Milk in the Appalachian and Southeast Marketing Areas; Tentative Partial Decision and Opportunity to File Written Exceptions on Proposed Amendments to Tentative Marketing Agreements and to Orders, 54118-54134 [06-7497]

Agencies

• Agricultural Marketing Service
• DEPARTMENT OF AGRICULTURE

[Federal Register Volume 71, Number 177 (Wednesday, September 13, 2006)]
[Proposed Rules]
[Pages 54118-54134]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-7497]



[[Page 54117]]

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Part II





Department of Agriculture





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Agricultural Marketing Service



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7 CFR Parts 1005 and 1007



Milk Marketing Orders--Tentative Partial Decision in the Appalachian 
and Southeast Marketing Areas; 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 Parts 1005 and 1007

[Docket No. AO-388-A17 and AO-366-A46; DA-05-06]


Milk in the Appalachian and Southeast Marketing Areas; Tentative 
Partial Decision and Opportunity to File Written Exceptions on Proposed 
Amendments to Tentative Marketing Agreements and to Orders

AGENCY: Agricultural Marketing Service, USDA.

ACTION: Proposed rule; tentative partial decision.

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SUMMARY: This document is the tentative partial decision proposing to 
adopt on an interim final and emergency basis amendments to the 
transportation credit balancing fund provisions of the Appalachian and 
Southeast milk marketing orders. Specifically, this document would 
establish a variable mileage rate factor using a fuel cost adjustor to 
determine the transportation credit payments of both orders, increase 
the maximum transportation credit assessment rate for both orders and 
establish a zero diversion limit standard on all milk receiving 
transportation credits in both orders. Other proposals concerning 
producer milk provisions and establishing transportation credit 
provisions on intra-market order movements of milk within the 
Appalachian and Southeast marketing areas will be addressed in a 
separate decision to be issued soon. This decision requires determining 
if producers approve the issuance of the amended orders on an interim 
basis.

DATES: Comments must be submitted on or before November 13, 2006.

ADDRESSES: Comments (six copies) should be filed with the Hearing 
Clerk, United States Department of Agriculture, STOP 9200--Room 1031, 
1400 Independence Avenue, SW., Washington, DC 20250-1031. You may send 
your comments by the electronic process available at the Federal 
eRulemaking portal: https://www.regulations.gov or by submitting 
comments to amsdairycomments@usda.gov. Reference should be made to the 
title of action and docket number.

FOR FURTHER INFORMATION CONTACT: Gino Tosi, Associate Deputy 
Administrator, USDA/AMS/Dairy Programs, Order Formulation and 
Enforcement Branch, STOP 0231--Room 2971, 1400 Independence Avenue, 
SW., Washington, DC 20250-0231, (202) 690-1366, e-mail address: 
gino.tosi@usda.gov.

SUPPLEMENTARY INFORMATION: This tentative partial decision proposes to 
adopt amendments that would: (1) Establish a variable transportation 
credit mileage rate factor which uses a fuel cost adjustor in both 
orders, (2) increase the Appalachian order's maximum transportation 
credit assessment rate to $0.15 per hundredweight (cwt) and the 
Southeast order's maximum transportation credit assessment rate to 
$0.20 per cwt and (3) establish a zero diversion limit standard on 
eligible Class I milk receiving transportation credits in both orders.
    This administrative action is governed by the provisions of 
Sections 556 and 557 of Title 5 of the United States Code and, 
therefore, is excluded from the requirements of Executive Order 12866.
    The amendments to the rules proposed herein have been reviewed 
under Executive Order 12988, Civil Justice Reform. They are not 
intended to have a retroactive effect. If adopted, the proposed 
amendments would not preempt any state or local laws, regulations, or 
policies, unless they present an irreconcilable conflict with this 
rule.
    The Agricultural Marketing Agreement Act of 1937, as amended (7 
U.S.C. 601-674) (the Act), 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 
of Agriculture (Department) a petition stating that the order, any 
provision of the order, or any obligation imposed in connection with 
the order is not in accordance with the law. A handler is afforded the 
opportunity for a hearing on the petition. After a hearing, the 
Department would rule on the petition. The Act provides that the 
district court of the United States in any district in which the 
handler is an inhabitant, or has its principal place of business, has 
jurisdiction in equity to review the Department's ruling on the 
petition, provided a bill in equity is filed not later than 20 days 
after the date of the entry of the ruling.

Regulatory Flexibility Act and Paperwork Reduction Act

    In accordance with the Regulatory Flexibility Act (5 U.S.C. 601 et 
seq.), the Agricultural Marketing Service has considered the economic 
impact of this action on small entities and has certified that this 
proposed rule would 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 
marketing guideline of 500,000 pounds per month. Although this 
guideline does not factor in additional monies that may be received by 
dairy producers, it should be an inclusive standard for most ``small'' 
dairy farmers. For purposes of determining a handler's size, if the 
plant is part of a larger company operating multiple plants that 
collectively exceed the 500-employee limit, the plant will be 
considered a large business even if the local plant has fewer than 500 
employees.
    During January 2006, the time of the hearing, there were 3,055 
dairy farmers pooled on the Appalachian order (Order 5). For the 
Southeast order (Order 7), 3,367 dairy farmers were pooled on the 
order. Of these, 2,889 dairy farmers in Order 5 (or 95 percent) and 
3,218 dairy farmers in Order 7 (or 96 percent) were considered small 
businesses.
    During January 2006, there were a total of 37 plants associated 
with the Appalachian order (22 fully regulated plants, 11 partially 
regulated plants, 2 producer-handler and 2 exempt plants). A total of 
51 plants were associated with the Southeast order (31 fully regulated 
plants, 9 partially regulated plants and 12 exempt plants). The number 
of plants meeting the small business criteria under the Appalachian and 
Southeast orders were 9 (or 24 percent) and 18 (or 35 percent), 
respectively.
    The proposed amendments adopted in this tentative final decision 
would amend the transportation credit provisions of the Appalachian and 
Southeast orders. The Appalachian and Southeast orders contain 
provisions for a transportation credit balancing fund. To partially 
offset the costs of transporting supplemental milk into each marketing 
area to meet fluid milk demand at distributing plants during the months 
of July through December, handlers are charged an assessment year-round 
to generate revenue used to make payments to qualified handlers.
    The proposed amendments would establish a variable mileage rate 
factor that would be adjusted monthly by changes in the price of diesel 
fuel (a fuel cost adjustor) as reported by the

[[Page 54119]]

