Milk in the Northeast and Other Marketing Areas; Recommended Decision and Opportunity To File Written Exceptions on Proposed Amendments to Tentative Marketing Agreements and Orders, 54384-54414 [E9-25292]

Agencies

• Agricultural Marketing Service
• DEPARTMENT OF AGRICULTURE

[Federal Register Volume 74, Number 202 (Wednesday, October 21, 2009)]
[Proposed Rules]
[Pages 54384-54414]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-25292]



[[Page 54383]]

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Part VI





Department of Agriculture





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Agricultural Marketing Service



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7 CFR Parts 1000, 1001, 1005, et al.



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

Federal Register / Vol. 74 , No. 202 / Wednesday, October 21, 2009 / 
Proposed Rules

[[Page 54384]]


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DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

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

[Doc. No. AO-14-A78, et al.; DA-09-02; AMS-09-0007]


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

AGENCY: Agricultural Marketing Service, USDA.

ACTION: Proposed rule; recommended decision.

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SUMMARY: This decision recommends that the producer-handler definitions 
of all Federal milk marketing orders be amended to limit exemption from 
pooling and pricing provisions to those with total route disposition of 
fluid milk products of 3 million pounds or less per month. The exempt 
plant definition would continue to limit disposition of Class I milk 
products to 150,000 pounds or less per month.

DATES: Comments must be submitted on or before December 21, 2009.

ADDRESSES: All comments received will be posted electronically without 
change, including any personal information provided. Comments (three 
copies) should be filed with the Hearing Clerk, United States 
Department of Agriculture, STOP 9200-Room 1031, 1400 Independence 
Avenue, SW., Washington, DC 20250-1031. You may electronically submit 
comments at the Federal eRulemaking portal: https://www.regulations.gov. 
Reference should be made to the title of the action and docket number.

FOR FURTHER INFORMATION CONTACT: Gino M. Tosi or Jack Rower, Senior 
Marketing Specialists, Order Formulation and Enforcement Branch, USDA/
AMS/Dairy Programs, Stop 0231-Room 2971, 1400 Independence Avenue, SW., 
Washington, DC 20250-0231, (202) 720-7183, e-mail addresses: 
gino.tosi@ams.usda.gov and jack.rower@ams.usda.gov.

SUPPLEMENTARY INFORMATION: This decision recommends that the producer-
handler provisions of all Federal milk marketing orders be amended to 
limit exemption from pooling and pricing to those with total route 
disposition of fluid milk products of 3 million pounds or less per 
month. The exempt plant definition would continue to limit disposition 
of Class I milk products to 150,000 pounds or less per month.
    This administrative action is governed by the provisions of 
sections 556 and 557 of Title 5 of the United States Code and, 
therefore, is excluded from the requirements of Executive Order 12866.
    The amendments to the rules proposed herein have been reviewed 
under Executive Order 12988, Civil Justice Reform. They are not 
intended to have a retroactive effect. The Agricultural Marketing 
Agreement Act of 1937, as amended (7 U.S.C. 601-674) (AMAA), provides 
that administrative proceedings must be exhausted before parties may 
file suit in court. Under Section 608c(15)(A) of the AMAA, any handler 
subject to an order may request modification or exemption from such 
order by filing with USDA a petition stating that the order, any 
provision of the order, or any obligation imposed in connection with 
the order is not in accordance with the law. A handler is afforded the 
opportunity for a hearing on the petition. After a hearing, USDA would 
rule on the petition. The AMAA provides that the district court of the 
United States in any district in which the handler is an inhabitant, or 
has its principal place of business, has jurisdiction in equity to 
review USDA's ruling on the petition, provided a bill in equity is 
filed not later than 20 days after the date of the entry of the ruling.

