Milk in the Northeast and Other Marketing Areas; Final Decision on Proposed Amendments to Tentative Marketing Agreements and to Orders and Termination of Proceeding, 78917-78925 [E8-30697]

Download as PDF 78917 Rules and Regulations Federal Register Vol. 73, No. 248 Wednesday, December 24, 2008 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. This section of the FEDERAL REGISTER contains regulatory documents having general applicability and legal effect, most of which are keyed to and codified in the Code of Federal Regulations, which is published under 50 titles pursuant to 44 U.S.C. 1510. SUPPLEMENTARY INFORMATION: The Code of Federal Regulations is sold by the Superintendent of Documents. Prices of new books are listed in the first FEDERAL REGISTER issue of each week. Small Business Consideration 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–A76, et al.; DA–07–01; AMS–DA–07–0116] Milk in the Northeast and Other Marketing Areas; Final Decision on Proposed Amendments to Tentative Marketing Agreements and to Orders and Termination of Proceeding AGENCY: Agricultural Marketing Service, USDA. ACTION: Final decision and termination of proceeding. 7 CFR part pwalker on PROD1PC71 with RULES 1001 1005 1006 1007 1030 1032 1033 1124 1126 1131 .... .... .... .... .... .... .... .... .... .... Marketing area AO Nos. Northeast .............. Appalachian .......... Florida ................... Southeast ............. Upper Midwest ..... Central .................. Mideast ................. Pacific Northwest .. Southwest ............. Arizona ................. AO–14–A76 AO–388–A20 AO–356–A41 AO–366–A49 AO–361–A42 AO–313–A51 AO–166–A75 AO–368–A37 AO–231–A70 AO–271–A42 SUMMARY: We are denying proposals that would have increased Class I and Class II prices and modified the formulas used to determine Class I and II prices in all Federal milk marketing orders. This document terminates the proceeding on the five proposed amendments. DATES: Effective December 29, 2008. FOR FURTHER INFORMATION CONTACT: Gino Tosi, Associate Deputy Administrator for Order Formulation and Enforcement, USDA/AMS/Dairy Programs, Stop 0231–Room 2971, 1400 Independence Avenue, SW., Washington, DC 20250–0231, (202) 720– 2357, e-mail: gino.tosi@usda.gov. VerDate Aug<31>2005 19:28 Dec 23, 2008 Jkt 217001 Actions under the Federal milk order program are subject to the Regulatory Flexibility Act (5 U.S.C. 601 et seq.). This Act seeks to ensure that, within the statutory authority of a program, the regulatory and information collection requirements are tailored to the size and nature of small businesses. For the purpose of the Act, a dairy farm is 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 (13 CFR 121.201). Most parties subject to a milk order are considered as a small business. 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. USDA has identified that during 2005 approximately 51,060 of the 54,652 dairy producers whose milk is pooled on Federal orders are small businesses. Small businesses represent about 93 percent of the dairy farmers who participate in the Federal milk order program. On the processing side, during June 2005 there were approximately 350 fully regulated plants (of which 149 or 43 percent were small businesses) and 110 partially regulated plants (of which 50 or 45 percent were small businesses). In addition, there were 48 producerhandlers, of which 29 were considered small businesses for the purposes of the initial regulatory flexibility analysis, who submitted reports under the Federal milk order program during this period. PO 00000 Frm 00001 Fmt 4700 Sfmt 4700 The fluid use of milk represented more than 45.0 percent of total Federal milk marketing order producer deliveries during January 2006. Almost 237 million Americans, approximately 80 percent of the total U.S. population reside within the geographical boundaries of the 10 Federal milk marketing areas. Because this action terminates the rulemaking proceeding without amending the present rules, the economic conditions of small entities remain unchanged. Also, this action does not change reporting, record keeping, or other compliance requirements. Preliminary Economic Analysis The Notice of Hearing in this proceeding contained a Preliminary Economic Analysis. The analysis is available at http://www.ams.usda.gov/ dairy/hearings.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 November 17, 2006; Published November 22, 2006 (71 FR 67489). Statement of Consideration A public hearing was held December 11–15, 2006, in Pittsburgh, PA, with respect to proposed amendments to the tentative marketing agreements and to the orders regulating the handling of milk in all marketing areas. The hearing was called pursuant to the provisions of the Agricultural Marketing Agreement Act of 1937, as amended (7 U.S.C. 601–674), and the applicable rules of practice and procedure governing the formulation of marketing agreements and marketing orders (7 CFR Part 900). The purpose of the hearing was to receive evidence with respect to the economic and marketing conditions that relate to the proposed amendments to the tentative marketing agreements and to the orders. The hearing was held at the request of the National Milk Producers Federation (NMPF), a trade group representing dairy farmers and dairy farmer cooperatives, to consider proposals that would have increased Class I and Class E:\FR\FM\24DER1.SGM 24DER1 78918 Federal Register / Vol. 73, No. 248 / Wednesday, December 24, 2008 / Rules and Regulations pwalker on PROD1PC71 with RULES II prices and modified the formulas used to determine Class I and Class II prices. Consideration of the proposals was requested on an emergency basis. Summary of Testimony NMPF submitted five proposals that were addressed in this proceeding. The proposals would: (1) Increase the Federal order minimum Class I milk price by $0.77; (2) Utilize an ‘‘advanced cheese skim milk price’’, or (3) An ‘‘advanced butter powder skim milk price’’ and a modified advanced butterfat price as replacements to the advance Class III and IV skim milk prices; (4) Modify the calculation of the Class II skim price; and (5) Modify the calculation of the Class II butterfat price. Proponents testified that dairy farmers have experienced an extended period of below-average milk prices, high production costs and low farm returns. NMPF is of the opinion that the formulas used to price milk used in Class I and II products are outdated and inadequate to ensure orderly marketing conditions. NMPF is also of the opinion that although Class I and II prices move in concert with Class III and IV prices, they do so in a way that does not properly consider the costs of supplying fluid milk to the market. NMPF supports adoption of Proposals 1–5 to compensate dairy farmers for increases in the costs borne in supplying the fluid milk needs of the market. NMPF is of the opinion that adoption of Proposals 1–5 will help maintain the appropriate relationship between class prices and dairy product prices. Proposal 1 would increase the Federal order minimum Class I price by $0.77 while eliminating reference to the advanced Class III and Class IV skim milk prices in the Class I skim milk price formula. Proponents argue that an increase in the Class I price is necessary to reflect increased costs faced by dairy farmers in supplying the Class I market. The witness argued that the increased costs of maintaining a ‘‘Grade A’’ dairy farm along with marketing and transportation costs justify a $0.77 per hundredweight (cwt) increase in the Class I price. Specifically, NMPF testified that increased costs of maintaining Grade A status on dairy farms require a $0.15 per cwt increase, increased ‘‘marketing’’ costs require a $0.23 per cwt increase and increased ‘‘competitive factor’’ costs require a $0.39 per cwt increase. Proposal 1 would replace the current Class I price mover (the higher of the Class III or Class IV price) with the higher of either: A. Nonfat dry milk price × 8.9 ¥ $0.63; or VerDate Aug<31>2005 19:28 Dec 23, 2008 Jkt 217001 B. Cheese price x 10.0 + Dry whey price × 6.1 ¥ Butter Price × 3.9 ¥ 1.63. The NMPF witness stated that the costs of establishing and maintaining ‘‘Grade A’’ status on dairy farms have increased. The witness was of the opinion that since the Class I price is intended to compensate producers for establishing and maintaining Grade A status, increases in the costs of establishing and maintaining Grade A status should be reflected in the Class I price. The witness presented USDA Economic Research Service (ERS) data that showed a 38 percent increase in ‘‘non-feed’’ costs for dairy farmers, including labor and utility expenses. The NMPF witness also presented a study published by the University of Wisconsin-Madison in 1977 1 detailing some of the costs associated with maintaining a Grade A dairy farm. The witness opined that many of the cost factors outlined in the 1977 study are the same type of costs faced by Grade A dairy farmers in 2006. The witness estimated that increases in non-feed costs of milk production including hot water, animal bedding and other supplies, justify a $0.15 increase in the Class I minimum price. The witness also cited increases in ‘‘marketing’’ costs to justify increasing the Class I price. Specifically, the witness was of the opinion that the costs of assembling, balancing and transporting milk to meet minimum delivery standards have increased. The NMPF witness stated that energy and processing costs to dairy farmer cooperative owned manufacturing plants have also increased, and should be offset by an increase in the Class I minimum price. The witness testified that supply plants often sacrifice profits in order to meet the demands of the Class I and II market. The NMPF witness added that shifts in the location of milk production and consolidation of manufacturing plants require longer hauls to Class I plants. The witness estimated that an increase in the minimum Class I price of $0.23 per cwt is necessary to offset these increased marketing costs. The NMPF witness testified that other ‘‘competitive factor’’ costs have also increased. These costs reflect the amount of money that distributing plants are willing to pay to assure adequate supplies of milk. The witness stated that recent increases in over-order premiums demonstrate an increased ‘‘competitive factor,’’ which justifies the 1 Frank, Gary G., G.A. Peterson, and Harlan Hughes. ‘‘Class I Differential: Cost of Production Justification’’, in Economic Issues, Number 8, April 1977. PO 00000 Frm 00002 Fmt 4700 Sfmt 4700 need for an increase in the minimum Class I price. The witness testified that increasing levels of over-order premiums indicate inadequate Class I prices to attract supplies of milk to fluid distributing plants, and that while certain ‘‘load-specific’’ costs are best addressed by over-order premiums, other costs should be covered by the regulated minimum Class I price. The witness, relying on Market Administrator data, added that overorder premiums have increased nearly 65 percent from 1995 to 2005 in the states of Minnesota and Wisconsin. The witness was of the opinion that increases in over-order premiums justify an increase of $.39 per cwt in the minimum Class I price. Proposals 2 and 3 detail the specific changes necessary to utilize the proposed formula in Proposal 1. Proposals 2 and 3 would implement an advanced ‘‘cheese skim milk price’’ per cwt, an ‘‘advanced butter-powder skim milk price’’ per cwt and an ‘‘advanced butterfat price’’ per pound to replace the current advanced Class III and Class IV skim milk prices per cwt. Proposal 2 would change the current advanced Class III skim milk pricing factor per cwt to an advanced cheese skim milk price per cwt factor. The cheese skim milk pricing factor per cwt would be determined by: (a) Multiplying the weighted average of the 2 most recent NASS average weekly prices for block and barrel cheese by 10; multiplying the weighted average of the 2 most recent NASS average weekly survey prices for dry whey announced before the 24th day of the month times 6.1; (b) Multiplying the weighted average of the 2 most recent NASS weekly survey prices for butter announced before the 24th day of the month times 3.9; (c) Adding the amounts computed in paragraph a, then subtracting the amount computed in paragraph b; and (d) Subtracting $1.44. (e) The advanced butterfat price per pound would be determined by multiplying the weighted average of the 2 most recent NASS survey prices for butter by 1.20 and from this product subtracting $0.1307. Proposal 3 would change the current advanced Class IV skim milk pricing factor to an advanced ‘‘butter-powder skim milk price.’’ The advanced butter powder skim milk price per cwt would be determined by: (a) Multiplying the weighted average of the 2 most recent NASS weekly survey prices for nonfat dry milk announced before the 24th day of the month by 8.9; and E:\FR\FM\24DER1.SGM 24DER1 pwalker on PROD1PC71 with RULES Federal Register / Vol. 73, No. 248 / Wednesday, December 24, 2008 / Rules and Regulations (b) From the product subtracting $0.52. Proposals 4 and 5 would adjust the way the Class II price is determined. Proposal 4 would change the manner in which the Class II skim milk price is computed. While the skim portion of milk used in Class II would continue to be announced in advance, it is proposed to be computed by: (a) Multiplying the weighted average of the 2 most recent NASS survey prices for nonfat dry milk per pound announced before the 24th day of the month by 8.9; and (b) From the product subtracting $0.53. The NMPF witness testified in support of Proposal 4. The witness was of the opinion that the current Class II skim milk formula incorrectly accounts for the costs of drying condensed skim milk and encourages substitution of condensed skim milk for nonfat dry milk (NFDM) in Class II products. The witness was of the opinion that their proposed revised formula more accurately reflects the full value of NFDM derived from a hundredweight of skim milk. Proposal 5 would modify the calculation of the Class II butterfat price. The Class II butterfat price would be determined by: (a) Multiplying the NASS AA butter survey price multiplied by 1.20; and (b) From the product subtracting $0.1147. The NMPF witness testified in support of Proposal 5. The witness was of the opinion that the proposed formula would set the Class II butterfat price equal to the minimum Class I butterfat price, without applying any location differential, so the price would be uniform across the entire country. The witness stated that average butterfat tests for Class I and II use were 1.97 percent and 7.42 percent, respectively, in 2005. The witness noted that when Class I and II milk marketings were combined, their average butterfat test was 3.34 percent, close to the Federal order standard of 3.5 percent. The witness testified that milk supplies for Class I and II products are complementary, with much Class II butterfat use coming from the surplus butterfat at Class I bottling plants. The NMPF witness was of the opinion that Class II butterfat, unlike Class II skim, cannot be substituted with Class III or IV butterfat in Class II products. The witness stated that Class III and IV butterfat can be used to produce butter, butteroil, plastic cream and anhydrous milkfat, however, these products are not viable economic substitutes for cream in Class II products. The witness noted VerDate Aug<31>2005 19:28 Dec 23, 2008 Jkt 217001 that the lack of substitutability between Class II cream and manufactured butterfat products requires that Class II butterfat be priced at a level near the Class I butterfat price and their proposal meets that intent. The NMPF witness offered as an exhibit a letter of support for adoption of Proposals 1–5 from the National Farmers Organization (NFO). NFO is a Capper-Volstead cooperative headquartered in Ames, Iowa. The NFO letter stated that an increase in Class I and II minimum prices is needed by dairy farmers who are continually experiencing increased fuel, feed and fertilizer costs. The NMPF witness also offered as an exhibit a letter of support for adoption of Proposals 1–5 from Cass-Clay Creamery (Cass-Clay). Cass-Clay is a Capper-Volstead cooperative headquartered in Fargo, North Dakota. The Cass-Clay letter stated that adoption of Proposals 1–5 is necessary because Class I and II price formulas should not have to directly rely on Class III and IV prices and make