Milk in the Upper Midwest Marketing Area; Decision on Proposed Amendments to Marketing Agreement and to Order, 54136-54149 [06-7496]

Agencies

• Agricultural Marketing Service
• DEPARTMENT OF AGRICULTURE

[Federal Register Volume 71, Number 177 (Wednesday, September 13, 2006)]
[Proposed Rules]
[Pages 54136-54149]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-7496]



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Part III





Department of Agriculture





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Agricultural Marketing Service



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7 CFR Part 1030



Milk in the Upper Midwest 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

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DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

7 CFR Part 1030

[Docket No. AO-361-A39; DA-04-03-B]


Milk in the Upper Midwest 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 Upper Midwest order intended to deter the de-pooling 
of milk and increase the order's maximum administrative assessment 
rate. 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 125 percent of the volume of 
milk pooled in the prior month; (2) Establish a limit on the volume of 
milk a handler may pool during the month of March to 135 percent of the 
volume of milk pooled in the prior month; and (3) Allow the Market 
Administrator to increase the maximum administrative assessment rate up 
to 8 cents per hundredweight on all pooled milk if necessary to 
maintain the required fund reserves. 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 Department 
a petition stating that the order, any provision of the order, or any 
obligation imposed in connection with the order is not in accordance 
with the law. A handler is afforded the opportunity for a hearing on 
the petition. After a hearing, the Department would rule on the 
petition. The Act provides that the district court of the United States 
in any district in which the handler is an inhabitant, or has its 
principal place of business, has jurisdiction in equity to review the 
Department 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 August 2004, the month during which the hearing occurred, 
there were 15,802 dairy producers pooled on and 60 handlers regulated 
by the Upper Midwest (UMW) order. Approximately 15,608 producers, or 97 
percent, were considered small businesses based on the above criteria. 
Of the 60 handlers regulated by the UMW during August 2004, 49 
handlers, or 82 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 UMW 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, 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. Administrative assessments 
are similarly charged 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 June 16, 2004; published June 23, 2004 
(69 FR 34963).
    Notice of Hearing Delay: Issued July 14, 2004; published July 21, 
2004 (69 FR 43538).
    Tentative Partial Decision: Issued April 8, 2005; published April 
14, 2005 (70 FR 19709).

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    Interim Final Rule: Issued May 26, 2005; published June 1, 2005 (70 
FR 31321).
    Final Partial Decision: Issued September 29, 2005; published 
October 5, 2005 (70 FR 58086).
    Final Partial Rule: Issued December 5, 2005; published December 9, 
2005 (70 FR 73126).
    Recommended Decision: Issued February 15, 2006; published February 
22, 2006 (71 FR 9004).

Preliminary Statement

    A public hearing was held upon proposed amendments to the marketing 
agreement and the order regulating the handling of milk in the UMW 
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 amendments set forth below are based on the record of a public 
hearing held at Bloomington, Minnesota, on August 16-19, 2004, pursuant 
to a notice of hearing issued June 16, 2004, published June 23, 2004 
(69 FR 34963), and a notice of hearing delay issued July 14, 2004, and 
published July 21, 2004(69 FR 43538).
    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 exceptions thereto.
    The material issues, findings, conclusions and rulings of the 
Recommended Decision, with one modification, are hereby approved, 
adopted and are set forth herein. The material issues on the record of 
hearing relate to:

1. Pooling Standards
    A. Establishing Pooling Limits
    B. Producer Definition
2. Administrative Assessment Rate

Findings and Conclusions

    This final decision specifically addresses proposals published in 
the hearing notice as Proposals 3, 4, and 5 and features of Proposal 2 
that seek to establish a limit on the volume of milk that can be pooled 
on the order, features of Proposal 6 intending to clarify the Producer 
definition by providing a definition of ``temporary loss of Grade A 
approval,'' and Proposal 7 which seeks to increase the order's maximum 
administrative assessment rate. As published in the hearing notice, 
Proposals 1, 6, and a portion of Proposal 2 concerning diversion limit 
standards and transportation credits were addressed in a tentative 
partial decision published on April 14, 2005 (70 FR 19709). For the 
purpose of this decision, references to Proposal 2 will only pertain to 
the first portion regarding de-pooling and references to Proposal 6 
will only pertain to establishing a definition of ``temporary loss of 
Grade A approval.''
    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 a formula using National Agricultural 
Statistics Service (NASS) survey prices of cheese, butter, and nonfat 
dried milk powder for the first two weeks of the preceding 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 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 value of the Class I, II and IV milk in the pool is 
greater than the Class III value, 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 UMW 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