Regulatory Flexibility Act and Paperwork Reduction Act

    In accordance with the Regulatory Flexibility Act (5 U.S.C. 601 et 
seq.), the Agricultural Marketing Service has considered the economic 
impact of this action on small entities and has certified that this 
proposed rule will not have a significant economic impact on a 
substantial number of small entities. For the purpose of the Regulatory 
Flexibility Act, a dairy farm is considered a ``small business'' if it 
has an annual gross revenue of less than $750,000, and a dairy products 
manufacturer is a ``small business'' if it has fewer than 500 
employees. For the purpose of determining which dairy farms are ``small 
businesses,'' the $750,000 per year criterion was used to establish a 
milk marketing guideline of 500,000 pounds per month. Although this 
guideline does not factor in additional monies that may be received by 
dairy producers, it should be an inclusive standard for most ``small'' 
dairy farms. For purposes of determining a handler's size, if the plant 
is part of a 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.
    Producer-handlers are dairy farms that process their own milk 
production. These entities must operate one or more dairy farms as a 
pre-condition to operating processing plants as producer-handlers. The 
size of the dairy farm(s) determines the production level of the 
operation and is a controlling factor in the capacity of the processing 
plant and possible sales volume associated with the producer-handler 
entity. Determining whether a producer-handler is considered a small or 
large business is therefore dependent on the capacity of its dairy 
farm(s), where a producer-handler with annual gross revenue in excess 
of $750,000 is considered a large business.
    The proposed amendments would obligate some large producer-handlers 
under the Federal milk marketing order system to the same terms as 
other fully regulated handlers of their respective orders provided they 
meet the criteria for qualification as fully regulated plants. Entities 
currently defined as producer-handlers under the terms of their order 
will be subject to the pooling and pricing provisions of the order if 
their total route disposition of fluid milk products is more than 3 
million pounds per month.
    Producer-handlers with total route disposition of 3 million pounds 
or less during the month will not be subject to the pooling and pricing 
provisions of any order as a result of this rulemaking. To the extent 
that current producer-handlers have route disposition of fluid milk 
products outside of the order's marketing areas, such route disposition 
will be subject to the pooling and pricing provisions of the orders if 
total route disposition causes them to become fully regulated.
    If current producer-handlers have total route disposition of fluid 
milk products of more than 3 million pounds during a month, such 
producer-handlers will be regulated under the pooling and pricing 
provisions of the orders like other fully regulated handlers. Such 
large producer-handlers will account to the pool for their uses of milk 
at the applicable minimum class prices and pay the difference between 
their use-value of milk and the blend price of the order to that 
order's producer-settlement fund.
    While this may cause an economic impact on those entities with more 
than three million pounds of route sales that are currently considered 
producer-handlers under the Federal order system, the impact is offset 
by the benefit to other small businesses. With respect to dairy farms 
whose milk is

[[Page 54385]]

