the 
order, Proposals 1 and 2, were addressed in a tentative partial 
decision published on July 27, 2005 (70 FR 43335). The portion of 
Proposal 3 that sought to amend the number of days a producer needs to 
deliver milk to a distributing plant before the milk of the producer is 
eligible for diversion was abandoned by the proponents at the hearing. 
No further reference to that portion of Proposal 3 will be made.
    The following findings and conclusions on the material issues are 
based on evidence presented at the hearing and the record thereof:

1. Pooling Standards

A. Establishing pooling limits
    Preliminary Statement. Federal milk marketing orders rely on the 
tools of classified pricing and marketwide pooling to assure an 
adequate supply of milk for fluid (Class I) use and to provide for the 
equitable sharing of the revenues arising from the classified pricing 
of milk. Classified pricing assigns a value to milk according to how 
the milk is used. Regulated handlers who buy milk from dairy farmers 
are charged class prices according to how they use the farmer's milk. 
Dairy farmers are then paid a weighted average or ``blend'' price. The 
blend price that dairy farmers are paid for their milk is derived 
through the marketwide pooling of all class uses of milk in a marketing 
area. Thus each producer receives an equal share of each use class of 
milk and is indifferent as to the actual class for which the milk was 
used. The Class I price is usually the highest class price for milk. 
Historically, the Class I use of milk provides the additional revenue 
to a marketing area's total classified use value of milk.
    The series of class prices that are applicable for any given month 
are not announced simultaneously. The Class I price and the Class II 
skim milk price are announced prior to the beginning of the month for 
which they will be effective. Class prices for milk in all other uses 
are not determined until on or before the 5th day of the following 
month. The Class I price is determined by adding a differential value 
to the higher of either an advanced Class III or Class IV value. These 
values are calculated based on formulas using the National Agricultural 
Statistics Service (NASS) survey prices of cheese, butter, and nonfat 
dried milk powder for the first two weeks of the prior month. For 
example, the Class I price for August is announced in late July and is 
based on the higher of the Class III or IV value computed using NASS 
commodity price surveys for the first two weeks of July.
    The Class III and IV prices for the month are determined and 
announced after the end of the month based on the NASS survey prices 
for the selected dairy commodities during the month. For example, the 
Class III and IV prices for August are based on NASS survey commodity 
prices during August. A large increase in the NASS survey price for the 
selected dairy commodities from one month to the next can result in the 
Class III or IV price exceeding the Class I price. This occurrence is 
commonly referred to by the dairy industry as a ``class price 
inversion.'' A producer price inversion generally refers to when the 
Class III or IV price exceeds the average classified use value, or 
blend price, of milk for the month. Price inversions have occurred with 
increasing frequency in Federal milk orders since the current pricing 
plan was implemented on January 1, 2000, despite efforts made during 
Federal Order Reform to reduce such occurrences. Price inversions can 
create an incentive for dairy farmers and manufacturing handlers who 
voluntarily participate in the marketwide pooling of milk to elect not 
to pool their milk on the order. Class I handlers do not have this 
option; their participation in the marketwide pool is mandatory.
    The producer price differential, or PPD, is the difference between 
the Class III price and the weighted average value of all Classes. In 
essence, the PPD is the dairy farmer's share of the additional/reduced 
revenues associated with the Class I, II, and IV milk pooled in the 
market. If the weighted average price of Class I, II, and IV milk in 
the pool is greater than the Class III price, then dairy farmers 
receive a positive PPD. However, a negative PPD can occur if the value 
of the Class III milk in the pool exceeds the value of the remaining 
classes of milk in the pool. This can occur as a result of the price 
inversions discussed above.
    The Mideast Federal order operates a marketwide pool. The Order 
contains pooling provisions which specify criteria that, if met, allow 
dairy farmers to share in the benefits that arise from classified 
pricing through pooling. The equalization of all class prices among 
handlers regulated by an order is accomplished through a mechanism 
known as the producer settlement fund (PSF). Typically, Class I 
handlers pay the difference between the blend price and their use-value 
of milk into the PSF. Manufacturing handlers typically receive a draw 
from the PSF, usually the difference between the Class II, III or IV 
price and the blend price. In this way, all handlers pay the class 
value for milk and all dairy farmer suppliers receive at least the 
order's blend price.
    When manufacturing class prices of milk are high enough to result 
in a use-value of milk for a handler that is higher than the blend 
price, handlers of manufacturing milk may choose to not pool their milk 
receipts. Opting to not pool their milk receipts allows these handlers 
to avoid the obligation of paying into the PSF. The choice by a 
manufacturing handler to not pool their milk receipts is commonly 
referred to in the dairy industry as ``de-pooling.'' When the blend 
price rises above the manufacturing class use-values of milk these same 
handlers again opt to pool

[[Page 54174]]