Department of Energy for paying claims from the transportation credit 
balancing funds of the Appalachian and Southeast orders. Currently, the 
mileage rate of both orders is fixed at 0.35 cents per cwt per mile.
    The proposed amendments would increase the maximum rates of the 
assessments for the Appalachian and Southeast orders. Specifically, the 
maximum assessment rate for the Appalachian order would be increased by 
5.5 cents per cwt from the current 9.5 cents per cwt to 15 cents per 
cwt. The maximum assessment rate for the Southeast order would be 
increased by 10 cents per cwt to 20 cents per cwt. The increase in each 
order's maximum transportation credit assessment rate is intended to 
minimize the proration and depletion of each order's transportation 
credit balancing fund during those months when supplemental milk is 
needed to service the fluid needs of both marketing areas. The 
increases in the maximum assessment rates for the Appalachian and 
Southeast orders adopted in this decision are necessary due to, 
primarily, expected higher mileage reimbursement rates arising from 
escalating fuel costs and the transporting of milk over longer 
distances and, secondarily, the expected continuing need to rely on 
supplemental milk supplies arising from declining local milk production 
in the marketing areas.
    The proposed amendments also would amend the producer milk 
provisions of the Appalachian and Southeast orders by eliminating the 
current ability to pool diverted milk associated with supplemental milk 
receiving a transportation credit payment. While this tentative partial 
decision does not specifically adopt the Dean Foods Company proposal 
(published in the hearing notice as Proposal 4), the Department agrees 
with the need to limit diverted milk pooled on the order made possible 
by supplemental milk eligible to receive transportation credits.
    Currently, the Appalachian and Southeast orders provide 
transportation credits on supplemental shipments of milk for Class I 
use provided the milk was from a dairy farmer who was not defined as a 
``producer'' under the orders during more than 2 of the immediately 
preceding months of February through May and not more than 50 percent 
of the milk production of the dairy farmer, in aggregate, was received 
as producer milk under the order during those 2 months and whose milk 
is produced on a farm not located within the specified marketing areas 
of either order. The provisions of each order provide the Market 
Administrator the discretionary authority to adjust the 50 percent milk 
production standard to assure orderly marketing and efficient handling 
of milk in the marketing areas.
    The proposed amendments would be applied to all Appalachian and 
Southeast order handlers and producers--both consist of large and small 
businesses. The proposed amendments will affect all supplemental 
producers and handlers equally regardless of their size. Accordingly 
the proposed amendments should 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 notice 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 forms are routinely used in most business 
transactions. Forms require only a minimal amount of information that 
can be supplied without data processing equipment or a trained 
statistical staff. Thus, the information collection and reporting 
burden is relatively small. Requiring the same reports for all handlers 
does not significantly disadvantage any handler that is smaller than 
the industry average.
    Interested parties are invited to submit comments on the probable 
regulatory and informational impact of this proposed rule on small 
entities. Also, parties may suggest modifications of this proposal for 
the purpose of tailoring their applicability to small businesses.

Prior Documents in This Proceeding

    Notice of Hearing: Issued December 22, 2005; published December 28, 
2005 (70 FR 76718).

Preliminary Statement

    Notice is hereby given of the filing with the Hearing Clerk of this 
tentative partial decision with respect to proposed amendments to the 
tentative marketing agreements and the orders regulating the handling 
of milk in the Appalachian and Southeast marketing areas. This notice 
is issued pursuant to the provisions of the Agricultural Marketing 
Agreement Act (AMAA) and the applicable rules of practice and procedure 
governing the formulation of marketing agreements and marketing orders 
(7 CFR Part 900).
    Interested parties may file written exceptions to this decision 
with the Hearing Clerk, U.S. Department of Agriculture, STOP 9200--Room 
1031, 1400 Independence Avenue, SW., Washington, DC 20250-9200, by 
November 13, 2006. Six (6) copies of these exceptions should be filed. 
All written submissions made pursuant to this tentative partial 
decision will be made available for public inspection at the Office of 
the Hearing Clerk during regular business hours (7 CFR 1.27(b)).
    The hearing notice specifically invited interested persons to 
present evidence concerning the probable regulatory and informational 
impact of the proposals on small businesses. Some evidence was received 
that specifically addressed these issues, and some of the evidence 
encompassed entities of various sizes.
    A public hearing was held upon proposed amendments to the marketing 
agreement and the orders regulating the handling of milk in the 
Appalachian and Southeast marketing areas. 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 in Louisville, Kentucky, on January 10-12, 2006, 
pursuant to a notice of hearing issued December 22, 2005, published 
December 28, 2005 (70 FR 76718).
    The material issues on the record of hearing relate to:

1. Transportation Credits
    A. Establishing a variable mileage rate factor.
    B. Increasing the maximum assessment rates.
    C. Establishing diversion limit standards.
2. Determination of emergency marketing conditions.

Findings and Conclusions

    This tentative partial decision specifically adopts on an interim 
basis, proposals published in the hearing notice as Proposals 3, 1 and 
certain objectives of Proposal 4. Proposal 3 seeks to establish a 
variable mileage rate factor using a fuel cost adjustor. Proposal 1 
seeks to increase the maximum transportation credit assessment rates 
for both orders. The intent of Proposal 4 is to discourage the volume 
of milk pooled by diversions by

[[Page 54120]]

reducing the amount of transportation credits a handler could receive. 
A complete discussion and findings on these three proposals appears 
after the summaries of testimony.
    Proposal 2, seeking to establish an intra-market transportation 
credit provision for both the Appalachian and Southeast orders and 
Proposal 5, seeking to reduce the volume of milk diverted to an out-of-
area plant, will be addressed in a separate decision to be issued soon. 
Therefore, no further references to Proposals 2 and 5 will be made in 
this decision.
    The following findings and conclusions on the material issues are 
based on evidence presented at the hearing and the record thereof:

1. Transportation Credits

A. Establishing a Variable Mileage Rate Factor
    A proposal, published in the hearing notice as Proposal 3, which 
seeks to establish a variable mileage reimbursement rate factor (MRF) 
that uses a fuel cost adjustor in the transportation credit payment 
provisions in both the Appalachian and Southeast orders should be 
adopted immediately. The orders currently provide for a fixed mileage 
rate of 0.35 cents per cwt per mile. The proposal was offered by Dairy 
Farmers of America, Inc., (DFA). DFA is a dairy farmer member-owned 
Capper-Volstead cooperative with 12,800 member farmers whose milk is 
pooled throughout the Federal order system, including the Appalachian 
and Southeast orders.
    A witness appearing on behalf of Southern Marketing Agency, Inc. 
(SMA) and Dairy Cooperative Marketing Association, Inc. (DCMA) 
testified in support of Proposal 3. SMA and DCMA are marketing 
agencies-in-common operating in the southeast region of the country. 
Members of SMA include Arkansas Dairy Cooperative Association; Dairy 
Farmers of America, Inc.; Dairymen's Marketing Cooperative, Inc.; Lone 
Star Milk Producers, Inc.; and Maryland & Virginia Milk Cooperative 
Association, Inc. Members of DCMA include Zia Milk Producers 
Association; Select Milk Producers Association; Cooperative Milk 
Producers Association, Inc.; and Southeast Milk, Inc. Dairylea 
Cooperative, Inc. also requested that the witness testify on their 
behalf and in support of Proposal 3.
    The SMA witness testified that the southeastern region of the 
United States is experiencing declining milk production while the 
population and demand for fluid milk are increasing. As a result, the 
witness stated that the Appalachian and Southeast marketing areas must 
continually seek supplemental supplies of milk from outside their 
normal milksheds. The witness added that the volume of supplemental 
milk needed to meet demands that cannot be met by local production, and 
the distances from where the supplemental milk is obtained continues to 
increase. The witness explained that these marketing conditions result 
in payments to handlers from the transportation credit balancing funds 
being depleted at a rate faster than the rate they are assessed.
    The SMA witness presented monthly fuel cost data for the United 
States and nine U.S. sub-regions from the Energy Information 
Administration of the United States Department of Energy (EIA). Relying 
on EIA data, the witness asserted that the cost of diesel fuel has 
escalated sharply in recent years. According to the witness, the 
national average diesel fuel price in mid-1997 was reported to be 
approximately $1.15 to $1.17 per gallon while the national average 
diesel fuel price in mid-2005 was reported to be $2.20 to $2.50 per 
gallon. The witness emphasized that these current diesel fuel prices 
are much higher than the prices that existed when the transportation 
credit provisions were first implemented in 1996 and amended in 1997.
    The SMA witness noted that the cost of hauling has also increased 
in recent years. Relying on EIA data, the SMA witness estimated the 
cost of hauling to be in the range of $1.75 to $1.80 per loaded mile in 
1997, whereas the cost in 2005 was about $2.35 per loaded mile. As 
diesel fuel costs have increased, the witness explained, so have other 
costs such as equipment, insurance and labor.
    The SMA witness emphasized that there have been no adjustments made 
to the MRF of the transportation credit provisions since they were last 
amended in 1997. The witness recounted that the original mileage rate 
was reduced by five percent, from 0.37 cents per cwt per mile to 0.35 
cents per cwt per mile in 1997.
    The SMA witness explained that in 1997, approximately 94 to 95 
percent of the transportation costs on supplemental milk were covered 
by transportation credit balancing fund payments. The witness 
reiterated that since no adjustments have been made to the orders' 
transportation credit reimbursement rate since 1997, the percentage of 
hauling costs covered by the transportation credits today are 
substantially less than those in 1997.
    According to the SMA witness, the current use of a fixed mileage 
rate is not responsive to changes in hauling costs. The witness 
explained that Proposal 3 would compute a variable transportation 
credit mileage rate per cwt per mile that would adjust with changes in 
the cost of diesel fuel. The witness stressed the importance and need 
to keep information on hauling costs current by using independent fuel 
cost data. The witness stated that hauling cost rates, adjusted for 
changes in fuel costs, are common in industry.
    The SMA witness illustrated components used to calculate the 
proposed variable MRF. According to the witness, a monthly average 
diesel fuel price, a reference diesel fuel price, an average mile-per-
gallon truck fuel use, a reference hauling cost per loaded mile and a 
reference load size are the components needed to calculate the proposed 
variable MRF.
    Using EIA data for the United States and nine U.S. sub-regions, the 
SMA witness explained that using the Lower Atlantic and Gulf Coast EIA 
regions in computing the monthly mileage rates would be reflective of 
the Appalachian and Southeast marketing areas. Relying on EIA data, the 
witness explained that the Lower Atlantic region is comprised of the 
states of Virginia, West Virginia, North Carolina, South Carolina, 
Georgia and Florida. Similarly, the witness added, the Gulf Coast 
region is comprised of Alabama, Mississippi, Arkansas, Louisiana, Texas 
and New Mexico. According to the witness, of the nine sub-regions 
described by the EIA, the Lower Atlantic and Gulf Coast regions best 
reflect the Appalachian and Southeast marketing areas geographically. 
The witness also noted that according to EIA data, the diesel fuel 
costs for these two regions are among the lowest reported nationally.
    In establishing a reference diesel fuel price for the proposed 
transportation credit mileage rate calculation, the SMA witness relied 
on EIA retail diesel fuel prices for the time period of October to 
November 2003. During that period, the witness said, diesel fuel prices 
averaged $1.48 per gallon nationally and ranged from $1.42 per gallon 
in the Lower Atlantic to $1.43 per gallon in the Gulf Coast EIA 
regions. Due to the relatively little fluctuation of diesel fuel prices 
during October to November 2003, the witness was of the opinion that 
this period is a fair and conservative timeframe on which to establish 
a reference diesel fuel price. The witness concluded by suggesting 
$1.42 per cwt per mile should be used as the reference diesel price.

[[Page 54121]]