allowances. According to the letter, costs to produce Class I milk have increased and should be reflected in the Class I formula. CassClay added that the Class I butterfat price should equal the Class II butterfat price. The Secretary of Agriculture for the commonwealth of Pennsylvania appeared in support of adoption of Proposals 1–5. Pennsylvania is home to 8,600 dairy farms producing over 10.6 billion pounds of milk annually. The Secretary testified that adoption of Proposals 1–5 is necessary to account for decreases in producer prices resulting from a recent decision to increase make allowances as well as increases in transportation and energy costs. The Secretary stated that Pennsylvania has lost over 2,000 dairy farms since 1997 because of low milk prices. The Secretary was of the opinion that adoption of Proposals 1–5 would help to ensure the viability of the Pennsylvania dairy industry in the future. A post-hearing brief was submitted by the Pennsylvania Farm Bureau in concurrence with the testimony of the Secretary. A representative from Dairylea Cooperative, Inc. (Dairylea), testified in support of emergency adoption of Proposals 1–5. Dairylea is a CapperVolstead cooperative whose milk is primarily pooled on the Northeast order. The Dairylea witness testified that Proposals 1–5 should be adopted to compensate farmers for significant increases in the costs to produce milk along with reductions in pay prices resulting from increased make PO 00000 Frm 00003 Fmt 4700 Sfmt 4700 78919 allowances for manufactured dairy products. A witness appeared on behalf of the Northeast Farm Credit Associations (NEFCA). The NEFCA represents four Farm Credit associations who collectively provide credit and other financial services to over 4,500 dairy farmers in the Northeast U.S. The witness provided analysis showing increases in the costs to produce milk. The witness testified that significant increases in labor, supplies, utilities and transportation demonstrate the need to update Federal order minimum prices. A witness appeared on behalf of the Michigan Milk Producers Association (MMPA) in support of expedited adoption of Proposals 1–5. MMPA is a Capper-Volstead cooperative that pools milk on the Mideast order. The MMPA witness testified that the costs of servicing the needs of the Class I and II market, which include maintaining Grade A status, assembly, hauling and balancing have substantially increased since 2000. The witness testified that MMPA supported recent increases in the make allowances for manufactured dairy products and stressed the need for balancing facilities. The witness testified that the increasing costs faced by dairy farmers need to be recognized and adoption of Proposals 1–5 would accomplish that intent. A witness appeared on behalf of United Dairymen of Arizona (UDA) in support of Proposals 1–5. UDA is a Capper-Volstead cooperative that pools milk on the Arizona order. The UDA witness testified that Proposals 1–5 represent the input and interests of dairy farmers across the U.S. The witness stated that adoption of Proposals 1–5 would compensate dairy farmers for recent increases in make allowances for manufactured dairy products. The witness added that adoption of Proposals 1–5 would also simplify the calculations of the cheesebased skim milk price and the butterpowder based skim milk price for determining Class I and II skim milk prices. A representative from Southeast Milk, Inc. (SMI), testified in support of expedited adoption of Proposals 1–5. SMI is a Capper-Volstead cooperative headquartered in Florida. The witness testified that recent decisions to increase make allowances for manufactured dairy products will decrease the prices received by farmers. The witness also testified that producers who supply the fluid market are incurring higher costs including balancing, transportation and energy. The witness testified that adoption of Proposals 1–5 would help to E:\FR\FM\24DER1.SGM 24DER1 pwalker on PROD1PC71 with RULES 78920 Federal Register / Vol. 73, No. 248 / Wednesday, December 24, 2008 / Rules and Regulations compensate producers for these increases in costs. A witness appeared on behalf of Dairy Farmers of America (DFA) in support of the adoption of Proposals 1–5 on an expedited basis. DFA is a CapperVolstead cooperative that pools milk on 9 of the 10 Federal milk marketing orders. The DFA witness testified that the adoption of Proposals 1–5 would more accurately reflect the cost of producing and marketing milk. The witness was of the opinion that failure to address this issue will be detrimental to DFA members. The DFA witness testified that the adopted changes to the make allowances for manufactured products were reflective of the costs of manufacturing dairy products, especially increased energy costs. However, when Class III and IV prices are lowered, prices for Class I and II products are lowered at the same time and returns to dairy farmers decrease, noted the witness. The DFA witness also testified that the cooperative owns and operates plants that condense milk. The witness testified that cost data from their plants is similar to those relied upon by other proponents for nonfat solids and rehydration of nonfat dry milk. The witness testified that DFA owns and operates plants that manufacture butter and concentrated milk fat products, and the cooperative also operates a cream marketing agency. The witness testified that typically Class II manufacturers do not substitute butter or concentrated fat products for cream since cream has other milk proteins and other solids in addition to butterfat. The DFA witness testified that the costs to provide fluid milk have risen dramatically because of increased energy costs. The witness cited the increasing distance between farms and difficulties in balancing as justification to increase Class I and II minimum prices. Two dairy farmer members of DFA also testified in support of Proposals 1– 5. Both dairy farmers testified that the adoption of Proposals 1–5 is necessary to compensate dairy farmers for increased make allowances and to recognize the increasing costs in producing milk. A witness appeared on behalf of the Association of Dairy Cooperatives in the Northeast (ADCNE) in support of the adoption of Proposals 1–5 on an emergency basis. The ADCNE is comprised of Agrimark, Dairy Farmers of America, Dairylea, Land O’ Lakes, Maryland & Virginia Milk Producers, O– AT–KA Milk Producers Cooperative, St. Albans Cooperative Creamery and Upstate Niagara Cooperative. These VerDate Aug<31>2005 19:28 Dec 23, 2008 Jkt 217001 organizations represent a majority of the milk pooled on the Northeast order. The ADCNE witness testified that adoption of Proposals 1–5 would update the production and marketing cost factors of the Class I and II price formulas. The witness was of the opinion that updating these factors is important in the Northeast since Federal Order 1 pools the largest volume of Class I and II milk in the Federal order system. The ADCNE witness testified that recent increases in the make allowances for manufactured dairy products compensated dairy product manufacturers for increased production costs. The witness stated that dairy farmers are also experiencing increased costs in servicing Class I and II markets and should also be compensated through adoption of Proposals 1–5. The ADCNE witness testified that the costs of servicing the needs of the Class I and II market in the Northeast have increased over the last 10 years. The witness stated that these costs are borne by dairy farmers and dairy farmer cooperatives and should be accounted for in Class I and II minimum prices. The witness stated that one of the largest cost increases has been transportation due to increased fuel costs along with consolidation of plants. A witness testified on behalf of LancoPennland Quality Milk Producers (Lanco) in support of Proposals 1–5. Lanco is a Capper-Volstead cooperative with members located primarily in Pennsylvania, Maryland and West Virginia. The Lanco witness testified that recent changes in the make allowances for manufactured dairy products will lower the prices that dairy farmers receive for their milk. The witness also testified that the costs in producing milk including feed and energy have increased substantially. The witness was of the opinion that adoption of Proposals 1–5 will compensate their dairy farmer members for these recent cost increases. A post-hearing brief was submitted by the Kentucky Dairy Development Council (KDDC) in support of Proposals 1–5. The KDDC is an organization of Kentucky dairy farmers whose purpose is to increase profitability and address issues that foster the sustainability and viability of the dairy industry. The KDDC brief said that adoption of Proposals 1–5 would help maintain a direct relationship between dairy product prices and Class I and II prices. The brief explained how dairy farmers will face substantial financial hardship if Proposals 1–5 are not adopted. A witness appearing on behalf of ´ Nestle USA and Dreyer’s Grand Ice PO 00000 Frm 00004 Fmt 4700 Sfmt 4700 Cream (Nestle) testified in opposition to ´ Proposals 1–5. Nestle and its subsidiaries manufacture and distribute a variety of ice cream and frozen dessert ´ products. The Nestle witness was of the opinion that adoption of Proposals 1–5 would increase the price they pay for milk used to make Class I and II ´ products. The witness stated that Nestle has not experienced difficulties in attracting an adequate milk supply. The witness stated that U.S. milk production is increasing and the utilization (share) of milk in Class I and Class II products is decreasing. The witness, relying on Economic Research Service (ERS) data, stated that per capita consumption of non-flavored, whole, reduced, lowfat and nonfat milks declined by 21 percent from 1990 to 2005. The witness concluded from this information that demand for milk used in Class I and II products will only increase through innovation and marketing, not increases in the Class I and II minimum price. ´ The Nestle witness testified that they have not needed to pay additional overorder premiums and have not experienced difficulties in attracting an adequate supply of milk due to the increases in costs noted by proponents. ´ The witness testified that Nestle is currently building a new Class I and Class II plant in Anderson, Indiana, and had been solicited by multiple potential milk suppliers. ´ The Nestle witness stated that an emergency situation does not exist. The witness was of the opinion that the milk supply has been adequate nationwide for Class I and Class II needs and encouraged the Department to thoroughly examine whether Class I and Class II milk needs are not being met. The witness opined that the focus of the Federal order program is to balance and allocate milk supplies, and that increasing Class I and II prices during a period of ample supply does not meet this intent. A witness appearing on behalf of the International Dairy Foods Association (IDFA) testified in opposition to Proposals 1–5. IDFA is a trade association that represents the nation’s manufacturers, marketers, distributors and suppliers of fluid milk and dairy products. IDFA has a membership of 530 companies and is composed of 3 constituent organizations that include: the Milk Industry Foundation (MIF), the National Cheese Institute (NCI) and the International Ice Cream Association (IIAC). The IDFA witness stressed that the proposed changes would create disorderly marketing conditions and that the data used to support the proponents’ positions is flawed and E:\FR\FM\24DER1.SGM 24DER1 pwalker on PROD1PC71 with RULES Federal Register / Vol. 73, No. 248 / Wednesday, December 24, 2008 / Rules and Regulations contradictory. The witness was of the opinion that there is no need to adopt Proposals 1–5 to ensure orderly marketing or a sufficient quantity of pure and wholesome milk to meet current or projected needs. The IDFA witness said that ensuring the adequacy of the fluid milk supply is one of the fundamental purposes of the Federal order program. The IDFA witness stated that the current U.S. milk supply is adequate to meet the demands of the fluid milk market. The witness noted that total milk production is growing while fluid sales are declining. The IDFA witness said that milk production has increased in the last 30 years as a result of increased demand for manufactured dairy products, not fluid milk products. The witness, relying on ERS data, explained that milk production in the U.S. was 115.4 billion pounds in 1975 and grew to 177.0 billion pounds in 2005. The witness noted that ERS projections for 2006 showed a 4.9 billion pound increase for a total of 181.9 billion pounds of milk being produced in the U.S. As milk production grew during 1975–2005, the IDFA witness said, fluid milk product sales grew by 800 million pounds during that same time period. According to the witness, fluid sales hit a record high of 55.1 billion pounds in 1991 and have trended downward ever since. The witness concluded that with increasing production and decreasing fluid milk consumption, there is plenty of milk to serve a declining fluid market. The IDFA witness acknowledged a Tentative Final Decision published November 22, 2006 (71 FR 67467) that updated the manufacturing allowances for Class III and Class IV products. The witness stated that those changes accomplish what the proponents are requesting by updating the factors representing the costs of processing for plants that manufacture Class III and Class IV products. The witness stated that adjusting balancing costs through Class I and Class II prices was addressed in a January 2005 decision to reject a proposal that would have covered the cost of balancing in the Northeast marketing area through marketwide service payments. The decision noted, the witness said, that opponents accurately testified that the costs of balancing were accounted for in the Class IV product price formula make allowances used for establishing the Class IV milk price. The IDFA witness referenced an Interim Final Rule published October 25, 2006 (71 FR 62377) that addressed transportation costs in the Appalachian and Southeast marketing areas. The adopted changes, that became effective VerDate Aug<31>2005 19:28 Dec 23, 2008 Jkt 217001 on December 1, 2006, increased the transportation credit rate, among other things, in the Appalachian and Southeast marketing areas. The witness was of the opinion that transportation credits can more effectively address pricing issues than the suggestions outlined in Proposals 1–5. The witness stated that transportation credits are preferred to changes in the Class I differentials. The witness noted that a similar set of regulations exists in the Upper Midwest marketing area to help move milk from supply plants to distributing plants. The IDFA witness testified that adoption of Proposals 1–5 would lead to disorderly marketing conditions and referenced the Department’s preliminary impact analysis to support that conclusion. The witness stated that the baseline analysis provided by the Department showed that U.S. milk production would be adequate to meet current and future demands for milk and dairy products. The witness highlighted points from the baseline analysis and said Federal order marketings would increase by over 9.6 billion pounds over the next 9 years. During that same 9 year period, the witness stated that the baseline showed only a 147 million pound increase in Class I marketings. According to the witness, the analysis prepared by the Department supports the claim that milk production over the next 9 years will exceed the needs of the Class I market. The IDFA witness testified that the economic analysis prepared by the Department prior to the hearing neglected to analyze the impacts of Proposals 1–5 on a regional/marketing area basis. The witness said the missing information could be crucial to producers when deciding their vote in a referendum since adoption of Proposals 1–5 would create disparities between regions with different Class I utilizations. The witness noted that dairy farmers whose milk is pooled in marketing areas with low Class I and Class II utilization could experience depressed prices for their milk if Proposals 1–5 were adopted. The IDFA witness testified that one of the initial goals of the Federal milk marketing order program was to encourage the conversion of Grade B farm operations to Grade A operations. The witness, relying