their milk receipts. This is often referred to as ``re-pooling.'' The 
ability of manufacturing handlers to de-pool and re-pool manufacturing 
milk is viewed by some market participants as being inequitable to both 
producers and handlers.
    The ``De-Pooling'' Proposals. Proponents are in agreement that milk 
marketing orders should contain provisions that will tend to limit the 
practice of de-pooling. Five proposals intending to limit the de-
pooling of milk were considered in this proceeding. The proposals 
offered different degrees of deterrence against de-pooling by 
establishing limits on the amount of milk that can be re-pooled. The 
proponents of these five proposals are generally of the opinion that 
de-pooling erodes equity among producers and handlers, undermines the 
orderly marketing of milk and is detrimental to the Federal order 
system.
    Two different approaches on how to best limit de-pooling are 
represented by these five proposals. The first approach, published in 
the hearing notice as Proposals 6 and 7, addresses de-pooling by 
limiting the volume of milk a handler can pool in a month to a 
specified percentage of what the handler pooled in the prior month. The 
second approach, published in the hearing notice as Proposals 4, 5 and 
8, addresses de-pooling by establishing what is commonly referred to as 
a ``dairy farmer for other markets'' provision. These proposals would 
require milk of a producer that was de-pooled to not be able to be re-
pooled by that producer for a defined time period. All proponents 
agreed that none of the proposals would completely eliminate de-pooling 
but would likely deter the practice.
    Of the five proposals received that would limit de-pooling, this 
final decision adopts Proposal 7, as modified in post-hearing briefs, 
offered by Dairy Farmers of America and Michigan Milk Producers 
Association (DFA/MMPA). DFA/MMPA are Capper-Volstead cooperatives who 
pool milk on the Mideast market. Specifically, adoption of Proposal 7 
will limit the volume of milk a handler can pool during the months of 
April through February to no more than 115 percent of the volume of 
milk pooled in the prior month, and limit the volume of milk a handler 
can pool in the month of March to 120 percent of the volume of milk 
pooled in the month prior. Milk diverted to nonpool plants in excess of 
these limits will not be pooled. Milk shipped to pool distributing 
plants and allocated to Class I in excess of the volume allocated to 
Class I in the prior month will not be subject to the 115 or 120 
percent limitation. Milk pooled on another Federal order during the 
previous 3 consecutive months would not be subject to the 115 or 120 
percent limitation. The 115 or 120 percent limitation may be waived at 
the discretion of the Market Administrator for a new handler on the 
order or for an existing handler whose milk supply changes due to 
unusual circumstances.
    As published in the hearing notice, Proposal 6, offered by Ohio 
Dairy Producers (ODP) and Ohio Farmers Union (OFU), was virtually 
identical to Proposal 7. ODP is an organization of independent Ohio 
dairy farmers and agriculture businesses that work to increase the 
productivity and profitability of dairy farmers. OFU is an organization 
whose members include dairy farmers pooled on the Mideast order. 
Proposal 6 would limit the volume of milk a handler could pool in a 
month to 115 percent of the volume of milk pooled in the prior month. 
The proposal does not contain a separate pooling standard for the month 
of March. Milk shipped to pool distributing plants, or milk pooled on 
another Federal order during the preceding 6 months, would not be 
subject to the 115 percent standard. The proposal would grant authority 
to the Market Administrator to increase or decrease the 115 percent 
standard.
    As published in the hearing notice, Proposals 4, 5 and 8 address 
de-pooling by establishing defined time periods during which de-pooled 
milk could not be pooled. Proposal 4, also offered by ODP and OFU, 
would require an annual pooling commitment by a handler to the market. 
The proposal specified that if the milk of a producer was not pooled 
during a month, or any of the preceding 11 months, the equivalent of at 
least 10 day's milk production of the dairy farmer would need to be 
delivered to a pool distributing plant during the month in order for 
all the milk of the dairy farmer for that month to be pooled. Proposal 
4 is not adopted.
    Proposal 5, offered by Continental Dairy Products (Continental), 
would limit the ability to pool the milk of a producer if such milk had 
not been pooled during the previous 12 months. Continental is a Capper-
Volstead cooperative whose members milk is pooled on the Mideast order. 
Proposal 5 is not adopted.
    Proposal 8, offered by Dean Foods Company (Dean), would not permit 
re-pooling for a 2 to 7 month period for milk that had been de-pooled. 
Dean is a handler that distributes fluid milk products within the 
Mideast marketing area. Under Proposal 8, if a producer's milk were de-
pooled in any of the months of February through June, or during any of 
the preceding 3 months, or during any of the preceding months of July 
through January, the equivalent of at least 10 day's milk production 
would need to be physically received at a pool distributing plant in 
the order to pool all of the dairy farmer's production for the month. 
Additionally, if the milk of a dairy farmer is de-pooled in any of the 
months of July through January, or in a preceding month, at least 10 
day's milk production of the dairy farmer would need to be delivered to 
a pool distributing plant to have all the milk of the dairy farmer 
pooled for the month. Proposal 8 is not adopted.
    While Proposals 4, 5 or 8 are not adopted, to the extent that these 
proposals offered alternative methods to deter the practice of de-
pooling, adoption of Proposals 6 and 7 essentially accomplishes this 
objective.
    The proponents of Proposals 4, 5, 6, 7 and 8 are all of the opinion 
that current inadequate pooling standards enable manufacturing handlers 
to de-pool milk and immediately re-pool milk the following month and 
are in need of revision. According to the proponents, the Mideast blend 
price is lowered when large volumes of higher-valued milk used for 
manufacturing is de-pooled as well as when the large volumes of de-
pooled milk returns to the pool. Furthermore, the witnesses argued that 
de-pooling handlers do not have to account to the Mideast pool at 
classified prices and therefore face different costs than their 
similarly situated pooling competitors. While all proponents insisted 
that the pooling standards of the order need to be amended to ensure 
producer and handler equity, their opinions differed only on how to 
best meet this end.
    The current Producer milk provision of the Mideast order considers 
the milk of a dairy farmer to be producer milk when it has been 
received at a pool plant of the order. A producer must deliver 2 day's 
milk production to a pool plant during each of the months of August 
through November so that all the milk of a producer will be eligible to 
be pooled throughout the year. Once the standard has been met, the milk 
of a producer is eligible to be diverted to nonpool plants and continue 
to be priced under the terms of the order. A pool plant cannot divert 
more than 50 percent of its total producer milk receipts to nonpool 
plants during each of the months of August through February and 60 
percent during each of the months of March through July. Milk that is 
subject to inclusion in another marketwide equalization program 
operated by another government entity

