Milk in the Northeast and Other Marketing Areas; Tentative Final Decision on Proposed Amendments and Opportunity To File Written Exceptions to Tentative Marketing Agreements and Orders, 67467-67489 [06-9340]

Agencies

• Agricultural Marketing Service
• DEPARTMENT OF AGRICULTURE

[Federal Register Volume 71, Number 225 (Wednesday, November 22, 2006)]
[Proposed Rules]
[Pages 67467-67489]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-9340]


========================================================================
Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

========================================================================


Federal Register / Vol. 71, No. 225 / Wednesday, November 22, 2006 / 
Proposed Rules

[[Page 67467]]


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DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

7 CFR Parts 1000, 1001, 1005, 1006, 1007, 1030, 1032, 1033, 1124, 
1126, and 1131

[Docket no. AO-14-A74, et al.; DA-06-01]


Milk in the Northeast and Other Marketing Areas; Tentative Final 
Decision on Proposed Amendments and Opportunity To File Written 
Exceptions to Tentative Marketing Agreements and Orders

------------------------------------------------------------------------
  7 CFR part             Marketing area                   AO Nos.
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1001.........  Northeast........................  AO-14-A73
1005.........  Appalachian......................  AO-388-A14
1006.........  Florida..........................  AO-356-A37
1007.........  Southeast........................  AO-366-A43
1030.........  Upper Midwest....................  AO-361-A38
1032.........  Central..........................  AO-313-A47
1033.........  Mideast..........................  AO-166-A71
1124.........  Pacific Northwest................  AO-368-A34
1126.........  Southwest........................  AO-231-A67
1131.........  Arizona..........................  AO-271-A39
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AGENCY: Agricultural Marketing Service, USDA.

ACTION: Proposed rule.

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SUMMARY: This tentative final decision proposes to adopt, on an interim 
final and emergency basis, changes to the manufacturing allowances 
contained in the Class III and Class IV product price formulas 
applicable to all Federal milk marketing orders. This decision is 
subject to producer approval.

DATES: Comments should be submitted on or before January 22, 2007.

ADDRESSES: Comments (four copies) should be filed with the Hearing 
Clerk, Stop 9200-Room 1031, United States Department of Agriculture, 
1400 Independence Avenue, SW., Washington, DC 20250-9200. Comments may 
also be submitted at the Federal eRulemaking portal: https://
www.regulations.gov or by submitting comments via e-mail to: 
amsdairycomments@usda.gov. Reference should be made to the title of 
action and docket number.

FOR FURTHER INFORMATION CONTACT: Jack Rower, Marketing Specialist, 
USDA/AMS/Dairy Programs, Order Formulation and Enforcement, Stop 0231-
Room 2971-S 1400 Independence Avenue, SW., Washington, DC 20250-0231, 
(202) 720-2357, e-mail address: jack.rower@usda.gov.

SUPPLEMENTARY INFORMATION: This tentative final decision adopts on an 
interim final and emergency basis, amendments to the manufacturing 
(make) allowances for cheese, butter, nonfat dry milk (NFDM) and dry 
whey powder contained in the Class III and Class IV product price 
formulas. Specifically, this decision proposes the following 
manufacturing allowances:

------------------------------------------------------------------------
                                                           Adopted make
                                                             allowance
------------------------------------------------------------------------
Cheese..................................................      $0.1682/lb
Butter..................................................       0.1202/lb
NFDM....................................................       0.1570/lb
Dry whey................................................       0.1956/lb
------------------------------------------------------------------------

    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 (Act), as amended 
(7 U.S.C. 604-674), 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 habitant, or has its 
principal place of business, has jurisdiction in equity to review the 
USDA's ruling on the petition, provided a bill in equity is filed not 
later than 20 days after the date of the entry of the ruling.

Regulatory Flexibility Act and Paperwork Reduction Act

    In accordance with the Regulatory Flexibility Act (5 U.S.C. 601 et 
seq.), the Agricultural Marketing Service has considered the economic 
impact of this action on small entities and has certified that this 
proposed rule will not have a significant economic impact on a 
substantial number of small entities. For the purpose of the Regulatory 
Flexibility Act, a dairy farm is considered a ``small business'' if it 
has an annual gross revenue of less than $750,000, and a dairy products 
manufacturer is a ``small business'' if it has fewer than 500 
employees.
    For the purposes of determining which dairy farms are ``small 
businesses,'' the $750,000 per year criterion was used to establish a 
production guideline of 500,000 pounds per month. Although this 
guideline does not factor in additional monies that may be received by 
dairy producers, it should be an inclusive standard for most ``small'' 
dairy farmers. For purposes of determining a handler's size, if the 
plant is part of a larger company operating multiple plants that 
collectively exceed the 500-employee limit, the plant will be 
considered a large business even if the local plant has fewer than 500 
employees.
    For the month of January 2006, the month the initial public hearing 
was held, the milk of 52,570 dairy farmers was pooled on the Federal 
order system. Of the total, 49,153 dairy farmers, or 94 percent, were 
considered small businesses. During the same month, 536 plants were 
regulated by or reported their milk receipts to be pooled and price on 
a Federal order. Of the total, 286 plants, or 53 percent, were 
considered small businesses.
    This decision provides that all orders be amended by changing the 
make allowances contained in the formulas used to compute component 
prices and the minimum class prices in all Federal milk orders. 
Specifically, the make allowance for butter would increase from $0.1150 
to $0.1202 per pound; the

[[Page 67468]]

make allowance for cheese would increase from $0.1650 to $0.1682 per 
pound; the make allowance for NFDM would increase from $0.1400 to 
$0.1570 per pound; and the make allowance for dry whey would increase 
from $0.1590 to $0.1956 per pound.
    The adoption of these new make allowances serves to approximate the 
average cost of producing cheese, butter, NFDM and dry whey for 
manufacturing plants located in Federal milk marketing areas.
    The established criteria for the make allowance changes are applied 
in an identical fashion to both large and small businesses and will not 
have any different impact on those businesses producing manufactured 
milk products. The following economic analysis discusses impacts of the 
order amendments on order participants including producers and 
manufacturers. Based on the economic analysis we have concluded that 
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 tentative final decision 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. The 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 proposed rule 
for the purpose of tailoring its applicability to small businesses.

Economic Analysis

Analysis

    In order to assess the impact of make allowance changes in Federal 
order product pricing formulas, the Department has conducted an 
economic analysis. While the primary purpose of this tentative final 
decision is to amend the product pricing formulas used to price milk 
regulated under Federal milk marketing orders and classified as either 
Class III or Class IV milk, these product price formulas also affect 
the prices of regulated milk classified as Class I and Class II.

