Milk in the Northeast and Other Marketing Areas; Tentative Partial Final Decision on Proposed Amendments and Opportunity To File Written Exceptions to Tentative Marketing Agreements and Orders, 35306-35331 [E8-13943]

Agencies

• Agricultural Marketing Service
• DEPARTMENT OF AGRICULTURE

[Federal Register Volume 73, Number 120 (Friday, June 20, 2008)]
[Proposed Rules]
[Pages 35306-35331]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-13943]



[[Page 35305]]

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Part IV





Department of Agriculture





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Agricultural Marketing Service



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7 CFR Part 1000



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

Federal Register / Vol. 73, No. 120 / Friday, June 20, 2008 / 
Proposed Rules

[[Page 35306]]


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DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

7 CFR Part 1000

[Docket No. AMS-DA-07-0026; AO-14-A77, et al.; DA-07-02-A]


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

AGENCY: Agricultural Marketing Service, USDA.

ACTION: Proposed rule; tentative partial final decision.

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SUMMARY: This tentative partial final decision proposes to adopt 
changes to the manufacturing cost allowances and the butterfat yield 
factor used in Class III and Class IV product-price formulas applicable 
to all Federal milk marketing orders on an interim basis. A separate 
decision regarding the collection of manufacturing cost information, 
the use of an energy cost adjustor and providing for a cost add-on 
feature to Class III and Class IV product-pricing formulas will be 
addressed in a separate decision. This tentative partial decision 
requires determining if producers approve the issuance of the amended 
orders on an interim basis.

DATES: Comments should be submitted on or before August 19, 2008.

ADDRESSES: Comments (six 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.

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 partial final decision 
proposes to adopt 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 to adopt 
the following make allowances: Cheese--$0.2003 per pound; butter--
$0.1715 per pound; NFDM--$0.1678 per pound; and dry whey--$0.1991 per 
pound. This decision also proposes increasing the butterfat yield 
factor in the butterfat price formula from 1.20 to 1.211.
    This decision also addresses proposals published in the hearing 
notice as Proposals 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16 and 
18 that seek to change various features of the Class III and Class IV 
product-price formulas. Proposals seeking to establish a manufacturing 
cost survey (Proposal 2), establish an energy cost adjustor (Proposal 
17) and establish a cost add-on (Proposal 20), will be addressed in a 
separate recommended decision.
    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 U.S. 
Department of Agriculture (USDA) 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, USDA 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-
612), 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 February 2007, the month the initial public 
hearing was held, the milk of 49,712 dairy farmers was pooled on the 
Federal order system. Of the total, 46,729 dairy farmers, or 94 
percent, were considered small businesses. During the same month, 352 
plants were regulated by or reported their milk receipts to be pooled 
and priced on a Federal order. Of the total, 186 plants, or 53 percent, 
were considered small businesses.
    This decision proposes 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 increases from $0.1202 to 
$0.1715 per pound; the make allowance for cheese increases from $0.1682 
to $0.2003 per pound; the make allowance for NFDM increases from 
$0.1570 to $0.1678 per pound; and the make allowance for dry whey 
increases from $0.1956 to $0.1991 per pound. The butterfat yield factor 
in the butterfat price formulas is increased from 1.20 to 1.211.
    The proposed 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.
    An economic analysis has been performed that discusses impacts of 
the proposed amendments on industry

[[Page 35307]]

participants including producers and manufacturers. It can be found on 
the AMS Dairy Web site at https://www.ams.usda.gov/dairy. 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 (AMS) 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 partial 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 were invited to submit comments on the probable 
regulatory and informational impact of this proposed rule on small 
entities.

Economic Analysis

    In order to assess the impact of the proposed changes in Federal 
order producer price formulas, the Department conducted an economic 
analysis. The complete analysis is available at on the Dairy Programs 
Web site which can be accessed through https://www.ams.usda.gov.
    The impacts of the proposed changes to the Class III and Class IV 
pricing formulas contained in the tentative final decision are 
summarized as changes from the USDA baseline on an annual basis and as 
a nine-year average change from 2008-2016. Impacts on the Federal order 
system are considered to be in the context of the broader U.S. market 
for milk and dairy products.
    Producers: The U.S. all-milk price falls an average $0.06 per cwt 
(0.39 percent) from a baseline level of $16.22 per cwt over the nine-
year projection period. The average Federal order minimum blend price 
at test averages $0.11 per cwt (0.68 percent) below the baseline level 
of $16.43 per cwt. The lower milk prices result in a tightening of 
production. In turn, Federal order marketings fall an average 145 
million pounds (0.11 percent) below the baseline average of 126.5 
billion pounds. Federal order cash receipts decrease an average $165 
million (0.79 percent) from the $20.8 billion baseline receipts. U.S. 
marketings come in an average 240 million pounds (0.13 percent) per 
year below the baseline average of 187.8 billion pounds. The lower 
marketings coupled with lower prices across the board result in an 
average decline of $156 million (0.51 percent) in producer revenue from 
the baseline average of $30.4 billion.
    Milk Manufacturers and Processors: Increases to the make allowances 
in Federal order minimum price formulas are advantageous for dairy 
product manufacturers. Average wholesale prices over the projection 
period exceed baseline by the following: Cheddar cheese by $0.0176 per 
pound (1.14 percent), butter by $0.0346 per pound (1.89 percent), 
nonfat dry milk by $0.0090 per pound (0.88 percent), and dry whey by 
$0.0034 per pound (0.94 percent).
    In spite of the higher product prices, the make allowance changes 
are substantial enough that the nine-year average component prices fall 
from baseline levels. The changes are as follows: Butterfat by $0.0014 
per pound (0.07 percent), protein by $0.0451 per pound (1.96 percent), 
nonfat solids by $0.0018 per pound (0.22 percent) and the other solids 
price by $0.001 per pound (0.05 percent). Lower component prices are 
carried through to lower skim milk pricing factors. The Class III skim 
price falls an average $0.14 per cwt (1.72 percent) from a baseline 
average level of $8.16 per cwt and remains the Class I price mover.
    Consumers: The retail price of fluid milk is expected to decrease 
an average of $0.0094 per gallon (0.27 percent) from the baseline 
average price of $3.4135 over the nine-year projection period due to 
the lower Class I price. Consumers respond, albeit modestly, to the 
decreased prices as evidenced by the average 32 million pound (0.07 
percent) increase in Class I marketings from a baseline average of 45 
billion pounds over the projection period. Class II marketings increase 
overall, indicating an increase in consumption of soft products 
consistent with the slight decline in Class II prices. At the same 
time, consumers face higher prices for hard manufactured dairy products 
such as cheese, butter and nonfat dry milk and as a result, Class III 
and Class IV marketings fall from baseline levels. Consumer demand for 
hard manufactured dairy products is more elastic than for fluid milk 
and soft products; consumers are more responsive to changes in price.
    Government Outlays: With the expiration of the Milk Income Loss 
Contract (MILC) program, and no activity under Dairy Export Incentive 
Program (DEIP), any change to government outlays occurs through Milk 
Price Support Program (MPSP) purchases. Baseline level prices are high 
enough that few government purchases are expected. Under the proposed 
changes, removals change only slightly at the beginning of the 
projection period; remaining unchanged in from baseline in the long run 
projection.
    The proposed changes to Class III and Class IV pricing formulas 
result in lower Federal order prices as well as higher manufactured 
product prices. Thus, the gap between the price of milk and the 
wholesale prices received by processors widens. At the same time, milk 
producers face lower prices and respond by cutting back on production, 
leading to lower marketings and producer revenue losses.
    The decrease in the Federal minimum price for Class I milk is 
passed on to consumers in the form of a slightly lower retail price for 
fluid milk which increases consumption. However, tighter milk supply 
bolsters manufactured product prices and in turn lowers consumption of 
cheese, butter, and NDFM. Class I and Class II marketings increase, but 
not enough to counteract the lower prices, allowing average receipts to 
fall across all classes. Though prices for Class III and Class IV milk 
decrease under the proposed changes, the decreased consumption of the 
associated dairy products and the increase in Class I and Class II 
product consumption causes a shift in dairy product allocation, 
increasing the amount of milk allocated to Class II production.