[[Page 54175]]

is not considered producer milk. The order currently does not limit a 
handler's ability to re-pool manufacturing uses of milk.
    A witness appearing on behalf of Continental testified in support 
of Proposal 5. The witness was of the opinion that pooling provisions 
should limit a handler's ability to de-pool their milk receipts at will 
and with little consequence. The witness testified that Proposal 5 
would prohibit a handler from pooling the milk of a producer that had 
been de-pooled during the previous 11 months. The witness characterized 
Proposal 5 as an adequate deterrent to handlers de-pooling large 
volumes of milk for short term financial gain. The witness added that 
adoption of Proposal 5 would provide adequate safeguards for new 
producers on the order or producers who may temporarily lose Grade A 
status to pool their milk without penalty.
    A post-hearing brief submitted on behalf of Continental reiterated 
their support for the adoption of Proposal 5. The brief stressed that 
de-pooling leads to the inequitable sharing of revenues amongst 
producers and therefore should be dealt with in the most stringent 
manner. Continental argued that adoption of any proposal that would 
allow handlers to continue to de-pool any percentage of their milk 
receipts supports the concept that de-pooling is an acceptable 
practice. Continental vigorously opposed any level of de-pooling and 
insisted that adoption of Proposal 5 was the only appropriate proposal 
to re-establish equity in the marketplace.
    A witness appearing on behalf of ODP testified in support of 
Proposals 4 and 6. According to the witness, over 1.3 billion pounds of 
milk was de-pooled during April and May 2004 reducing the value of the 
marketwide pool by $21.3 million. The ODP witness insisted that pooling 
standards should ensure that producer milk which regularly supplies the 
needs of the fluid market does not receive a lower blend price when 
manufacturing handlers opt to not pool their milk receipts. The witness 
noted that Federal order hearings have been held in the Central and 
Upper Midwest markets to address de-pooling. The witness stressed that 
if the ability of manufacturing handlers to not pool their milk 
receipts is eliminated in the Central and Upper Midwest markets, it may 
add to the volume of de-pooled milk in the Mideast market. The witness 
was of the opinion that adoption of either Proposal 4 or Proposal 6 
would best solve the inequities created from de-pooling.
    A witness appearing on behalf of Dean testified in support of 
Proposal 4. The witness asserted that the intent of the Federal order 
system is to ensure a sufficient supply of milk for fluid use and 
provide for uniform payments to producers who stand ready, willing, and 
able to serve the fluid market regardless of how the milk of any 
individual is utilized. The Dean witness testified that provisions 
allowing manufacturing handlers the option to participate or not 
participate in the pool causes inequities between handlers.
    The Dean witness was of the opinion that de-pooling causes 
inequities between handlers and undermines the order's ability to 
provide for a stable milk supply to meet Class I demand. The inequity, 
the witness said, is that all handlers do not have the same ability to 
pool and de-pool; fluid handlers are required to pool their milk 
receipts while manufacturing handlers have the option of pooling their 
milk receipts. The witness was of the opinion that this difference in 
pooling options creates cost inequities between handlers since a fluid 
handler must always account to the pool at classified use values while 
manufacturing handlers may not.
    The Dean witness also explained how de-pooling leads to inequities 
between producers. The witness used a hypothetical example of two 
cooperatives--Cooperative A that delivers 50 percent of its milk 
receipts to distributing plants and Cooperative B who delivers 30 
percent of its milk receipts to distributing plants. Cooperative A, the 
witness said, is always at a disadvantage when a price inversion occurs 
because they can only de-pool 50 percent of their milk receipts because 
the milk delivered to distributing plants must be pooled. However, the 
witness said, Cooperative B can de-pool 70 percent of their milk 
receipts because only 30 percent is delivered to distributing plants. 
Therefore, the witness concluded, Cooperative B is able to pay a higher 
price to its dairy farmer suppliers since it is able to de-pool an 
additional 20 percent of its total milk receipts that Cooperative A 
cannot.
    The Dean witness stressed that hearings have been held in other 
Federal orders to consider proposals seeking to deter de-pooling and 
urged the Department to adopt provisions to prevent milk from 
opportunistically pooling on the Mideast order. In the opinion of the 
Dean witness, Proposal 4 is the most appropriate solution to deter the 
de-pooling of milk because it creates large and long-term consequences 
to handlers who opt to de-pool. The Dean witness believed that should 
the Department determine that Proposal 4 is not appropriate, Proposal 8 
would be the best alternative.
    A post-hearing brief submitted on behalf of Dean reiterated support 
for the adoption of Proposal 4 with a modification. Dean proposed 
granting the Market Administrator the ability to waive a producer's de-
pooled status if the producer was de-pooled after informing its pooling 
handler that it intended to deliver its milk to another handler. The 
brief stressed that the intention of Proposal 4 is not to prevent a 
producer from being pooled because of circumstances out of their 
control and believed their modification would remedy this potential 
situation. Dean's brief reiterated that de-pooling results in 
inequities between both handlers and producers. The brief noted that a 
provision similar to Proposal 4 is in place in the Northeast order and 
asserted that it has been very effective in limiting de-pooling.
    Comments filed on behalf of Dean in response to the Recommended 
Decision supported the Department's decision to deter the practice of 
de-pooling. However, Dean expressed reservations that adoption of 
Proposal 7 would be sufficient to adequately deter the practice of de-
pooling in the Mideast marketing area. Dean also commented that the re-
pooling standard for the month of February should be modified to 110 
percent to account for additional days in January much like the re-
pooling standard for the month of March was modified to account for the 
fewer days in February.
    A witness appearing on behalf of Superior Dairy (Superior) 
testified in support of Proposal 4. Superior is a pool distributing 
plant regulated by the Mideast order. The witness said that Proposal 4 
should be adopted because the de-pooling actions of some handlers are 
reducing the blend price paid to producers who regularly and 
consistently service the needs of the Class I market.
    A witness appearing on behalf of OFU testified in support of 
Proposal 6. The witness said that current regulations allow handlers to 
take advantage of the Federal order program and not share income 
generated in the market with pooled producers. The witness supported 
adoption of Proposal 6 and stressed that adoption of the proposal would 
discourage manufacturing handlers from not pooling their milk receipts 
when it is to their financial advantage.
    A second witness appearing on behalf of Dean testified in support 
of Proposals 4, 6, 7, and 8. The witness testified that Proposal 4 
would encourage handlers to