on National Agricultural Statistics Service (NASS) data, testified that 98 percent of the nation’s milk now comes from Grade A farms. The witness was of the opinion that since there is an adequate supply of milk for Class I needs, there is no need to provide incentives for maintaining or converting to Grade A status. PO 00000 Frm 00005 Fmt 4700 Sfmt 4700 78921 The IDFA witness testified that proponents did not provide data as to the costs of operating a Grade A dairy farm versus a Grade B dairy farm. The witness stated the most recent research on the cost difference between Grade A and Grade B farms was published in 1977. The IDFA witness said the request to update the 40 cent difference between Grade A and Grade B ignores the fact that the standards for producing Grade A and Grade B milk have narrowed over time. The IDFA witness was also of the opinion that marketing costs, including balancing, have not increased to the levels advanced by proponents. The IDFA witness testified that proponents provided inadequate evidence regarding the actual costs of balancing and instead relied on plant cost of manufacturing data. The IDFA witness was of the opinion that this approach overlooks relevant data, for example, the decreasing seasonality in milk production since 1998. The IDFA witness questioned the logic of requiring milk processors to pay dairy producers for post farm gate marketing costs like seasonal and daily balancing, shrinkage, administrative costs and give-up charges. The witness was of the opinion that these costs could not be addressed by increases in payments to dairy farmers, and need to come from elsewhere in the marketing channel. The witness again added that make allowances used in the Class IV price formula already account for balancing costs. The IDFA witness presented information from the Minnesota Department of Agriculture to show that average hauling rates paid by producers in Minnesota declined between 1982 and 2003. The witness said some of the decreases in costs were probably related to subsidization of some of the costs by the buyer of the milk, and that the adoption of proposals 1–5 would not ensure that the entity bearing the cost of hauling would receive the benefit of a higher Class I price. The IDFA witness testified that adjustments in over-order premiums serve to attract milk more efficiently than adjustments in Class I minimum prices. The witness was of the opinion that over-order premiums can quickly adjust to changing market conditions over time and regions, while it could take months or years to change the Class I minimum price. The IDFA witness stated that the Department should also reject proposals to increase the Class II price because a greater amount of substitution of Class IV products for fresh cream would occur. E:\FR\FM\24DER1.SGM 24DER1 pwalker on PROD1PC71 with RULES 78922 Federal Register / Vol. 73, No. 248 / Wednesday, December 24, 2008 / Rules and Regulations A consultant witness from Texas A&M University testified on behalf of IDFA in opposition to Proposals 1–5. The witness testified that adoption of Proposals 1–5 are unnecessary since disorderly marketing conditions are not occurring. The witness testified that that there is no economic evidence to support a change in Class I and Class II price policies and that there is ample milk available to meet fluid milk demands. The witnesses stated that Federal milk orders were designed to help facilitate ‘‘least-cost’’ milk movements with a minimum of government involvement and are successful in meeting this end. The witness stated that the current dairy industry is not the same as when the AMAA was enacted, nor is it the same as when order reform occurred in the late 1990s. The dairy industry has shifted into increased regional production and larger farms resulting from higher feed costs, more complex dairy nutrition issues and more competition from nondairy products, the witness noted. The witness said that the Department’s challenge is to evaluate economic conditions relevant to Class I and Class II pricing and determine if they warrant a change in regulation. The witness stated that the issue of Class I and Class II pricing can not be adequately addressed under emergency conditions. The witness cited previous hearings such as the January 2006 Class III and Class IV make allowance hearing where 90 days notice was given before a hearing was held to consider changes. The witness also noted that a prehearing information session was held in preparation for the upcoming Class III and Class IV pricing hearing. Changes to Class I and Class II pricing, the witness said, should be given the same time for consideration. When ample time is given, the witness said, decision-makers can make critical decisions and rely on analysis and facts. If Proposals 1–5 were adopted, the IDFA consultant witness said, an unintended market distortion would occur. Dairy farmers in high utilization markets would experience higher returns than dairy farmers in low utilization markets. The witness stated that adoption of the proposals would also lower Class III and Class IV prices, harming dairy farmers in the Upper Midwest region of the country. The witness was of the opinion that it would be impossible to raise Class I and Class II prices without adversely affecting Class III and Class IV prices. The witness said that the benefits of an increased Class I price become diluted by lower Class III and Class IV prices. VerDate Aug<31>2005 19:28 Dec 23, 2008 Jkt 217001 An additional unintended consequence for the Upper Midwest, the IDFA expert witness said, would occur if the MILC program was extended in the 2007 Farm Bill because of further price signals to increase production, ultimately lowering the Class III/IV price. The witness stated that since 98 percent of all U.S. milk is produced on Grade A farms, the cost of conversion is no longer relevant. The witness stated that the dairy industry converted to Grade A decades ago and that all Federal order milk is produced to meet Grade A standards. The witness stated that the costs of maintaining Grade A milk is born by all classes of milk, not just Class I. The witness stated that the Department cannot determine that the costs for converting to Grade A status have increased since a study has not been done. The witness stated there has not been a study conducted since 1977 that shows the differential cost between Grade A and Grade B. The study, the witness said, was conducted by Gary G. Frank, G. A. Peterson and Harlan Hughes and titled Class I Differential: Cost of Production Justification. The witness said that the cost of converting to Grade A is no longer relevant and that the proponents do nothing to show that the costs of maintaining Grade A status on a dairy farm have increased. The witness stated that proponents cite that marketing costs have increased and focus mainly on balancing and transportation costs. However, the witness said, both of those cost issues are addressed and provided for in other Federal order provisions. Balancing, the witness said, has been addressed in at least four hearings since 1980, said the witness, and has been rejected because the conclusion of all four is that balancing costs are a part of Class III and Class IV prices. The witness also stated that the costs of balancing are a component of contract services provided by cooperatives assessing over-order premiums and handling charges. The witness said that considering these costs would be double counting. The witness also stated that there is no economic justification for relying on increased over-order premiums as a basis for increasing the Class I price. The witness said that over-order premiums reflect the value of milk used in manufacturing and the amount of money required for a manufacturing plant to give up milk for Class I uses. Some of this, the witness said, is related to the supply obligations of cooperatives. The witness said that increasing the Class I minimum price does not substitute for the function of PO 00000 Frm 00006 Fmt 4700 Sfmt 4700 over-order premiums and will not reduce the amount of premiums. A witness appearing on behalf of Prairie Farms, Inc. (Prairie Farms), testified in opposition to Proposals 1–5. Prairie Farms is a cooperative that owns and operates a number of fluid milk plants that are pooled under several Federal milk marketing orders. Prairie Farms is a member of IDFA and NMPF. The Prairie Farms witness stated that the cooperative has not had any longterm problems attracting fluid milk. The witness was of the opinion that the adoption of Proposals 1–5 would create confusion and inequities in the marketplace. The witness was of the opinion that adoption of Proposals 1–5 would provide greater benefit to dairy farmers whose milk is pooled in areas of the country with higher Class I utilization than to dairy farmers whose milk is pooled in areas with lower Class I utilization. The witness testified that adoption of Proposals 1–5 would not represent the interests of all dairy farmer member cooperatives in an equitable manner. The Prairie Farms witness stated that the Class I price should assign a value to fluid milk to account for the transportation costs from production areas to deficit areas. The witness was of the opinion that the Class I price should also reflect current market values of manufactured dairy products. The witness stated that Prairie Farms prefers the use of transportation credits, pooling standards, assembly credits and over-order premiums to attract milk for Class I use rather than increasing the Class I price. The witness said that changing the Class I differentials is unnecessary and would not serve to attract more milk to Class I handlers. The witness testified that an increase in the Class I minimum price will raise the uniform prices received by dairy farmers, who will in turn produce more milk. More milk, the witness said, would lower Class III and Class IV prices because more milk will be used in manufactured products, eventually decreasing the uniform price. The witness stressed that farmers who pool milk in orders with lower Class I utilizations would experience greater negative impacts from the decreases in Class III and IV prices. A witness appearing on behalf of H.P. Hood (Hood) testified in opposition to Proposals 1–5. Hood operates 14 Class I plants in the Northeast marketing area and 6 plants in the Upper Midwest marketing area. The witness was of the opinion that an adequate supply of milk is available for Class I and Class II use and adoption of Proposals 1–5 could negatively affect dairy producers located E:\FR\FM\24DER1.SGM 24DER1 pwalker on PROD1PC71 with RULES Federal Register / Vol. 73, No. 248 / Wednesday, December 24, 2008 / Rules and Regulations in the Upper Midwest region of the country. The Hood witness questioned why proponents are seeking compensation for transportation costs through increases in Class I and Class II minimum prices. The witness was of the opinion that manufacturers of all classes of milk face increased transportation costs and Proposals 1–5 place an inequitable burden on Class I and II markets. A witness appearing on behalf of Wells Dairy, Inc. (Wells), testified in opposition to Proposals 1–5. According to the witness, Wells is the world’s largest family-owned dairy processor in the United States. Wells is located in Le Mars, Iowa, and their ice cream can be found throughout the United States and in 20 countries. The dairy operates five plants: A bottling plant and two ice cream plants in Iowa, a yogurt plant in Omaha, Nebraska, and an ice cream plant in St. George, Utah. The witness said that Wells’ procures milk from more than 70 independent producers and many cooperatives located in South Dakota, Kansas, Nebraska and Iowa. The Wells witness stated that they have not experienced difficulties in procuring fluid milk and that they pay their milk suppliers a premium. The witness stated that the proposed changes could reduce fluid milk consumption, increase milk production and increase regional differences in farm milk prices. The witness said the issue of pricing is regional in nature and therefore should be addressed regionally. The Wells witness added that a higher minimum Class II butterfat price could cause their plants to substitute Class IV butterfat products for Class II cream in their Class II products. A witness appearing on behalf of MidWest Dairymen’s Company, Manitowoc Milk Producers Cooperative, Milwaukee Cooperative Milk Producers and Lakeshore Federated Dairy Cooperative (Mid-West, et al.) testified in opposition to Proposals 1–5. Mid-West, et al., represents dairy farmers whose milk is mostly pooled on Orders 30 and 32. The Mid-West, et al., witness stated that NMPF, in seeking to have Proposals 1– 5 adopted, was not working in the best interest of the nation’s dairy farmers. The witness was of the opinion that many of NMPF’s member cooperatives did not agree with the proposals and that many of the largest NMPF members have producers in areas not regulated or pooled on Federal orders. The witness stated that the milk supply was adequately meeting Class I and Class II market needs and emergency conditions did not exist. The Mid-West, et al., witness testified that the Class I price has historically been linked to VerDate Aug<31>2005 19:28 Dec 23, 2008 Jkt 217001 manufacturing prices and the adoption of Proposals 1–5 would insulate the Class I and Class II prices from realities of marketplace changes. The Mid-West, et al., witness testified that other than assembly or transportation credits received from the pool, there is no direct incentive to ship milk for fluid use because the Class I value is shared with all pool participants. The incentive, if any, the witness said, comes from over-order premiums; the minimum Class I price does not cover any costs such as balancing and ‘‘give-up’’ charges. The Mid-West et al., witness testified that adoption of Proposals 1–5 will cause regional price disparities. The witness said the Upper Midwest could see a 15 cent increase while Florida could see an increase of 65 cents or more. The witness reasoned that a higher Class I price would also result in more milk production which would lead to a lower cheese price and lower mailbox prices. A representative from Associated Milk Producers, Inc. (AMPI), testified in opposition to adoption of Proposals 1–5 on an emergency basis. AMPI is a Capper-Volstead cooperative whose members’ milk is pooled on Orders 30 and 32. The AMPI witness testified that although the costs to produce and supply milk for the Class I and II market has increased, it is an insufficient reason to raise the Class I and II price at all locations. The witness testified that there is an adequate supply of milk to meet the fluid needs of the market. The witness was of the opinion that individual order regulations and overorder premiums serve to move milk when needed with fewer burdens on consumers and producers than increasing Class I and II minimum prices. The witness testified that although increasing Class I and II minimum prices may increase proceeds to dairy farmers, dairy farmers whose milk is pooled in Federal orders with higher Class I utilizations would receive a larger increase. The witness stated that an increase in minimum prices would cause a supply response which would depress Class III and IV prices. This would turn the limited Class I benefit in a low utilization market into a net negative result, said the witness. The witness testified that maintaining the linkage between Class III and IV prices and Class I and II prices is important. The witness added that the Federal milk marketing order program is a marketing tool, not a support price program. A professor from the University of Wisconsin-Madison testified in PO 00000 Frm 00007 Fmt 4700 Sfmt 4700 78923 opposition to adoption of Proposals 1–5. The witness testified that the disparate regional impacts that would result from adoption of Proposals 1–5 are of major concern. The witness and other colleagues from the University of Wisconsin performed an analysis on the possible impacts of the proposed changes. The witness testified that most dairy farmers and handlers across the country have been experiencing increased energy costs. The witness testified that if Class I prices were increased it would generate an increase in the supply of milk. An increase in the supply of milk would increase the volume of milk used in Class III and IV, ultimately lowering the