Scope of Analysis

    Impacts of increasing make allowances were measured as changes from 
the USDA Agricultural Baseline Projections to 2015 (OCE-2006-1, https://
www.usda.gov/oce/commodity/ag_baseline.htm). The 
baseline projections are ``a Departmental consensus on a long-run 
scenario for the agricultural sector.'' Included is a national, annual 
projection of the supply-demand-price situation for milk. The USDA 
baseline and the model baseline assume: (1) The Milk Price Support 
Program (MPSP) will continue unchanged; (2) The Dairy Export Incentive 
Program will be utilized to the maximum extent allowed beginning in the 
2006/07 fiscal year; (3) The Milk Income Loss Contract (MILC) program 
will continue through September 2007 \1\; and (4) The Federal Milk 
Marketing Order Program will continue unchanged. This analysis 
maintains the first three assumptions as unchanged. The only changes to 
the Federal Milk Marketing Order Program are those that are brought 
about by the changes in make allowances adopted in this decision. Since 
the model is an annual model, a simplifying assumption is made that the 
make allowance changes become effective January 1, 2007.
---------------------------------------------------------------------------

    \1\ Dairy producers are not eligible to choose September 2007 as 
a month for which MILC payments are to be applied. This provision 
was included so that it would not be necessary to include MILC 
payments in the Federal budget for fiscal year 2007-08.
---------------------------------------------------------------------------

    Demands for fluid milk and manufactured dairy products are 
functions of per capita consumption and population. Per capita 
consumption for the major milk and dairy products are estimated as 
functions of own prices, substitute prices, and income. Retail margins 
are assumed unchanged from the baseline. The demands for fluid milk and 
soft manufactured products are satisfied first by the eligible supply 
of milk. The milk supply for manufactured hard products is the volume 
of milk marketings remaining after satisfying the volumes demanded for 
fluid and soft manufactured products. Milk is manufactured into cheese, 
butter or nonfat dry milk (NFDM) according to returns to manufacturing 
in each class. Wholesale prices for cheese, butter, NFDM and dry whey 
reflect supply and demand for these products. These manufactured dairy 
product prices underlie the Federal order pricing system.

Summary of Results

    The impacts of the changes to the Class III and Class IV formulas 
that are set forth in this tentative final decision are summarized 
using annual and nine-year, 2007-2015, average changes from the model 
baseline. The results presented for the Federal order system are in the 
context of the larger U.S. market. In particular, the Federal order 
price formulas use national manufactured dairy product prices.
    Producers. Over the nine-year period, the average Federal order 
minimum blend price for milk at test decreases $0.08 (0.55 percent) 
from a baseline level of $14.71 per hundredweight (cwt). The average 
U.S. all-milk price decreases by about $0.05 (0.35 percent) from a 
baseline level of 14.79 per cwt. Federal order marketings decrease by 
an average 136 million pounds annually due to the production decrease 
in response to lower producer milk prices. Federal order milk cash 
receipts decrease by an average $125 million annually (0.65 percent) 
from baseline receipts of $19,165 million. U.S. milk marketings 
decrease by an average 206 million pounds annually (0.11 percent), 
yielding an average producer revenue decrease of $125 million annually 
(0.44 percent) from average baseline receipts of $28,396 million.
    Milk Manufacturers and Processors. Increasing Federal order make 
allowances benefits dairy manufacturers by widening the spread between 
Federal order minimum prices and the prices that they receive for 
manufactured dairy products. While prices paid for milk are lower, 
prices received for dairy products are higher due to the tighter milk 
supply. Over the nine year projection period, wholesale dairy product 
prices increase as follows: $0.0119 per pound (0.82 percent) for 
cheddar cheese, $0.0305 (1.99 percent) for butter, $0.0012 (0.14 
percent) for NFDM, and $0.0015 (0.56 percent) for dry whey.
    With the proposed increases in make allowances, most Federal order 
component prices decrease on average over the nine-year projection 
period: $0.0038 per pound (0.16 percent) for protein, $0.0156 (2.24 
percent) for nonfat solids, and $0.0361 (30.22 percent) for other 
solids. For the butterfat price, the increase in the butter price more 
than offsets the increase in the butter make allowance, resulting in

[[Page 67469]]

an average increase of $0.0303 per pound (1.78 percent) over the 
projection period. Changes in Federal order component prices translate 
into reductions for Federal order skim milk pricing factors at 3.5 
percent butterfat over the nine-year period: $0.22 per cwt for Class I 
and Class III, $0.14 per cwt for Class II and Class IV. Federal order 
Class I and III average prices decrease by $0.11 per cwt over the 
projection period, while Class II and IV prices decrease by $0.03 per 
cwt.
    There are notable differences between changes in Federal order 
class prices at 3.5 percent butterfat and changes in Federal order 
class prices at class butterfat percentages. Butterfat tests for the 
four Federal order milk classes differ from one class to another due to 
the mix of products within each class. Butterfat proportions are higher 
for Class II and IV milk than for Class I and III milk. Average Class I 
and III prices at test are below baseline levels over the nine-year 
period: $0.16 per cwt (1.12 percent) for Class I and $0.11 per cwt 
(0.83 percent) for Class III. For Class II and Class IV prices at test, 
the increase in the butterfat price more than offsets the increase in 
the make allowances, resulting in prices above baseline levels for the 
nine-year period: $0.12 per cwt (0.58 percent) for Class II and $0.03 
per cwt (0.20 percent) for Class IV.
    Consumers. The expected $0.16 per cwt (1.12 percent) decrease in 
the minimum nine-year average Class I price at test results in an 
average $0.0137 per gallon decrease in the price of fluid milk for 
consumers. Consumers increase consumption of fluid milk products 
slightly, resulting in an increase of 17 million pounds (0.04 percent) 
in Federal order Class I marketings. Consumers reduce consumption of 
manufactured dairy products in response to higher dairy product prices. 
All of the manufacturing Federal order class marketings decrease as 
follows: 26 million pounds (0.15 percent) for Class II, 30 million 
pounds (0.06 percent) for Class III and 97 million pounds (0.62 
percent) for Class IV.
    Government Outlays. In 2007, with lower milk prices, MILC payments 
increase by $25 million (12.94 percent) above the baseline level of 
$190 million. This impact rounds to approximately $0.01 per cwt 
averaged over all of the milk production.
    With an increase in Federal order make allowances, dairy product 
prices increase, milk production declines and government removals 
decrease relative to baseline levels. The analysis assumes that current 
MPSP make allowances will remain in effect throughout the projection 
period. Over the projection period government removals of NFDM decrease 
by an average of 9 million pounds (2.95 percent) per year. This reduces 
government outlays by an average $7 million per year over the 
projection period.