Prior Documents in This Proceeding

    Notice of Hearing: Issued February 5, 2007; published February 9, 
2007 (72 FR 6179).
    Supplemental Notice of Hearing: Issued February 14, 2007; published 
February 20, 2007 (72 FR 7753).
    Notice To Reconvene Hearing: Issued March 15, 2007; published March 
21, 2007 (72 FR 13219).
    Notice To Reconvene Hearing: Issued May 2, 2007; published May 8, 
2007 (72 FR 25986).

Preliminary Statement

    Notice is hereby given of the filing with the Hearing Clerk of this 
tentative partial final decision with respect to the proposed 
amendments to the tentative marketing agreements and the orders

[[Page 35308]]

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 August 19, 2008, deadline. Six (6) copies of the 
exceptions should be filed. Comments may also be submitted at the 
Federal eRulemaking portal: https://www.regulations.gov.
    A public hearing was held upon proposed amendments to the marketing 
agreements 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 proposed amendments set forth below are based on the record of 
the first session of a public hearing held in Strongsville, Ohio, on 
February 26-March 2, 2007, pursuant to a notice of hearing issued 
February 5, 2007, published March 21, 2007 (72 FR 13219); a second 
session of a public hearing held in Indianapolis, Indiana, on April 9-
13, 2007, pursuant to a reconvened hearing notice issued March 15, 
2007, published March 21, 2007 (72 FR 13219); and a third session of a 
public hearing held in Pittsburgh, Pennsylvania, on July 9-11, 2007, 
pursuant to a reconvened hearing notice issued May 2, 2007, published 
May 8, 2007 (72 FR 25986).
    The material issues on the record of the hearing relate to:
    1. Amending the product-price formulas used to compute Class III 
and Class IV prices.
    2. Determination of Emergency Marketing Conditions.

Findings and Conclusions

1. Amending the product-price formulas used to compute Class III and 
Class IV prices
    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, nonfat dry milk 
(NFDM) and dry whey using the most currently available data, and a 
portion of Proposal 6 that increases the butterfat yield in the 
butterfat price formula. Specifically, this decision adopts the 
following manufacturing allowances: Cheese--$0.2003 per pound, butter--
$0.1715 per pound, NFDM--$0.1678 per pound and dry whey--$0.1991 per 
pound. This decision also increases the butterfat yield factor in the 
butterfat price formula from 1.20 to 1.211.
    The Federal Milk Marketing Order (FMMO) program currently uses 
product-price formulas to compute prices handlers must account for in 
the marketwide pooling of milk used in the four classes of products. 
These formulas rely on the price of finished products to determine the 
minimum classified prices handlers pay for raw milk. In addition, the 
Class III and Class IV prices form the base from which Class I and 
Class II prices are determined. This end-product pricing system was 
implemented on January 1, 2000 (published February 12, 1999; 64 FR 
70868).
    The product-price formulas are computed by using component values 
from National Agricultural Statistic Service (NASS) surveyed prices of 
manufactured dairy products. The pricing system determines butterfat 
prices for milk used in products in each of the four classes from a 
surveyed butter price; protein and other solids prices for milk used in 
Class III products from surveyed cheese and dry whey prices; and a 
nonfat solids price for milk used in Class II and Class IV products 
from surveyed nonfat dry milk product prices. The skim milk portion of 
the Class I price may be derived from either the protein and other 
solids price, or from the nonfat dry milk price depending on the price 
relationships. The butterfat, protein, other solids and nonfat solids 
prices are all derived in a similar manner: Average NASS survey price 
minus a manufacturing (make) allowance times a yield factor. The yield 
factor is an approximation of the quantity of a specific product that 
can be made from a hundredweight (cwt) of milk. The yield factors were 
last amended on April 1, 2003 (published February 12, 2003; 68 FR 
7063).
    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--$0.1682 per pound, butter--$0.1202 per pound, NFDM--$0.1570 per 
pound and dry whey--$0.1956 per pound. These make allowances were 
adopted in 2006 (71 FR 78333) and became effective on March 1, 2007, 
and were determined on the basis of a California Department of Food and 
Agriculture (CDFA) and a Cornell Program on Dairy Markets and Policy 
(CPDMP) survey of manufacturing costs. The current make allowances, 
except dry whey, were computed by taking a weighted average of the CDFA 
and CPDMP surveys using National commodity production as the weights, 
and adjusting for marketing costs. The dry whey make allowance was 
computed by relying solely on the CPDMP 2005 survey and adjusting for 
marketing costs.
    Nineteen proposals were published in the hearing notice for this 
proceeding. Proposals 4, 5 and 11 were withdrawn at the hearing by 
proponents in support of other noticed proposals. No further reference 
to these proposals will be made.
    A proposal published in the hearing notice as Proposal 1, offered 
by Agri-Mark Cooperative (Agri-Mark), seeks to amend the Class III and 
Class IV make allowances by using the most current plant cost survey 
data available. Agri-Mark is a Capper-Volstead cooperative with 
approximately 1,400 member-owners throughout New England and New York, 
and operates four manufacturing plants.
    Agri-Mark is also the proponent of Proposal 2 that seeks to amend 
the Class III and Class IV product price formulas to annually update 
the manufacturing allowances using an annual manufacturing cost survey 
of cheese, whey powder, butter, and nonfat dry milk plants (located 
outside of California.) The proposed amendments would grant authority 
to the Market Administrator to administer the survey, select the sample 
plants, and collect, audit, and assemble cost information. This 
proposal will also be addressed in a separate decision.
    A proposal published in the hearing notice as Proposal 3, offered 
by Dairy Producers of New Mexico (DPNM), seeks to amend the 
manufacturing allowances contained in the Class III and Class IV 
product price formulas. Specifically, this proposal seeks to set the 
make allowances at the following levels: $0.1108 per pound for butter; 
$0.1638 per pound for cheese; $0.1410 per pound for NFDM; and $0.1500 
per pound for dry whey. DPNM is an association of dairy producers 
located in New Mexico and West Texas.
    DPNM is the proponent of Proposals 6, 7 and 8 that seek to amend 
the yield factors and the butterfat recovery rate of the Class III and 
Class IV product price formulas. Proposal 6 seeks to amend the butter 
price formula by increasing the butterfat yield factor from 1.20 to 
1.211