blend price, said the witness. These effects would be amplified, said the witness, in Federal milk orders with lower Class I utilizations. A witness appeared on behalf of Kraft Foods (Kraft) in opposition to adoption of Proposals 1–5. Kraft is a manufacturer of mostly Class II and III products. The Kraft witness testified that adoption of Proposals 4–5 would have a negative impact on markets for Class II products. The witness stated that increasing the minimum Class II price would decrease sales of Class II products and encourage the substitution of milk powders or nondairy based ingredients. The witness also noted that currently a change in the Class IV formulas and therefore the Class IV price would automatically change the Class II price but the NMPF proposal would sever the link. The Kraft witness was also of the opinion that adoption of the NMPF proposals would result in benefits that are regionally disproportionate. The witness stated that increasing the minimum Class I and II prices would have a greater positive impact on the milk of producers that is pooled on orders with higher Class I utilization. A witness appeared on behalf of Dean Foods (Dean) in opposition to adoption of Proposals 1–5 on an emergency basis. The witness stated that Dean owns and operates distributing plants that are located in or regulated by all 10 Federal milk marketing orders. The Dean witness testified that there is an adequate supply of milk to meet Class I and II demand. The witness, summarizing the economic analysis prepared by the Department for the hearing, stated that the analysis predicts government purchases of surplus nonfat dry milk absent of adoption of the NMPF proposals. The witness concluded that adoption of Proposals 1–5 would increase government outlays to purchase surplus dairy products while increasing the retail prices of Class I and II dairy products. The E:\FR\FM\24DER1.SGM 24DER1 pwalker on PROD1PC71 with RULES 78924 Federal Register / Vol. 73, No. 248 / Wednesday, December 24, 2008 / Rules and Regulations witness testified that increases to Class I and II prices would decrease demand for fluid milk. The Dean witness testified that increases in Class I and II minimum prices would not be returned to the dairy farmers that supply the Class I and II market. The witness testified that an increase in the Class I and II minimum price benefits all producers whose milk is pooled on a market, not the producers actually supplying the Class I and II market. The Dean witness testified that adoption of Proposals 1–5 would have disparate impacts on producers depending on the Class I utilization of the order on which their milk is pooled. This could lead to opportunities for pool-riding, said the witness, which could require another round of hearings to tighten pooling standards. The Dean witness testified that adoption of Proposals 1–5 would be a major policy shift for the Federal milk marketing order program. The witness testified that the NMPF proposals would sever the connection between Class I and II prices and Class III and IV prices. The witness predicted that adoption of the NMPF proposals could also encourage the substitution of nonfat dry milk for Class II skim milk. A witness appeared on behalf of the Center for International Food and Agriculture Policy at Citizens Against Government Waste (CAGW). CAGW is a nonprofit organization that aims to eliminate waste and inefficiency in the Federal Government. The CAGW witness testified that adoption of Proposals 1–5 will increase the retail price of milk, reduce fluid milk consumption, increase costs to taxpayers and increase regional disparities in the prices dairy farmers receive for their milk. The witness was of the opinion that adequate amounts of milk are available to meet fluid milk demands. A witness appearing on behalf of New York State Dairy Foods (NYSDF) and Queensboro Farm Products, Inc. (Queensboro), testified in opposition to Proposals 4 and 5. According to the witness, NYSDF is a trade organization made up of a variety of New York dairy industry participants. Queensboro, the witness said, is a proprietary handler pooled in the Northeast marketing area. Queensboro distributes Class I and Class II products to metropolitan New York City. The witness stated that NYSDF and Queensboro are concerned about possible inequities that could result from adoption of Proposals 4 and 5. The NYSDF/Queensboro witness explained that if Proposals 4 and 5 are adopted, the price of a 50,000 pound VerDate Aug<31>2005 19:28 Dec 23, 2008 Jkt 217001 tanker of 40 percent cream would increase $328. The witness said this would occur because the proposal would increase the difference on butterfat from 0.7 cents per pound to 2.33 cents per pound, altering the relationship between Class IV butterfat and skim prices and Class II butterfat and skim prices. The witness added that an increase in the price of milk used to manufacture Class II products could encourage customers to substitute Class II cream with butter, butter oil and anhydrous milkfat. A witness appearing on behalf of Galloway Company (Galloway), located in Neenah, Wisconsin, testified in opposition to Proposals 4 and 5. Galloway manufactures Class II products including sweetened condensed milk, ice cream mixes and beverage bases that are used in food and beverage processing. The witness stated that the changes proposed are too complex to be properly addressed in an emergency hearing. The Galloway witness stated that adoption of Proposals 4 and 5 would distort the relationship between Class II and Class IV prices. The witness was of the opinion that adoption of Proposals 4 and 5 would increase the Class II price to a point where their customers (ice cream and confectionary manufacturers) would substitute Class IV products or other unregulated products as ingredients. The witness presented data demonstrating decreased production of Class II bulk sweetened condensed whole and skim milk from 1995–2005. The witness attributed the reduced production to pricing disparities between Class II and IV. The witness continued that there must be a tie between Class II and Class IV price formulas to prevent disorderly marketing because manufacturers can alternate between Class II and Class IV components. The witness stated that the processes for making condensed skim milk, sweetened condensed milk and NFDM all require the same condensing processes and costs. The witness questioned why there would be a make allowance for a process in one class and a different rate for the same process in another class. The witness urged the Department to not adopt Proposals 4 and 5 and further distort the relationship between Class II and IV. The Galloway witness stated that 52 percent of the milk pooled in Federal orders was Class I and Class II. Of that milk, the witness said that 39 percent was Class I and 13 percent was Class II. The witness stated that if the proposals are adopted, processors who use Class II ingredients will face hardships in competing with processors who use PO 00000 Frm 00008 Fmt 4700 Sfmt 4700 alternative ingredients. The witness also stated that producers will be negatively affected because the substitution for Class II ingredients will decrease blend prices. Findings and Conclusions Class I Discussion NMPF argues that dairy farmers are experiencing increased costs in supplying fluid milk and should be compensated by an increase in the Class I price. NMPF attempts to justify an increase in the Class I price through claims that on-farm and farm to plant costs associated with Grade A milk production, transportation, balancing and ‘‘competitive costs’’ have recently increased. Specifically, NMPF argues that the increases in milk supply costs justify an increase of $0.77 per cwt over the current minimum Class I differential value of $1.60. Evidence submitted at the hearing does not support claims that the costs incurred by dairy farmers in supplying fluid milk have increased to the levels advanced by NMPF. Proponents do not provide adequate data to justify that the additional costs faced by dairy farmers in supplying the needs of the Class I market have increased. Proponents do not reasonably analyze the actual differences in costs of maintaining Grade A production versus Grade B production or demonstrate the cost differences that could be expected between the two. Proponents do not analyze the actual impacts of these cost factors on the minimum level of the Class I differential borne by producers in servicing fluid milk needs, or the costs of balancing in the marketplace. Proponents also do not demonstrate how the ‘‘competitive costs’’ faced by fluid plants in attracting milk away from manufacturing uses have increased. Multiple opponents including dairy product manufacturers and dairy-farmer cooperatives agree that data supplied by proponents is inadequate. The NMPF proposals would also revise the formula used to calculate the Class I price. The revised formula would ‘‘de-couple’’ the Class I price from the Class III or Class IV price by using a different formula. The Class I price is directly linked to the (higher of) Class III or IV price to ensure that supply and demand conditions for milk are reflected throughout all classes. All classified uses must compete for the same supply of milk. If a change is made to the Class III or IV price formulas, the change will equally affect the Class I price. Rather than maintaining this direct link, the NMPF proposal essentially ‘‘locks in’’ the current Class E:\FR\FM\24DER1.SGM 24DER1 Federal Register / Vol. 73, No. 248 / Wednesday, December 24, 2008 / Rules and Regulations III and IV price formulas and breaks the necessary link between Class I prices and any future changes in Class III and IV pricing formulas. Class II Discussion Proponents argue that the formula used to determine the Class II price does not properly account for the costs of drying and re-hydrating NFDM and encourages the substitution of NFDM for fresh skim milk in Class II products. They claim that a $0.17 per cwt increase in the Class II minimum price is necessary to reflect increased costs of drying and re-hydrating skim milk. Additionally, they proposed that the Class II butterfat price be the same as the Class I butterfat price. Proponents argue that since milk supplies for Class I and II products are complementary, and that the Class II butterfat supply is primarily from surplus butterfat at Class I bottling plants, the butterfat values should be the same. Proponents fail, however, to provide relevant data demonstrating that condensing and rehydrating costs have actually increased to levels advanced, or a compelling argument as to why Class I and II butterfat values should be equal. Adoption of NMPF’s proposed Class II skim milk formula would also sever the relationship between Class IV and Class II product prices, just as it would to the relationship of the Class I price to Class III and IV prices. If a change was made to the Class IV price formula in future proceedings, for example, a make allowance proceeding, the change would not be reflected in the Class II price. pwalker on PROD1PC71 with RULES Rulings on Findings and Conclusions All briefs, findings and conclusions, and the evidence in the record were considered in reaching the findings and conclusions set forth above. The petition to consider proposals that would have increased Class I and Class II prices and modified the formulas used to determine Class I and Class II prices is denied for the reasons stated in this decision. Termination of Proceeding At issue in this proceeding is whether the level of the Class I and II prices, and the manner in which the Class I and II prices are determined, are successful in promoting orderly marketing conditions and meeting the intent of the Agricultural Marketing Agreement Act of 1937 (AMAA). As reflected in the above Class I and Class II discussions, the record does not demonstrate that the proposed modifications to the Class I and Class II price formulas are supportable. While some evidence may VerDate Aug<31>2005 19:28 Dec 23, 2008 Jkt 217001 indicate that dairy farmers have faced increased additional costs in supplying the needs of the fluid market, other evidence suggests that other costs may have decreased. In any case, the evidence is neither compelling nor provides a basis to make a reasoned decision for either recommending adoption or denial of the proposals. Accordingly, the proceeding is terminated. List of Subjects in 7 CFR Parts 1000, 1001, 1005, 1006, 1007, 1030, 1032, 1033, 1124, 1126, and 1131 Milk marketing orders. The authority citation for 7 CFR Parts 1000, 1001, 1005, 1006, 1007, 1030, 1032, 1033, 1124, 1126, and 1131 continues to read as follows: Authority: 7 U.S.C. 601–674, and 7253. Dated: December 19, 2008. James E. Link, Administrator, Agricultural Marketing Service. [FR Doc. E8–30697 Filed 12–23–08; 8:45 am] BILLING CODE 3410–02–P DEPARTMENT OF AGRICULTURE Animal and Plant Health Inspection Service 9 CFR Part 94 [Docket No. APHIS–2007–0124] Change in Disease Status of Surrey County, England, Because of Footand-Mouth Disease AGENCY: Animal and Plant Health Inspection Service, USDA. ACTION: Final rule. SUMMARY: We are amending the regulations governing the importation of certain animals, meat, and other animal products into the United States by restoring Surrey County, England, to the list of regions of the world that are considered free of rinderpest and footand-mouth disease (FMD), and to the list of regions of the world considered free of rinderpest and FMD but subject to additional importation restrictions because of those regions’ proximity to or trading relationships with FMD-affected regions. This final rule follows an interim rule that removed Surrey County, England, from those lists due to the detection of FMD in that region. Based on the results of a risk analysis concerning the FMD disease status of Surrey County, England, we have determined that Surrey County, England, can be added to the list of regions considered free of FMD. This PO 00000 Frm 00009 Fmt 4700 Sfmt 4700 78925 rule relieves certain FMD-related prohibitions and restrictions on the importation of ruminants and swine and the fresh meat and other animal products of ruminants and swine into the United States from Surrey County, England. DATES: Effective Date: January 8, 2009. FOR FURTHER INFORMATION CONTACT: Dr. Chip Wells, Senior Staff Veterinarian, Regionalization Evaluation Services Import Staff, National Center for Import and Export, VS, APHIS, 4700 River Road Unit 38, Riverdale, MD 20737– 1231; (301) 734–4356. SUPPLEMENTARY INFORMATION: Background The regulations in 9 CFR part 94 (referred to below as the regulations) govern the importation of certain animals and animal products into the United States in order to prevent the introduction of various animal diseases, including rinderpest and foot-andmouth disease (FMD). FMD is a severe and highly contagious viral infection affecting all cloven-hoofed animals, including cattle, deer, goats, sheep, swine, and other animals. Section 94.1 of the regulations lists regions of the world that are considered free of rinderpest and FMD. Section 94.11 lists regions of the world that the Animal and Plant Health Inspection Service (APHIS) has determined to be free of rinderpest and FMD but from which the importation of meat and other animal products into the United States is subject to additional restrictions because of those regions’ proximity to or trading relationships with FMD-affected regions. In an interim rule 1 effective and published in the Federal Register on January 30, 2008 (73 FR 5424–5426, Docket No. APHIS-2007-0124), we amended the regulations in § 94.1 to remove Surrey County, England, from the list of regions that are considered free of rinderpest and FMD. We also amended the regulations in § 94.11 to remove Surrey County, England, from the list of regions considered free of rinderpest and FMD but from which the importation of meat and other animal products of ruminants and swine into the United States is subject to additional restrictions. That action was necessary because, by September 30, 2007, a total of eight outbreaks of FMD in Surrey County, England, had been reported to the World Organization for Animal Health (OIE). As a result of the interim 1 To view the interim rule and the comment we received, go to http://www.regulations.gov/ fdmspublic/component/ main?main=DocketDetail&d=APHIS-2007-0124. E:\FR\FM\24DER1.SGM 24DER1