Detailed Analysis Information

    A complete Economic Analysis, Class III and IV Make Allowances, 
Tentative Final Decision is available on the Internet at https://
www.ams.usda.gov/dairy/proposals/classIII_IV_make_all.htm. For 
further information contact Howard McDowell, Senior Economist, USDA/
AMS/Dairy Programs, Office of the Chief Economist, Room 2753, South 
Building, U.S. Department of Agriculture, Washington, DC 20250, (202) 
720-7091, e-mail address howard.mcdowell@usda.gov.

Prior Documents in This Proceeding

    Notice of Hearing: Issued December 30, 2005; published January 5, 
2006 (71 FR 545).
    Notice of Intent to Reconvene Hearing: Issued June 28, 2006; 
published June 23, 2006 (71 FR 36715).
    Notice to Reconvene Hearing: Issued August 31, 2006; published 
September 6, 2006 (71 FR 52502).

Preliminary Statement

    Notice is hereby given of the filing with the Hearing Clerk of this 
tentative final decision with respect to the proposed amendments to the 
tentative marketing agreements and the orders regulating the handling 
of milk in the Northeast and other marketing areas. This notice is 
issued pursuant to the provisions of the Agricultural Marketing 
Agreement Act (AMAA) and 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, United States Department of Agriculture, Room 
1031-Stop 9200, 1400 Independence Avenue, SW., Washington, DC 20250-
9200, by the January 22, 2007. Four (4) copies of the exceptions should 
be filed. All written submissions made pursuant to this notice will be 
made available for public inspection at the office of the Hearing Clerk 
during regular business hours (7 CFR 1.27(b)).
    A public hearing was held upon proposed amendments to the marketing 
agreement and the orders regulating the handling of milk in the 
Northeast and other 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 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.
    The proposed amendments set forth below are based on the record of 
the first session of a public hearing held in Alexandria, Virginia, on 
January 24-27, 2006, pursuant to a notice of a hearing issued December 
30, 2005; published January 5, 2006 (71 FR 545) and a second session of 
a public hearing held in Strongsville, Ohio, on September 14-15, 2006, 
pursuant to a reconvened hearing notice issued August 31, 2006; 
published September 6, 2006 (71 FR 52502).
    The material issues on the record of the hearing relate to:
    1. Amending the manufacturing allowances.
    2. Determination of emergency marketing conditions.

Findings and Conclusions

1. Amending the Manufacturing Allowances
    This tentative final decision adopts on an interim basis, a 
proposal published in the hearing notice as Proposal 1 which seeks to 
amend the manufacturing allowances for butter, cheese, NFDM and dry 
whey. Specifically, this decision adopts the following manufacturing 
allowances: cheese--$0.1682 per pound, butter--$0.1202 per pound, 
NFDM--$0.1570 per pound and dry whey--$0.1956 per pound.
    The Federal Milk order system currently uses product price formulas 
to compute prices handlers must account for in the marketwide pooling 
of milk used in Class III and Class IV products. Class III and Class IV 
prices form the base from which Class I and Class II prices are 
determined.
    The price formulas used to compute Class III and Class IV prices 
contain a factor called a manufacturing (make) allowance. The make 
allowance factor represents the cost manufacturers incur in making raw 
milk into one pound of product. Federal milk order pricing formulas 
currently contain the following make allowances: cheese--$0.1650 per 
pound, butter--$0.1150 per pound, NFDM--$0.1400 per pound and dry

[[Page 67470]]

whey--$0.1590 per pound. These make allowances were last amended in 
2003 and were determined on the basis of a California Department of 
Food and Agriculture (CDFA) and a USDA Rural Business Cooperative 
Service (RBCS) survey of 1998 manufacturing costs. The current make 
allowances were computed by taking a weighted average of the CDFA and 
RBCS surveys and adjusting for return on investment, general and 
administrative costs and marketing costs.
    a. The following summary of testimony and post-hearing briefs 
pertains to the first session of the public hearing held January 24-27, 
2006, in Alexandria, Virginia.
    A proposal published in the hearing notice as Proposal 1 seeking to 
amend the current make allowances was offered by Agri-Mark Dairy 
Cooperative (Agri-Mark). Agri-Mark is a Capper-Volstead cooperative 
with approximately 1300 member-owners located throughout New England 
and New York and operates 4 manufacturing plants. Proposal 1 seeks to 
amend the make allowances for cheese, butter, NFDM and dry whey powder 
contained in the Class III and Class IV price formulas based upon the 
results of the California State 2004 dairy products manufacturing cost 
survey conducted by the CDFA and a 2004 manufacturing cost survey 
conducted by the RBCS. The results of these surveys, reported in 
dollars per pound, are as follows:

----------------------------------------------------------------------------------------------------------------
                                                   40-lb. block      Dry whey
                                    All cheese        cheese          powder          Butter           NDFM
----------------------------------------------------------------------------------------------------------------
RBCS \2\........................        $0.13295        $0.15136        $0.11409        $0.16588        $0.16816
CDFA............................    Not reported          0.1769          0.2673          0.1368          0.1543
----------------------------------------------------------------------------------------------------------------
\2\ Results do not include factors for return on investment, general and administrative costs, marketing costs
  and milk transportation and procurement costs.