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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, manufacturing handlers 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 as ``de-pooling.'' When the blend price rises above the 
manufacturing class use-values of milk these same handlers again opt to 
pool 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 deter the 
practice of de-pooling. Four proposals intending to deter 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 four 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 four proposals. The first approach, published in 
the hearing notice as Proposals 2 and 5, 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 3 and 4, 
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 while none of the proposals would completely eliminate de-
pooling, they would likely deter the practice.
    Of the four proposals received that would limit de-pooling, this 
decision adopts Proposal 2, offered by Mid-West Dairymen's Company 
(Mid-West) on behalf of Cass-Clay Creamery Inc. (Cass-Clay); Dairy 
Farmers of America, Inc. (DFA); Foremost Farms USA Cooperative 
(Foremost Farms); Land O'Lakes Inc. (LOL); Milwaukee Cooperative Milk 
Producers (MCMP); Manitowoc Milk Producers Cooperative (MMPC); Swiss 
Valley Farms Company (Swiss Valley); and Woodstock Progressive Milk 
Producers Association (Woodstock). Hereinafter, this decision will 
refer to these proponents as ``Mid-West, et al.'' Although Foremost 
Farms was a proponent of Proposal 2, no testimony was offered on their 
behalf. At the hearing, Plainview Milk Products Cooperative and Westby 
Cooperative Creamery also supported the testimony given on behalf of 
Mid-West, et al. The proponents of Proposal 2 are all cooperatives 
representing producers who supply the milk needs of the marketing area 
and is pooled on the UMW order.
    Specifically, adoption of Proposal 2 will limit the volume of milk 
a handler can pool in a month to no more than 125 percent of the volume 
of milk pooled in the prior month during the months of April through 
February, and to no more than 135 percent of the prior month's pooled 
volume in the month of March. Milk diverted to nonpool plants in excess 
of this limit will not be pooled. Milk shipped to pool distributing 
plants in excess of the volume shipped to pool distributing plants in 
the prior month will not be subject to the 125 or 135 percent 
limitation.
    As published in the hearing notice, Proposal 5, offered by Dean 
Foods Company (Dean), addresses de-pooling in a similar manner as 
Proposal 2, but would establish a limit on the total volume of milk a 
handler could pool in a given month to 115 percent of the volume that 
was pooled in the prior month. Dean is a handler who operates 
manufacturing plants and distributing plants in the UMW marketing area. 
Producer milk shipped to and physically received at a pool distributing 
plant, and producer milk that was pooled continuously on another 
Federal Order during the previous 6 months, would not be subject to 
this pooling standard. Proposal 5 is not recommended for adoption.
    As published in the hearing notice, Proposals 3 and 4, also offered 
by Dean, address de-pooling by establishing defined time periods during 
which de-pooled milk could not be pooled. Proposal 3 would require an 
annual pooling commitment by a handler to the UMW market. As advanced 
in Proposal 3, if the milk of a producer is de-pooled in a month, the 
milk of a producer could not re-establish eligibility for pooling on 
the order during the following 11 months unless 10 day's milk 
production of a producer was delivered to a pool distributing plant 
during the month. Under Proposal 3, handlers that de-pool milk have 
limited options to return milk to the pool, either shipping 10 day's 
milk production of a producer to a pool distributing plant during the 
month or waiting 11 months to regain pooling eligibility.
    Proposal 4 is similar to Proposal 3 but is less restrictive. Under 
Proposal 4, as modified at the hearing, if a producer's milk is 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 
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. Proposals 3 and 4 are not adopted.
    The current Producer milk provision of the UMW order considers the 
milk of a dairy farmer to be producer milk when it is delivered 
directly from farms to a pool plant or diverted by a pool plant or 
cooperative handler to a nonpool plant. Milk is not eligible for 
diversion to nonpool plants unless at least 1 day's production of such 
dairy farmer is received at a pool plant anytime during the initial 
qualifying month, often referred to as ``touching-base.'' To be 
eligible to pool all of its milk receipts, the pooling handler must 
ship at least 10 percent of its milk receipts to a pool distributing 
plant, producer-handler, a partially regulated distributing plant, or a 
pool distributing plant regulated by another Federal order. A handler's 
diversion of milk to nonpool plants can only be made to nonpool plants 
located in the States of Illinois, Iowa, Minnesota, Wisconsin, North 
Dakota, South Dakota, and the Upper Peninsula of Michigan. Milk that is 
subject to inclusion in another marketwide equalization program 
operated by a state government is not considered producer milk. The 
order currently does not limit a handler's ability to re-pool milk.
    The proponents of Proposals 2, 3, 4 and 5 are all of the opinion 
that the current pooling standards are inadequate because they enable 
manufacturing handlers to de-pool milk when advantageous to do so and 
immediately re-pool milk in a following month if advantageous to do so. 
According to the proponents, the UMW blend price is lowered when large