[[Page 35309]]

and to amend the protein price formula by increasing the butterfat 
recovery rate from 90 percent to 94 percent. Proposal 7 seeks to 
eliminate the farm-to-plant shrink and butterfat shrink adjustments of 
all yield factors. Proposal 8 seeks to increase the nonfat solids yield 
factor from 0.99 to 1.02, and increase the protein price yield factor 
for cheese from 1.383 to 1.405 and for butter from 1.572 to 1.653.
    Proposal 9 was offered by the International Dairy Foods Association 
(IDFA). Proposal 9 seeks to amend the Class III and Class IV product-
price formulas by adjusting the protein price formula to reflect the 
lower value and reduced volume of butterfat recoverable as whey cream. 
IDFA is a trade association with 530 members representing 
manufacturers, marketers, distributors, and suppliers of fluid milk and 
related products.
    Proposal 10 was submitted on behalf of Agri-Mark. Proposal 10 seeks 
to amend the Class III and Class IV product-price formulas by reducing 
the protein price to reflect the lower selling price of whey butter.
    Proposal 12 was offered by IDFA. Proposal 12 seeks to amend the 
Class III and Class IV product price formulas by eliminating the 3-cent 
cost adjustment for cheese manufacturing of 500-pound barrels contained 
in the protein price formula.
    Proposal 13 was offered by Dairy Farmers of America, Inc. (DFA) and 
the Northwest Dairy Association (NDA). Proposal 13 seeks to amend the 
Class III and Class IV product-price formulas by removing the barrel 
cheese price as a cost component of the protein price formula. DFA is a 
Capper-Volstead cooperative with 13,500 member-owners producing milk in 
40 states. NDA is a Capper-Volstead cooperative with approximately 610 
member-owners, and operates 6 manufacturing plants and 4 distributing 
plants in the western United States.
    Proposal 14 was advanced by Agri-Mark. Proposal 14 seeks to amend 
the Class III and Class IV product price formulas by using a 
combination of the weekly NASS and CME cheese price series to determine 
the cheese price contained in the Class III and Class IV product-price 
formulas.
    Proposal 15 also was offered by DPNM. This proposal seeks to 
replace the NASS commodity price surveys with CME commodity prices in 
each of the price formulas except for the other solids formula. The dry 
whey price in the other solids formulas would continue to be derived 
from the NASS dry whey price survey.
    Proposal 16 was offered by National All-Jersey, Inc. (NAJ). 
Proposal 16 seeks to amend the Class III and Class IV product-price 
formulas by eliminating the other solids price and adding the 
equivalent value of dry whey to the protein price formula. NAJ is a 
breed organization with more than 1,000 members.
    Proposal 17 was offered by the National Milk Producers Federation 
(NMPF). The proposal seeks to amend the Class III and Class IV product-
price formulas to incorporate a monthly energy cost adjustment based on 
monthly changes in the manufacturing price indices for industrial 
natural gas and industrial electricity as published by the Bureau of 
Labor Statistics. NMPF is an association consisting of 33 dairy-farmer 
cooperative members representing nearly three-quarters of U.S. dairy 
farmers. This proposal will be addressed in a separate decision.
    Proposal 18 was offered by the Maine Dairy Industry Association 
(MDIA). Proposal 18 seeks to amend the Class III and Class IV product-
price formulas by incorporating a factor to account for any monthly 
spread between component price calculations for milk and a competitive 
pay price for equivalent Grade A milk. MDIA is an association that 
represents all of Maine's 350 dairy farmers.
    A proposal published in a supplemental hearing notice as Proposal 
20 was submitted on behalf of Dairylea Cooperative, Inc. (Dairylea). 
Proposal 20 seeks to amend the Class III and Class IV price formulas by 
establishing cost-of-production add-ons that manufacturers could 
include in the selling price of their products but would not be 
included in the determination of the NASS survey prices. Dairylea is a 
Capper-Volstead cooperative with 2,400 member-owners located in seven 
states. This proposal also will be addressed in a separate decision.
    To provide order to the volume of hearing testimony and post-
hearing briefs, the summary of testimony is organized as follows:
    1. Make Allowances: Proposals 1, 2 and 3
    2. Product Yields and Butterfat Recovery Percentage: Proposals 6, 7 
and 8
    3. Value of Butterfat in Whey: Proposals 9 and 10
    4. Barrel Cheese Price: Proposals 12 and 13
    5. Product Price Series: Proposals 14, 15 and 18
    6. Other Solids Price: Proposal 16
1. Make Allowances
    A witness from Cornell University (Cornell witness) testified 
regarding the 2006 manufacturing cost survey (2006 survey) conducted by 
the Cornell Program on Dairy Markets and Policy (CPDMP), to assess the 
manufacturing costs of plants producing cheddar cheese, dry whey, 
butter and NFDM. The witness did not testify in support or opposition 
to any proposal presented at the hearing. The witness explained that an 
earlier study, the CPDMP 2005 manufacturing cost survey (2005 survey), 
was contracted in part by USDA and was presented at a 2006 rulemaking 
hearing (71 FR 52502), and were factors considered by USDA in 
developing the make allowances that became effective March 1, 2007 (71 
FR 78333). The witness said that some manufacturing plants that 
participated in the 2005 survey requested a new survey to reflect more 
current cost information.
    The Cornell witness said that each of the plants that participated 
in the 2005 survey were asked to participate in the 2006 survey. The 
witness stated that 21 plants agreed to participate and of those plants 
19 were deemed to have acceptable data to be included in the 2006 
survey. Plants submitted data corresponding to their most recent fiscal 
year; most of the data observations occurred in calendar year 2006, the 
witness said. The data was not audited by the witness. The witness 
explained that if a plant produced multiple products they were asked to 
allocate manufacturing costs for each product. However, if they failed 
to do so the witness allocated costs on a per pound of solids basis in 
the finished product. The average manufacturing costs detailed in the 
study were on a per pound of finished product basis and were not 
adjusted for moisture content, the witness said.
    The Cornell witness said that 11 cheese plants participated in the 
2006 survey compared with 16 cheese plants in the 2005 survey. Eight of 
those plants (one classified as a large plant and the other seven as 
small plants) also participated in the 2005 survey; the three remaining 
plants that participated in the 2006 survey were asked to participate 
in 2005 but submitted data too late for its inclusion. The witness 
testified that five small cheese plants that were included in the 2005 
survey opted not to participate in the 2006 survey. Of the eleven 
plants, the witness classified seven as small plants and the remaining 
four as large volume plants. The witness testified that the weighted 
average manufacturing cost of the 2006