    A witness from the RBCS testified regarding the methodology used by 
RBCS in conducting the 2004 Dairy Product Plant Costs Survey. The 
witness did not testify in either support of or in opposition to 
Proposal 1. The witness said the study was conducted at the request of 
dairy-farmer owned cooperatives as a technical assistance project from 
which cooperatives could compare their costs to average costs of all 
participating cooperatives. The witness stated that 9 cooperatives 
voluntarily submitted 2004 cost data for 17 cheese plants, 8 butter 
plants and 16 NFDM plants. Due to data incompatibility, the witness 
said that one butter plant and two NFDM plants were not included in the 
final study. The witness noted that the number of plants surveyed in 
2004 was greater than the number of plants surveyed in 1998. The 
witness testified that the study represents the second time that this 
technical assistance project collected and analyzed cost data for dried 
and condensed dry whey processing. The witness reported that the data 
collected did not include costs from privately owned manufacturing 
plants and that none of the plants surveyed were located in the State 
of California.
    The RBCS witness testified that the plant data represented each 
plant's cost of producing butter, NFDM, commodity cheese and condensed 
dry whey or dried dry whey depending on the product(s) produced at the 
individual plants. The RBCS witness explained the basic data collection 
methodology used in requesting data from individual plants and 
testified that the manufacturing costs provided by the cooperatives 
represented only those costs incurred by the plant from the receiving 
deck to the shipping deck of the plant. The witness testified that milk 
procurement, milk transportation, as well as plant administrative and 
management overhead, return on investment costs and marketing costs 
were not included in the data collected. The witness also noted that 
the cost of producing dry whey was excluded from the cost of cheese 
manufacturing. According to the witness, the data provided were not 
audited or verified by an independent party. The witness explained that 
the cost data were aggregated by product category and a weighted 
average cost of production for each product type was then calculated. 
The witness said that the RBCS data did not support concluding that as 
plant size increased, costs of production decreased on a per unit 
basis.
    Two witnesses from CDFA testified regarding the methodology used in 
conducting a 2004 processing costs survey for cheddar cheese, butter, 
NFDM and dry whey powder for manufacturing plants located in the State 
of California. The witnesses noted that 2003 was the first year that 
CDFA included dry whey processing costs in their manufacturing cost 
survey. The witnesses did not testify in either support of or in 
opposition to Proposal 1.
    The CDFA witnesses explained that plant participation in the cost 
survey is voluntary and that the 2004 survey represented 99.9 percent 
of butter production, 98.5 percent of Cheddar and Monterey Jack 
production, 99.17 percent of NFDM production and 79 percent of dry whey 
powder production in the State of California. The witnesses testified 
that all cost survey data collected is from audited plant cost records. 
The CDFA witnesses noted that the audited costs for California plants 
demonstrated that costs per unit of output are inversely related to 
plant size. The witnesses elaborated that as plant size increases, the 
costs of production on a per unit basis decrease consistently across 
manufacturing product categories.
    A witness appearing on behalf of Agri-Mark testified in support of 
Proposal 1. The witness testified that the costs of manufacturing dairy 
products have increased since the make allowances were amended in 2003 
by relying on cost data from 1998 and 1999. The witness asserted that 
many manufacturing plants are unable to recoup their increased costs in 
the marketplace and, the witness asserted, caused some plants located 
in the Northeast marketing area to cease operating. The witness argued 
that the Class III and Class IV make allowances should be updated using 
2004 data contained in the CDFA and RBCS surveys to reflect current 
manufacturing costs.
    The Agri-Mark witness asserted that the role of Class III and Class 
IV plants is to balance the milk needs of the Class I and II markets. 
According to the witness, monthly Class III milk volumes as a 
percentage of the annual average monthly volume in the Northeast order 
for 2005 ranged from a high of 107 percent in May to a low of 92 
percent in October. Class IV usage for that same time period ranged 
from 145 percent in May to 48 percent in September, said the witness. 
The witness also stated that when milk production in the Northeast 
marketing area increased in 2000, it was primarily Class IV plants that 
balanced the increased supply.
    The Agri-Mark witness stressed that even though Class IV plants are

[[Page 67471]]