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volumes of sometimes higher-valued milk used for manufacturing are de-
pooled and when these large volumes of de-pooled milk return to the 
pool. Furthermore, the witnesses argued that de-pooling handlers do not 
account to the UMW pool at the order's classified prices and therefore 
face different costs than their similarly situated pooling competitors. 
The proponents insisted that the pooling standards of the order need to 
be amended to ensure producer and handler equity, even though the 
proposals differed on how best to meet this end.
    A witness appearing on behalf of Mid-West, et al., testified in 
support of Proposal 2. The witness was of the opinion that the 
underlying principles of the Federal order program are to supply milk 
to the fluid market, equitably share pool proceeds among all 
participating producers, and promote orderly marketing. The witness 
explained that the Federal order program achieves these objectives 
through classified pricing, through which Class I milk generates 
revenue for the pool; and marketwide pooling, which equalizes payments 
to all participating producers who serve the market regardless of how 
the milk of any single producer is utilized.
    The Mid-West, et al., witness said that currently milk utilized at 
manufacturing plants can be de-pooled and again pooled in a subsequent 
month when it is economically beneficial to the handler. When choosing 
to pool or not to pool, the witness explained, handlers assess whether 
participating in the marketwide pool would require them to make a 
payment into or receive a payment from the PSF. According to the 
witness, milk utilized as Class I must always be pooled regardless of 
whether the pooling handler would make a payment into, or receive a 
payment from, the PSF.
    The Mid-West, et al., witness testified that because manufacturing 
milk can freely exit and return to the pool, producers who regularly 
and consistently service the UMW fluid market are not being treated 
equitably under the terms of the order. According to the witness, these 
producers receive a lower blend price because the value of the milk 
that was de-pooled was not shared equitably among all the market's 
producers.
    The Mid-West, et al., witness maintained that the ability of 
manufacturing handlers to de-pool milk creates inequities among 
handlers and producers. The witness said that when the PPD is negative, 
dairy farmers receive different payments for their milk depending on if 
their milk was pooled, and handlers are not required to account to the 
pool at classified prices depending on their pooling decisions. Class I 
handlers who must pool their milk receipts always have a disadvantage 
when the PPD is negative, explained the witness, because manufacturing 
handlers can opt to de-pool and avoid paying into the PSF. According to 
the witness, this results in higher prices that can be paid to the 
producers supplying manufacturing handlers. The witness contrasted that 
when the PPD is positive, milk that had been de-pooled seeks to return 
to the pool. According to the witness, this also dilutes the blend 
price paid to producers who had been supplying Class I handlers.
    The Mid-West, et al., witness, relying on Market Administrator 
statistics, noted that in May 2004, all producer milk pooled on the 
order was subject to a negative $1.97 per hundredweight (cwt) PPD. 
However, the witness emphasized that a manufacturing handler who chose 
to de-pool its milk supply and did not have to account to the pool at 
classified prices had an imputed PPD of zero. In other words, the 
witness explained, milk used in manufactured products was worth more 
than milk used in fluid products. Relying on additional Market 
Administrator statistics, the witness demonstrated that if 100 percent 
of eligible Class III milk had pooled in July 2003 through May 2004, 
the estimated PPD would have averaged a negative $0.098 per cwt rather 
than the actual average PPD of negative $0.773 per cwt.
    The Midwest, et al., witness explained how adoption of Proposal 2 
would improve both producer and handler equity. The witness said that 
Proposal 2 would only limit the amount of milk a handler could pool up 
to 125 or 135 percent of the previous month's pooled volume and 
clarified that any milk delivered to a distributing plant would not be 
subject to the 125 or 135 percent pooling calculation. If Proposal 2 
were adopted, the witness claimed, no current handler would have to 
change the physical operations of their plant. While adoption of this 
proposal would not end the practice of de-pooling, speculated the 
witness, it would establish financial consequences for handlers who 
might not otherwise consistently pool their milk receipts.
    In explaining why adoption of Proposal 2 would be reasonable and 
appropriate for the UMW order, the Mid-West, et al., witness said that 
a 125 percent standard should accommodate any change in the potential 
growth of a handler's pooled milk volume resulting from seasonal 
fluctuations in milk supply or the addition of new producers, assuming 
that the handler did not de-pool. Additionally, the witness added that 
to ensure no handler would need to change its physical operations, 
Proposal 2 allows a 135 percent re-pooling standard in March because of 
the fewer calendar days in February. The witness stressed that the 125 
and 135 percent standards allow a handler to de-pool a portion of its 
milk supply and over a period of months, regain the ability to again 
pool its entire supply. The witness added that the proposal does not 
restrict the volume of milk able to be pooled in August since this is 
generally considered the start of the new marketing year.
    The Mid-West, et al., witness also emphasized that establishing a 
standard on the basis of the prior month's pooled volume has been done 
in other orders. The Northeast order has a ``producer for other 
markets'' provision that restricts the ability to pool the milk of a 
producer if the milk of that producer had been previously de-pooled, 
noted the witness. Furthermore, the witness said, milk orders in the 
south and southeastern part of the country had provisions which limited 
the sharing of marketwide returns in the spring months to only those 
producers whose milk served the fluid market during the fall months.
    The Mid-West, et al., witness predicted that price volatility would 
continue in the future and result in negative PPD's and the further de-
pooling of milk. The witness was of the opinion that price volatility 
and de-pooling have created emergency marketing conditions that would 
warrant the Department to omit issuing a recommended decision.
    A witness from DFA, appearing on behalf of Mid-West, et al., 
testified in support of Proposal 2. The witness testified that DFA 
engages in the practice of de-pooling when warranted to earn sufficient 
revenue to pay their producer members a competitive milk price. The 
witness emphasized that de-pooling creates disorderly marketing 
conditions and supported Proposal 2 as the best option to deter the 
practice of de-pooling. The witness offered scenarios that demonstrated 
the financial incentives available to handlers who de-pool milk. The 
witness asserted that the current pooling standards of the UMW order, 
where producers qualify for pooling by meeting a one-day touch base 
standard, allow handlers the opportunity to reap financial rewards from 
the market by de-pooling and re-pooling their milk receipts.