[[Page 35310]]

cheese plant sample was $0.1584 per pound, a decrease of $0.0054 per 
pound from 2005. The witness said that comparing the costs for the 
eight plants that participated in both surveys revealed a weighted 
average cost increase of $0.017 per pound between the 2005 and 2006 
surveys. The total pounds covered by the 2006 survey increased from 
approximately 60 million pounds in 2005 to nearly 119 million pounds in 
2006. The Cornell witness asserted that the 2005 survey over-sampled 
small plants while the 2006 survey over-sampled large plants. The 
witness noted that the average packaging cost for cheese in the 2006 
survey was only for 40-pound block production. If a plant produced 
barrel cheese the witness assigned it an average 40-pound block 
packaging cost before computing the average manufacturing costs for the 
entire sample.
    The Cornell witness said that seven whey plants participated in the 
2006 survey and their weighted average cost was $0.1976 per pound--an 
increase of $0.0035 per pound from the 2005 survey. According to the 
witness, the seven participating whey plants were associated with a 
cheese plant that was also included in the 2006 survey. The witness 
noted that 12 whey plants participated in the 2005 survey.
    The Cornell witness said that four butter plants participated in 
the 2006 survey; three of the plants also participated in the 2005 
survey. The weighted average cost of the four plants was $0.1846 per 
pound, an increase of $0.0738 per pound over the 2005 survey. The 
survey accounted for 57.6 million pounds of butter. The witness 
testified that significant cost allocation problems and data quality 
problems with the 2005 butter data were major reasons for the large 
increase in the weighted average cost from 2005 to 2006. The witness 
testified that the 2005 survey butter data was not accurate, but 
asserted that the allocation problems were corrected in the 2006 
survey. While maintaining that the 2006 survey data was reliable, the 
witness said that a larger sample size would have been preferred. The 
witness also noted that the manufacturing costs submitted by one of the 
butter plants in the 2006 survey did include the cost of transporting 
cream from its drying plant to its butter plant.
    The Cornell witness said that the 2006 survey for NFDM consisted of 
seven of the eight NFDM plants that participated in the 2005 survey. 
According to the witness, the weighted average cost of the seven plants 
was $0.1662 per pound, an increase of $0.0239 per pound from 2005. The 
witness explained that the weighted average cost increase is partially 
explained by increases in real costs (labor, packaging, etc.), but also 
partly because of a change in the methodology of indirectly allocating 
costs between butter and NFDM. According to the witness, there were 
flaws in the method used to indirectly allocate costs for NFDM in the 
2005 study that resulted in understating the cost of processing NFDM. 
The witness claimed that an attempt was made in the 2006 survey to 
correct this understated processing cost. The witness did not explain 
the reported flawed methodology or the methodological changes for 2006. 
According to the witness, the 2006 survey accounted for 70.1 million 
pounds of NFDM, an increase of 15 million pounds.
    A witness appearing on behalf of Agri-Mark testified in support of 
Proposals 1 and 2. The witness explained that Proposal 1 seeks to 
update the make allowances adopted on an interim final basis (71 FR 
78333), effective March 1, 2007, using 2005 CDFA data. The witness 
asserted that this update would increase the butter, NFDM and cheese 
make allowances by $0.0014, $0.0092 and $0.0029 per pound, 
respectively. The witness was of the opinion that the dry whey make 
allowance should incorporate the 2005 CDFA data which reflects an 
average cost of $0.2851 per pound.
    The witness reiterated Agri-Mark's position expressed in comments 
to the tentative final decision (71 FR 67467) that proposed adoption of 
the current make allowances. The witness concluded that using this 
weighting methodology (including a $0.0015 per pound marketing cost 
factor) the resulting make allowances should be: $0.1780 per pound for 
cheese, $0.1351 per pound for butter, $0.1510 for NFDM and $0.2090 per 
pound for dry whey.
    The Agri-Mark witness conceded that increasing the make allowances 
would assist high-cost plants in covering their costs while creating a 
financial windfall for low-cost plants. In turn, the witness said, the 
low-cost plants could use the additional revenue to sell products at a 
lower cost, pay producers a higher price, or increase their financial 
returns. The witness said that any financial gains low-cost plants in 
the Southwest earn from a high make allowance would not harm high-cost 
plants in the Northeast because it is too costly to transport milk from 
the Southwest to the Northeast. The witness believed that competitive 
issues resulting from high make allowances would only arise if a low-
cost plant was located next door to a high-cost plant that competes for 
the same milk supply.
    The Agri-Mark witness advanced Proposal 2 seeking to establish an 
annual manufacturing cost survey, administered by USDA that would 
automatically update make allowances without requiring a rulemaking 
proceeding. On brief, Agri-Mark withdrew the automatic updating portion 
of this proposal. The witness explained that manufacturing input prices 
fluctuate in the short-run and an annual survey would ensure the 
timelier recognition of these fluctuations in make allowances. The 
witness said that the CPDMP survey should provide the basic methodology 
needed to conduct the survey and that any changes to the methodology 
should be done through the formal rulemaking process. The witness 
asserted that the survey should be administered by market administrator 
audit personnel and the plant sample, preferably larger than the CPDMP 
sample, should be selected by random sampling. The witness also 
supported auditing surveyed plants and asserted that this function 
should be funded by payments from the Market Administrator's 
administrative assessment fund. The witness said that if the survey was 
audited, the use of CDFA cost data would no longer be necessary in 
determining make allowances. The witness also supported addressing the 
proposed manufacturing cost survey in a recommended decision to allow 
for public comments.
    The Agri-Mark witness was of the opinion that based on the new 
CPDMP survey the make allowances should be set at the higher of: (1) A 
level that would allow a minimum of 80 percent of the producer milk 
used by Class III and Class IV plants to cover their costs; or (2) a 
level that would allow a minimum of 25 percent of the producer milk 
volume used by Class III and Class IV plants in any specific Federal 
order annually pooling at least 4 billion pounds of milk to cover their 
costs. The Agri-Mark witness opposed Proposal 3.
    A witness appearing on behalf of Land O'Lakes (LOL) testified in 
support of Proposals 1 and 2. According to the witness, LOL is a 
Capper-Volstead cooperative with over 3,000 members that own 4 
manufacturing plants in the United States. The witness supported 
updating the current make allowances with 2005 CDFA manufacturing cost 
data as advanced in Proposal 1. The witness advocated that the audited 
CDFA whey manufacturing cost data be included in the whey make 
allowance computation. The witness asserted that the make allowances 
should be recalculated by weighting the CDFA and