    The SMA witness submitted a random selection of actual milk hauler 
bills as the basis for computing a reference hauling cost component of 
the proposed MRF. According to the witness, actual origination and 
destination points, miles moved, and rates and fuel surcharges per 
loaded mile were depicted on each hauling bill. For the month of 
October 2005, the witness stated that hauling costs ranged from $1.89 
to $2.70 per loaded mile, with the average being $2.48 per loaded mile. 
In order to be consistent with the timeframe used for the reference 
diesel price, the witness submitted selected milk hauling bills from 
October to November 2003 as the basis for determining the reference 
hauling cost. The witness testified that for this time period the 
simple average hauling rate charged per loaded mile in the Southeast 
was $1.9332 and $1.8913, respectively, and averaged $1.9122. 
Accordingly, the witness offered that the average hauling rate of $1.91 
per loaded mile become the reference hauling cost used in calculating 
the MRF.
    The SMA witness provided data compiled by the United States 
Department of Transportation (USDOT) on combination truck fuel economy. 
According to the witness, the USDOT data show that the average miles 
traveled per gallon for a combination truck in 2002 was 5.2 miles per 
gallon. The witness was of the opinion that the dairy industry fuel 
economy is similar as it ranges between 5.0 to 6.0 miles per gallon. 
Accordingly, the witness advocated using a 5.5 miles per gallon fuel 
consumption rate in computing the proposed MRF. The witness also 
testified that a 5,600 gallon tanker at its fullest can carry 48,160 
pounds of milk. Therefore, the witness explained, 48,000 should be the 
reference load size used in calculating the MRF.
    The SMA witness summarized that Proposal 3 calculates a variable 
monthly MRF by using: (1) EIA data from a base period defined as 
October and November 2003, (2) hauling cost of $1.91 per loaded mile, 
(3) a reference diesel fuel rate of $1.42 per gallon, (4) a fuel 
economy of 5.5 miles per gallon and (5) a load size of 48,000 pounds.
    The SMA witness explained that the proposed mileage rate would be 
calculated by averaging the four most recent weeks of retail on-highway 
diesel prices for both the Lower Atlantic and Gulf Coast, as reported 
by the EIA that are available prior to each order's announcement of the 
Advance Class milk prices. According to the witness, the proposed 
mileage rate would then be computed and included in each orders' 
announcement of Advanced Class milk prices that are announced publicly 
on the Friday on or before the 23rd of the current month.
    The SMA witness stressed that the proposed mileage rate computation 
reflects less than the actual cost of hauling for various reasons. The 
witness asserted that the proposed mileage rate is based on costs of 
hauling from 2003, rather than a more current timeframe, and therefore 
would only reflect changes in the cost of diesel fuel since that time. 
The witness also reiterated that the proposed mileage rates would only 
apply to milk used in Class I shipped directly from farms to plants 
that exceeds 85 miles. The SMA witness was of the opinion that 
transportation costs will continue to increase and that adopting the 
proposed changes to the transportation credit provisions will avoid 
exhausting the transportation credit balancing fund before costs are 
reimbursed.
    The SMA witness asserted that they were incurring substantial 
losses in supplying supplemental milk for Class I use to the 
Appalachian and Southeast marketing areas. The witness indicated that 
hauling costs in supplying supplemental milk reach over $15 million 
annually.
    Six DFA farmer-members testified in support of Proposal 3. 
According to these witnesses, it is the cooperative members of SMA who 
are acting as handlers to supply the supplemental fluid milk needs of 
both marketing areas. According to the witnesses, this results in 
additional costs that are absorbed by the dairy farmer members of the 
cooperatives that comprise SMA. The witnesses argued that hauling costs 
and the distance supplemental milk must be hauled continues to 
increase.
    The six DFA dairy farmer witnesses were of the opinion that 
Proposal 3 is a reasonable solution to deal with the continued 
production decline and population driven demand increase in the 
southeastern region of the United States. The witnesses were of the 
opinion that using a fuel adjustor that moves up and down with changes 
in the cost of diesel fuel would more adequately cover the costs of 
transporting supplemental milk in the marketing areas.
    A post-hearing brief submitted by DFA, and supported by SMA, 
reiterated support for adopting a fuel cost adjustor.
    A post-hearing brief was submitted on behalf of Arkansas Dairy 
Cooperative Association (ADCA) in support of Proposal 3. According to 
ADCA, their members' milk does not usually qualify for transportation 
credit payments because their milk is typically pooled on the Southeast 
and Central orders year-round. However, ADCA noted that their members 
are impacted by the cost of hauling supplemental milk into the 
southeast because of their membership in a marketing agency-in-common.
    A post-hearing brief was submitted on behalf of Dairymen's 
Marketing Cooperative, Inc. (DMCI) in support of Proposal 3. The brief 
emphasized that as fuel costs continue to increase, the Class I 
differential surface becomes more outdated and unable to reflect the 
costs of moving milk.
    A post-hearing brief was submitted on behalf of Lone Star Milk 
Producers (Lone Star) in support of Proposal 3 because it would 
establish updated mileage rates for making payments from the 
transportation credit balancing funds. The brief stated that the 
hauling cost factor used to develop the mileage rate for the 
transportation credit balancing fund has not been updated since the mid 
1990's and is inadequate.
    A post-hearing brief submitted by Maryland & Virginia Milk 
Producers Cooperative Association, Inc. (Maryland & Virginia) 
reiterated support for the adoption of Proposal 3.
    A post-hearing brief was submitted on behalf of South East Dairy 
Farmers Association (SEDFA). The brief expressed support for a variable 
mileage rate based on the changes in the cost of diesel fuel. The brief 
stated that the industry uses a consistent fuel economy estimate of 5.0 
to 6.0 miles per gallon when calculating expected milk transportation 
costs. The brief stressed that the extreme rise in diesel fuel prices 
in recent months has made the adoption of Proposal 3 critical for 
producers who incur the cost of hauling milk to the market.
    A dairy farmer who supplies milk to Dean Foods Company (Dean) 
testified in support of the intent of Proposal 3. The witness stated 
that a dynamic mileage rate that adjusts to the energy markets is 
better than a static factor that is unable to change with changes in 
energy costs.
    A dairy farmer who markets milk to Dean through Dairy Marketing 
Service (DMS) testified in favor of Proposal 3. The witness stated that 
using a variable MRF derived from a source outside of the dairy 
industry such as the USDOT would help decrease the chances of industry 
manipulating what information should be used in calculating a MRF.
    A witness appearing on behalf of Southeast Milk, Inc. (SMI) 
testified in support of Proposal 3. SMI is a dairy marketing 
cooperative with approximately 300 dairy farmer members in Florida, 
Georgia, Alabama and Tennessee. The SMI witness stated

[[Page 54122]]