[[Page 54140]]

    The DFA witness explained that Proposal 2 was a compromise position 
among all the entities of Mid-West, et al., noting that its adoption 
would improve the current disorderly market conditions arising from the 
practice of de-pooling. The witness noted that many alternatives were 
considered but the proponents were of the opinion that Proposal 2 is a 
significant improvement to the order's pooling provisions while still 
allowing handlers to make their own pooling decisions.
    Witnesses from LOL, Swiss Valley, Cass-Clay, MMPC, and DFA Central 
Council, all appearing on behalf of Mid-West, et al., testified in 
support of Proposal 2. Many of the witnesses testified that their 
respective organizations engage in the practice of de-pooling when it 
is advantageous but that they recognize that the practice has a 
negative impact on the PPD and creates disorderly marketing conditions. 
Consequently, they are of the opinion that while a moderate level of 
de-pooling should be tolerated, a set of standards should be 
established to deter de-pooling to maintain orderly marketing 
conditions.
    The Mid-West, et al., witnesses identified above expressed support 
for Proposal 2 as an acceptable and moderate approach to limiting the 
practice of de-pooling. The proposal would allow flexibility in making 
pooling decisions, explained the witnesses, but would also establish 
significant consequences for those who opt to de-pool large volumes of 
their producer milk supply. In this regard, the witnesses said that 
Proposal 2 would result in improving equity among handlers and among 
producers during times of price inversions.
    A DFA dairy farmer member, whose milk is pooled on the UMW order, 
testified in support of Proposal 2. The witness was of the opinion that 
if dairy farmers want to participate in the UMW marketwide pool and 
share in the revenue generated from the market, they should be prepared 
to service the market every month. When handlers engage in the practice 
of de-pooling their milk receipts, the witness said, severe price 
fluctuations and larger, negative PPDs result that negatively affect 
the price paid to pooled producers. The witness was of the opinion that 
the adoption of Proposal 2 would result in more stable pooled milk 
volumes and lessen the severe and volatile price changes that producers 
have experienced.
    A dairy farmer appearing on behalf of MCMP, whose milk is pooled on 
the UMW order, testified in support of Proposal 2. The witness said 
that their farm income was reduced during May 2004 as a result of the 
negative $1.97 per cwt PPD. The witness added that neighboring farms 
that shipped milk to other handlers reported receiving a higher price 
for their milk. The opinion of the witness was that the practice of de-
pooling has led to non-uniform prices received by farmers and that 
adoption of Proposal 2 would restore price equity among producers.
    Comments filed on behalf of the members of Midwest, et al., Westby 
Cooperative Creamery, and Woodstock Progressive Milk Producers 
Association expressed their support for the proposed re-pooling 
standards of Proposal 2 and increasing the maximum administrative 
assessment. Midwest, et al., clarified that the intent of Proposal 2 
was to constrain the practice of de-pooling while still encouraging 
additional milk shipments for Class I use. Midwest, 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 all milk delivered to 
distributing plants. Midwest, et al., explained that their intent was 
not to exempt all milk delivered to distributing plants from the re-
pooling standard, rather it was to exempt any incremental increase in 
distributing plant deliveries to ensure that handlers would not be 
discouraged from serving the Class I market.
    A witness appearing on behalf of Dean testified in opposition to 
Proposal 2. The witness said that the pooling standards of Proposal 2 
are too liberal and that unlimited pooling in the month of August could 
allow handlers to again take advantage of the pooling system.
    A witness appearing on behalf of Northwest Dairy Association (NDA) 
testified in opposition to Proposal 2. NDA is a dairy cooperative that 
markets 7 billion pounds of milk annually with members in the States of 
Washington, Oregon, Idaho, and Northern California. The witness 
explained that NDA engages in the practice of de-pooling in other 
Federal orders as a way to recover costs in their manufacturing of 
butter and cheese because the Class III and IV make allowances do not 
adequately reflect such costs. The NDA witness was of the opinion that 
the practice of de-pooling should be addressed at a national hearing 
that would also consider other issues such as the make allowances used 
in the Class III and IV price formulas.
    A witness appearing on behalf of Dean testified in support of 
Proposals 3, 4, and 5. 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. While some entities are of 
the opinion that the Federal order system should ensure a sufficient 
milk supply to all plants, the Dean witness was of the opinion that the 
Federal order system addresses only the need for ensuring a milk supply 
to distributing plants. The witness elaborated on this opinion by 
citing examples of order provisions that stress providing for a regular 
supply of milk to distributing plants as a priority of the Federal milk 
order program.
    The Dean witness was of the opinion that for the Federal milk order 
system to ensure orderly marketing, orders need to provide adequate 
economic incentives that will attract milk to fluid plants and to 
properly define regulations that identify the milk of those producers 
who can participate in the marketwide pool. The witness argued that a 
major flaw in the current regulations is that they allow handlers to 
choose when to participate in the pool. In this regard, the witness 
said, the order lacks the economic incentive for pool participation by 
its lack of an economic disincentive to the practice of de-pooling.
    The Dean witness testified that Proposals 3, 4, and 5 are designed 
to establish proper economic incentives for supplying the fluid market 
and maintain equity among handlers and producers. While each proposal 
offered a slightly different solution to the problem, the witness said, 
Dean Foods supports their adoption in the following order or 
preference: Proposal 3, Proposal 4, and then Proposal 5.
    A second witness appearing on behalf of Dean testified in support 
of Proposals 3, 4, and 5. The witness argued that when handlers engage 
in the practice of de-pooling it creates a burden on the producers who 
consistently serve the Class I needs of the market. According to the 
witness, when the PPD is negative, there is an incentive for handlers 
to de-pool Class III and Class IV milk. When a handler opts to de-pool, 
it decreases the amount of pooled milk and makes the PPD more negative 
than it would have been had all milk been pooled, the witness said. 
When the PPD is positive, milk previously de-pooled seeks to be re-
pooled which increases the volume of pooled milk valued at lower 
classified prices and lowers the blend price paid to all producers, the 
witness asserted. The major ``losers'' in this process, concluded the 
witness, are the