pooled on Federal marketing orders, such dairy farms who have not 
heretofore shared in the additional revenue that accrues from the 
marketwide pooling of Class I sales by producer-handlers will share in 
such revenue. All producer-handlers who dispose of more than three 
million pounds of fluid milk products per month will account to all 
market participants at the announced Federal order Class I price for 
such use.
    To the extent that some large producer-handlers become subject to 
the pooling and pricing provisions of Federal milk marketing orders, 
such will be determined in their capacity as handlers. Such entities 
will no longer have restrictions applicable to their business 
operations that were conditions for producer-handler status and 
exemption from the pooling and pricing provisions of the orders. In 
general, this includes being able to buy or acquire any quantity of 
milk from dairy farmers or other handlers instead of being limited by 
the current constraints of the orders. Additionally, the burden of 
balancing their milk production is relieved. Milk production in excess 
of what is needed to satisfy their Class I route disposition needs may 
receive the minimum price protection established under the terms of the 
Federal milk marketing orders. The burden of balancing milk supplies 
will be borne by all producers and handlers who are pooled and 
regulated under the terms of the orders.
    During May 2009 the Northeast order had 57 pool distributing 
plants, 10 pool supply plants, 16 partially regulated distributing 
plants, 13 producer-handler plants and 40 exempt plants. Of the 83 
regulated plants, 49 plants or 59 percent were considered large 
businesses. Of the 13,050 dairy farmers whose milk was pooled on the 
order, 628 farms or 5 percent were considered large businesses and 
12,422 farms or 95 percent of dairy farms in the Northeast order were 
considered small businesses. Most of these dairy farms, large and 
small, could benefit by receiving a higher blend price, if the 
recommended 3-million pound monthly Class I route disposition 
limitation for producer-handlers is adopted.
    During May 2009, the Appalachian order had 21 pool distributing 
plants, 1 pool supply plant, 2 partially regulated distributing plants, 
1 producer-handler plant and 4 exempt plants. Of the 24 regulated 
plants, 21 plants or 88 percent were considered large businesses. Of 
the 2,516 dairy farmers whose milk was pooled on the order, 159 farms 
or 6 percent were considered large businesses and 2,357 farms or 94 
percent of dairy farms in the Appalachian order were considered small 
businesses. Most of these dairy farms, large and small, could benefit 
by receiving a higher blend price, if the recommended 3-million pound 
monthly Class I route disposition limitation for producer-handlers is 
adopted.
    During May 2009, the Florida order had 11 pool distributing plants, 
5 partially regulated distributing plants and 2 exempt plants. The 
order had no pool supply plants or producer-handler plants as of May 
2009. Of the 16 regulated plants, 12 plants or 75 percent were 
considered large businesses. Of the 249 dairy farmers whose milk was 
pooled on the order, 105 farms or 42 percent were considered large 
businesses and 144 farms or 58 percent of dairy farms in the Florida 
order were considered small businesses. Most of these dairy farms, 
large and small, could benefit by receiving a higher blend price, if 
the recommended 3-million pound monthly Class I route disposition 
limitation for producer-handlers is adopted.
    During May 2009, the Southeast order had 22 pool distributing 
plants, 3 pool supply plants, 6 partially regulated distributing plants 
and 12 exempt plants. The order had no producer-handler plants as of 
May 2009. Of the 31 regulated plants, 28 plants or 90 percent were 
considered large businesses. Of the 2,992 dairy farmers whose milk was 
pooled on the order, 187 farms or 6 percent were considered large 
businesses and 2,805 farms or 94 percent of dairy farms in the 
Southeast order were considered small businesses. Most of these dairy 
farms, large and small, could benefit by receiving a higher blend 
price, if the recommended 3-million pound monthly Class I route 
disposition limitation for producer-handlers is adopted.
    During May 2009, the Upper Midwest order had 24 pool distributing 
plants, 53 pool supply plants, 2 partially regulated distributing 
plants, 5 producer-handler plants and 11 exempt plants. Of the 79 
regulated plants, 37 plants or 47 percent were considered large 
businesses. Of the 15,336 dairy farmers whose milk was pooled on the 
order, 1,001 farms or 7 percent were considered large businesses and 
14,335 farms or 93 percent of dairy farms in the Upper Midwest order 
were considered small businesses. Most of these dairy farms, large and 
small, could benefit by receiving a higher blend price, if the 
recommended 3-million pound monthly Class I route disposition 
limitation for producer-handlers is adopted.
    During May 2009, the Central order had 30 pool distributing plants, 
12 pool supply plants, 1 partially regulated distributing plant, 7 
producer-handler plants and 19 exempt plants. Of the 43 regulated 
plants, 35 plants or 81 percent were considered large businesses. Of 
the 3,600 dairy farmers whose milk was pooled on the order, 413 farms 
or 11 percent were considered large businesses and 3,187 farms or 89 
percent of dairy farms in the Central order were considered small 
businesses. Most of these dairy farms, large and small, could benefit 
by receiving a higher blend price, if the recommended 3-million pound 
monthly Class I route disposition limitation for producer-handlers is 
adopted.
    During May 2009, the Mideast order had 22 pool distributing plants, 
2 pool supply plants, 4 partially regulated distributing plants, 1 
producer-handler plant and 17 exempt plants. Of the 28 regulated 
plants, 8 plants or 29 percent were considered large businesses. Of the 
7,238 dairy farmers whose milk was pooled on the order, 504 farms or 7 
percent were considered large businesses and 6,734 farms or 93 percent 
of dairy farms in the Mideast order were considered small businesses. 
Most of these dairy farms, large and small, could benefit by receiving 
a higher blend price, if the recommended 3-million pound monthly Class 
I route disposition limitation for producer-handlers is adopted.
    During May 2009, the Pacific Northwest order had 15 pool 
distributing plants, 8 pool supply plants, 13 partially regulated 
distributing plants, 5 producer-handler plants and 2 exempt plants. Of 
the 36 regulated plants, 20 plants or 56 percent were considered large 
business. Of the 657 dairy farmers whose milk was pooled on the order, 
326 farms or 50 percent were considered large businesses. Because the 
Pacific Northwest order already fully regulates producer-handlers with 
monthly route distribution in excess of three million pounds per month, 
the proposed action will have a minimal effect on small farmers whose 
milk is pooled on the order.
    During May 2009, the Southwest order had 19 pool distributing 
plants, 2 pool supply plants, 1 partially regulated distributing plant, 
5 producer-handler plants and 2 exempt plants. Of the 79 regulated 
plants, 19 plants or 86 percent were considered large businesses. Of 
the 588 dairy farmers whose milk was pooled on the order, 318 farms or 
54 percent were considered large businesses and 270 farms or 46 percent 
of dairy farms in the Southeast order were considered small businesses. 
Most of these dairy farms, large and small,