Agencies

[Federal Register Volume 73, Number 248 (Wednesday, December 24, 2008)]
[Rules and Regulations]
[Pages 78917-78925]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-30697]



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                                                Federal Register
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Federal Register / Vol. 73, No. 248 / Wednesday, December 24, 2008 / 
Rules and Regulations

[[Page 78917]]



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-A76, et al.; DA-07-01; AMS-DA-07-0116]


Milk in the Northeast and Other Marketing Areas; Final Decision 
on Proposed Amendments to Tentative Marketing Agreements and to Orders 
and Termination of Proceeding

AGENCY: Agricultural Marketing Service, USDA.

ACTION: Final decision and termination of proceeding.

-----------------------------------------------------------------------

------------------------------------------------------------------------
     7 CFR part           Marketing area                AO Nos.
------------------------------------------------------------------------
1001...............  Northeast...............  AO-14-A76
1005...............  Appalachian.............  AO-388-A20
1006...............  Florida.................  AO-356-A41
1007...............  Southeast...............  AO-366-A49
1030...............  Upper Midwest...........  AO-361-A42
1032...............  Central.................  AO-313-A51
1033...............  Mideast.................  AO-166-A75
1124...............  Pacific Northwest.......  AO-368-A37
1126...............  Southwest...............  AO-231-A70
1131...............  Arizona.................  AO-271-A42
------------------------------------------------------------------------

SUMMARY: We are denying proposals that would have increased Class I and 
Class II prices and modified the formulas used to determine Class I and 
II prices in all Federal milk marketing orders. This document 
terminates the proceeding on the five proposed amendments.

DATES: Effective December 29, 2008.

FOR FURTHER INFORMATION CONTACT: Gino Tosi, Associate Deputy 
Administrator for Order Formulation and Enforcement, USDA/AMS/Dairy 
Programs, Stop 0231-Room 2971, 1400 Independence Avenue, SW., 
Washington, DC 20250-0231, (202) 720-2357, e-mail: gino.tosi@usda.gov.

SUPPLEMENTARY INFORMATION: 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.

Small Business Consideration

    Actions under the Federal milk order program are subject to the 
Regulatory Flexibility Act (5 U.S.C. 601 et seq.). This Act seeks to 
ensure that, within the statutory authority of a program, the 
regulatory and information collection requirements are tailored to the 
size and nature of small businesses. For the purpose of the Act, a 
dairy farm is 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 (13 CFR 121.201). Most 
parties subject to a milk order are considered as a small business.
    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.
    USDA has identified that during 2005 approximately 51,060 of the 
54,652 dairy producers whose milk is pooled on Federal orders are small 
businesses. Small businesses represent about 93 percent of the dairy 
farmers who participate in the Federal milk order program.
    On the processing side, during June 2005 there were approximately 
350 fully regulated plants (of which 149 or 43 percent were small 
businesses) and 110 partially regulated plants (of which 50 or 45 
percent were small businesses). In addition, there were 48 producer-
handlers, of which 29 were considered small businesses for the purposes 
of the initial regulatory flexibility analysis, who submitted reports 
under the Federal milk order program during this period.
    The fluid use of milk represented more than 45.0 percent of total 
Federal milk marketing order producer deliveries during January 2006. 
Almost 237 million Americans, approximately 80 percent of the total 
U.S. population reside within the geographical boundaries of the 10 
Federal milk marketing areas.
    Because this action terminates the rulemaking proceeding without 
amending the present rules, the economic conditions of small entities 
remain unchanged. Also, this action does not change reporting, record 
keeping, or other compliance requirements.

Preliminary Economic Analysis

    The Notice of Hearing in this proceeding contained a Preliminary 
Economic Analysis. The analysis is available at http://
www.ams.usda.gov/dairy/hearings.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 November 17, 2006; Published November 22, 
2006 (71 FR 67489).

Statement of Consideration

    A public hearing was held December 11-15, 2006, in Pittsburgh, PA, 
with respect to proposed amendments to the tentative marketing 
agreements and to the orders regulating the handling of milk in all 
marketing areas.
    The hearing was called pursuant to the provisions of the 
Agricultural Marketing Agreement Act of 1937, as amended (7 U.S.C. 601-
674), and the applicable rules of practice and procedure governing the 
formulation of marketing agreements and marketing orders (7 CFR Part 
900). The purpose of the hearing was to receive evidence with respect 
to the economic and marketing conditions that relate to the proposed 
amendments to the tentative marketing agreements and to the orders.
    The hearing was held at the request of the National Milk Producers 
Federation (NMPF), a trade group representing dairy farmers and dairy 
farmer cooperatives, to consider proposals that would have increased 
Class I and Class

[[Page 78918]]

II prices and modified the formulas used to determine Class I and Class 
II prices. Consideration of the proposals was requested on an emergency 
basis.

Summary of Testimony

    NMPF submitted five proposals that were addressed in this 
proceeding. The proposals would: (1) Increase the Federal order minimum 
Class I milk price by $0.77; (2) Utilize an ``advanced cheese skim milk 
price'', or (3) An ``advanced butter powder skim milk price'' and a 
modified advanced butterfat price as replacements to the advance Class 
III and IV skim milk prices; (4) Modify the calculation of the Class II 
skim price; and (5) Modify the calculation of the Class II butterfat 
price.
    Proponents testified that dairy farmers have experienced an 
extended period of below-average milk prices, high production costs and 
low farm returns. NMPF is of the opinion that the formulas used to 
price milk used in Class I and II products are outdated and inadequate 
to ensure orderly marketing conditions. NMPF is also of the opinion 
that although Class I and II prices move in concert with Class III and 
IV prices, they do so in a way that does not properly consider the 
costs of supplying fluid milk to the market. NMPF supports adoption of 
Proposals 1-5 to compensate dairy farmers for increases in the costs 
borne in supplying the fluid milk needs of the market. NMPF is of the 
opinion that adoption of Proposals 1-5 will help maintain the 
appropriate relationship between class prices and dairy product prices.
    Proposal 1 would increase the Federal order minimum Class I price 
by $0.77 while eliminating reference to the advanced Class III and 
Class IV skim milk prices in the Class I skim milk price formula. 
Proponents argue that an increase in the Class I price is necessary to 
reflect increased costs faced by dairy farmers in supplying the Class I 
market. The witness argued that the increased costs of maintaining a 
``Grade A'' dairy farm along with marketing and transportation costs 
justify a $0.77 per hundredweight (cwt) increase in the Class I price. 
Specifically, NMPF testified that increased costs of maintaining Grade 
A status on dairy farms require a $0.15 per cwt increase, increased 
``marketing'' costs require a $0.23 per cwt increase and increased 
``competitive factor'' costs require a $0.39 per cwt increase.
    Proposal 1 would replace the current Class I price mover (the 
higher of the Class III or Class IV price) with the higher of either:
    A. Nonfat dry milk price x 8.9 - $0.63; or
    B. Cheese price x 10.0 + Dry whey price x 6.1 - Butter Price x 3.9 
- 1.63.
    The NMPF witness stated that the costs of establishing and 
maintaining ``Grade A'' status on dairy farms have increased. The 
witness was of the opinion that since the Class I price is intended to 
compensate producers for establishing and maintaining Grade A status, 
increases in the costs of establishing and maintaining Grade A status 
should be reflected in the Class I price. The witness presented USDA 
Economic Research Service (ERS) data that showed a 38 percent increase 
in ``non-feed'' costs for dairy farmers, including labor and utility 
expenses. The NMPF witness also presented a study published by the 
University of Wisconsin-Madison in 1977 \1\ detailing some of the costs 
associated with maintaining a Grade A dairy farm. The witness opined 
that many of the cost factors outlined in the 1977 study are the same 
type of costs faced by Grade A dairy farmers in 2006. The witness 
estimated that increases in non-feed costs of milk production including 
hot water, animal bedding and other supplies, justify a $0.15 increase 
in the Class I minimum price.
---------------------------------------------------------------------------

    \1\ Frank, Gary G., G.A. Peterson, and Harlan Hughes. ``Class I 
Differential: Cost of Production Justification'', in Economic 
Issues, Number 8, April 1977.
---------------------------------------------------------------------------

    The witness also cited increases in ``marketing'' costs to justify 
increasing the Class I price. Specifically, the witness was of the 
opinion that the costs of assembling, balancing and transporting milk 
to meet minimum delivery standards have increased.
    The NMPF witness stated that energy and processing costs to dairy 
farmer cooperative owned manufacturing plants have also increased, and 
should be offset by an increase in the Class I minimum price. The 
witness testified that supply plants often sacrifice profits in order 
to meet the demands of the Class I and II market. The NMPF witness 
added that shifts in the location of milk production and consolidation 
of manufacturing plants require longer hauls to Class I plants. The 
witness estimated that an increase in the minimum Class I price of 
$0.23 per cwt is necessary to offset these increased marketing costs.
    The NMPF witness testified that other ``competitive factor'' costs 
have also increased. These costs reflect the amount of money that 
distributing plants are willing to pay to assure adequate supplies of 
milk. The witness stated that recent increases in over-order premiums 
demonstrate an increased ``competitive factor,'' which justifies the 
need for an increase in the minimum Class I price. The witness 
testified that increasing levels of over-order premiums indicate 
inadequate Class I prices to attract supplies of milk to fluid 
distributing plants, and that while certain ``load-specific'' costs are 
best addressed by over-order premiums, other costs should be covered by 
the regulated minimum Class I price. The witness, relying on Market 
Administrator data, added that over-order premiums have increased 
nearly 65 percent from 1995 to 2005 in the states of Minnesota and 
Wisconsin. The witness was of the opinion that increases in over-order 
premiums justify an increase of $.39 per cwt in the minimum Class I 
price.
    Proposals 2 and 3 detail the specific changes necessary to utilize 
the proposed formula in Proposal 1. Proposals 2 and 3 would implement 
an advanced ``cheese skim milk price'' per cwt, an ``advanced butter-
powder skim milk price'' per cwt and an ``advanced butterfat price'' 
per pound to replace the current advanced Class III and Class IV skim 
milk prices per cwt. Proposal 2 would change the current advanced Class 
III skim milk pricing factor per cwt to an advanced cheese skim milk 
price per cwt factor. The cheese skim milk pricing factor per cwt would 
be determined by:
    (a) Multiplying the weighted average of the 2 most recent NASS 
average weekly prices for block and barrel cheese by 10; multiplying 
the weighted average of the 2 most recent NASS average weekly survey 
prices for dry whey announced before the 24th day of the month times 
6.1;
    (b) Multiplying the weighted average of the 2 most recent NASS 
weekly survey prices for butter announced before the 24th day of the 
month times 3.9;
    (c) Adding the amounts computed in paragraph a, then subtracting 
the amount computed in paragraph b; and
    (d) Subtracting $1.44.
    (e) The advanced butterfat price per pound would be determined by 
multiplying the weighted average of the 2 most recent NASS survey 
prices for butter by 1.20 and from this product subtracting $0.1307.
    Proposal 3 would change the current advanced Class IV skim milk 
pricing factor to an advanced ``butter-powder skim milk price.'' The 
advanced butter powder skim milk price per cwt would be determined by:
    (a) Multiplying the weighted average of the 2 most recent NASS 
weekly survey prices for nonfat dry milk announced before the 24th day 
of the month by 8.9; and

[[Page 78919]]