balancing the market by processing the additional producer milk supply, 
they are not profitable in the Northeast marketing area. The witness 
explained that one dairy processor attempted to recoup their increased 
energy costs in the market through an energy surcharge on its finished 
products. However, stated the witness, the surcharge was captured in 
the NASS survey price and subsequently the Class IV milk price paid by 
manufacturing plants also increased.
    The Agri-Mark witness estimated that its members lost $15.5 million 
in 2004 because manufacturing costs were not adequately covered in the 
pricing formula for cheese. According to the witness, this resulted in 
a loss of $0.6500 per hundredweight (cwt) on all its producer-member 
milk. In this regard, the witness asserted that Agri-Mark members were 
subsidizing the Northeast order blend price because they are paying a 
classified price for Class III and Class IV milk that is higher than 
the value of the milk used to make these products. The witness 
conceded, however, that despite incurring a loss on its producer-member 
milk Agri-Mark does pay premiums for milk it purchases for processing 
into Class III and Class IV products.
    The Agri-Mark witness proposed that the updated cheese make 
allowance is computed by taking a weighted average of the RBCS 40-pound 
block cheddar and the all California total cheese manufacturing plant 
costs. The witness calculated this value to be $0.1794 per pound. The 
witness was of the opinion that the RBCS 40 pound block cost should be 
used because the CDFA survey had standardized its reported costs to 
plants that produce 40 pound blocks.
    The Agri-Mark witness proposed that the butter make allowance 
should be computed by using the weighted average cost for all RBCS 
butter plants with the weighted average costs of all CDFA butter 
plants. The witness calculated this value to be $0.1515 per pound. The 
witness explained that only the high cost sub-group of CDFA butter 
plants was used in 2003 when the current make allowances were adopted. 
The witness was of the opinion that using only the high cost sub-group 
would now be inappropriate because those plants were not similar in 
size to the RBCS butter plants.
    The Agri-Mark witness proposed that the NFDM make allowance should 
be computed using the RBCS weighted average cost for all NFDM plants 
and the weighted average cost of the medium cost sub-group of CDFA NFDM 
plants. The witness calculated this value to be $0.1867 per pound. The 
witness was of the opinion that this methodology and value was 
appropriate because of the comparable plant volumes between the two 
groups. The low cost plants in the CDFA survey produce a large volume 
of NFDM, the witness said, and including those plants in the 
calculation would distort the average costs of the plants in the RBCS 
study. The witness explained that using a weighted average by product 
volume implies that half of the product will be produced at a cost 
lower than the weighted average and half of the product would be 
produced at a cost higher than the weighted average. If the low cost 
CDFA plants were included in the make allowance calculation, the 
witness concluded that because of their high product volume more than 
half of the product and a majority of plants regulated by the Federal 
order system would not be able to cover their manufacturing costs.
    The Agri-Mark witness expressed concern regarding the large 
variation in the CDFA survey cost of dry whey ($0.2673 per pound) and 
the RBCS survey cost of dry whey ($0.11409 per pound). According to the 
witness, CDFA has only collected data on dry whey processing for two 
years and during that same time period the survey cost of dry whey 
($0.2670 per pound) was not recommended as the appropriate make 
allowance--instead, a make allowance of $0.2000 per pound was adopted. 
This was also the second time the RBCS survey collected data for dry 
whey production and the witness was of the opinion that there may have 
been problems regarding the reporting and allocation of dry whey costs 
that resulted in the RBCS survey product cost far below the CDFA cost. 
The witness insisted that because dry whey cost accounting methodology 
is new and not standardized, the Department should not rely on, or 
adopt the RBCS or CDFA survey costs for dry whey. Rather, the witness 
asserted that it would be more appropriate to use the methodology 
adopted when make allowances were last amended which added a factor of 
$0.0190 to the NFDM make allowance. The witness was of the opinion that 
either a $0.0190 or $0.0250 factor would be appropriate and would 
result in a dry whey make allowance of either $0.2057 or $0.2117 per 
pound.
    The Agri-Mark witness also supported updating the return on 
investment, administrative and marketing cost factors that are 
incorporated into the make allowance calculations. The previous 
Department decision amending the make allowances adopted the cost 
factors that were contained in the CDFA survey, and the witness was of 
the opinion that the same cost factors contained in the 2004 CDFA 
survey should again be used.
    The Agri-Mark witness submitted data estimating the impact the 
proposed make allowances would have on class and component prices. 
According to the witness, the price of butterfat would fall $0.0440 per 
pound, the price of protein would remain the same, the price of nonfat 
solids would fall $0.0460 per pound, and the price of other solids 
would fall either $0.0480 per pound or $0.0540 per pound depending on 
the factor used to calculate the dry whey powder make allowance. 
Additionally, the witness predicted that the Class III price would fall 
either $0.4300 per cwt or $0.4600 per cwt (depending on the dry whey 
powder factor) and the Class IV price would fall $0.5500 per cwt.
    The Agri-Mark witness also offered data regarding increased energy 
costs that have occurred over the past 4 years. Referring to U.S. 
Department of Energy data, the witness asserted that crude oil prices 
increased 33 percent in 2004 and 36 percent in 2005, and those prices 
are expected to increase 52 percent and 45 percent above 2004 levels in 
2006 and 2007, respectively. Other similar increases were seen in 
natural gas prices, the witness noted. In this regard, the witness 
offered a modification to Proposal 1 to include an energy adjustment 
for 2005 using the Producer Price Indexes for Industrial Natural Gas 
and Industrial Electric Power Distribution. According to the witness, 
those indexes recorded a 6 percent increase in electric power costs and 
a 23.8 percent increase in industrial natural gas costs from 2004 to 
2005.
    If the energy adjustment were incorporated into the make allowance, 
the Agri-Mark witness proposed that the make allowances be set at 
$0.1815 per pound for cheese, $0.1543 per pound for butter, $0.1965 per 
pound for NFDM, and either $0.2155 per pound or $0.2117 per pound for 
dry whey powder. This set of proposed make allowances would result in a 
decrease of the Class III price of either $0.5100 or $0.5400 per cwt 
and a decrease in the Class IV price by $0.6500 per cwt.
    The Agri-Mark witness conceded that adoption of Proposal 1 would 
decrease the blend prices paid to all dairy farmers. The witness was of 
the opinion that their proposed higher make allowances would lead to 
lowering blend prices by $0.09 to $0.13 per cwt over 5 years. However, 
the witness said, if the make allowances are not amended to reflect 
current costs, manufacturing plants that are unable to recoup their 
increased costs would go out of business

[[Page 67472]]