[[Page 54176]]

pool their milk receipts in times of a price inversion since the 
decision to de-pool would result in a 12-month penalty. The witness 
said that adoption of Proposal 4 would also ensure that the de-pooled 
producer provided service to the Class I market by making substantial 
and consistent service to fluid distributing plants.
    The second Dean witness characterized Proposal 8 as a less 
desirable alternative to Proposal 4. The difference in the two 
proposals, the witness said, is the number of months a producer must 
meet the 10-day touch base standard to be re-pooled--it is fewer under 
Proposal 8 and varies depending on the month in which the milk was de-
pooled. In general, emphasized the witness, the effects of both 
proposals would be the same except that if Proposal 8 were adopted, the 
cost to a de-pooling handler and the benefit to continuously pooled 
producers would be less.
    The second Dean witness testified that Proposal 7 and Proposal 6 
are less desirable options to Proposals 4 and 8. According to the 
witness, if a 115 percent re-pooling standard were adopted it would 
take a handler who opted to de-pool 90 percent of its milk 17 months to 
re-pool all the handler's milk receipts. If a handler opted to de-pool 
30 percent of its milk receipts, the witness added, it would only take 
3 months to again pool all of its milk receipts. The witness emphasized 
that the larger the volume of milk a handler opted to de-pool, the 
longer the length of time a handler would need to requalify all its 
milk receipts and the more money it would cost the de-pooling handler. 
The witness concluded that Proposals 6 and 7 offered a different method 
for limiting de-pooling that would not be as effective as the method 
contained in Proposals 4 and 8.
    A dairy farmer whose milk is pooled on the Mideast order testified 
in support of Proposals 4, 5, and 6. The witness testified that in 
April 2004 their farm lost $9,000 because of the reduced PPD that 
resulted from de-pooling. The witness urged the Department to adopt 
either Proposal 4, 5, or 6 to remedy de-pooling and to do so on an 
emergency basis.
    A witness appearing on behalf of DFA/MMPA testified in support of 
Proposal 7. The witness said that Proposal 7 was designed to limit de-
pooling by creating financial consequences for manufacturing handlers 
who de-pool their milk receipts. The witness testified that members of 
DFA/MMPA currently de-pool milk when it is to their advantage but 
emphasized that de-pooling causes market disorder and should be 
prohibited.
    The DFA/MMPA witness said that de-pooling is not a new occurrence; 
however, the volatility of milk prices in recent years has caused more 
frequent price inversions and subsequent opportunities to de-pool. The 
witness referenced data presented at a similar proceeding held in the 
Central order that during the 84 month period from 1993 to 1999, there 
were 16 months with negative PPD's, 6 of which were in excess of a 
negative 50 cents per cwt. However, the witness noted that during the 
60 month period from January 2000 through December 2004 the opportunity 
to de-pool had occurred 51 times.
    The DFA/MMPA witness contended that de-pooling causes inequities 
because similarly situated handlers face different costs in procuring a 
milk supply. Class I milk is required to be pooled, the witness said, 
and distributing plants always have to share the additional value of 
their Class I milk sales with all pooled producers. However, the 
witness said, a manufacturing handler is not required to account to the 
pool at classified prices and can therefore retain the revenue 
generated from not pooling milk when price inversions occur. The 
witness asserted that manufacturing handlers use the additional revenue 
generated from de-pooling to pay a higher price to their producers 
while fluid handlers must use money from their profit margins to pay a 
competitive price. In this regard, the witness said, Class I handlers 
are at a disadvantage in competing with manufacturing handlers for a 
producer milk supply.
    Relying on Market Administrator statistics, the DFA/MMPA witness 
illustrated that in April 2004 manufacturing handlers that may have 
chosen to not pool their milk receipts were able to keep $3.78 more per 
hundredweight than a fluid handler on all their de-pooled milk and 
could use the proceeds to pay dairy farmers. The witness showed how a 
supplying handler that delivered one load of milk a day for a month to 
a Class I plant, would have received $56,700 less than a manufacturing 
handler who could opt to de-pool their milk receipts. Relying on Market 
Administrator statistics, the witness testified that 649.3 million 
pounds of milk was de-pooled in April 2004. According to the witness, 
if that milk had been pooled the PPD paid to all producers would have 
been $1.66 per cwt higher.
    The DFA/MMPA witness testified that Proposal 7 would limit the 
amount of milk a handler could pool to 115 percent of the handler's 
prior month pooled milk volume. The witness insisted that the 115 
percent standard would create the economic incentive necessary to keep 
an adequate reserve supply of milk pooled on the order while 
accommodating reasonable levels of growth in a handler's month-to-month 
production and other seasonal production fluctuations. The witness 
noted that the Market Administrator should be given the discretion to 
disqualify de-pooled milk from pooling if the Market Administrator 
believes that the handler was trying to circumvent the pooling 
standards.
    The DFA/MMPA witness testified that emergency marketing conditions 
exist without a deterrent to de-pooling that warrant the omission of a 
recommended decision. The witness was of the opinion that the volatile 
dairy product markets that gave rise to rapid price increases and price 
inversions will continue and therefore, should be addressed in an 
expedited manner.
    A post-hearing brief submitted on behalf of DFA/MMPA reiterated 
their support of Proposal 7. The brief stressed that adoption of 
Proposal 7, while not completely eliminating a handler's ability to de-
pool, would reduce the total volume of de-pooled milk. DFA/MMPA 
suggested a modification to Proposal 7 in their post-hearing brief to 
establish a limit on the volume of milk a handler could pool in March 
to 120 percent of the their total volume of milk pooled during the 
prior month. DFA/MMPA believed that this modification would better 
accommodate and account for the fewer number of days in the month of 
February.
    The DFA/MMPA brief argued that Proposals 4 and 5 are not 
appropriate for the Mideast order because they call for stringent and 
unnecessary changes in the order's pooling provisions. The brief 
stressed that the intention of Proposal 7 was to improve the pooling 
standards of the order but not in a manner that would necessitate a 
change to a handler's business operations.
    Comments filed on behalf of DFA/MMPA; Dairylea; National Farmers 
Organization, Inc.; and Land O'Lakes, hereinafter referred to as DFA, 
et al., expressed their support of the proposed re-pooling standards. 
DFA, et al., clarified that the intent of Proposal 7 was to constrain 
the practice of de-pooling while still encouraging additional milk 
shipments for Class I use. DFA, et al., proposed that the re-pooling 
standard be amended to exempt milk delivered to distributing plants in 
excess of the previous month's pooled volume instead of the proposed 
standard that exempts milk delivered to distributing plants in excess 
of the