that relying on cost indexes of other government agencies determined on 
a national scale makes the data less subject to manipulation by any 
given industry.
    A witness testified on behalf of Dean in support of Proposal 3. 
According to the witness Dean owns and operates 8 plants regulated by 
the Appalachian marketing area and 10 plants regulated by the Southeast 
marketing area. The Dean witness agreed with the benefit of using an 
adjustor in determining the MRF to reflect changes in fuel prices over 
time. However, the witness also was of the opinion that the MRF should 
be reduced by 95 percent in order to be consistent with the Secretary's 
past decisions that transportation credits do not encourage the 
uneconomic movement of milk or inefficiencies.
    The Dean witness testified that there is a need for supplemental 
supplies of milk for the marketing areas and that supplying such milk 
presents challenges. Nevertheless, the witness was of the opinion and 
expressed concern for the continuing and potential abuse of 
transportation credits. The witness asserted that current order 
provisions allow supplemental milk to receive transportation credits 
when such milk is not demanded. Moreover, the witness stressed that 
there is no assurance that transportation credit balancing fund 
payments would flow to the dairy farmer members of the cooperatives 
acting as handlers located in the two marketing areas regardless of 
their status as independent or cooperative members.
    A post-hearing brief submitted on behalf of Dean reiterated support 
for Proposal 3, indicating that disorderly marketing conditions exist 
because the milk supply in the Southeastern United States is deficit 
and the cost of supplying the market is not borne equally.
    A witness appearing on behalf of Land O'Lakes, Inc. (LOL) testified 
in support of Proposal 3. LOL is a dairy cooperative with over 4,000 
dairy farmer member-owners who are pooled on six Federal Orders. The 
witness stated that their member's milk located in the Northeast and 
Midwest have provided supplemental supplies to both the Appalachian and 
Southeast marketing orders for the past 10 years.
    According to the witness, LOL is a continuous supplemental milk 
supplier to the Appalachian and Southeast orders and has higher costs 
hauling milk. The witness asserted that basing the MRF on changes in 
diesel fuel prices would be responsive to costs actually experienced by 
the handlers who move milk into these two deficit markets.
    A post-hearing brief submitted by LOL reiterated support for the 
adoption of Proposal 3. The brief said that in order to fulfill the 
supplemental milk needs of the two marketing areas, milk is sourced 
from 28 states, which demonstrates the distance milk must travel has 
further increased adding to the justification of why Proposal 3 should 
be adopted.
    An independent dairy farmer from New Market, Tennessee, testified 
in opposition to any changes to the Appalachian or Southeast marketing 
orders. The witness testified that additional government intervention 
in moving milk was not necessary and that supply and demand should be 
relied upon to dictate what services are needed. The witness asserted 
that amending the orders as proposed would change the way milk is moved 
and that would hinder efficient milk hauling. The witness also was of 
the opinion that there is no assurance transportation credits received 
for supplying supplemental milk would truly reach the market's 
producers. The witness expressed concerns that the proposed increases 
in the transportation credit rate could affect producer decisions and 
producer blend prices.
    A witness testified on behalf of the Kentucky Dairy Development 
Council (KDDC). KDDC is a member-based organization that represents 
approximately 1,360 dairy farmers in Kentucky. KDDC did not state 
support or opposition for the proposals presented at the hearing. The 
witness was of the opinion that noncompetitive pricing is discouraging 
milk production in the southeastern United States. The witness stated 
the opinion that farm milk prices in Kentucky and in the Southeastern 
states have eroded and that KDDC was opposed to any Federal Order 
changes which would further erode farm prices. The witness did testify 
in support of changes to the orders that would strengthen the position 
of dairy farmers in Kentucky and in other Southeastern states.
    A post-hearing brief was submitted by KDDC in support of Proposal 3 
even though no specific position was taken on proposals considered 
during the hearing. The brief said that Proposal 3 would benefit 
Kentucky dairy farmers by providing assistance in recovering market 
service costs.
B. Increasing the Maximum Assessment Rate
    A proposal, published in the hearing notice as Proposal 1, offered 
by DFA, that seeks to increase the maximum transportation credit 
balancing fund assessment rates for the Appalachian and Southeast 
orders should be adopted immediately. Specifically, this proposal would 
increase the maximum transportation credit balancing fund assessment 
rate in the Appalachian order by $0.055 per cwt on Class I milk so that 
the maximum rate of assessment would be $0.15 per cwt. The Southeast 
order maximum assessment rate would be increased by $0.10 per cwt so 
that the maximum rate of assessment would be $0.20 per cwt.
    A witness appearing on behalf of DCMA and SMA testified in support 
of Proposal 1. As previously described in testimony regarding Proposal 
3, the SMA witness said that the current transportation credit 
provisions provide for collecting a maximum transportation credit 
assessment to handlers on all Class I milk for the Appalachian and 
Southeast marketing areas year-round. While the Market Administrator 
has the discretion to waive the maximum transportation credit 
assessments if deemed necessary, the SMA witness explained that the 
Market Administrator of each order collected the maximum assessments in 
2004 and 2005. However, the witness said that the collected assessments 
in both orders had been insufficient to pay the requested credits 
necessitating the proration of payments from the transportation credit 
balancing fund.
    The SMA witness stated that even with the November 1, 2005, 
implementation of the most recent transportation credit assessment 
increase of 3 cents per cwt for both orders, the assessment rate will 
likely not be able to ensure payments from the transportation credit 
balancing funds on all milk eligible to receive payment.
    The SMA witness estimated that the transportation credit assessment 
rate for the Appalachian order for 2004 would have needed to be $0.0889 
per cwt and $0.0953 per cwt for all of 2005 in order to cover all of 
the transportation credits requested. The witness also estimated that 
the Southeast area transportation credit assessment rate would needed 
to have been $0.1318 per cwt and $0.1246 per cwt in 2004 and 2005, 
respectively, to cover all requested credits. The witness also noted 
that the transportation credits requested for both the Appalachian and 
Southeast marketing orders for the months of July, September and 
October of 2005 exceeded the transportation credits requested in all of 
2004. The witness said that this also demonstrates that increased 
volumes of supplemental milk were transported from locations located 
farther from the marketing areas.
    The witness said that the reason the Market Administrators' 
prorated

[[Page 54123]]