[[Page 54141]]

producers whose milk is continuously pooled regardless of the PPD.
    The second Dean witness said that Proposal 3 was designed to 
increase the availability of milk for fluid use and ensure that pool 
proceeds are only shared among producers who consistently service the 
fluid market. The witness said that if Proposal 3 is adopted, de-pooled 
milk could again become pooled as long as the producer delivered 10-
day's milk production to a pool distributing plant for 12 consecutive 
months. Once that standard was met, the witness added, the producer's 
milk could then be pooled under the more flexible provisions of the UMW 
order.
    The Dean witness asserted that there are three benefits to adoption 
of Proposal 3: (1) When the PPD is negative, more Class III milk would 
stay in the pool resulting in a less negative PPD; (2) Some Class III 
de-pooled milk would never be re-pooled which would result in a more 
positive PPD; and (3) Class III de-pooled milk would have to 
demonstrate regular and significant deliveries to distributing plants 
in order to be re-pooled.
    In explaining Proposal 4 as an alternative to Proposal 3, the 
second Dean witness indicated that the difference in the two proposals 
is the number of months that the 10-day touch base provision would be 
applicable before de-pooled milk could again be pooled under normal 
circumstances. The witness was of the opinion that Proposal 4 would 
discourage some de-pooling; however, the harm caused by the practice of 
de-pooling would be better prevented by the adoption of Proposal 3.
    The Dean witness also discussed Proposal 5 as a less desirable 
alternative to Proposals 3 and 4. According to the witness, Proposal 5 
would limit the amount of milk that can be pooled to 115 percent of the 
handler's previous month's pooled milk volume. The witness explained 
that the greater the volume of de-pooled milk, the more time needed 
under Proposal 5 for a handler to re-pool all its milk receipts. This, 
the witness said, ensures that the entities that benefit the most from 
the practice of de-pooling would not receive an immediate benefit that 
would otherwise occur when re-pooling.
    A third witness appearing on behalf of Dean testified in support of 
Proposal 3. The witness said that the current liberal pooling standards 
of the UMW order are one source of disorderly marketing and are 
preventing all producers from sharing equally in pool proceeds. The 
witness asserted that the Federal milk order system was designed so 
that through marketwide pooling all producers would share equally in 
pool proceeds, and that through classified pricing milk would move to 
the market's highest-valued use.
    Relying on Market Administrator statistics for January 2000 through 
June 2004, the Dean witness asserted that the volume of pooled Class 
III milk varied from 1.5 billion pounds in January 2004 to 11 million 
pounds in April 2004. Furthermore, the witness said, the blend price in 
April 2004 would have been $2.97 higher if all Class III milk had been 
pooled. The witness was of the opinion that these large swings in the 
volume of pooled milk results in the disorderly marketing condition of 
inequitable sharing of pool proceeds among producers.
    A witness appearing on behalf of Oberweis Dairy testified in 
support of Proposals 2 and 3. Oberweis Dairy operates a distributing 
plant with approximately 40 dairy farmer suppliers and 32 ice cream 
stores in the Chicago and St. Louis area markets. The witness was of 
the opinion that it is inequitable to producers and Class I handlers 
when manufacturing handlers engage in the practice of de-pooling. The 
witness was of the opinion that either all handlers should be able to 
engage in the practice of de-pooling or it should be prohibited. While 
no proposal at the hearing proposed such a restriction, the witness was 
of the opinion that Proposal 3 would be the best option to restore 
equity among producers. Nevertheless, the witness said that Oberweis 
would support the adoption of Proposal 2 if the Department finds it to 
be more appropriate.
    A witness appearing on behalf of the Wisconsin Farmers Union, 
Minnesota Farmers Union, and the North Dakota Farmers Union testified 
about the negative effects of de-pooling on dairy producers. According 
to the witness, these organizations represent farmers of various 
agricultural products in their respective States. The witness asserted 
that when a cooperative engages in the practice of de-pooling, dairy 
farmers are negatively affected because the revenue a cooperative gains 
from de-pooling is not paid to producers by the cooperatives. The 
witness insisted that the practice of de-pooling should be curbed so 
that producers are adequately paid for the total value of their milk.
    A witness appearing on behalf of Galloway Company (Galloway) 
testified in support of all proposals that would limit the practice of 
de-pooling. Galloway owns and operates a dairy manufacturing plant in 
the UMW marketing area. The witness was of the opinion that large 
negative PPD's are due, in part, to de-pooling and that has a negative 
impact on the income of Galloway. The witness was of the opinion that 
changes to order provisions to limit the ability to re-pool are 
necessary but had no opinion as to which proposal would be the best 
option.
    A post-hearing brief submitted by Dean reiterated their opinion 
that the pooling standards of the order need to be amended to correct 
the disorderly marketing conditions arising from the practice of de-
pooling. The brief argued that the practice of de-pooling is disorderly 
because a handler who de-pools milk avoids accounting to the pool at 
classified prices and is not required to pay its suppliers the minimum 
blend price. However, asserted Dean, a pooled handler not only accounts 
to the pool at classified prices and pays its suppliers the minimum 
blend price, the handler also finds it necessary to pay large premiums 
to keep its suppliers.
    According to the Dean brief, negative PPD's and the resulting 
practice of de-pooling are not a national issue, noting that de-pooling 
typically occurs in markets with low Class I utilization such as the 
UMW. The Dean brief predicted that the practice of de-pooling would 
occur in the future and therefore concluded that the disorderly 
marketing conditions arising from the practice of de-pooling warrant 
emergency action from the Department by omitting a recommended 
decision.
    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 2 would be sufficient to adequately deter the practice of de-
pooling in the Upper Midwest marketing area. Dean also commented that 
the re-pooling standard for the month of February should be modified to 
115 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 post hearing brief submitted on behalf of Lamers Dairy, Inc. 
(Lamers) asserted that the ability of some handlers to engage in the 
practice of de-pooling when it is economically advantageous is a 
disorderly marketing condition. Furthermore, the brief expressed the 
opinion that de-pooling causes inequitable treatment among handlers 
because pooling handlers must account to the PSF at minimum classified 
prices while handlers who de-pool their milk receipts do not. The 
Lamers brief supported adoption of

[[Page 54142]]