    (b) From the product subtracting $0.52.
    Proposals 4 and 5 would adjust the way the Class II price is 
determined. Proposal 4 would change the manner in which the Class II 
skim milk price is computed. While the skim portion of milk used in 
Class II would continue to be announced in advance, it is proposed to 
be computed by:
    (a) Multiplying the weighted average of the 2 most recent NASS 
survey prices for nonfat dry milk per pound announced before the 24th 
day of the month by 8.9; and
    (b) From the product subtracting $0.53.
    The NMPF witness testified in support of Proposal 4. The witness 
was of the opinion that the current Class II skim milk formula 
incorrectly accounts for the costs of drying condensed skim milk and 
encourages substitution of condensed skim milk for nonfat dry milk 
(NFDM) in Class II products. The witness was of the opinion that their 
proposed revised formula more accurately reflects the full value of 
NFDM derived from a hundredweight of skim milk.
    Proposal 5 would modify the calculation of the Class II butterfat 
price. The Class II butterfat price would be determined by:
    (a) Multiplying the NASS AA butter survey price multiplied by 1.20; 
and
    (b) From the product subtracting $0.1147.
    The NMPF witness testified in support of Proposal 5. The witness 
was of the opinion that the proposed formula would set the Class II 
butterfat price equal to the minimum Class I butterfat price, without 
applying any location differential, so the price would be uniform 
across the entire country. The witness stated that average butterfat 
tests for Class I and II use were 1.97 percent and 7.42 percent, 
respectively, in 2005. The witness noted that when Class I and II milk 
marketings were combined, their average butterfat test was 3.34 
percent, close to the Federal order standard of 3.5 percent. The 
witness testified that milk supplies for Class I and II products are 
complementary, with much Class II butterfat use coming from the surplus 
butterfat at Class I bottling plants.
    The NMPF witness was of the opinion that Class II butterfat, unlike 
Class II skim, cannot be substituted with Class III or IV butterfat in 
Class II products. The witness stated that Class III and IV butterfat 
can be used to produce butter, butteroil, plastic cream and anhydrous 
milkfat, however, these products are not viable economic substitutes 
for cream in Class II products. The witness noted that the lack of 
substitutability between Class II cream and manufactured butterfat 
products requires that Class II butterfat be priced at a level near the 
Class I butterfat price and their proposal meets that intent.
    The NMPF witness offered as an exhibit a letter of support for 
adoption of Proposals 1-5 from the National Farmers Organization (NFO). 
NFO is a Capper-Volstead cooperative headquartered in Ames, Iowa. The 
NFO letter stated that an increase in Class I and II minimum prices is 
needed by dairy farmers who are continually experiencing increased 
fuel, feed and fertilizer costs.
    The NMPF witness also offered as an exhibit a letter of support for 
adoption of Proposals 1-5 from Cass-Clay Creamery (Cass-Clay). Cass-
Clay is a Capper-Volstead cooperative headquartered in Fargo, North 
Dakota. The Cass-Clay letter stated that adoption of Proposals 1-5 is 
necessary because Class I and II price formulas should not have to 
directly rely on Class III and IV prices and make allowances. According 
to the letter, costs to produce Class I milk have increased and should 
be reflected in the Class I formula. Cass-Clay added that the Class I 
butterfat price should equal the Class II butterfat price.
    The Secretary of Agriculture for the commonwealth of Pennsylvania 
appeared in support of adoption of Proposals 1-5. Pennsylvania is home 
to 8,600 dairy farms producing over 10.6 billion pounds of milk 
annually. The Secretary testified that adoption of Proposals 1-5 is 
necessary to account for decreases in producer prices resulting from a 
recent decision to increase make allowances as well as increases in 
transportation and energy costs. The Secretary stated that Pennsylvania 
has lost over 2,000 dairy farms since 1997 because of low milk prices. 
The Secretary was of the opinion that adoption of Proposals 1-5 would 
help to ensure the viability of the Pennsylvania dairy industry in the 
future. A post-hearing brief was submitted by the Pennsylvania Farm 
Bureau in concurrence with the testimony of the Secretary.
    A representative from Dairylea Cooperative, Inc. (Dairylea), 
testified in support of emergency adoption of Proposals 1-5. Dairylea 
is a Capper-Volstead cooperative whose milk is primarily pooled on the 
Northeast order. The Dairylea witness testified that Proposals 1-5 
should be adopted to compensate farmers for significant increases in 
the costs to produce milk along with reductions in pay prices resulting 
from increased make allowances for manufactured dairy products.
    A witness appeared on behalf of the Northeast Farm Credit 
Associations (NEFCA). The NEFCA represents four Farm Credit 
associations who collectively provide credit and other financial 
services to over 4,500 dairy farmers in the Northeast U.S. The witness 
provided analysis showing increases in the costs to produce milk. The 
witness testified that significant increases in labor, supplies, 
utilities and transportation demonstrate the need to update Federal 
order minimum prices.
    A witness appeared on behalf of the Michigan Milk Producers 
Association (MMPA) in support of expedited adoption of Proposals 1-5. 
MMPA is a Capper-Volstead cooperative that pools milk on the Mideast 
order. The MMPA witness testified that the costs of servicing the needs 
of the Class I and II market, which include maintaining Grade A status, 
assembly, hauling and balancing have substantially increased since 
2000. The witness testified that MMPA supported recent increases in the 
make allowances for manufactured dairy products and stressed the need 
for balancing facilities. The witness testified that the increasing 
costs faced by dairy farmers need to be recognized and adoption of 
Proposals 1-5 would accomplish that intent.
    A witness appeared on behalf of United Dairymen of Arizona (UDA) in 
support of Proposals 1-5. UDA is a Capper-Volstead cooperative that 
pools milk on the Arizona order. The UDA witness testified that 
Proposals 1-5 represent the input and interests of dairy farmers across 
the U.S. The witness stated that adoption of Proposals 1-5 would 
compensate dairy farmers for recent increases in make allowances for 
manufactured dairy products. The witness added that adoption of 
Proposals 1-5 would also simplify the calculations of the cheese-based 
skim milk price and the butter-powder based skim milk price for 
determining Class I and II skim milk prices.
    A representative from Southeast Milk, Inc. (SMI), testified in 
support of expedited adoption of Proposals 1-5. SMI is a Capper-
Volstead cooperative headquartered in Florida. The witness testified 
that recent decisions to increase make allowances for manufactured 
dairy products will decrease the prices received by farmers. The 
witness also testified that producers who supply the fluid market are 
incurring higher costs including balancing, transportation and energy. 
The witness testified that adoption of Proposals 1-5 would help to

[[Page 78920]]

compensate producers for these increases in costs.
    A witness appeared on behalf of Dairy Farmers of America (DFA) in 
support of the adoption of Proposals 1-5 on an expedited basis. DFA is 
a Capper-Volstead cooperative that pools milk on 9 of the 10 Federal 
milk marketing orders. The DFA witness testified that the adoption of 
Proposals 1-5 would more accurately reflect the cost of producing and 
marketing milk. The witness was of the opinion that failure to address 
this issue will be detrimental to DFA members.
    The DFA witness testified that the adopted changes to the make 
allowances for manufactured products were reflective of the costs of 
manufacturing dairy products, especially increased energy costs. 
However, when Class III and IV prices are lowered, prices for Class I 
and II products are lowered at the same time and returns to dairy 
farmers decrease, noted the witness.
    The DFA witness also testified that the cooperative owns and 
operates plants that condense milk. The witness testified that cost 
data from their plants is similar to those relied upon by other 
proponents for nonfat solids and re-hydration of nonfat dry milk. The 
witness testified that DFA owns and operates plants that manufacture 
butter and concentrated milk fat products, and the cooperative also 
operates a cream marketing agency. The witness testified that typically 
Class II manufacturers do not substitute butter or concentrated fat 
products for cream since cream has other milk proteins and other solids 
in addition to butterfat.
    The DFA witness testified that the costs to provide fluid milk have 
risen dramatically because of increased energy costs. The witness cited 
the increasing distance between farms and difficulties in balancing as 
justification to increase Class I and II minimum prices.
    Two dairy farmer members of DFA also testified in support of 
Proposals 1-5. Both dairy farmers testified that the adoption of 
Proposals 1-5 is necessary to compensate dairy farmers for increased 
make allowances and to recognize the increasing costs in producing 
milk.
    A witness appeared on behalf of the Association of Dairy 
Cooperatives in the Northeast (ADCNE) in support of the adoption of 
Proposals 1-5 on an emergency basis. The ADCNE is comprised of 
Agrimark, Dairy Farmers of America, Dairylea, Land O' Lakes, Maryland & 
Virginia Milk Producers, O-AT-KA Milk Producers Cooperative, St. Albans 
Cooperative Creamery and Upstate Niagara Cooperative. These 
organizations represent a majority of the milk pooled on the Northeast 
order.
    The ADCNE witness testified that adoption of Proposals 1-5 would 
update the production and marketing cost factors of the Class I and II 
price formulas. The witness was of the opinion that updating these 
factors is important in the Northeast since Federal Order 1 pools the 
largest volume of Class I and II milk in the Federal order system.
    The ADCNE witness testified that recent increases in the make 
allowances for manufactured dairy products compensated dairy product 
manufacturers for increased production costs. The witness stated that 
dairy farmers are also experiencing increased costs in servicing Class 
I and II markets and should also be compensated through adoption of 
Proposals 1-5.
    The ADCNE witness testified that the costs of servicing the needs 
of the Class I and II market in the Northeast have increased over the 
last 10 years. The witness stated that these costs are borne by dairy 
farmers and dairy farmer cooperatives and should be accounted for in 
Class I and II minimum prices. The witness stated that one of the 
largest cost increases has been transportation due to increased fuel 
costs along with consolidation of plants.
    A witness testified on behalf of Lanco-Pennland Quality Milk 
Producers (Lanco) in support of Proposals 1-5. Lanco is a Capper-
Volstead cooperative with members located primarily in Pennsylvania, 
Maryland and West Virginia. The Lanco witness testified that recent 
changes in the make allowances for manufactured dairy products will 
lower the prices that dairy farmers receive for their milk. The witness 
also testified that the costs in producing milk including feed and 
energy have increased substantially. The witness was of the opinion 
that adoption of Proposals 1-5 will compensate their dairy farmer 
members for these recent cost increases.
    A post-hearing brief was submitted by the Kentucky Dairy 
Development Council (KDDC) in support of Proposals 1-5. The KDDC is an 
organization of Kentucky dairy farmers whose purpose is to increase 
profitability and address issues that foster the sustainability and 
viability of the dairy industry. The KDDC brief said that adoption of 
Proposals 1-5 would help maintain a direct relationship between dairy 
product prices and Class I and II prices. The brief explained how dairy 
farmers will face substantial financial hardship if Proposals 1-5 are 
not adopted.
    A witness appearing on behalf of Nestl[eacute] USA and Dreyer's 
Grand Ice Cream (Nestle) testified in opposition to Proposals 1-5. 
Nestl[eacute] and its subsidiaries manufacture and distribute a variety 
of ice cream and frozen dessert products. The Nestl[eacute] witness was 
of the opinion that adoption of Proposals 1-5 would increase the price 
they pay for milk used to make Class I and II products. The witness 
stated that Nestl[eacute] has not experienced difficulties in 
attracting an adequate milk supply. The witness stated that U.S. milk 
production is increasing and the utilization (share) of milk in Class I 
and Class II products is decreasing. The witness, relying on Economic 
Research Service (ERS) data, stated that per capita consumption of non-
flavored, whole, reduced, lowfat and nonfat milks declined by 21 
percent from 1990 to 2005. The witness concluded from this information 
that demand for milk used in Class I and II products will only increase 
through innovation and marketing, not increases in the Class I and II 
minimum price.
    The Nestl[eacute] witness testified that they have not needed to 
pay additional over-order premiums and have not experienced 
difficulties in attracting an adequate supply of milk due to the 
increases in costs noted by proponents. The witness testified that 
Nestl[eacute] is currently building a new Class I and Class II plant in 
Anderson, Indiana, and had been solicited by multiple potential milk 
suppliers.
    The Nestl[eacute] witness stated that an emergency situation does 
not exist. The witness was of the opinion that the milk supply has been 
adequate nationwide for Class I and Class II needs and encouraged the 
Department to thoroughly examine whether Class I and Class II milk 
needs are not being met. The witness opined that the focus of the 
Federal order program is to balance and allocate milk supplies, and 
that increasing Class I and II prices during a period of ample supply 
does not meet this intent.
    A witness appearing on behalf of the International Dairy Foods 
Association (IDFA) testified in opposition to Proposals 1-5. IDFA is a 
trade association that represents the nation's manufacturers, 
marketers, distributors and suppliers of fluid milk and dairy products. 
IDFA has a membership of 530 companies and is composed of 3 constituent 
organizations that include: the Milk Industry Foundation (MIF), the 
National Cheese Institute (NCI) and the International Ice Cream 
Association (IIAC).
    The IDFA witness stressed that the proposed changes would create 
disorderly marketing conditions and that the data used to support the 
proponents' positions is flawed and