payments from the transportation credit balancing funds was because the 
rate of assessments exceeded collections. The witness was of the 
opinion that this occurred because more supplemental milk was sourced 
from more distant locations.
    Relying on Market Administrator data, the witness concluded that 
only 55 percent of the actual cost of transporting supplemental milk 
was covered by the transportation credit payments in the Appalachian 
Order and only 39 percent of the actual cost was covered for the 
Southeast Order in 2004. The witness estimated that for 2005, only 53 
percent and 43 percent of the actual hauling costs for supplemental 
milk would be covered for the Appalachian and Southeast orders 
respectively.
    In explaining the need for the adoption of Proposal 3, the SMA 
witness reiterated that the combined effect of higher mileage hauling 
rates and supplemental milk being hauled from more distant locations 
resulted in a smaller portion of actual transportation costs being 
funded with transportation credits than in 1997. The witness was of the 
opinion that transportation costs will continue to increase thus making 
it necessary to again increase the assessment rate.
    Further illustrating the need to increase the maximum 
transportation credit assessment rate, the SMA witness related that if 
a transportation credit reimbursement rate of 0.46 cents per cwt per 
mile had been in place rather than the current rate of 0.35 cents per 
cwt per mile, the Appalachian order would have required an assessment 
of $0.133 per cwt in 2004 in order to prevent the proration of 
transportation credit claims, and 2005 would have required an 
assessment of $0.1415 per cwt. Similarly, the witness stated for the 
Southeast order, the assessment rate would have needed to have been 
$0.1927 per cwt for 2004 and $0.1869 per cwt for 2005.
    The SMA witness testified that the differing rates of 
transportation credit balancing fund assessments proposed for the 
Appalachian and Southeast orders reflect the differing costs of 
supplying supplemental milk into each marketing area. The witness 
stated that while the transportation credit assessment was waived for 2 
months during 2002 and 2003, assessments were not waived for the 
Southeast order. The witness asserted that while both orders rely on 
some of the same sources for supplemental milk, the Appalachian 
marketing area receives most of its milk from the more northern Mid-
Atlantic States while the Southeast marketing area receives most of its 
supplemental milk from States located to the west and southwest of the 
marketing area. Further, the witness added that different assessment 
rates are warranted for the two orders because supplemental milk moves 
greater distances to service the Southeast market than it does to 
service the Appalachian market.
    The six DFA dairy farmer witnesses that testified in support of 
Proposal 3 also testified in support for increasing the transportation 
credit assessments for both orders. The witnesses were of the opinion 
that the assessment increases would generate funds needed to maintain a 
sufficient transportation credit fund balance to pay eligible claims. 
In addition, the witnesses were of the opinion that the orders' current 
location adjustments are not able to reflect the rapidly increasing 
costs of transporting milk from where it is located to where it is 
needed. Similarly, the witnesses stated that over-order premiums cannot 
be commanded from the market to offset rapidly increasing 
transportation costs.
    The six DFA dairy farmer witnesses were also of the opinion that 
the intent of increasing the transportation credit assessment rates was 
a reasonable solution to mitigate continued production declines and the 
increasing demand for milk in the southeastern United States by a 
growing population. The witnesses added that higher fuel costs and 
longer hauling distances from which to obtain supplemental milk 
supplies are costing the markets' producers. When producers go out of 
business, the witnesses related, the gap between supply and demand 
widens thereby increasing the cost of supplying the market with 
supplemental milk.
    Post-hearing briefs submitted by DFA reiterated the position and 
testimony by SMA in support of increasing the transportation credit 
assessment rates immediately.
    A post-hearing brief was submitted on behalf of Select Milk 
Producers, Inc. (Select) and Continental Dairy Products, Inc. 
(Continental) in support of Proposal 1. Select's members are located in 
New Mexico, Texas, Kansas and Oklahoma, and Continental's members are 
located in Indiana, Michigan and Ohio. The brief stated that both 
cooperatives supply the Appalachian and Southeast marketing areas with 
supplemental milk. The brief stated support for testimony given at the 
hearing by proponents for increasing the transportation credit 
assessment rates of the two orders. The brief also stated that while 
the proposals under consideration will not fix long-term marketing and 
transportation problems, Proposal 1 should be adopted in conjunction 
with the Department considering alternative approaches in an effort to 
correct the milk deficit problems in the southeast region of the United 
States.
    The Select/Continental brief expressed the opinion that blend 
prices, not Class I prices, provide the economic incentive to supply 
milk to a marketing area. The brief stated that when producers in a 
large marketing area share the same blend price the incentive to move 
milk within the large marketing area is greatly diminished. In 
addition, the brief indicated that the pricing of diverted milk ignores 
the true relative value of milk to the market where pooled which 
results in milk being pooled that is not available to meet the Class I 
needs of the market.
    A post-hearing brief was submitted on behalf of South East Dairy 
Farmers Association (SEDFA). The brief expressed support for Proposal 1 
as published in the hearing notice. SEDFA represents cooperative and 
independent producers who are normal and supplemental milk suppliers 
and are located in and outside of the Appalachian and Southeast 
marketing areas.
    The SEDFA brief asserted that whether milk is produced within or 
outside of the two marketing areas, the cost of moving Class I 
supplemental milk should be borne by the marketplace. The brief stated 
that while the percent reimbursement of actual hauling costs is much 
lower than in 1997, the amount of supplemental milk being brought into 
the marketing areas is increasing. The brief concluded that because 
reimbursement of actual hauling cost is smaller, the higher costs not 
reimbursed has fallen disproportionately to producers. The brief agreed 
with Lone Star and Maryland & Virginia that the 3-cent increase in the 
transportation credit assessments implemented in November 2005 would be 
insufficient to cover expected transportation credit claims during 
2006.
    A witness appearing on behalf of DFA testified in support of 
Proposal 1. The witness testified that the pay prices for cooperative 
producers in the southeast region of the country (Tennessee, Louisiana, 
Missouri, Virginia, North Carolina, South Carolina and Alabama) between 
January through June 2005 for DFA cooperative members ranged from $0.25 
per cwt below the blend price to $0.30 per cwt above the blend price 
with the majority being at about $0.20 per cwt above the blend price. 
The witness indicated that over-order premiums paid to producers ranged 
from $0.10 to $0.90 per cwt above the blend price and were similar to 
the pay

[[Page 54124]]