[[Page 54177]]

volume classified as Class I in the prior month. A witness appearing on 
behalf of Ohio Farm Bureau Federation testified in support of Proposal 
7. The witness was of the opinion that if the current pooling 
provisions are not amended to deter the practice of de-pooling, prices 
received by farmers who reliably service the Class I market would 
decrease. The witness claimed that handlers who de-pool milk do not 
share the revenues generated from de-pooling with all pooled producers 
which lowers returns to producers who are consistently serving the 
Class I market. The witness added that Federal order hearings 
concerning de-pooling have been held in other Federal orders. The 
witness claimed that if de-pooling is not addressed in the Mideast 
order, milk from other Federal orders may seek to be pooled on the 
Mideast order. In this regard, the witness said that adoption of 
Proposal 7 is necessary to ensure that blend prices received by 
producers who are consistently pooled are not further eroded.
    A witness appearing on behalf of Prairie Farms Dairy (Prairie 
Farms) testified in support of Proposal 7. Prairie Farms is a member 
owned Capper-Volstead cooperative that pools milk on the Mideast order. 
The witness testified that since Prairie Farms is required to pool all 
milk utilized at their distributing plants, all revenues generated from 
their Class I sales are shared with all pooled producers. The witness 
noted that Prairie Farms does de-pool its manufacturing milk when it is 
advantageous but emphasized that this practice is detrimental to 
producers who are consistently serving the Class I market. The witness 
urged adoption of Proposal 7 but also offered support for Proposal 6.
    Seven dairy farmers whose milk is pooled on the Mideast order 
testified in support of Proposal 7. The dairy farmers testified that 
the purpose of the Federal order system is to ensure that pooled 
producers receive an equitable share of the revenue generated from all 
classes of milk. The witnesses were of the opinion that the practice of 
de-pooling caused them to lose a substantial amount of potential 
income. These witnesses stressed that if manufacturing handlers choose 
to pool their milk receipts in months when the PPD is positive, it is 
only equitable for them to pool their milk receipts when the PPD is 
negative. The witnesses believed that de-pooling results in producers 
who consistently service the Class I needs of the market receiving a 
lower blend price than they otherwise would have if all milk had been 
pooled. The witnesses maintained that because de-pooling erodes 
revenues received by pooled producers, the Department should address 
de-pooling on an emergency basis.
    Another dairy farmer witness whose milk is pooled on the Mideast 
order testified in support of limiting de-pooling but did not offer 
support for any specific proposal. The witness said that as a result of 
de-pooling in the months of April and May 2004, their farm lost over 
$6,000. The witness was of the opinion that the Department should act 
on an emergency basis since the ability for manufacturing handlers to 
de-pool milk will continue to lower the proceeds received by producers 
that service the needs of the Class I market.
    A witness appearing on behalf of Smith Dairy Products Company 
testified in support of proposals limiting de-pooling. Smith operates 
two distributing plants located in the Mideast marketing area. The 
witness said that the practice of de-pooling manipulates the intent of 
the Federal milk order system and results in the lowering of the blend 
prices paid to producers that service the needs of the Class I market. 
The witness did not offer support for a specific proposal but urged the 
Department to eliminate the ability to de-pool milk on the Mideast 
order on an emergency basis.
    A witness appearing on behalf of Continental testified in 
opposition to Proposals 4, 6, 7, and 8. The witness opposed adoption of 
these proposals because they would allow milk delivered to a 
distributing plant to be immediately re-pooled and maintained that 
Proposal 5 would be a better option for the marketing area.
    A witness appearing on behalf of White Eagle Cooperative Federation 
(White Eagle) testified neither in support of or opposition to Proposal 
7. White Eagle is a federation of cooperatives and independent 
producers that markets approximately 150 million pounds of milk per 
month on the Mideast order. The witness asserted that adoption of the 
115 percent pooling standard could limit smaller cooperatives from 
increasing their dairy farmer membership. The witness testified that 
adoption of Proposal 7 would allow for an increase in the volume of 
milk pooled above 115 percent if a producer who was pooled on another 
Federal order sought to become pooled on the Mideast order but would 
not make the same exception for a producer continually pooled on the 
Mideast order who increases production. The witness said that if de-
pooling were limited on the Mideast order, de-pooled milk would seek to 
be pooled on other Federal orders where there are no de-pooling 
restrictions. The witness was of the opinion that the de-pooling issue 
should be handled on a national basis and with a recommended decision 
where the public could submit comments. These positions were reiterated 
in their post-hearing brief filed on behalf of White Eagle, Superior 
Dairy, United Dairy, Guggisberg Cheese, Brewster Dairy, and Dairy 
Support, Inc.
    A post-hearing reply brief submitted on behalf of Dean expressed 
opposition to Proposal 5. Dean argued that Proposal 5 was too 
restrictive because it contained no provision to enable de-pooled milk 
to become immediately re-pooled if it was truly needed to service the 
fluid market later in the month.
    Comments filed on behalf of Foremost Farms USA Cooperative 
(Foremost) and Alto Dairy Cooperative (Alto), hereinafter, referred to 
as ``Foremost, et al.'', took exception to the Recommended Decision. 
Foremost, et al., are member owned Capper-Volstead cooperatives that 
market milk and supply distributing plants in the Mideast marketing 
area. Foremost, et al., took exception to the proposed regulations that 
would require a producer to be continuously pooled on another Federal 
order for the previous 3 months to be exempted from the re-pooling 
standards. Their exception asserted that a producer should be allowed 
to have some de-pooled milk receipts during the previous 3 months and 
still be exempted from the re-pooling standards of the Mideast order.
    Comments filed on behalf of Family Dairies USA took exception with 
amendments proposed in the Recommended Decision. Family Dairies is a 
member owned Capper-Volstead cooperative whose milk is pooled on the 
Mideast order. Family Dairies wrote that the Recommended Decision did 
not address the cause of negative PPD's--class price inversions--and 
therefore opposed the adoption of the proposed amendments.
    Comments were filed on behalf of Associated Milk Producers, Inc.; 
Bongards' Creameries; Ellsworth Cooperative Creamery; Family Dairies 
USA; First District Association; Davisco Foods; Valley Queen Cheese 
Company; and Wisconsin Cheese Makers Association, hereinafter referred 
to as the ``AMPI Group.'' The AMPI Group took exception to the re-
pooling standard proposed by the Department and asserted that the 
proposed standard did not solve the underlying cause of de-pooling. The 
AMPI Group asserted that the Department arbitrarily refused to consider 
proposals that would end the time lag in classified price announcements 
as a remedy to de-pooling and did not consider alternative