[[Page 54386]]

could benefit by receiving a higher blend price, if the recommended 3-
million pound monthly Class I route disposition limitation for 
producer-handlers is adopted.
    During May 2009, the Arizona order had 5 pool distributing plants, 
1 pool supply plant, 15 partially regulated distributing plants and 1 
exempt plant. The order had no producer-handler plants as of May 2009. 
Of the 21 regulated plants, 13 plants or 62 percent were considered 
large businesses. Of the 100 dairy farmers whose milk was pooled on the 
order, 95 farms or 95 percent were considered large businesses. Because 
the Arizona order already fully regulates producer-handlers with 
monthly route distribution in excess of 3 million pounds, the proposed 
action will have a minimal effect on small farmers whose milk is pooled 
on the order.
    As of May 2009, in their capacity as producers, 15 producer-
handlers would be considered large producers as their annual marketings 
exceed 6 million pounds of milk (500,000 pounds per month). During the 
same month, 22 producer-handlers would be considered small producers. 
Record evidence indicates that as of March 2009, seven large producer-
handlers had total route sales of 2 million pounds or more per month. 
Therefore, seven or fewer large producer-handlers could potentially 
become subject to the pooling and pricing provisions of Federal milk 
marketing orders because of route disposition of more than 3 million 
pounds per month.
    A review of reporting requirements was completed under the 
Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35). It was 
determined that these proposed amendments would have minimal impact on 
reporting, recordkeeping, or other compliance requirements for entities 
currently considered producer-handlers under Federal milk marketing 
orders because they would remain identical to the current requirements 
applicable to all other regulated handlers who are subject to the 
pooling and pricing provisions. No new forms are proposed and no 
additional reporting requirements would be necessary.
    This notice does not require additional information collection that 
requires clearance by the Office of Management and Budget (OMB) beyond 
currently approved information collection. The primary sources of data 
used to complete the forms are routinely used in most business 
transactions. Forms require only a minimal amount of information that 
can be supplied without data processing equipment or a trained 
statistical staff. Thus, the information collection and reporting 
burden is relatively small. Requiring the same reports for all handlers 
does not significantly disadvantage any handler that is smaller than 
the industry average.
    Interested parties are invited to submit comments on the probable 
regulatory and informational impact of this proposed rule on small 
entities.
    Prior Documents in this Proceeding:
    Notice of Hearing: Issued April 3, 2009; published April 9, 2009 
(74 FR 16296).