[[Page 35311]]

CPDMP data by the survey sample volumes, not national product volumes 
which the witness argued was not statistically valid. The witness 
concluded that the new make allowances (using LOL's proposed weighting) 
should be as follows: $0.1780 for cheese; $0.2090 for dry whey; $0.1560 
for NFDM; and $0.1351 for butter.
    The LOL witness supported the annual cost survey offered in 
Proposal 2, with technical modifications. The witness stated that the 
authority for collecting plant cost data should be granted to the AMS 
Administrator, that the plant sample be limited to plants located 
outside of California that receive pooled (producer) milk, and that the 
survey results are combined with the CDFA data to determine appropriate 
Federal order make allowance levels. The witness opposed the portion of 
Proposal 2 that would set make allowances at a level that would cover 
the cost of manufacturing for the highest cost Federal order marketing 
area. The witness said that classified prices are determined on a 
national, not a regional basis, and therefore relying on regional costs 
is inappropriate. The witness was of the opinion that USDA should 
clearly identify the target product volume and percentage of plants 
that should be covered by new make allowances that result from this 
proceeding.
    The LOL witness opposed Proposal 3 seeking to exclude CDFA 
manufacturing cost data when computing new make allowances. The witness 
argued that since 2000 the Department has continuously considered CDFA 
manufacturing cost data when determining new make allowance levels and 
asserted that there is no justification to modify that policy. The 
witness elaborated that classified prices are determined using a 
national survey that includes California plants and therefore including 
California plant costs when determining make allowance levels is 
appropriate.
    A witness testifying on behalf of Michigan Milk Producers 
Association (MMPA) testified in support of Proposals 1 and 2, and in 
opposition to Proposal 3. According to the witness, MMPA is a Capper-
Volstead cooperative with approximately 2,400 members that markets 3.5 
billion pounds of milk annually and operates 2 manufacturing plants. 
The witness offered support for Proposal 1 to update the make 
allowances based on the most currently available data, specifically the 
2005 CDFA manufacturing cost data. The MMPA witness stressed support 
for Proposal 2's annual survey of manufacturing costs that would be 
administered by AMS through its market administrators.
    A witness appearing on behalf of NDA testified regarding the CPDMP 
2005 survey that was used to determine current make allowance levels. 
The witness said that NDA participated in the study and that costs for 
its NFDM plants were incorrectly allocated. The witness estimated that 
NDA's NFDM production represented approximately 54 percent of the total 
volume contained in the CPDMP 2005 survey for NFDM. In the survey, 
cream costs were allocated on a butterfat solids basis rather than as a 
percent of total solids, the witness said. However, according to the 
witness NDA's NFDM plants separate the cream that is stored in silos to 
be sold or transported to its butter manufacturing plant resulting in 
an over-allocation of costs to cream in the CPDMP 2005 survey. 
According to the witness, this misallocation inaccurately lowered NDA's 
NFDM manufacturing costs by $0.036 per pound. The witness asserted that 
after correcting for this error, the CPDMP 2005 survey for NFDM 
weighted average cost should been $0.019 per pound higher. The witness 
urged USDA to issue an emergency decision addressing make allowances 
because of the errors contained in the CPDMP 2005 survey.
    A post-hearing brief was filed on behalf of Agri-Mark, Foremost 
Farms USA, LOL, MMPA, NDA and Associated Milk Producers, Inc., 
hereinafter referred to as Agri-Mark, et al. The members of Agri-Mark, 
et al., are all Capper-Volstead cooperatives who market their members' 
milk in the Federal order system and operate manufacturing plants.
    The Agri-Mark, et al., brief emphasized its support for product-
price formulas because, in their opinion, no truly independent 
competitive price series exists to determine milk prices. The brief 
summarized the evolution of the Federal order pricing system and 
asserted that USDA's past policy has been to set make allowances at 
levels that cover the processing costs for most Federal order plants. 
The brief expressed the opinion that USDA deviated from this policy 
when determining current make allowance levels.
    The Agri-Mark, et al., brief supported adoption of Proposal 1 and 
argued that make allowances should be updated using the 2005 CDFA and 
the CPDMP 2006 surveys. Agri-Mark, et al., was of the opinion that USDA 
should continue to use the same national product volume weighting 
methodology that determined the current make allowances, incorporate 
CDFA whey cost data, use the CPDMP 2005 survey cheese plant population 
average cost instead of the sample average cost and continue to include 
a marketing cost factor of $0.0015 per pound in each make allowance.
    In their post-hearing brief, Agri-Mark, et al., proposed that the 
cheese make allowance be set at $0.2154 per pound. Agri-Mark, et al., 
wrote that the CPDMP 2005 survey cheese plant population average of 
$0.2028 per pound was the most representative of average size plants 
and therefore it is the best available information to determine an 
appropriate cheese make allowance. Agri-Mark, et al., endorsed the 
methodology explained in the IDFA brief that derived a cheese make 
allowance of $0.2154 per pound.
    The Agri-Mark, et al., brief proposed a dry whey make allowance of 
$0.2080 per pound by combining the 2005 CDFA and the CPDMP survey of 
2006 weighted average costs. Using this same methodology, the brief 
proposed a butter make allowance of $0.1725 per pound and the NFDM make 
allowance of $0.1782 per pound (though stipulating that the CDFA 
medium-sized plant cost should be used for NFDM.) The brief summarized 
the Cornell witness' testimony regarding the errors with the 2005 
butter and NFDM survey methodology and concluded that the current make 
allowances that were determined with this data are unrepresentative of 
actual costs. Agri-Mark, et al., requested that Proposal 1 be adopted 
on an emergency basis to rectify the current unrepresentative make 
allowances.
    In their brief, Agri-Mark, et al., expressed support for the 
portion of Proposal 2 that would authorize USDA to develop and conduct 
periodic manufacturing cost surveys of plants located outside of 
California. The brief explained that this data could then be relied 
upon in future rulemaking proceedings to amend the product price 
formulas.
    A witness testified on behalf of DPNM, Select Milk Producers, Inc. 
(Select), and Continental Dairy Producers, Inc. (Continental). 
Hereinafter, these entities will be referred to as DPNM, et al. The 
witness said that Select and Continental are Capper-Volstead 
cooperatives whose members are located in New Mexico, Texas, Kansas, 
Ohio, Michigan and Indiana. According to the witness, the DPNM, et al., 
testimony was endorsed by Lone Star Milk Producers and Zia Milk 
Producers, Inc., who are also Capper-Volstead cooperatives.
    The DPNM, et al., witness testified in support of Proposal 3. The 
witness was