price of their competitors in these areas who are not DFA members.
    A witness appearing on behalf of LOL testified in support of 
Proposal 1. The LOL witness agreed with other proponents that the 
transportation credit balancing fund for both orders has been 
insufficient to support transportation credit payments. While the 
witness supported the transportation credit assessment increases 
effective in November 2005, the witness did not think that this would 
be sufficient to reimburse future claims.
    A post-hearing brief submitted by LOL reiterated their support for 
the adoption of Proposal 1. The brief indicated that the southeast 
region of the country is not able to fulfill Class I demands during any 
season of the year and must rely on supplemental supply from about 28 
States outside the Appalachian and Southeast marketing areas. The brief 
noted that transportation credits installed in the southeastern region 
in 1996 were based on recognition that the region's Class I needs could 
only be met by supplemental milk from dairy farms located outside of 
the region.
    A witness testifying on behalf of Dean expressed cautious support 
for increasing the transportation credit assessment rates of the two 
orders because the availability of additional credits needs to be 
balanced with a consideration for abuses and undesired results. The 
witness was of the opinion that handlers who receive such credits also 
are pooling milk on the orders through the diversion process that does 
not actually serve the market's Class I needs.
    A post-hearing brief submitted on behalf of Dean agreed with 
proponents of Proposal 1 that disorderly marketing conditions exist. 
The brief stated that the southeast area's milk supply is deficit and 
the cost of supplying the market is not borne equally.
    A witness testified on behalf of SMI in opposition to Proposal 1. 
The witness characterized transportation credits as a subsidy and was 
of the opinion that subsidizing the transportation of milk produced 
outside of the marketing areas results in economic disincentives for 
local milk production and incentives for milk from outside the two 
marketing areas to replace local supplies. The witness noted that when 
transportation credits were first adopted in 1996, the average Class I 
utilization of the southeast region was in the mid-80 percent range. 
Since the implementation of transportation credits, the witness 
contrasted the Class I utilization noting that it had fallen to the 60 
percent range. It was the opinion of the witness that transportation 
credit provisions are contributing to the declining milk production in 
the two marketing areas.
    The SMI witness testified that transportation credits should be 
eliminated. As an alternative, the witness suggested (1) establishing a 
method by which Class I prices could be adjusted based on more regional 
marketing conditions, (2) adopting a base-excess plan, (3) increasing 
the current Class I differential level and (4) any other provisions 
that would encourage local milk production.
    A Kentucky dairy farmer testified in opposition to Proposal 1. The 
witness argued that providing transportation credits devalues local 
milk, results in lower prices to local producers, and is a cause of the 
declining milk production in the two marketing areas. The witness 
expressed concern that Proposal 1 will provide for more milk located 
outside the marketing areas the opportunity to be pooled on the orders 
even though that milk is not delivered to either marketing area on a 
daily basis as is the locally produced milk. According to the witness, 
local producers are not able to receive the full value for local 
production because transportation credits give producers located far 
from the marketing areas price advantages. The witness concluded by 
stating that pooling milk located outside of both marketing areas does 
not represent Class I use and this milk should not be pooled on the 
Appalachian or Southeast orders.
    A dairy farmer witness who supplies milk to Dean testified in 
opposition to Proposal 1. The witness viewed increasing assessment 
rates on transportation credits as detrimental to dairy farmers located 
in the Appalachian and Southeast marketing areas who regularly supply 
the Class I needs of the market. The witness was of the opinion that 
Proposal 1 lacks safeguards on the amount of additional milk that could 
be pooled on the orders by diversions. The witness said this additional 
pooled milk would unnecessarily lower the blend price received by 
producers and essentially result in out-of-area milk supplies becoming 
less expensive relative to milk produced in-area. As a consequence, the 
witness said local in-area producers will be forced out of business 
because of lower prices thereby further increasing the need for 
additional out-of-area supplemental milk supplies to meet the Class I 
needs of the marketing areas.
    The witness suggested that instead of providing additional 
transportation credits, a review of the level of Class I differentials 
and a review of diversions and touch-base provisions should be 
considered in another hearing.
    An independent dairy farmer from New Market, Tennessee, testified 
against making any changes to the Appalachian and Southeast marketing 
orders including the adoption of Proposal 1. In addition to the 
witness' testimony regarding Proposal 3 already described, the witness 
was of the opinion that additional government intervention to provide 
for the increasing transportation credit assessment rate was not 
necessary and that supply and demand forces should dictate what 
services are needed. The witness asserted that amending the orders as 
proposed would change the way milk is transported and would hinder 
efficient handling of milk. The witness was of the opinion that there 
would be no assurance that the transportation credits would benefit the 
producers who were pooled on the two orders and incurred the additional 
costs of servicing the Class I market.
    A dairy farmer who also markets milk to Dean through DMS testified 
in opposition to Proposal 1. The witness said that local producers of 
the Appalachian and Southeast marketing areas are unable to supply all 
the fluid milk needs of the two marketing areas because local milk 
production in these areas is declining. The witness suggested that if 
Proposal 1 were adopted, the accounting of the total transportation 
costs of all milk movements should be supplied to the Market 
Administrators and be made available for public inspection. The witness 
also suggested making changes to the level of adjustments of milk 
prices by location (location adjustments) as an alternative to 
increasing the transportation credit assessment rate. The witness said 
if location adjustments were changed, the pooling standards for both 
orders would also need to be adjusted. Specifically, the witness 
suggested increasing the number of days' production needed to touch 
base or increasing the performance standards of the orders.
    A post-hearing brief submitted by the Kentucky Dairy Development 
Council (KDDC) supported Proposal 1 even though they did not state 
their position at the hearing. The brief noted that increasing the 
transportation credit assessment rate would benefit Kentucky dairy 
farmers by providing assistance in recovering costs associated with 
serving the market.
C. Establishing Diversion Limit Standards
    A proposal submitted by Dean Foods, published in the hearing notice 
as Proposal 4, seeks to reduce a handler's ability to utilize 
transportation credits to

[[Page 54125]]