[[Page 54178]]

proposals that would be less burdensome to handlers or requests to 
address the practice of de-pooling on a national basis.
    The AMPI Group commented that provisions which allow the Market 
Administrator to waive the re-pooling standard for handlers that 
experience a significant change in their milk supply due to unusual 
circumstances should be more specific as to what constitutes an unusual 
circumstance. The AMPI Group argued that small manufacturers may 
experience a growth in their milk supply that would not be considered 
an unusual circumstance and that such a situation should not cause a 
handler to be penalized under the re-pooling standard. The AMPI Group 
also cited various legal issues as reasons why the Department should 
not adopt the re-pooling standards. All Federal milk marketing orders 
require the pooling of milk received at pooled distributing plants--
which is predominately Class I milk--and all pooled producers and 
handlers on an order share in the additional revenue arising from 
higher valued Class I sales. Manufacturing handlers and cooperatives of 
Class II, III and IV uses of milk who meet the pooling and performance 
standards make all of their milk receipts eligible to be pooled and 
usually find it advantageous. Manufacturing handlers and cooperatives 
who supply a portion of their total milk receipts to Class I 
distributing plants receive the difference between their use-value of 
milk and the order's blend price. Federal milk orders, including the 
Mideast order, establish limits on the volume of milk eligible to be 
pooled that is not for fluid uses primarily through diversion limit 
standards. However, manufacturing handlers and cooperatives are not 
required, as are Class I handlers, to pool all their eligible milk 
receipts.
    According to the record, manufacturing handlers and cooperatives 
have opted to not pool their milk receipts when the manufacturing class 
prices of milk are higher than the order's blend price--commonly 
referred to as being ``inverted.'' During such months, manufacturing 
handlers and cooperatives have elected to not pool all of their 
eligible milk receipts because doing so would require them to pay into 
the PSF of the order, the mechanism through which handler and producer 
prices are equalized. When prices are not inverted, these handlers 
would pool all of their eligible receipts and receive a payment or draw 
from the PSF. In receiving a draw from the PSF, such handlers have 
sufficient money to pay at least the order's blend price to their 
supplying dairy farmers.
    When manufacturing handlers and cooperatives opt to not pool all of 
their eligible milk receipts in a month, they are essentially avoiding 
a payment to the PSF. This, in turn, enables them to avoid the 
marketwide sharing of the additional value of milk that accrues in the 
higher-valued uses of milk other than Class I. When the Class I price 
again becomes the highest valued use of milk, or when other class-price 
relationships become favorable, the record reveals that these same 
handlers opt to again pool their eligible milk receipts and draw money 
from the PSF. It is the ability of manufacturing handlers and 
cooperatives opting to not pool milk and thereby avoid the marketwide 
sharing of the revenue accruing from non-Class I milk sales that is 
viewed by proponents as giving rise to disorderly marketing conditions. 
According to proponents, producers and handlers who cannot escape being 
pooled and priced under the order are not assured of equitable prices.
    The record reveals that since the implementation of Federal milk 
marketing order reform in January 2000, and especially in more recent 
years, large and rapid increases in manufactured product prices during 
certain months have provided the economic incentives for manufacturing 
handlers to opt not to pool eligible milk on the Mideast order. For 
example, during the 3-month period of February to April 2004, the Class 
III price increased over 65 percent from $11.89 cwt to $19.66 cwt. 
During the same time period, total producer milk pooled on the Mideast 
order decreased by nearly 40 percent from 1.4 billion pounds to 873 
million pounds. When milk volumes of this magnitude are not pooled the 
impacts on producer blend prices are significant. Producers who incur 
the additional costs of consistently servicing the Class I needs of the 
market receive a lower return than would otherwise have been received 
if they did not continue to service the Class I market. Prices received 
by dairy farmers who supplied the other milk needs of the market are 
not known. However, it is reasonable to conclude that prices received 
by dairy farmers were not equitable or uniform.
    The record reveals that ``inverted'' prices of milk are generally 
the result of the timing of Class price announcements. Despite changes 
made as part of Federal milk order reform to shorten the time period of 
setting and announcing Class I milk prices and basing the Class I price 
on the higher of the Class III or Class IV price to avoid price 
inversions, large month-to-month price increases in Class III and Class 
IV product prices sometimes trumped the intent of better assuring that 
the Class I price for the month would be the highest-valued use of 
milk. In all orders, the Class I price (and the Class II skim price) is 
announced prior to or in advance of the month for which it will apply. 
The Class I price is calculated by using the National Agricultural 
Statistics Service (NASS) surveyed cheese, butter, nonfat dry milk and 
dry whey prices for the two most current weeks prior to the 24th day of 
the preceding month and then adding a differential value to the higher 
of either the advanced Class III or Class IV price.
    Historically, the advance pricing of Class I milk has been used in 
all Federal orders because Class I handlers cannot avoid regulation and 
since they are required to pool all of their Class I milk receipts they 
should know their product costs in advance of notifying their customers 
of price changes. However, milk receipts for Class III and IV uses are 
not required to be pooled; thus, Class III and IV product prices (and 
the Class II butterfat value) are not announced in advance. These 
prices are announced on or before the 5th of the following month. Of 
importance here is that manufacturing plant operators and cooperatives 
have the benefit of knowing all the classified prices of milk before 
making a decision to pool or not pool eligible receipts.
    The record reveals that the decision of manufacturing handlers or 
cooperatives to pool or not pool milk is made on a month-to-month basis 
and is generally independent of past pooling decisions. Manufacturing 
handlers and cooperatives that elected to not pool their milk receipts 
did so to avoid making payments to the PSF and they anticipated that 
all other manufacturing handlers and cooperatives would do the same. 
However, the record indicates that normally pooled manufacturing 
handlers and cooperatives met the pooling standards of the order to 
ensure that the Class I market was adequately supplied and that they 
established eligibility to pool their physical receipts including 
diversions to nonpool plants. Opponents to proposals to deter de-
pooling are of the view that meeting the pooling standards of the order 
and deciding how much milk to pool are unrelated events. Proponents 
took the view that participation in the marketwide pool should be based 
on a long-term commitment to supply the market because in the long-term 
it is the sales of higher priced Class I milk that adds additional 
revenue to the pool.