[[Page 35312]]

of the opinion that CDFA cost data should not be used to determine new 
make allowance levels because the data are only representative of 
California manufacturing plants which the witness asserted have higher 
manufacturing costs than the rest of the country. The witness testified 
that CDFA data had been utilized in the past when make allowances were 
determined using Rural Business Cooperative Service (RBCS) cost data 
because the audited CDFA data broadened the available data and was used 
to verify the information contained in the RBCS study. However, the 
witness insisted that the CPDMP cost surveys are far more 
representative of the population of manufacturing plants and should now 
be relied upon as the sole determinant of make allowances.
    The DPNM, et al., witness testified that make allowances should be 
set at the following levels: $0.1108 per pound for butter; $0.1638 per 
pound for cheese; $0.1410 per pound for NFDM; and $0.1500 per pound for 
dry whey. The witness stated that except for dry whey, the proposed 
make allowances are identical to the weighted average costs contained 
in the CPDMP 2005 survey. The witness proposed that the dry whey make 
allowance be determined by adding $0.0090 per pound to the NFDM make 
allowance to account for the additional energy needed to produce dry 
whey. The witness estimated that if the DPNM, et al's., proposed make 
allowances are adopted, blend prices would increase by $0.22 per cwt.
    A second witness, a dairy accountant and dairy farmer appearing on 
behalf of DPNM, et al., testified regarding dairy farm operating costs, 
accounting, and business analysis of large modern dairy farm 
operations. According to the witness, the firm provides accounting and 
other business services to dairy producer operations in 27 states whose 
production volume represents about 10 percent of the milk produced in 
the United States. The witness testified that based on data collected 
during the 1990's, large dairy farms in six Western states had an 
average annual net profit per cwt of $1.31. The witness testified that 
based on 10 years' worth of client data, dairy farms in the west and 
eastern states must earn a net income of $1.50 and $2.00 per cwt, 
respectively, for a dairy farmer to collect a salary and retire debt. 
The witness predicted that for 2007 producer client average gross 
income of $15.51 per cwt and an average cost of production of $15.17 
per cwt, would yield an average net profit of $0.34 per cwt. The 
witness said that this was far from the $1.50 per cwt net profit needed 
for their clients to reduce debt or cover living expenses.
    The second DPNM, et al., witness stated that low milk prices in 
2005 reduced dairy farm client income to an average of $206 per cow. 
The witness noted that during the 1990s, average production cost per 
cwt in western states was $11.87 but this has risen to $13.50 for 2004-
2005. The witness testified that rising input costs combined with lower 
milk prices in 2004-2005 made large-scale, highly efficient dairy 
farming unprofitable, even in low-cost operating areas such as west 
Texas and New Mexico. The witness provided additional testimony to show 
that increasing make allowances depressed dairy farmer income during a 
period of increasing costs and reduced opportunities for profitability. 
The witness supported this testimony with 2006 client data showing that 
a farm milking 1,800 cows would have lost $284,000. The witness 
provided detailed client data showing that the major higher-cost milk 
production factors during 2005 and 2006 were increased energy and feed 
costs.
    A third witness, a dairy farmer, appearing on behalf of DPNM, et 
al., testified in support of Proposal 3. The witness operates a farm in 
New Mexico that milks approximately 3,800 cows and testified that they 
have been receiving $1.50 cwt below the Southwest order's blend price 
because of hauling costs. The witness said that over the last few years 
any increase in producer milk prices has been consumed by rapidly 
increasing production costs. The witness supported all proposals 
submitted by DPNM and articulated opposition to adoption of Proposals 1 
and 2.
    The DPNM, et al., post-hearing brief explained its opposition to 
all other proposals included in the hearing to adjust the make 
allowances was based on three principles: (1) The data used to 
determine the appropriate level of manufacturing allowances for 
establishing Federal order prices should be drawn from plants operating 
within the Federal order system; (2) adjustments to Federal order 
pricing regulations should always be subject to formal rulemaking; and 
(3) make allowances should be set at a level deemed appropriate by 
USDA, after taking into consideration all statutorily required factors 
and current milk marketing conditions, rather than prescribed 
geographic or volumetric factors. The brief explained why the CPDMP 
2005 survey is the best data available and met their criteria for use 
in establishing Federal order make allowances and why the 2006 survey 
is flawed and should not be relied upon in determining make allowances.
    A witness appearing on behalf of IDFA testified in support of 
Proposal 1 and the annual manufacturing cost survey advanced in 
Proposal 2. However, the witness did not support adoption of the 
portion of Proposal 2 that would result in the automatic update of make 
allowances. The witness requested emergency adoption of Proposal 1 and 
this request was reiterated in IDFA's post-hearing brief.
    The IDFA witness testified that the product-price formulas 
determine the minimum prices manufacturers must pay for their raw milk 
and that those whose costs exceed the fixed make allowances in the 
price formulas are unable to recoup their higher costs. The witness 
asserted that any increase in the manufacturer's end product prices 
would only result in an increase in the minimum raw milk price they 
must pay. According to the witness, manufacturers also face financial 
problems if any of the product-price formula factors are incorrect. The 
witness illustrated by example the impacts of both inaccurate product 
prices and inaccurate make allowances on manufacturers.
    The IDFA witness testified that before January 1, 2000, the Federal 
order system utilized a market-based pricing system which automatically 
reflected current market conditions. However, under the end product 
pricing system, market factors (e.g. yields, butterfat retention) are 
set at a point in time and can only be changed through the formal 
rulemaking process, the witness said.
    The IDFA witness espoused that setting make allowances too high or 
yield factors too low may result in low milk prices but that should not 
be of concern to USDA. In this regard, the witness was of the opinion 
that the Federal order system should only determine minimum prices and 
allow market responses through over-order premiums to remedy any 
regulated prices that are too low. However, the witness conceded that 
if a plant can manufacture products at costs lower than those reflected 
by the price formula make allowance levels then the difference could be 
used to make plant investments, secure a larger milk supply to the 
detriment of higher-cost plants or return higher margins to plant 
owners.
    The IDFA witness testified in support of updating the current make 
allowances with the most current cost data available (Proposal 1). The 
witness was of the opinion that the CDFA dry whey cost data should be a 
factor in determining a new dry whey make allowance for Federal orders. 
The