causing disorderly marketing conditions because there would be fewer 
local outlets for producer milk. The witness claimed that some 
cooperatives are currently decreasing the price paid to their members 
in an effort to recoup some of their increased manufacturing costs. The 
witness said that while Agri-Mark pays premiums above the minimum 
Federal order blend price to its members, they also are collecting a 
$0.15 per cwt assessment on all of their members' milk to offset some 
of the cooperative's losses. The witness said that if the make 
allowances were not increased, dairy farmers who are members of 
cooperatives would continue to lose money as cooperatives that operate 
manufacturing plants would further need to decrease the price they pay 
to their members in an effort to recoup additional loses. The Agri-Mark 
witness strongly urged the Department to expedite the rulemaking 
process by eliminating a recommended decision.
    A second witness appearing on behalf of Agri-Mark offered testimony 
regarding the production costs experienced at Agri-Mark plants. The 
witness asserted that their production costs have steadily increased 
since 1998 when that cost data was used in establishing current make 
allowances. According to the witness, Agri-Mark has taken many steps to 
increase efficiency and to lower costs, such as installing more 
efficient equipment, purchasing supplies in bulk quantities and forward 
pricing their energy needs. Despite these efforts, explained the 
witness, Agri-Mark has still been unable to offset increases in most 
production costs. To support their claim of increased production costs, 
the witness provided data which listed various costs experienced at 
Agri-Mark manufacturing plants from 2001 to 2005.
    A post-hearing brief submitted on behalf of Agri-Mark; Northwest 
Dairy Association; Foremost Farms USA Cooperative; Associated Milk 
Producers, Inc.; and Land O'Lakes, Inc. expressed support for updating 
the make allowances. Hereinafter, these entities will be referred to as 
``Agri-Mark, et al.'' The brief argued that the hearing record clearly 
establishes that manufacturers are incurring higher processing costs 
since current make allowances were adopted. The brief asserted that the 
current make allowances force many manufacturers to operate at a 
financial loss. The brief estimated that Agri-Mark members alone are 
incurring losses in excess of $700,000 per month.
    The Agri-Mark, et al., brief stated that unlike the competitive 
pricing system, the current pricing system does not give manufacturers 
the ability to recoup increased processing costs from the marketplace. 
The current set of fixed make allowances, wrote Agri-Mark, et al., do 
not reflect current manufacturing costs which are shown in the most 
current CDFA and RBCS surveys. The brief asserted that the inadequate 
make allowances have played a role in many manufacturing plant closures 
in recent years, and claimed that more plants would be forced out of 
business if the make allowances were not updated as quickly as 
possible.
    The Agri-Mark, et al., brief asserted that the RBCS and CDFA 
surveys are reliable and representative of manufacturing costs 
throughout the country. The brief also stressed the importance of 
including a 2005 energy adjuster in determining any amended make 
allowances. The brief reiterated Agri-Mark's concern with the dry whey 
cost data contained in both the RBCS and CDFA surveys and advocated 
deriving the dry whey make allowance by adding a 1.9 cent per pound 
factor to the NFDM make allowance, noting that the same methodology was 
used to derive the current dry whey make allowance.
    The Agri-Mark brief conceded that any increase in the make 
allowances will reduce producer income. However, the brief stated that 
the Department did not account for the current loss of revenue by 
cooperative members whose manufacturing plants are currently operating 
at a financial loss in their baseline analysis. The brief also asserted 
that the baseline analysis did not include the impact on producer 
revenue due to closures which might result from fewer local outlets for 
their milk supply. The brief concluded that if these and other factors 
were included in the baseline analysis, the reduction in producer 
revenue would not be as large as projected.
    A witness appearing on behalf of National Milk Producers Federation 
(NMPF) testified in support of Proposal 1. According to the witness, 
NMPF consists of 33 dairy-farmer cooperative associations that 
represent 75 percent of the country's dairy farmers. The witness said 
that NMPF supports updating the make allowances to reflect current 
manufacturing costs to provide needed cost relief to the dairy product 
manufacturing industry. The witness stated that the current make 
allowances were derived from manufacturing cost data collected in 1998 
and that costs have increased making the current make allowances 
obsolete. The witness maintained that the updated CDFA and RBCS survey 
data should be combined according to the same basic methodology used by 
the Department when the current make allowances were established. The 
witness urged the Department to implement these changes on an emergency 
basis and omit a recommended decision.
    The NMPF witness explained that make allowances set the maximum 
margin a manufacturer can earn for its products. According to the 
witness, if a manufacturer is able to produce at a per unit cost less 
the make allowance, then they generate a processing premium. However, 
the witness said, if a manufacturer's per unit cost is greater than the 
make allowance they do not earn a processing premium and have no method 
under the current pricing formulas to recoup those costs from the 
marketplace. The witness asserted that this undermines the ability of 
manufacturing plants to provide market balancing services and the 
Federal orders the ability to provide for orderly marketing conditions.
    The NMPF witness testified that the CDFA and RBCS surveys together 
represent a large portion of the domestic manufacturing industry--41 
percent of cheddar cheese production, 51 percent of butter production, 
81 percent of NFDM production and 45 percent of dry whey production. 
While the witness supported using the Department's methodology for 
establishing the current make allowances, NMPF proposed a modification. 
The current butter make allowance was determined after excluding the 
lower-cost CDFA butter plants from the calculation of the average plant 
cost, the witness explained. According to the witness, this exclusion 
is no longer justified because that group represents a large share of 
U.S. butter production and should now be included.
    The NMPF witness also explained that the most volatile input cost 
of manufacturing is energy and asserted that recent increases in energy 
costs have countered many cost reducing measures undertaken by 
manufacturers to increase productivity or efficiency. The witness was 
of the opinion that the energy cost factor contained in the make 
allowances should be indexed and adjusted monthly to take into account 
the volatile energy market. The witness insisted that this was an 
appropriate way to maintain equity between producers and manufacturers 
explaining that processors would not be unduly harmed when energy 
prices rise and producers would not be harmed when energy prices fall. 
Therefore, the witness said, the Department should adopt a monthly 
energy price adjuster using the monthly Bureau of Labor Statistics

[[Page 67473]]

Producer Price Indexes for Industrial Electricity and Industrial 
Natural Gas, and use the weighted average 2004 electricity and fuels 
costs from the RBCS and CDFA surveys as the initial base for the 
adjuster. The witness added that if an energy index is not adopted, the 
make allowances that are determined as a result of the proceeding may 
become obsolete before they are implemented if there are large 
fluctuations in energy prices. The witness supported delaying 
implementation of an energy cost factor until the issuance of a final 
decision if its consideration would delay adopting adjustments in the 
make allowances. A post-hearing brief submitted on behalf of NMPF 
reiterated their support for updating the make allowances.
    A witness appearing on behalf of Land O' Lakes (LOL) testified in 
support of Proposal 1. According to the witness, LOL is a Capper-
Volstead cooperative with more than 4,000 members that owns 
manufacturing plants located throughout the United States. The witness 
explained that Class III and Class IV prices are determined in part by 
taking the market price of various manufactured goods and subtracting 
the cost of converting milk into that specific commodity (make 
allowance). The witness said that the current classified pricing system 
was implemented in 2000 and the current make allowances were last 
adopted in 2003 relying on data that was collected in 1998. The LOL 
witness stated that all of LOL's plants have experienced increased 
manufacturing costs since 1998. The witness emphasized that despite 
efforts by LOL to reduce costs increase in processing costs could not 
be completely offset.
    The LOL witness stressed that relative plant size, comparable per 
unit costs and recognition of balancing costs should be criteria used 
by the Department in appropriately weighting the CDFA and RBCS surveys 
to determine the make allowances. The witness further suggested that 
when establishing the butter make allowance, the weighted average of 
the CDFA and RBCS butter plants should be used because the costs of the 
average plant size measured by both surveys are comparable. According 
to the witness, this would result in a butter make allowance of $0.1515 
per pound. The NFDM make allowance should be computed using the 
weighted average of the RBCS NFDM plants and Group II of the CDFA NFDM 
plants, the witness stated. The costs of those two groups, after 
adjusting the RBCS data for return on investment, general and 
administrative costs and marketing expenses, are similar, the witness 
said, and would result in a NFDM make allowance of $0.1867 per pound.
    For determining the cheese make allowance, the LOL witness 
advocated using the weighted average RBCS cost with the weighted 
average CDFA cost because those costs are similar. The witness asserted 
that the resulting cheese make allowance should be $0.1710 per pound. 
The witness also insisted that the RBCS and CDFA survey costs for dry 
whey processing are counter-intuitive and supported Agri-Mark's 
modification to add a factor to the NFDM make allowance to determine 
the dry whey make allowance.
    The LOL witness maintained that the make allowances need to be 
amended to reflect current manufacturing and to remedy an error in the 
RBCS cost data presented at a 2000 hearing on Federal order product 
price formulas that contained some California plants. The witness also 
recognized that lower blend prices would result if Proposal 1 is 
adopted. However, the witness said, LOL cooperative members are 
currently bearing the additional cost of processing manufactured 
products which the witness asserted should be born by all producers. 
The witness emphasized that all of the LOL butter, cheese, and NFDM 
plants that participated in the RBCS survey lost money in 2004 even 
though the average selling price for the products were above the NASS 
average price for the year. The witness urged the Department to 
expedite the hearing process and omit a recommended decision to provide 
cost relief to manufacturing operations.
    A post-hearing brief submitted on behalf of LOL reiterated their 
support of adoption of Proposal 1. The brief supported adoption of the 
specific make allowances advanced by Agri-Mark including a 2005 energy 
adjuster and adoption of an energy index in the calculation of the make 
allowances that would be updated quarterly. The brief expressed 
opposition to reopening the hearing record to take evidence regarding 
the proper make allowances to be included in the Class I and Class II 
price formulas.
    A witness appearing on behalf of the National Cheese Institute 
(NCI) testified in support of Proposal 1. NCI is a trade association 
with 70 member companies representing manufacturers, marketers, 
distributors and suppliers of cheese. The witness said that the make 
allowances should be updated with the 2004 CDFA and RBCS survey data 
using the methodology that established the current make allowances and 
that they be adjusted for 2005 energy cost increases. The witness 
specified that after adding an energy adjustment the make allowance 
should be set no lower than the following: $0.1810 per pound for 
cheese, $0.2220 per pound for dry whey, $0.1540 per pound for butter 
and $0.1970 per pound for NFDM.
    The NCI witness explained that the Federal order pricing system 
prior to Federal order reform was based on the competitive market 
prices paid for unregulated milk in the Upper Midwest region. The 
witness asserted that this pricing scheme reacted to changes in 
manufacturing costs and therefore manufacturers did not need to seek 
government intervention to recover any cost increases. However, the 
current pricing system determines the classified prices received by 
farmers based on the products' finished wholesale prices minus fixed 
make allowances that represents the handlers' costs incurred to make 
the finished products, explained the witness. The current system, the 
witness said, does not react to cost changes. If a manufacturer's costs 
of production increases, the plant still only receives the fixed make 
allowance to produce that specific product, the witness said even if 
this does not cover all of its processing costs. The witness noted that 
while a plant could increase its finished product prices to recover 
additional expenses, the higher prices would be included in the NASS 
product price survey and would consequently increase their cost for raw 
milk. According to the witness this circularity in price determination 
undercuts market forces and justifies increasing the make allowances.
    The NCI witness maintained that manufacturing costs have increased 
substantially since RBCS and CDFA survey data for 1998 was used to 
establish the current make allowances. The witness asserted that if the 
make allowances are not updated, cheese manufacturers will either have 
to decide to lose money on each pound of product or stop production 
entirely. While the witness supported the methodology used by the 
Department to set the current make allowances, NCI offered their views 
regarding what CDFA cost sub-groups should be used in establishing new 
make allowances. The witness also insisted that because the 2004 CDFA 
and RBCS survey results do not include 2005 energy cost increases, an 
adjustment as proposed by Agri-Mark, to reflect these increases, is 
justified. The witness testified that a 2.5 cent factor should be added 
to the NFDM make allowance to establish the dry whey make allowance. 
The NCI witness concluded that the increasing differences between 
current make allowances and actual manufacturing