help broaden the number of producers who touch base. The intent of the 
proposal is to limit the pooling of additional surplus milk on the 
orders through the diversion process. Currently, large volumes of milk 
are being pooled through diversions on the Appalachian and Southeast 
orders from locations distant from the marketing areas. While Proposal 
4 would provide incentives to limit the pooling of milk through the 
diversion process, it would do so indirectly by limiting the payment of 
transportation credits. This decision chooses to directly limit 
diversions by establishing a zero diversion limit on milk that receives 
transportation credits.
    A witness appearing on behalf of Dean testified in support of 
Proposal 4 while also expressing cautious support for the proposed 
transportation credit assessment increase (Proposal 1). The witness was 
of the opinion that handlers supplying supplemental milk to the two 
marketing areas receive a financial benefit from pooling diverted milk 
on the orders but maintained that such milk does not serve the fluid 
market. The witness explained that while the diverted milk typically 
does not serve the two markets, it is nevertheless pooled on the two 
orders because the blend prices are higher than what this milk could 
receive if pooled on other Federal orders.
    The Dean witness testified that the establishment of large 
marketing orders has created new marketing problems. According to the 
witness, when the Federal order system had a larger number of smaller 
markets, each order's marketwide pools were small. Markets with large 
populations relative to associated milk, the witness explained, had 
higher Class I utilizations and higher blend prices to attract 
supplemental milk supplies. Markets with significant supplies of milk 
and smaller populations, the witness related, had lower Class I 
utilizations and producers pooled in those markets were provided with 
the economic incentive to look for higher returns in markets with 
higher blend prices. The witness further explained that smaller 
marketing areas limited the size of the Class I market and in turn 
limited how much milk could be pooled by diversion. The witness said 
that not only were smaller orders effective in limiting a handler's 
ability to pool milk through diversions, but smaller orders also had 
disincentives to pooling diverted milk. According to the witness, the 
relative value of diverted milk was tied to its distance from the 
market.
    The Dean witness also testified that the Class I price surface 
adopted during Federal milk order reform changed the relative 
relationship of milk value to its distance from the market. According 
to the witness, the location value of diverted milk prior to reform was 
based on adjusting milk value based on the distance to an order's 
pricing point. The witness said this resulted in each plant having a 
different location adjustment value to its milk receipts depending on 
the order on which its receipts were pooled. The witness explained that 
the further milk was located from the order's pricing point, the less 
likely that such milk would be pooled as diversions.
    The Dean witness expressed concern that no longer valuing milk 
relative to the order on which it is pooled had a material effect on 
the value of pooling milk located far from the market by diversion. The 
witness was of the opinion that the flatter Class I price surface, with 
fixed differential levels by county, places a value on milk that is not 
reflective of its value to the marketing order where pooled and has 
made it economically desirable to pool milk located far from the market 
by the diversion process. The witness was also of the opinion that this 
served to provide the incentive for pooling distant milk by diversions.
    The Dean witness testified that even though there are closer milk 
supplies, distant milk is being pooled on both orders and asserted that 
transportation credits amplify the pooling of milk on the orders which 
does not service the Class I needs of the markets. The witness was of 
the opinion that pooling distant milk by diversions are clearly 
disorderly marketing conditions for the two markets. According to the 
witness, when such milk is pooled, local farmers who are consistently 
serving the Class I needs of the markets receive a needlessly lower 
blend price.
    According to the Dean witness, the objective of Proposal 4 is to 
modify the receipt of transportation credits depending on a handler's 
specific service to the Class I need of the markets and to lower the 
payment of transportation credits to those handlers who have higher 
levels of diversions. The witness stated that the current reimbursement 
rate of transportation credits is the same for each handler regardless 
of the level of its relative service to the fluid market. The witness 
explained that when a handler delivers 100 percent of its receipts to a 
pool distributing plant, it receives transportation credits at the same 
rate as a handler delivering only the minimum volume needed to meet the 
pooling qualifications. The witness related that the handlers only 
meeting the minimum pooling standards are then able to divert milk 
which is not available to the market. Additionally, the witness 
indicated that adjusting a handler's receipt of transportation credits 
in this way will maintain and help extend the transportation credit 
balancing funds.
    The Dean witness acknowledged the need for balancing because 
distributing plants do not typically need to receive milk every day of 
the week. However, the witness asserted that not limiting diversions 
undermines the purpose of the Federal order system. The witness 
explained that their proposed 30 percent diversion limit on 
supplemental milk seeking transportation credits was reasonable because 
a distributing plant typically receives milk for five days per week. 
The need to divert milk for two days per week, the witness explained, 
justifies the 30 percent diversion limit. The Dean witness explained 
that based on data provided by the Market Administrator, there are 
handlers in both orders who receive transportation credits and who 
divert significantly more pounds of milk than the orders need to 
balance the Class I demands of pool distributing plants.
    A post-hearing brief submitted on behalf of Dean reiterated support 
for the adoption of Proposal 4 provided that Proposals 1 and 3 are 
adopted. The brief stated that Proposal 4, when adopted with Proposals 
1 and 3, would tend to limit the abuse of transportation credits on 
supplemental milk for Class I use because Proposal 4 sets a cap on the 
receipt of transportation credits by handlers. The brief also stressed 
that the adoption of Proposal 4 would exercise some control over how 
much milk would be pooled on the orders through the diversion process.
    A dairy farmer who supplies milk to Dean testified in support of 
Proposal 4. The witness agreed with Dean and other opponents that 
orders should only pool the milk of producers who truly serve the Class 
I needs of the market; otherwise revenue essentially leaves the two 
marketing areas. According to the witness, this loss of revenue leads 
to the area's dairy farmers exiting the industry and further reduces 
the availability of local milk supplies. The witness said that the 
result is the need for acquiring more milk produced from far outside 
the marketing areas. The witness was of the opinion that it is the 
shipments of supplemental milk into the marketing areas that provide 
the ability to pool milk by diversion when it is not available to the 
market.
    A witness from SMI testified in support of Proposal 4 provided 
Proposals 1 and 3 are adopted.
    A Kentucky dairy producer testified in support of Proposal 4 and 
said that

[[Page 54126]]

supplemental milk receiving transportation credits should have some 
limits on the amount of additional milk that can be pooled by 
diversions. The witness was of the opinion that transportation credits 
give producers located outside the marketing areas a price advantage 
because their diverted milk receives the blend price of the orders.
    A witness appearing on behalf of LOL testified in opposition to 
Proposal 4. The witness noted that transportation credits were 
established to attract supplemental milk and to partially offset the 
cost of hauling supplemental milk into the deficit markets. The witness 
explained that the orders' specify conditions that must be met for 
being eligible to receive transportation credit payments. The current 
transportation credit provisions, the witness said, already limit 
payments for supplemental milk from outside the marketing areas to the 
milk of dairy farmers who are not defined as ``producers'' under the 
orders. The witness also said that payments are limited to Class I 
pounds and are not made on the first 85 miles of hauling milk from 
farms to the plant that receives supplemental milk.
    The LOL witness stressed that additional limitations would do 
nothing to encourage the delivery of needed supplemental milk into the 
marketing areas during the short production months. The witness was of 
the opinion that if the intent is to change the diversion limits of the 
orders, those changes should be addressed in a separate hearing.
    A post-hearing brief submitted by LOL reiterated opposition to 
Proposal 4. The brief reiterated the positions given at the hearing. 
The brief also stated that Proposal 4 improperly assumes that all 
handlers supplying supplemental milk have equal access to distributing 
plants and that distributing plants Class I use of milk is the same as 
the Class I utilization of the two markets.
    A witness appearing on behalf of SMA also testified in opposition 
to Proposal 4. The SMA witness stated that there is some rational basis 
for the intent limiting transportation credits to a handler who diverts 
more milk to nonpool plants above reasonable levels. However, the 
witness was of the opinion that it is the touch-base and diversion 
limit standards of the orders that already provide sufficient 
safeguards to pooling milk not needed for Class I use. According to the 
witness, adoption of the proposal would disproportionately place 
burdens on market participants.
    The SMA witness explained that it is difficult to establish 
specific diversion limits on supplemental milk as contained in Proposal 
4 because of individual differences in the balancing needs of each 
distributing plant, noting that these needs continually change. The 
witness emphasized that there are difficulties in balancing pool 
distributing plants of the orders year-round and suppliers sometimes 
have no control over factors that may alter balancing needs. The 
witness noted that some of SMA's purchase agreements for supplemental 
milk included arrangements where transportation credit payments are 
paid directly to the cooperative acting as the supplier. In this 
regard, the witness expressed concern that providing a separate 
diversion limit on milk receiving transportation credit payments would 
unfairly penalize them when a distributing plant overestimates its need 
for supplemental milk. The witness stated that extreme variations in 
daily, weekly and monthly deliveries to pool distributing plants occur. 
Relying on Market Administrator data for January 2004 through October 
2005 that showed the ratio of the highest delivery day to the lowest 
delivery, the witness concluded that a 30 percent reserve factor would 
not have been sufficient to cover distributing plant balancing needs.
    The SMA witness also was of the opinion that Proposal 4 would give 
an advantage to pool distributing plant operators to the detriment