[[Page 35313]]

witness asserted that the CDFA average dry whey plant size more closely 
resembled the NASS average dry whey plant size than did the CPDMP 
survey. Furthermore, the witness asserted that the CDFA dry whey data 
was skewed toward low cost plants, not high cost plants as asserted by 
USDA. The witness maintained that using the CDFA data in determining 
the dry whey make allowance would not cause the make allowance to be 
set too high. The witness concluded that both the CDFA and CPDMP dry 
whey weighted average costs should be used to determine the dry whey 
make allowance and reiterated this position in its post-hearing brief.
    Also in its post-hearing brief, IDFA stated that any decision made 
by USDA on the Class III and Class IV pricing formulas should not 
directly consider hearing testimony regarding dairy farmer cost-of-
production. The brief asserted that it is already captured indirectly 
through the supply and demand for manufactured products and therefore 
should not be given additional consideration in this proceeding.
    The IDFA witness testified that USDA needs to correct for CPDMP's 
stratified cheese plant sampling which in IDFA's opinion over-
represents low-cost cheese plants. The witness highlighted testimony of 
the Cornell witness which compared the eight cheese plants that 
participated in both surveys revealing an average manufacturing cost 
increase of 1.7 cents per pound. IDFA was of the opinion that since the 
same cheese plant sample was not used in the two CPDMP surveys, the 
most appropriate method for determining a new cheese make allowance 
would be to use the weighted average cost from the 2005 survey 
($0.2028) plus 1.7 cents for a total of $0.2198 per pound. In its 
brief, IDFA concluded that the new make allowances should be set no 
lower than the following: $0.2154 per pound for cheese; $0.1725 per 
pound for butter; $0.1782 for NFDM; and $0.2080 for dry whey.
    The IDFA witness supported adopting an annual manufacturing cost 
survey as contained in Proposal 2 but opposed any automatic updating of 
make allowances. The witness said that an annual survey would provide 
industry participants information regarding trends in plant costs and 
such information could be used in future hearings to adjust make 
allowances. However, the witness did not support automatically updating 
make allowances outside of the hearing process because it would 
prohibit industry input regarding how the data should be utilized. IDFA 
reiterated these views in its post-hearing brief.
    The IDFA witness testified in opposition to Proposal 3. The witness 
argued that audited CDFA data should continue to be included when 
determining new make allowance levels. The witness asserted that the 
elimination of the CDFA data would result in lower make allowances that 
in their opinion are already too low. In its post-hearing brief, IDFA 
asserted that the proponents of Proposal 3 had presented no evidence 
that manufacturing costs have decreased to levels similar to the 
manufacturing costs reflected in make allowances that were effective 
prior to February 1, 2007.
    A witness appearing on behalf of Lactalis American Group, Inc. 
(Lactalis) testified in support of Proposal 1 and in opposition to 
Proposal 3. According to the witness, Lactalis operates six cheese 
plants in the United States. The witness expressed support for IDFA's 
positions. The witness said that the Class III and Class IV product-
price formulas should be amended to give more flexibility to market 
participants in establishing market prices. The witness was of the 
opinion that increasing make allowances by adopting Proposal 1 would 
give processors the flexibility to make short-term adjustments in 
response to changing market conditions. The witness argued that the 
increasing milk supply, not make allowances which are too high, is the 
cause of low milk prices received by dairy farmers. Therefore, the 
witness opposed any proposals that would result in lower make 
allowances.
    A witness appearing on behalf of Leprino testified in opposition to 
Proposal 3 stating that there is no basis to set make allowances below 
current levels. According to the witness, Leprino operates nine 
manufacturing plants throughout the United States that produce Italian 
style cheeses. The post-hearing brief filed by Leprino expressed 
support for the make allowances proposed in IDFA's post-hearing brief. 
Leprino was of the opinion that make allowances should be set no lower 
than the following: $0.2154 for cheese; $0.2080 for dry whey; $0.1725 
for butter; and $0.1782 for NFDM.
    A witness appearing on behalf of Saputo Cheese USA (Saputo), a 
dairy manufacturer, testified in support of IDFA's positions. The 
witness testified that Saputo opposed any proposal which would add 
complexity to the Federal milk order system. The witness supported 
updating the current make allowances to reflect the most current 
available data as sought in Proposal 1 and that updated make allowances 
for dry whey should use CDFA data.
    A post-hearing brief filed on behalf of Twin County Dairy (Twin 
County), an Iowa-based cheese manufacturer, expressed support for the 
proposals offered by IDFA and Agri-Mark that seek to increase make 
allowances. However, the brief asserted that the proposals do not go 
far enough to ensure that medium-sized plants such as those operated by 
Twin County remain profitable. The brief argued that the proposed make 
allowances are heavily weighted toward large, low-cost plants and their 
adoption, especially the dry whey make allowance, would cause financial 
hardship on many cheese manufacturing plants that are similar in size 
to Twin County. Twin County insisted that even though product-price 
formulas are applied identically to large and small plants, USDA should 
conduct a regulatory impact analysis because in Twin County's opinion, 
product-price formulas have a disproportionate impact on small 
businesses compared with larger entities that may benefit from 
advantages of economies of scale.
    A witness appearing on behalf of HP Hood LLC (HP Hood) testified in 
opposition to Proposals 1, 2 and 3. According to the witness, HP Hood 
is a manufacturer of Class I and Class II dairy products that are 
distributed nationally. The witness opposed Proposals 1, 2 and 3 
because their adoption would change the Class III and Class IV milk 
pricing formulas that in turn are used to determine the Class I and 
Class II prices that HP Hood pays for its raw milk supply. The witness 
opposed adoption of any proposal that would result in the automatic or 
periodic updating of the Class III and Class IV pricing formulas 
arguing that such updates should be made through the formal rulemaking 
process.
    A witness appearing on behalf of NAJ offered an amendment to 
Proposal 2. The witness said the amendment would expand the 
manufacturing cost survey to include gathering manufacturing cost data 
for whey protein concentrates (WPC's) and lactose. This inclusion was 
reiterated in NAJ's post-hearing brief.
    A Michigan dairy farmer testified regarding the profitability of 
dairy farmers and in opposition to adopting any proposals that would 
increase make allowances. The witness was opposed to increasing make 
allowances until the price formulas are amended to recognize a farmer's 
cost of production. The witness stated that on-farm fuel costs were 
$35,000 in 2004 and had risen to $70,000 in 2006. The witness asserted 
that there are many Michigan dairy farmers considering leaving the 
dairy industry because of increased costs and low milk prices. The 
witness also