[[Page 67474]]

costs justifies the need for emergency action by the Department through 
the omission of a recommended decision.
    A post-hearing brief submitted on behalf of NCI reiterated their 
support for updating the make allowances using CDFA and RBCS 2004 
survey data, adjusted for 2005 energy costs, on an emergency basis. The 
brief stated that such an update should result in new make allowances 
that would be set no lower than the following: $0.1810 per pound for 
cheese, $0.1540 per pound for butter, $0.1970 per pound for NFDM and 
$0.2220 per pound for dry whey. The brief stated that the hearing 
record is replete with evidence demonstrating a significant increase in 
manufacturing costs and the manufacturers' inability to recoup those 
costs though the marketplace. The brief also argued that the RBCS data 
regarding the costs of producing dry whey do not include all input 
costs and are not representative of typical U.S. dry whey drying 
plants. Therefore, the brief said, the Department should continue the 
methodology used in the past and establish a dry whey make allowance by 
adding a differential to the NFDM make allowance.
    A witness appearing on behalf of Lactalis America Group (Lactalis) 
testified in support of Proposal 1. According to the witness, Lactalis 
produces and markets a variety of cheeses across the United States. The 
witness testified that their manufacturing costs of production have 
increased 14 percent since 1998 even though their plant capacity had 
increase by 25 percent during that time frame. The witness projected 
that Lactalis' costs of production would increase 16 percent in 2006 as 
compared to 2005. The witness urged the Department to expedite the 
rulemaking process and omit a recommended decision.
    A witness appearing on behalf of Alto Dairy Cooperative (Alto) 
testified in support of Proposal 1. According to the witness, Alto is a 
Capper-Volstead cooperative located in Wisconsin that markets over 1.5 
billion pounds of milk annually and operates 2 manufacturing plants. 
The witness stated that a financially stable dairy manufacturing 
industry which provides numerous local outlets for milk is vital to 
maintaining a stable market for dairy farmers. The witness was of the 
opinion that the current make allowances disadvantage cheese 
manufacturers because they do not adequately account for the current 
costs of manufacturing. The witness stated that even though Alto has 
become more efficient, their costs of production still increased 3 
cents per pound because of increases in costs for natural gas, 
packaging materials and transportation. The witness urged the adoption 
of Proposal 1 on an expedited basis.
    A witness appearing on behalf of Associated Milk Producers, Inc. 
(AMPI) testified in support of Proposal 1. According to the witness, 
AMPI is a Capper-Volstead cooperative that represents 4,000 dairy 
farmers in 7 Midwestern states and whose milk is pooled on the Upper 
Midwest and Central orders. The witness expressed support for 
increasing the make allowances because of increased manufacturing 
costs, particularly for energy, that have occurred since 2001. The 
witness was of the opinion that adequate make allowances are critical 
in allowing a manufacturing plant to cover their processing costs and 
earn a competitive rate of return on equity. The witness said that if 
the make allowances remained too low plant profitability will continue 
to erode and investment in plants and manufacturing equipment will 
decrease. The witness emphasized that manufactured dairy products 
compete in a national market against other unregulated or state-
regulated plants that either have no regulated pricing system or have a 
make allowance that more accurately reflects current marketing 
conditions.
    The AMPI witness also supported the inclusion of a 2005 energy 
adjustor as advanced by Agri-Mark. The witness said that AMPI 
experienced 31 percent higher average natural gas costs in 2005 than in 
2004. The witness noted that for the months of September through 
December 2005, AMPI's natural gas costs were on average 65 percent 
higher than during the same time period in 2004. The witness asserted 
that the steep increases in energy prices that occurred in 2005 need to 
be reflected in any update of the make allowances. The witness also 
supported indexing energy costs as proposed by NMPF, provided its 
inclusion would not delay the issuance of a decision, and that its 
inclusion should be contained in a later decision. The witness urged 
the Department to expedite the hearing process and omit a recommended 
decision.
    A witness appearing on behalf of Foremost Farms USA Cooperative 
(Foremost) testified in support of Proposal 1. According to the 
witness, Foremost is a Capper-Volstead cooperative with 3,476 members 
that markets 5.05 billion pounds of milk and operates 15 manufacturing 
plants and 2 distributing plants. The witness said the current make 
allowances have dramatically risen since 1998 and is causing 
manufacturing plants to lose substantial amounts of money.
    The witness explained that Foremost has taken numerous steps since 
2000 to increase their competitiveness and efficiency by reconfiguring 
their product mix, closing numerous plants and a storage and 
distribution facility, increasing employee health care contributions, 
and purchasing packaging, ingredients, and other supplies in bulk. 
Despite these efforts Foremost has been unable to completely offset as 
the cost increases in energy, employee healthcare, and packaging 
materials, the witness stated. The witness claimed that at their 
Lancaster, Wisconsin, cheese plant, 2004 manufacturing costs per pound 
for cheese had increased 25.6 percent since 1999. According to the 
witness, the increased costs were linked to higher natural gas, 
electricity, and employee fringe benefits. The witness added that the 
2005 manufacturing costs per pound of cheese at the same plant was 14.1 
percent higher than 2004. The witness also emphasized that Foremost has 
attempted to raise its product prices and premiums but those increases 
were incorporated into the NASS Dairy Product Price survey that in 
turn, resulted in higher Federal order minimum class prices for their 
raw milk.
    The Foremost witness stressed that make allowances need to be 
increased quickly; otherwise they will be unable to continue absorbing 
cost increases without paying their members less for their milk. The 
witness supported adoption of Proposal 1 with an energy adjustor and 
urged its adoption on an emergency basis.
    A witness appearing on behalf of Davisco Foods International 
(Davisco) testified in support of Proposal 1. According to the witness, 
Davisco operates three manufacturing plants that collectively produce 1 
million pounds of cheese per day. The witness offered support for the 
testimony offered by the NCI. The witness stated that the price Davisco 
is able to charge for products is not high enough to return the 
classified price to the marketwide pool and cover their manufacturing 
costs. According to the witness, many of Davisco's processing costs 
have increased from 1998 to 2004. During this time period, the witness 
explained, labor costs have increased 25 percent per man hour, employee 
benefits have increased 92 percent and natural gas costs have increase 
149 percent per therm. The witness said energy costs increased 
substantially again in 2005. The witness insisted that in order to 
maintain a viable dairy manufacturing industry, make allowances need to 
be amended