[[Page 78921]]

contradictory. The witness was of the opinion that there is no need to 
adopt Proposals 1-5 to ensure orderly marketing or a sufficient 
quantity of pure and wholesome milk to meet current or projected needs.
    The IDFA witness said that ensuring the adequacy of the fluid milk 
supply is one of the fundamental purposes of the Federal order program. 
The IDFA witness stated that the current U.S. milk supply is adequate 
to meet the demands of the fluid milk market. The witness noted that 
total milk production is growing while fluid sales are declining. The 
IDFA witness said that milk production has increased in the last 30 
years as a result of increased demand for manufactured dairy products, 
not fluid milk products. The witness, relying on ERS data, explained 
that milk production in the U.S. was 115.4 billion pounds in 1975 and 
grew to 177.0 billion pounds in 2005. The witness noted that ERS 
projections for 2006 showed a 4.9 billion pound increase for a total of 
181.9 billion pounds of milk being produced in the U.S. As milk 
production grew during 1975-2005, the IDFA witness said, fluid milk 
product sales grew by 800 million pounds during that same time period. 
According to the witness, fluid sales hit a record high of 55.1 billion 
pounds in 1991 and have trended downward ever since. The witness 
concluded that with increasing production and decreasing fluid milk 
consumption, there is plenty of milk to serve a declining fluid market.
    The IDFA witness acknowledged a Tentative Final Decision published 
November 22, 2006 (71 FR 67467) that updated the manufacturing 
allowances for Class III and Class IV products. The witness stated that 
those changes accomplish what the proponents are requesting by updating 
the factors representing the costs of processing for plants that 
manufacture Class III and Class IV products. The witness stated that 
adjusting balancing costs through Class I and Class II prices was 
addressed in a January 2005 decision to reject a proposal that would 
have covered the cost of balancing in the Northeast marketing area 
through marketwide service payments. The decision noted, the witness 
said, that opponents accurately testified that the costs of balancing 
were accounted for in the Class IV product price formula make 
allowances used for establishing the Class IV milk price.
    The IDFA witness referenced an Interim Final Rule published October 
25, 2006 (71 FR 62377) that addressed transportation costs in the 
Appalachian and Southeast marketing areas. The adopted changes, that 
became effective on December 1, 2006, increased the transportation 
credit rate, among other things, in the Appalachian and Southeast 
marketing areas. The witness was of the opinion that transportation 
credits can more effectively address pricing issues than the 
suggestions outlined in Proposals 1-5. The witness stated that 
transportation credits are preferred to changes in the Class I 
differentials. The witness noted that a similar set of regulations 
exists in the Upper Midwest marketing area to help move milk from 
supply plants to distributing plants.
    The IDFA witness testified that adoption of Proposals 1-5 would 
lead to disorderly marketing conditions and referenced the Department's 
preliminary impact analysis to support that conclusion. The witness 
stated that the baseline analysis provided by the Department showed 
that U.S. milk production would be adequate to meet current and future 
demands for milk and dairy products. The witness highlighted points 
from the baseline analysis and said Federal order marketings would 
increase by over 9.6 billion pounds over the next 9 years. During that 
same 9 year period, the witness stated that the baseline showed only a 
147 million pound increase in Class I marketings. According to the 
witness, the analysis prepared by the Department supports the claim 
that milk production over the next 9 years will exceed the needs of the 
Class I market.
    The IDFA witness testified that the economic analysis prepared by 
the Department prior to the hearing neglected to analyze the impacts of 
Proposals 1-5 on a regional/marketing area basis. The witness said the 
missing information could be crucial to producers when deciding their 
vote in a referendum since adoption of Proposals 1-5 would create 
disparities between regions with different Class I utilizations. The 
witness noted that dairy farmers whose milk is pooled in marketing 
areas with low Class I and Class II utilization could experience 
depressed prices for their milk if Proposals 1-5 were adopted.
    The IDFA witness testified that one of the initial goals of the 
Federal milk marketing order program was to encourage the conversion of 
Grade B farm operations to Grade A operations. The witness, relying on 
National Agricultural Statistics Service (NASS) data, testified that 98 
percent of the nation's milk now comes from Grade A farms. The witness 
was of the opinion that since there is an adequate supply of milk for 
Class I needs, there is no need to provide incentives for maintaining 
or converting to Grade A status.
    The IDFA witness testified that proponents did not provide data as 
to the costs of operating a Grade A dairy farm versus a Grade B dairy 
farm. The witness stated the most recent research on the cost 
difference between Grade A and Grade B farms was published in 1977. The 
IDFA witness said the request to update the 40 cent difference between 
Grade A and Grade B ignores the fact that the standards for producing 
Grade A and Grade B milk have narrowed over time.
    The IDFA witness was also of the opinion that marketing costs, 
including balancing, have not increased to the levels advanced by 
proponents. The IDFA witness testified that proponents provided 
inadequate evidence regarding the actual costs of balancing and instead 
relied on plant cost of manufacturing data. The IDFA witness was of the 
opinion that this approach overlooks relevant data, for example, the 
decreasing seasonality in milk production since 1998.
    The IDFA witness questioned the logic of requiring milk processors 
to pay dairy producers for post farm gate marketing costs like seasonal 
and daily balancing, shrinkage, administrative costs and give-up 
charges. The witness was of the opinion that these costs could not be 
addressed by increases in payments to dairy farmers, and need to come 
from elsewhere in the marketing channel. The witness again added that 
make allowances used in the Class IV price formula already account for 
balancing costs.
    The IDFA witness presented information from the Minnesota 
Department of Agriculture to show that average hauling rates paid by 
producers in Minnesota declined between 1982 and 2003. The witness said 
some of the decreases in costs were probably related to subsidization 
of some of the costs by the buyer of the milk, and that the adoption of 
proposals 1-5 would not ensure that the entity bearing the cost of 
hauling would receive the benefit of a higher Class I price.
    The IDFA witness testified that adjustments in over-order premiums 
serve to attract milk more efficiently than adjustments in Class I 
minimum prices. The witness was of the opinion that over-order premiums 
can quickly adjust to changing market conditions over time and regions, 
while it could take months or years to change the Class I minimum 
price.
    The IDFA witness stated that the Department should also reject 
proposals to increase the Class II price because a greater amount of 
substitution of Class IV products for fresh cream would occur.

[[Page 78922]]

    A consultant witness from Texas A&M University testified on behalf 
of IDFA in opposition to Proposals 1-5. The witness testified that 
adoption of Proposals 1-5 are unnecessary since disorderly marketing 
conditions are not occurring. The witness testified that that there is 
no economic evidence to support a change in Class I and Class II price 
policies and that there is ample milk available to meet fluid milk 
demands. The witnesses stated that Federal milk orders were designed to 
help facilitate ``least-cost'' milk movements with a minimum of 
government involvement and are successful in meeting this end. The 
witness stated that the current dairy industry is not the same as when 
the AMAA was enacted, nor is it the same as when order reform occurred 
in the late 1990s. The dairy industry has shifted into increased 
regional production and larger farms resulting from higher feed costs, 
more complex dairy nutrition issues and more competition from nondairy 
products, the witness noted.
    The witness said that the Department's challenge is to evaluate 
economic conditions relevant to Class I and Class II pricing and 
determine if they warrant a change in regulation. The witness stated 
that the issue of Class I and Class II pricing can not be adequately 
addressed under emergency conditions. The witness cited previous 
hearings such as the January 2006 Class III and Class IV make allowance 
hearing where 90 days notice was given before a hearing was held to 
consider changes. The witness also noted that a pre-hearing information 
session was held in preparation for the upcoming Class III and Class IV 
pricing hearing. Changes to Class I and Class II pricing, the witness 
said, should be given the same time for consideration. When ample time 
is given, the witness said, decision-makers can make critical decisions 
and rely on analysis and facts.
    If Proposals 1-5 were adopted, the IDFA consultant witness said, an 
unintended market distortion would occur. Dairy farmers in high 
utilization markets would experience higher returns than dairy farmers 
in low utilization markets. The witness stated that adoption of the 
proposals would also lower Class III and Class IV prices, harming dairy 
farmers in the Upper Midwest region of the country.
    The witness was of the opinion that it would be impossible to raise 
Class I and Class II prices without adversely affecting Class III and 
Class IV prices. The witness said that the benefits of an increased 
Class I price become diluted by lower Class III and Class IV prices. An 
additional unintended consequence for the Upper Midwest, the IDFA 
expert witness said, would occur if the MILC program was extended in 
the 2007 Farm Bill because of further price signals to increase 
production, ultimately lowering the Class III/IV price.
    The witness stated that since 98 percent of all U.S. milk is 
produced on Grade A farms, the cost of conversion is no longer 
relevant. The witness stated that the dairy industry converted to Grade 
A decades ago and that all Federal order milk is produced to meet Grade 
A standards. The witness stated that the costs of maintaining Grade A 
milk is born by all classes of milk, not just Class I. The witness 
stated that the Department cannot determine that the costs for 
converting to Grade A status have increased since a study has not been 
done. The witness stated there has not been a study conducted since 
1977 that shows the differential cost between Grade A and Grade B. The 
study, the witness said, was conducted by Gary G. Frank, G. A. Peterson 
and Harlan Hughes and titled Class I Differential: Cost of Production 
Justification. The witness said that the cost of converting to Grade A 
is no longer relevant and that the proponents do nothing to show that 
the costs of maintaining Grade A status on a dairy farm have increased.
    The witness stated that proponents cite that marketing costs have 
increased and focus mainly on balancing and transportation costs. 
However, the witness said, both of those cost issues are addressed and 
provided for in other Federal order provisions. Balancing, the witness 
said, has been addressed in at least four hearings since 1980, said the 
witness, and has been rejected because the conclusion of all four is 
that balancing costs are a part of Class III and Class IV prices. The 
witness also stated that the costs of balancing are a component of 
contract services provided by cooperatives assessing over-order 
premiums and handling charges. The witness said that considering these 
costs would be double counting.
    The witness also stated that there is no economic justification for 
relying on increased over-order premiums as a basis for increasing the 
Class I price. The witness said that over-order premiums reflect the 
value of milk used in manufacturing and the amount of money required 
for a manufacturing plant to give up milk for Class I uses. Some of 
this, the witness said, is related to the supply obligations of 
cooperatives. The witness said that increasing the Class I minimum 
price does not substitute for the function of over-order premiums and 
will not reduce the amount of premiums.
    A witness appearing on behalf of Prairie Farms, Inc. (Prairie 
Farms), testified in opposition to Proposals 1-5. Prairie Farms is a 
cooperative that owns and operates a number of fluid milk plants that 
are pooled under several Federal milk marketing orders. Prairie Farms 
is a member of IDFA and NMPF. The Prairie Farms witness stated that the 
cooperative has not had any long-term problems attracting fluid milk. 
The witness was of the opinion that the adoption of Proposals 1-5 would 
create confusion and inequities in the marketplace. The witness was of 
the opinion that adoption of Proposals 1-5 would provide greater 
benefit to dairy farmers whose milk is pooled in areas of the country 
with higher Class I utilization than to dairy farmers whose milk is 
pooled in areas with lower Class I utilization. The witness testified 
that adoption of Proposals 1-5 would not represent the interests of all 
dairy farmer member cooperatives in an equitable manner.
    The Prairie Farms witness stated that the Class I price should 
assign a value to fluid milk to account for the transportation costs 
from production areas to deficit areas. The witness was of the opinion 
that the Class I price should also reflect current market values of 
manufactured dairy products. The witness stated that Prairie Farms 
prefers the use of transportation credits, pooling standards, assembly 
credits and over-order premiums to attract milk for Class I use rather 
than increasing the Class I price. The witness said that changing the 
Class I differentials is unnecessary and would not serve to attract 
more milk to Class I handlers.
    The witness testified that an increase in the Class I minimum price 
will raise the uniform prices received by dairy farmers, who will in 
turn produce more milk. More milk, the witness said, would lower Class 
III and Class IV prices because more milk will be used in manufactured 
products, eventually decreasing the uniform price. The witness stressed 
that farmers who pool milk in orders with lower Class I utilizations 
would experience greater negative impacts from the decreases in Class 
III and IV prices.
    A witness appearing on behalf of H.P. Hood (Hood) testified in 
opposition to Proposals 1-5. Hood operates 14 Class I plants in the 
Northeast marketing area and 6 plants in the Upper Midwest marketing 
area. The witness was of the opinion that an adequate supply of milk is 
available for Class I and Class II use and adoption of Proposals 1-5 
could negatively affect dairy producers located

[[Page 78923]]