Proposal 3 as the most appropriate solution to limit the practice of 
de-pooling.
    A witness appearing on behalf of Mid-West, et al., testified in 
opposition to Proposal 3. According to the witness, requiring a 
producer whose milk was de-pooled to deliver 10-day's milk production 
to a pool distributing plant is a standard that would be extremely 
difficult to meet. The witness stressed that finding access to a pool 
distributing plant for 10-day's production would not only be extremely 
difficult, it would also be costly. The Mid-West, et al., brief also 
contended that the proposals offered by Dean would require physical 
changes in plant operations that are not necessary to address the 
practice of de-pooling in the UMW market.
    The Mid-West, et al., brief disagreed with others who were of the 
opinion that the de-pooling issue should be addressed at a national 
hearing. The brief explained that historical Federal milk order policy 
is that the pooling provisions of orders be reflective of each order's 
individual marketing conditions. Therefore, the brief concluded, it is 
appropriate to address the practice of de-pooling on an individual 
order basis.
    A witness appearing on behalf of Associated Milk Producers, Inc. 
(AMPI) testified in opposition to all proposals intended to limit the 
practice of de-pooling as specified in Proposals 2, 3, 4, and 5. The 
witness' testimony was given on behalf of Alto Dairy Cooperative, 
Bongards' Creameries, Ellsworth Cooperative Creamery, Family Dairies 
USA, First District Association, Davisco Foods, Valley Queen Cheese 
Company and Wisconsin Cheesemakers Association (WCA). The members 
consist of cooperative associations and handlers who market or purchase 
milk in the UMW marketing area. Hereinafter, this coalition of members 
will be referred to collectively as ``AMPI, et al.''
    The AMPI, et al., witness testified that the option to engage in 
the practice of de-pooling in response to price inversions has been a 
longstanding part of the Federal milk order system. The witness 
testified that as a result of timing differences in announcing 
classified prices, a lag between changes in the market value of milk 
used in manufacturing and corresponding changes in the Federal order 
Class I price sometimes results in price inversions. The witness 
explained that the occasional price inversion is caused by the 
announcement of the Class I price approximately two weeks prior to the 
month and the announcement of the price for milk used in Class II, III, 
and IV products occurring after the close of the month--a difference of 
six weeks. The witness drew attention to April 2004 where the value of 
Class III milk increased $6.02 per cwt during the six-week lag. This 
resulted in a blend price that was substantially less than the 
estimated Class III price, resulting in a large amount of de-pooled 
Class III milk because, the witness said, there was no incentive for 
manufacturing handlers to pool all of their milk receipts.
    The AMPI, et al., witness asserted that the argument that de-pooled 
milk does not serve, nor is available to serve, the fluid market is 
false. According to the witness, milk that is de-pooled is available to 
the Class I market during the month it is marketed and a decision to 
de-pool the milk is made after the end of the month when the Class II, 
III and IV prices are known. Additionally, the witness asserted that 
fluid milk plants always receive a continuous supply of fluid milk 
because of their contractual supply agreements.
    The AMPI, et al., witness characterized the proposals under 
consideration to address the practice of de-pooling as designed to 
penalize handlers who engage in de-pooling their Class III milk. AMPI, 
et al., the witness stated, is strongly opposed to this change in 
pooling philosophy. The witness was of the opinion that the Federal 