[[Page 35314]]

expressed the opinion that NASS NFDM prices were misreported or under-
reported during the prior 12 months.
    A post-hearing brief submitted on behalf of O-AT-KA Milk Products 
Cooperative, Inc., (O-AT-KA) expressed support for Proposals 1 and 2, 
and opposition to Proposal 3. According to the brief, O-AT-KA is a 
Capper-Volstead cooperative located in New York and its plant 
manufactures 600 million pounds of milk annually into butter and NFDM. 
The brief stressed that changes to the make allowances and other 
factors of the product price formulas need to accurately represent the 
current manufacturing market. O-AT-KA expressed support for Proposal 1 
and was of the opinion that the CPDMP 2006 survey should be considered 
a minimum when setting make allowances. According to the brief, O-AT-
KA's plant manufacturing costs are higher than the CPDMP 2006 survey 
weighted average NFDM cost. O-AT-KA also wrote that they compete 
directly with California plants and requested that USDA should keep the 
Class IV and California Class 4a prices aligned if it recommends any 
changes to the product price formulas. O-AT-KA noted support for 
Proposal 2, but not the portion that calls for automatically updating 
make allowances. The O-AT-KA brief opposed adoption of Proposal 3 
because it would inhibit their ability to provide balancing services to 
the market and a fair return to its member-owners.
    A joint post-hearing brief filed on behalf of Dairylea and DFA, 
hereinafter referred to as Dairylea, et al., opposed adoption of 
Proposals 1 and 2. The brief opined that the current make allowances 
should be used with the addition of the energy adjustor advanced in 
Proposal 17 and cost add-ons described in Proposal 20. The Dairylea, et 
al., brief supported the NAJ modification of Proposal 2 to expand the 
NASS product price survey to include information on whey protein 
concentrates.
2. Product Yields and Butterfat Recovery Percentage
    A witness appearing on behalf of DPNM, et al., testified in support 
of Proposals 6, 7 and 8. The witness testified that before January 1, 
2000, the Federal milk order price discovery mechanism took into 
account dairy farmers' cost of production when determining minimum 
regulated prices. If farmers' costs of production increased, the 
witness said that manufacturers were able to pay farmers higher prices 
because on-farm production costs could be passed on to their customers. 
However, under the current pricing system, the witness argued, minimum 
prices to dairy farmers are based on the average prices of dairy 
products sold nationally during the month. As a result, the witness 
asserted, dairy farmers have experienced financial hardship because 
they are unable to pass on their higher costs to the marketplace.
    The DPNM, et al., witness was of the opinion that Proposals 6, 7 
and 8 should be considered jointly as coordinated adjustments to the 
various yield factors to ensure that dairy farmers receive a fair 
minimum price. In its post-hearing brief, DPNM, et al., added that 
Proposals 3 and 15 also should be considered in conjunction with 
Proposals 6, 7 and 8 because together they address all parts of the 
current product price formulas.
    The DPNM, et al., witness testified in support of Proposal 6 
seeking to increase the butterfat yield factor from 1.20 to 1.211. The 
witness said that this change would correct for a mathematical error in 
calculating farm-to-plant shrinkage. The witness explained that in the 
2002 final decision that established the current farm-to-plant 
shrinkage factor, shrinkage allocated to butterfat loss should have 
been calculated on a per cwt of milk basis, not on a per pound of 
butterfat basis. DPNM, et al., noted on brief that no witnesses at the 
hearing disagreed with this assertion.
    The DPNM, et al., witness also offered a modification to Proposal 6 
seeking to amend the butterfat credit in the protein price. The witness 
explained that when USDA adjusted the butterfat yield factor in the 
protein price formula to 1.572 in 2002 to account for farm-to-plant 
shrinkage, the butterfat credit portion of the protein formula was not 
adjusted to an equivalent of 89.4 percent. The witness estimated that 
increasing the butterfat yield factor from 1.20 to 1.211 and decreasing 
the butterfat credit portion of the protein