in the Upper Midwest region of the country. The Hood witness questioned 
why proponents are seeking compensation for transportation costs 
through increases in Class I and Class II minimum prices. The witness 
was of the opinion that manufacturers of all classes of milk face 
increased transportation costs and Proposals 1-5 place an inequitable 
burden on Class I and II markets.
    A witness appearing on behalf of Wells Dairy, Inc. (Wells), 
testified in opposition to Proposals 1-5. According to the witness, 
Wells is the world's largest family-owned dairy processor in the United 
States. Wells is located in Le Mars, Iowa, and their ice cream can be 
found throughout the United States and in 20 countries. The dairy 
operates five plants: A bottling plant and two ice cream plants in 
Iowa, a yogurt plant in Omaha, Nebraska, and an ice cream plant in St. 
George, Utah. The witness said that Wells' procures milk from more than 
70 independent producers and many cooperatives located in South Dakota, 
Kansas, Nebraska and Iowa.
    The Wells witness stated that they have not experienced 
difficulties in procuring fluid milk and that they pay their milk 
suppliers a premium. The witness stated that the proposed changes could 
reduce fluid milk consumption, increase milk production and increase 
regional differences in farm milk prices. The witness said the issue of 
pricing is regional in nature and therefore should be addressed 
regionally. The Wells witness added that a higher minimum Class II 
butterfat price could cause their plants to substitute Class IV 
butterfat products for Class II cream in their Class II products.
    A witness appearing on behalf of Mid-West Dairymen's Company, 
Manitowoc Milk Producers Cooperative, Milwaukee Cooperative Milk 
Producers and Lakeshore Federated Dairy Cooperative (Mid-West, et al.) 
testified in opposition to Proposals 1-5. Mid-West, et al., represents 
dairy farmers whose milk is mostly pooled on Orders 30 and 32. The Mid-
West, et al., witness stated that NMPF, in seeking to have Proposals 1-
5 adopted, was not working in the best interest of the nation's dairy 
farmers. The witness was of the opinion that many of NMPF's member 
cooperatives did not agree with the proposals and that many of the 
largest NMPF members have producers in areas not regulated or pooled on 
Federal orders. The witness stated that the milk supply was adequately 
meeting Class I and Class II market needs and emergency conditions did 
not exist. The Mid-West, et al., witness testified that the Class I 
price has historically been linked to manufacturing prices and the 
adoption of Proposals 1-5 would insulate the Class I and Class II 
prices from realities of marketplace changes.
    The Mid-West, et al., witness testified that other than assembly or 
transportation credits received from the pool, there is no direct 
incentive to ship milk for fluid use because the Class I value is 
shared with all pool participants. The incentive, if any, the witness 
said, comes from over-order premiums; the minimum Class I price does 
not cover any costs such as balancing and ``give-up'' charges.
    The Mid-West et al., witness testified that adoption of Proposals 
1-5 will cause regional price disparities. The witness said the Upper 
Midwest could see a 15 cent increase while Florida could see an 
increase of 65 cents or more. The witness reasoned that a higher Class 
I price would also result in more milk production which would lead to a 
lower cheese price and lower mailbox prices.
    A representative from Associated Milk Producers, Inc. (AMPI), 
testified in opposition to adoption of Proposals 1-5 on an emergency 
basis. AMPI is a Capper-Volstead cooperative whose members' milk is 
pooled on Orders 30 and 32. The AMPI witness testified that although 
the costs to produce and supply milk for the Class I and II market has 
increased, it is an insufficient reason to raise the Class I and II 
price at all locations. The witness testified that there is an adequate 
supply of milk to meet the fluid needs of the market. The witness was 
of the opinion that individual order regulations and over-order 
premiums serve to move milk when needed with fewer burdens on consumers 
and producers than increasing Class I and II minimum prices.
    The witness testified that although increasing Class I and II 
minimum prices may increase proceeds to dairy farmers, dairy farmers 
whose milk is pooled in Federal orders with higher Class I utilizations 
would receive a larger increase. The witness stated that an increase in 
minimum prices would cause a supply response which would depress Class 
III and IV prices. This would turn the limited Class I benefit in a low 
utilization market into a net negative result, said the witness.
    The witness testified that maintaining the linkage between Class 
III and IV prices and Class I and II prices is important. The witness 
added that the Federal milk marketing order program is a marketing 
tool, not a support price program.
    A professor from the University of Wisconsin-Madison testified in 
opposition to adoption of Proposals 1-5. The witness testified that the 
disparate regional impacts that would result from adoption of Proposals 
1-5 are of major concern. The witness and other colleagues from the 
University of Wisconsin performed an analysis on the possible impacts 
of the proposed changes.
    The witness testified that most dairy farmers and handlers across 
the country have been experiencing increased energy costs. The witness 
testified that if Class I prices were increased it would generate an 
increase in the supply of milk. An increase in the supply of milk would 
increase the volume of milk used in Class III and IV, ultimately 
lowering the blend price, said the witness. These effects would be 
amplified, said the witness, in Federal milk orders with lower Class I 
utilizations.
    A witness appeared on behalf of Kraft Foods (Kraft) in opposition 
to adoption of Proposals 1-5. Kraft is a manufacturer of mostly Class 
II and III products. The Kraft witness testified that adoption of 
Proposals 4-5 would have a negative impact on markets for Class II 
products. The witness stated that increasing the minimum Class II price 
would decrease sales of Class II products and encourage the 
substitution of milk powders or non-dairy based ingredients. The 
witness also noted that currently a change in the Class IV formulas and 
therefore the Class IV price would automatically change the Class II 
price but the NMPF proposal would sever the link.
    The Kraft witness was also of the opinion that adoption of the NMPF 
proposals would result in benefits that are regionally 
disproportionate. The witness stated that increasing the minimum Class 
I and II prices would have a greater positive impact on the milk of 
producers that is pooled on orders with higher Class I utilization.
    A witness appeared on behalf of Dean Foods (Dean) in opposition to 
adoption of Proposals 1-5 on an emergency basis. The witness stated 
that Dean owns and operates distributing plants that are located in or 
regulated by all 10 Federal milk marketing orders. The Dean witness 
testified that there is an adequate supply of milk to meet Class I and 
II demand. The witness, summarizing the economic analysis prepared by 
the Department for the hearing, stated that the analysis predicts 
government purchases of surplus nonfat dry milk absent of adoption of 
the NMPF proposals. The witness concluded that adoption of Proposals 1-
5 would increase government outlays to purchase surplus dairy products 
while increasing the retail prices of Class I and II dairy products. 
The

[[Page 78924]]

witness testified that increases to Class I and II prices would 
decrease demand for fluid milk.
    The Dean witness testified that increases in Class I and II minimum 
prices would not be returned to the dairy farmers that supply the Class 
I and II market. The witness testified that an increase in the Class I 
and II minimum price benefits all producers whose milk is pooled on a 
market, not the producers actually supplying the Class I and II market.
    The Dean witness testified that adoption of Proposals 1-5 would 
have disparate impacts on producers depending on the Class I 
utilization of the order on which their milk is pooled. This could lead 
to opportunities for pool-riding, said the witness, which could require 
another round of hearings to tighten pooling standards.
    The Dean witness testified that adoption of Proposals 1-5 would be 
a major policy shift for the Federal milk marketing order program. The 
witness testified that the NMPF proposals would sever the connection 
between Class I and II prices and Class III and IV prices. The witness 
predicted that adoption of the NMPF proposals could also encourage the 
substitution of nonfat dry milk for Class II skim milk.
    A witness appeared on behalf of the Center for International Food 
and Agriculture Policy at Citizens Against Government Waste (CAGW). 
CAGW is a nonprofit organization that aims to eliminate waste and 
inefficiency in the Federal Government. The CAGW witness testified that 
adoption of Proposals 1-5 will increase the retail price of milk, 
reduce fluid milk consumption, increase costs to taxpayers and increase 
regional disparities in the prices dairy farmers receive for their 
milk. The witness was of the opinion that adequate amounts of milk are 
available to meet fluid milk demands.
    A witness appearing on behalf of New York State Dairy Foods (NYSDF) 
and Queensboro Farm Products, Inc. (Queensboro), testified in 
opposition to Proposals 4 and 5. According to the witness, NYSDF is a 
trade organization made up of a variety of New York dairy industry 
participants. Queensboro, the witness said, is a proprietary handler 
pooled in the Northeast marketing area. Queensboro distributes Class I 
and Class II products to metropolitan New York City. The witness stated 
that NYSDF and Queensboro are concerned about possible inequities that 
could result from adoption of Proposals 4 and 5.
    The NYSDF/Queensboro witness explained that if Proposals 4 and 5 
are adopted, the price of a 50,000 pound tanker of 40 percent cream 
would increase $328. The witness said this would occur because the 
proposal would increase the difference on butterfat from 0.7 cents per 
pound to 2.33 cents per pound, altering the relationship between Class 
IV butterfat and skim prices and Class II butterfat and skim prices. 
The witness added that an increase in the price of milk used to 
manufacture Class II products could encourage customers to substitute 
Class II cream with butter, butter oil and anhydrous milkfat.
    A witness appearing on behalf of Galloway Company (Galloway), 
located in Neenah, Wisconsin, testified in opposition to Proposals 4 
and 5. Galloway manufactures Class II products including sweetened 
condensed milk, ice cream mixes and beverage bases that are used in 
food and beverage processing. The witness stated that the changes 
proposed are too complex to be properly addressed in an emergency 
hearing.
    The Galloway witness stated that adoption of Proposals 4 and 5 
would distort the relationship between Class II and Class IV prices. 
The witness was of the opinion that adoption of Proposals 4 and 5 would 
increase the Class II price to a point where their customers (ice cream 
and confectionary manufacturers) would substitute Class IV products or 
other unregulated products as ingredients. The witness presented data 
demonstrating decreased production of Class II bulk sweetened condensed 
whole and skim milk from 1995-2005. The witness attributed the reduced 
production to pricing disparities between Class II and IV. The witness 
continued that there must be a tie between Class II and Class IV price 
formulas to prevent disorderly marketing because manufacturers can 
alternate between Class II and Class IV components. The witness stated 
that the processes for making condensed skim milk, sweetened condensed 
milk and NFDM all require the same condensing processes and costs. The 
witness questioned why there would be a make allowance for a process in 
one class and a different rate for the same process in another class. 
The witness urged the Department to not adopt Proposals 4 and 5 and 
further distort the relationship between Class II and IV.
    The Galloway witness stated that 52 percent of the milk pooled in 
Federal orders was Class I and Class II. Of that milk, the witness said 
that 39 percent was Class I and 13 percent was Class II. The witness 
stated that if the proposals are adopted, processors who use Class II 
ingredients will face hardships in competing with processors who use 
alternative ingredients. The witness also stated that producers will be 
negatively affected because the substitution for Class II ingredients 
will decrease blend prices.

Findings and Conclusions

Class I Discussion

    NMPF argues that dairy farmers are experiencing increased costs in 
supplying fluid milk and should be compensated by an increase in the 
Class I price. NMPF attempts to justify an increase in the Class I 
price through claims that on-farm and farm to plant costs associated 
with Grade A milk production, transportation, balancing and 
``competitive costs'' have recently increased. Specifically, NMPF 
argues that the increases in milk supply costs justify an increase of 
$0.77 per cwt over the current minimum Class I differential value of 
$1.60.
    Evidence submitted at the hearing does not support claims that the 
costs incurred by dairy farmers in supplying fluid milk have increased 
to the levels advanced by NMPF. Proponents do not provide adequate data 
to justify that the additional costs faced by dairy farmers in 
supplying the needs of the Class I market have increased. Proponents do 
not reasonably analyze the actual differences in costs of maintaining 
Grade A production versus Grade B production or demonstrate the cost 
differences that could be expected between the two. Proponents do not 
analyze the actual impacts of these cost factors on the minimum level 
of the Class I differential borne by producers in servicing fluid milk 
needs, or the costs of balancing in the marketplace. Proponents also do 
not demonstrate how the ``competitive costs'' faced by fluid plants in 
attracting milk away from manufacturing uses have increased. Multiple 
opponents including dairy product manufacturers and dairy-farmer 
cooperatives agree that data supplied by proponents is inadequate.
    The NMPF proposals would also revise the formula used to calculate 
the Class I price. The revised formula would ``de-couple'' the Class I 
price from the Class III or Class IV price by using a different 
formula. The Class I price is directly linked to the (higher of) Class 
III or IV price to ensure that supply and demand conditions for milk 
are reflected throughout all classes. All classified uses must compete 
for the same supply of milk. If a change is made to the Class III or IV 
price formulas, the change will equally affect the Class I price. 
Rather than maintaining this direct link, the NMPF proposal essentially 
``locks in'' the current Class

[[Page 78925]]

III and IV price formulas and breaks the necessary link between Class I 
prices and any future changes in Class III and IV pricing formulas.

Class II Discussion

    Proponents argue that the formula used to determine the Class II 
price does not properly account for the costs of drying and re-
hydrating NFDM and encourages the substitution of NFDM for fresh skim 
milk in Class II products. They claim that a $0.17 per cwt increase in 
the Class II minimum price is necessary to reflect increased costs of 
drying and re-hydrating skim milk. Additionally, they proposed that the 
Class II butterfat price be the same as the Class I butterfat price. 
Proponents argue that since milk supplies for Class I and II products 
are complementary, and that the Class II butterfat supply is primarily 
from surplus butterfat at Class I bottling plants, the butterfat values 
should be the same. Proponents fail, however, to provide relevant data 
demonstrating that condensing and re-hydrating costs have actually 
increased to levels advanced, or a compelling argument as to why Class 
I and II butterfat values should be equal.
    Adoption of NMPF's proposed Class II skim milk formula would also 
sever the relationship between Class IV and Class II product prices, 
just as it would to the relationship of the Class I price to Class III 
and IV prices. If a change was made to the Class IV price formula in 
future proceedings, for example, a make allowance proceeding, the 
change would not be reflected in the Class II price.

Rulings on Findings and Conclusions

    All briefs, findings and conclusions, and the evidence in the 
record were considered in reaching the findings and conclusions set 
forth above. The petition to consider proposals that would have 
increased Class I and Class II prices and modified the formulas used to 
determine Class I and Class II prices is denied for the reasons stated 
in this decision.

Termination of Proceeding

    At issue in this proceeding is whether the level of the Class I and 
II prices, and the manner in which the Class I and II prices are 
determined, are successful in promoting orderly marketing conditions 
and meeting the intent of the Agricultural Marketing Agreement Act of 
1937 (AMAA). As reflected in the above Class I and Class II 
discussions, the record does not demonstrate that the proposed 
modifications to the Class I and Class II price formulas are 
supportable. While some evidence may indicate that dairy farmers have 
faced increased additional costs in supplying the needs of the fluid 
market, other evidence suggests that other costs may have decreased. In 
any case, the evidence is neither compelling nor provides a basis to 
make a reasoned decision for either recommending adoption or denial of 
the proposals. Accordingly, the proceeding is terminated.

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

    Milk marketing orders.

    The authority citation for 7 CFR Parts 1000, 1001, 1005, 1006, 
1007, 1030, 1032, 1033, 1124, 1126, and 1131 continues to read as 
follows:

    Authority: 7 U.S.C. 601-674, and 7253.

    Dated: December 19, 2008.
James E. Link,
Administrator, Agricultural Marketing Service.
 [FR Doc. E8-30697 Filed 12-23-08; 8:45 am]
BILLING CODE 3410-02-P