order system should continue to provide for the marketwide sharing of 
money derived from sales of Class I milk since it is Class I sales that 
historically generate additional revenue to producers. However, the 
witness said, the order should not force handlers to share money 
generated from manufactured milk products to offset a low Class I 
price.
    The AMPI, et al., witness was of the opinion that the practice of 
de-pooling is a national issue that should be addressed in a national 
hearing. The witness believed that a better solution to the practice of 
de-pooling would be to eliminate the advanced pricing of Class I milk 
and instead announce all Class prices after the end of the month.
    The AMPI, et al., witness also testified that emergency marketing 
conditions do not exist to warrant the omission of a recommended 
decision by the Department. The witness stressed that price inversions 
and the practice of de-pooling have occurred in the Federal order 
system for decades and any major change in Department policy regarding 
this practice should be addressed in a recommended decision where 
interested parties can file comments and exceptions.
    A post-hearing brief submitted on behalf of AMPI, et al., 
reiterated their opposition to all of the proposals that seek to deter 
de-pooling. The brief argued that the AMAA intended for the government 
to only require the sharing of the revenues generated from fluid sales. 
According to the brief, requiring manufactured milk to remain pooled 
oversteps the authority of the AMAA. The brief also expressed the 
opinion that Proposals 3, 4, and 5 are designed to limit a producer's 
access to the market and should therefore be denied. Furthermore, the 
brief stressed that Proposals 3 through 5 would unfairly increase costs 
of some UMW handlers because of the increased transportation and 
capital investment that would be needed to comply with the proposed 
amendments.
    A witness appearing on behalf of WCA, testified in opposition to 
all proposals intended to limit the practice of de-pooling as specified 
in Proposals 2, 3, 4, and 5. The witness testified that WCA represents 
dairy manufacturers and marketers with 32 of its members operating 42 
pooled dairy facilities on the UMW order. According to the witness, 30 
of the 42 pooled dairy facilities are small businesses and if the 
proposals to limit the practice of de-pooling were adopted, these small 
businesses would face new and significant costs to comply with the 
proposed new standards without benefit to their dairy farmer suppliers.
    The WCA witness expressed concern that Proposal 2 addressed the 
practice of de-pooling without regard to the cause of negative PPD's, 
specifically the inversion of classified prices. The witness also said 
that Proposals 2, 3, 4 and 5 would put an additional administrative 
burden on handlers by requiring them to designate which producers would 
remain pooled or de-pooled. The witness asserted that access to 
distributing plants in the UMW market is very limited and it would be 
hard for a de-pooled producer to re-associate with a distributing plant 
in order to be eligible to again pool their milk on the order.
    The WCA witness was of the opinion that Proposals 3 and 4 also 
would add additional transportation costs, administrative costs, and 
the potential need for additional silo capacity to accommodate the 
increased volume of milk that would be needed to meet the 10-day 
production delivery standard at a pool distributing plant. The witness 
explained that many WCA members do not have the capacity to accommodate 
meeting a 10-day production delivery standard for each month. The 
witness was also of the opinion that existing supply contracts provide 
ample milk supplies for the Class I market and concluded that 
additional deliveries to