[[Page 54179]]

    The producer price differential, or PPD, is the difference between 
the Class III price and the weighted average value of all Class I, II 
and IV milk pooled. In essence, the PPD is the residual revenue 
remaining after all butterfat, protein and other solids values are paid 
to producers. If the pooled value of Class I, II and IV milk is greater 
than the Class III value, dairy farmers receive a positive PPD. While 
the PPD is usually positive, a negative PPD can occur when class prices 
rise rapidly during the 6-week period between the time the Class I 
price is announced and the time the Class II butterfat and III and IV 
milk prices are announced. When manufacturing prices fall, this same 
lag in the announcement of class prices yields a positive PPD.
    As revealed by the record, when manufacturing plants and 
cooperatives opted to not pool milk because of inverted price 
relationships, PPD's were much more negative. When this milk is not 
pooled, a larger percentage of the milk remaining pooled will be the 
``lower'' priced Class I milk. When manufacturing milk is not pooled 
the weighted average value of milk decreases relative to the Class II, 
III or IV value making the PPD more negative. For example, record 
evidence demonstrated that in April 2004, a month when a sizeable 
volume of milk was not pooled, the PPD was a negative $3.78 per cwt. If 
all eligible milk had been pooled, the PPD would have been $1.66 per 
cwt higher or a negative $2.12 per cwt. This $1.66 per cwt represents 
the additional burden borne by those producers who remain pooled.
    The record reveals that when manufacturing handlers and 
cooperatives opt to not pool milk, unequal pay prices may result to 
similarly located dairy farmers. For example, Dean noted that when a 
cooperative delivers a high percentage of their milk receipts to a 
distributing plant, it lessens their ability to not pool milk and makes 
them less competitive in the marketplace relative to other producers 
and handlers. Other evidence in the record supports conclusions 
identical to Dean that when a dairy farmer or cooperative is able to 
receive increased returns from shipping milk to a manufacturing handler 
during times of price inversions, other dairy farmers or cooperatives 
who may have shipped more milk to a pool distributing plant are 
competitively disadvantaged.
    The record of this proceeding reveals that the ability of 
manufacturing handlers and cooperatives to not pool all of their 
eligible milk receipts gives rise to disorderly marketing conditions 
and warrants the establishment of additional pooling standards to 
safeguard marketwide pooling. Current pooling provisions do not require 
or prohibit handlers and cooperatives from pooling all eligible milk 
receipts. However, the record reveals that when handlers and 
cooperatives opt to not pool milk, inequities arise among producers and 
handlers that are contrary to the intent of the Federal milk marketing 
order program--maintaining orderly marketing conditions.
    The record contains extensive testimony regarding the effects on 
the milk order program resulting from advance pricing and the priority 
the milk order program has placed on the Class I price being the 
highest valued use of milk. It remains true that the Class I use of 
milk is still the highest valued use of milk notwithstanding those 
occasional months when milk used in usually lower-valued classes may be 
higher. This has been demonstrated by an analysis of the effective 
Class I differential values--the difference in the Class I price at the 
base zone of Cuyahoga County, Ohio, and the higher of the Class III or 
Class IV price--for the 65-month period of January 2000 through May 
2005 performed by USDA.\1\ These computations reveal that the effective 
monthly Class I differential averaged $1.97 per cwt. Accordingly, it 
can only be concluded that if the longer-term Class I sales continue to 
be the source of additional revenue accruing to the pool even when, in 
some months, the effective differential is negative.
---------------------------------------------------------------------------