[[Page 67475]]

on an emergency basis to reflect current market conditions.
    A witness appearing on behalf of Michigan Milk Producers 
Association (MMPA) testified in support of Proposal 1. According to the 
witness, MMPA is a Capper-Volstead cooperative with approximately 2,400 
members that markets over 3.3 billion pounds of milk per year and 
operates 2 manufacturing plants. The witness said that MMPA 
participated in the 1998 and 2004 RBCS manufacturing cost surveys and 
presented data revealing their cost increases during that time period. 
According to the witness, MMPA's manufacturing costs per pound of NFDM 
were 54 percent higher in 2004 than in 1998 and represent $2.1 million 
in additional processing costs that they were unable to recoup from the 
marketplace. During that same period, the witness noted, the 
manufacturing costs per pound of butter increased 14.3 percent, 
reducing their profit margin by $207,000. The witness insisted that 
energy costs have been the major driver of cost increases and said that 
in 2006 MMPA forecasts their gas costs to increase by nearly $1.3 
million. The witness stressed that MMPA tried to increase their product 
prices but those higher prices were captured by the NASS product price 
survey which in turn resulted in higher raw milk costs.
    The MMPA witness emphasized the need for increasing make allowances 
to reflect current manufacturing costs and urged the Department to act 
on an emergency basis. The witness also offered support for indexing 
fuel costs and periodically adjusting make allowances to reflect 
changes in energy costs.
    A post-hearing brief submitted on behalf of MMPA reiterated support 
for adoption of Proposal 1. The brief stated that MMPA manufacturing 
plants have been incurring financial losses because processing costs 
are not fully recovered by current make allowances. The brief supported 
the make allowances advanced by Agri-Mark and NMPF. The brief also 
advocated that the make allowances be adjusted for 2005 energy cost 
increases and that the new allowances include a monthly energy 
adjuster. MMPA wrote that by indexing energy costs in the make 
allowances, manufacturers would not be harmed if future energy costs 
continue to increase and if energy costs decrease producers would share 
in the additional revenue resulting from lower processing costs. The 
brief described large financial losses that MMPA member-owned plants 
would incur if make allowances are not adjusted as quickly as possible.
    A witness appearing on behalf of Northwest Dairy Association (NDA) 
testified in support of Proposal 1. According to the witness, NDA is a 
Capper-Volstead cooperative with approximately 640 dairy-farmer 
members, of which 520 pool their milk on the Pacific Northwest order 
and also operates manufacturing plants in the northwest through its 
subsidiary, WestFarm Foods. The witness said that make allowances need 
to be updated to reflect the current marketing conditions. The witness 
insisted that the current make allowances do not reflect the higher 
costs of energy, labor and packaging and that efforts to recoup these 
costs from the marketplace have been unsuccessful. Therefore, the 
witness asserted that updating the make allowances is a logical step to 
ensure that manufacturing plants do not continue to lose money from 
higher costs that cannot be recouped.
    The NDA witness stressed that balancing costs should be considered 
as part of determining the appropriate make allowances for Class IV 
products--butter and NFDM. The witness claimed that NDA's NFDM 
processing costs were 2 to 5 cents per pound higher in their NFDM 
plants that specifically are used to balance the market. The witness 
said that NDA provided dry whey cost data for the RBCS survey and noted 
an error in their data--NDA did not include the purchase of a large 
amount of condensed dry whey in their total dry whey processing cost. 
The witness claimed that after accounting for this purchase, their dry 
whey processing cost increased 1.969 cents per pound for all dry whey 
manufactured by NDA.
    The NDA witness offered support for adjusting the make allowances 
to reflect 2005 energy costs and for indexing energy costs to 
periodically adjust the make