[[Page 54143]]

pool plants are not needed to assure an adequate supply to Class I 
facilities.
    Comments filed by on behalf of AMPI, Bongards' Creameries, 
Ellsworth Cooperative Creamery, Family Dairies USA, First District 
Association, Davisco Foods, Valley Queen Cheese Company, and Wisconsin 
Cheese Markers Association (hereinafter referred to as ``AMPI Group'') 
took exception to the re-pooling standard proposed in the Recommended 
Decision. They asserted that the proposed standard did not solve the 
underlying cause of the practice 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 proposals that would be 
less burdensome to handlers or requests to address the practice of de-
pooling on a national basis.
    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 which 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.
    Comments filed by Eau Galle Cheese Factory and the Wisconsin Cheese 
Makers Association took exception to the Department's proposed re-
pooling standards and offered support for the views expressed by the 
AMPI Group.
    Comments filed on behalf of Family Dairies USA took exception to 
amendments proposed in the Recommended Decision and reiterated the 
testimony given on their behalf at the hearing by the AMPI, et al., 
witness.
    A witness appearing on behalf of the National Family Farm 
Coalition, an organization representing family farms located in 32 
states including those states comprising the UMW marketing area, 
testified in opposition to all proposals at the hearing. The witness 
was of the opinion that the entire Federal order system was in need of 
a complete reform. The witness asserted that the proponents of the 
proposals being heard were entities whose past actions have lowered 
prices received by family farmers.
    A post-hearing brief submitted on behalf of Alto Dairy (Alto), a 
cooperative with 580 dairy farmer members in Wisconsin and Michigan, 
reiterated their opposition to all proposals seeking to limit the 
practice of de-pooling. The brief stressed that a decision to de-pool 
is made separately from the decision to adequately supply the Class I 
needs of the market.
    Comments filed on behalf of Alto Dairy Cooperative and Foremost 
Farms USA took exception to the proposed regulations that would require 
a producer to be continuously pooled on another Federal order for the 
previous 6 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 6 months and still be exempt 
from the re-pooling standards of the Upper Midwest order.
    An Extension Dairy Marketing Specialist from the University of 
Wisconsin testified on the issues surrounding the practice of de-
pooling but did not support or oppose any specific proposal. The 
witness referred to and explained a research paper which identified and 
explained problems arising in the UMW marketing area by pooling distant 
milk, the practice of de-pooling, and the resulting economic impacts to 
producers. The witness said that if manufacturing prices for milk 
rapidly increase during the month there will be a negative PPD but as 
prices begin to decline, the PPD will again become positive over time. 
The witness also explained that a negative PPD does not mean that 
producers lost money. Rather, the witness clarified, the PPD is a 
calculation of the difference between the Class III price and the blend 
price that producers receive. However, concluded the witness, the 
ability to engage in the practice of de-pooling does result in volatile 
PPD's and gives rise to inequities among producers and among handlers.
    Comments filed on behalf of Grande Cheese Company took exception to 
findings made by the Department in the Recommended Decision. Grande was 
of the opinion that the cause of negative PPD's is the timing of 
classified price announcements. In addition, they were of the opinion 
that the Department was incorrect in establishing re-pooling standards 
as a way to address negative PPD's.
    Comments filed on behalf of the Cedar Grove Cheese Company (CGCC) 
took exception to establishing re-pooling standards. CGCC was of the 
opinion that previous amendments to the order's pooling provisions in a 
final partial decision (70 FR 58086) would deter the practice of de-
pooling, making the establishment of a re-pooling standard unnecessary. 
CGCC advocated rejecting or delaying the implementation of the re-
pooling standards until Upper Midwest market participants are given the 
opportunity to operate under the newly amended pooling standards. CGCC 
commented that the re-pooling standard would cause producers whose milk 
was de-pooled to be unfairly disadvantaged in subsequent months when 
prices are no longer inverted because their pooling handlers would be 
unable to pay a competitive price for their milk. CGCC also excepted to 
the discretion granted to the Market Administrator to determine if a 
handler has purposely misreported milk for the purpose of evading the 
re-pooling standard because it does not provide the Market 
Administrator or handlers with guidance for making such a finding.
    All Federal milk marketing orders require the pooling of milk 
received at pool distributing plants--which is predominantly 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 UMW 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, 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

[[Page 54144]]

handlers will 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 UMW order. For 
example, during the three-month period of February to April 2004, the 
Class III price increased over 65 percent from $11.89 per cwt to $19.66 
per cwt. During the same time period, total producer milk pooled on the 
UMW order decreased by over 60 percent from 1.94 billion pounds to 608 
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 
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 ann