    \1\ Official notice is taken of data and information published 
in Market Administrator Bulletins, as posted on individual Market 
Administrator Web sites.
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    Price inversions occur when the wholesale price for manufactured 
products rises rapidly indicating a tightening of milk supplies to 
produce those products. It is for this reason that the Department chose 
the higher of the Class III or Class IV prices as the mover of the 
Class I price. Distributing plants must have a price high enough to 
attract milk away from manufacturing uses to meet Class I demands. As 
revealed by the record, this method has not been sufficient to provide 
the appropriate price signals to assure an adequate supply of milk for 
the Class I market. Accordingly, additional measures are needed as a 
means of assuring that milk remains pooled and thus available to the 
Class I market. Adoption of Proposal 7 is a reasonable measure to meet 
the objectives of orderly marketing.
    This final decision does find that disorderly marketing conditions 
are present when producers do not receive uniform prices. Handlers and 
cooperatives opting to not pool milk do not account to the pool at the 
classified use value of those milk receipts. They do not share in all 
the additional costs and burdens with those producers who are pooled 
and who are incurring the costs of servicing the Class I needs of the 
market. This is not a desired or reasonable outcome especially when the 
same handlers and cooperatives will again pool all of their eligible 
receipts when class-price relationships change in a subsequent month. 
These inequities borne by the market's producers are contrary to the 
intent of the Federal order program's reliance on marketwide pooling--
ensuring that all producers supplying the market are paid uniform 
prices for their milk regardless of how the milk of any single producer 
is used.
    Exceptions filed by the AMPI Group and Foremost, et al., asserting 
that the re-pooling standards do not address the cause of de-pooling--
price inversions--are unpersuasive. It is reasonable that the order 
contain pooling provisions intended to deter the disorderly conditions 
that arise when de-pooling occurs. Such provisions maintain and enhance 
orderly marketing. Accordingly, this final decision finds it reasonable 
to adopt provisions that limit the volume of milk a handler or 
cooperative may pool during the months of April through February to 115 
percent of the total volume pooled by the handler or cooperative in the 
prior month and to 120 percent of the prior month's pooled volume 
during March. Adoption of this standard will not prevent manufacturing 
handlers or cooperatives from electing to not pool milk. However, it 
should serve to maintain and enhance orderly marketing by encouraging 
participation in the marketwide pooling of all classified uses of milk.
    A modification proposed by Dean in their exceptions to the 
Recommended Decision to lower the re-pooling standard in February to 
110 percent is denied. This modification was not discussed at the 
hearing. The 115 percent re-pooling standard should adequately deter 
excessive de-pooling. However, should de-pooling abuses continue under 
the new re-pooling standards the Department can be petitioned to adjust 
the standards.
    Despite exceptions filed by the AMPI Group, this decision continues 
to adopt provisions that grant authority to the Market Administrator to 
waive the re-pooling standard for a bloc of milk due to unusual 
circumstances. This discretion has been previously granted to the 
Market Administrator to amend or waive other pooling standards and it 
is

[[Page 54180]]

reasonable to make a similar accommodation here. Consideration was 
given on whether de-pooling should be considered at a national hearing 
with other, broader national issues of milk marketing. However, each 
marketing area has unique marketing conditions and characteristics that 
have area-specific pooling provisions to address those specific 
conditions. Because of this, pooling issues are considered unique to 
each order. Historically, pooling issues have been addressed on an 
order by order basis and, despite exceptions filed by the AMPI Group, 
this final decision continues to find that it would be unreasonable to 
address pooling issues, including de-pooling, on a national basis. 
Other objections by the AMPI Group that the Department should take into 
account a manufacturers cost of production are irrelevant in regards to 
the pooling standards of the order. The record does not support finding 
that manufacturers de-pool milk to recoup manufacturing costs that they 
otherwise cannot. The record clearly establishes that manufacturers de-
pool their milk supply to avoid making a payment into the order's PSF. 
Nevertheless, manufacturing allowances, which are uniform in all 
Federal orders, are currently being addressed by the Department on a 
national basis (71 FR 545).
    Some manufacturing handlers and cooperatives argued at the hearing 
and noted in exceptions to the Recommended Decision that their milk did 
perform in meeting the Class I needs during the month and this occurred 
before making their pooling decisions. They argue that the Class I 
market is therefore not harmed and that the intents and goals of the 
order program are satisfied. In response to these arguments, this 
decision finds that the practice of de-pooling undermines the intent of 
the Federal order program to assure producers uniform prices across all 
uses of milk normally associated with the market as a critical 
indicator of orderly marketing conditions.
    Exceptions filed by Foremost, et al., arguing that a producer 
should be allowed to de-pool some milk in each month and still be 
allowed to utilize the exception for producers or blocs of producers 
moving between orders is contrary to the goal of the re-pooling 
provision. If a producer were allowed to de-pool milk in one Federal 
order and subsequently re-pool in a second Federal order without 
limitation, the re-pooling standard would be severely undermined. As a 
matter of clarification, a producer can be de-pooled in one order and 
re-pooled in the Mideast order as part of the 115 percent re-pooling 
limitation, but no further exemption from the limitation would apply to 
this producer.
    Handlers and cooperatives who de-pool purposefully do so to gain a 
momentary financial benefit (by avoiding making payments to the PSF) 
which would otherwise be equitably shared among all market 
participants. While the order's performance standards tend to assure 
that distributing plants are adequately supplied with fresh, fluid 
milk, the goals of marketwide pooling are undermined by the practice of 
de-pooling. Producers and handlers who regularly and con