Preliminary Statement

    Notice is hereby given of the filing with the Hearing Clerk of this 
recommended decision with respect to proposed amendments to the 
tentative marketing agreement and the order regulating the handling of 
milk in the Northeast and all other marketing areas. This notice is 
issued pursuant to the provisions of the AMAA and the applicable rules 
of practice and procedure governing the formulation of marketing 
agreements and marketing orders (7 CFR part 900).
    Interested parties may file written exceptions to this decision 
with the Hearing Clerk, U.S. Department of Agriculture, STOP 9200-Room 
1031, 1400 Independence Ave., SW., Washington, DC 20250-9200, by 
December 21, 2009 or through the Federal rulemaking portal at https://www.regulations.gov. Three copies of exceptions should be submitted if 
filed with the Hearing Clerk. All written submissions made pursuant to 
this notice will be made available for public inspection at the Office 
of the Hearing Clerk during regular business hours (7 CFR 1.27(b)). The 
hearing notice specifically invited interested persons to present 
evidence concerning the probable regulatory and informational impact of 
the proposals on small businesses. Some evidence was received that 
specifically addressed these issues and some of the evidence 
encompassed entities of various sizes. Such evidence was considered in 
this decision.
    A public hearing was held upon proposed amendments to the marketing 
agreements and the orders regulating the handling of milk in all 
Federal milk marketing orders. The hearing was held pursuant to the 
provisions of the AMAA, as amended (7 U.S.C. 601-674), and the 
applicable rules of practice and procedure governing the formulation of 
marketing agreements and marketing orders (7 CFR part 900).
    The proposed amendments set forth below are based on the record of 
a public hearing held in Cincinnati, Ohio, pursuant to a notice of 
hearing issued April 9, 2009.
    The material issues on the record of hearing relate to:
    1. Producer-handler and exempt plant definitions in all Federal 
milk marketing orders.

Findings and Conclusions

    All orders should be amended to limit producer-handlers to total 
Class I route disposition of not more than 3 million pounds per month 
as a condition for exemption from pooling and pricing provisions. The 
exempt plant definition of all orders should continue to limit 
disposition of Class I milk products to 150,000 pounds or less per 
month.

The Regulatory Status of Producer-Handlers

    Currently, several orders define and describe a special category of 
handler known as producer-handler. Under the Pacific Northwest and 
Arizona orders (Orders 124 and 131, respectively) producer-handlers are 
subject to provisions that limit Class I route disposition to 3 million 
pounds or less per month within the respective marketing areas. The 
other 8 orders have no similar route disposition limit. The 3 
southeastern orders do not allow producer-handlers to purchase 
supplemental milk while the remaining 5 orders provide producer-
handlers the opportunity to purchase limited amounts. With noted 
exceptions, the producer-handler definitions of all Federal milk 
marketing orders exempt producer-handlers from the pooling and pricing 
provisions.
    As a result of their exemption from pooling and pricing, producer-
handlers, as handlers, are not required to pay the minimum class prices 
established under the orders nor are they, as producers, granted 
minimum price protection for disposal of surplus milk. Producer-
handlers, in their capacity as handlers, are not obligated to equalize 
their use-value of milk through payment of the difference between their 
use-value of milk and the respective order's blend price into the 
producer-settlement fund. As such, producer-handlers retain the full 
value of milk processed and disposed of as fluid milk products by their 
operation within the marketing areas.
    Entities defined as producer-handlers must adhere to strict 
criteria that limit certain business practices including the purchase 
of supplemental milk. Given these limitations, producer-handlers bear 
the full burden of balancing their milk production between fluid and 
other uses. Milk production in excess of their Class I route 
disposition does not

[[Page 54387]]

enjoy minimum price protection under the orders and may be sold at 
whatever price is obtainable in the market.
    Producer-handlers are required to submit reports to the Market 
Administrator to ensure compliance with the requirements for their 
regulatory status as producer-handlers. In this sense, producer-
handlers are regulated under the orders but are not ``fully regulated'' 
as are other handlers who are subject to an order's pooling and pricing 
provisions.

The Regulatory Status of Exempt Plants

    The current exempt plant definition was implemented in January 2000 
and is uniform across all orders. Exempt plants are not subject to full 
regulation on the basis of size. At or below the monthly Class I 
disposition threshold for exempt plants, these entities do not impact 
competitive relationships among handlers in the market such that full 
regulation is warranted. Exempt plants may operate solely as processing 
operations or may have the structure of producer-handlers. Operational 
structure is irrelevant in so much as qualification for exempt plant 
status is based solely upon Class I sales volume. Exempt plants are 
required to occasionally submit reports and information to the Market 
Administrator to ensure compliance with the exempt plant definition.

Summary of Testimony

Overview of Proposals

    This proceeding was held in response to two proposals jointly 
submitted by the National Milk Producers Federation (NMPF) and the 
International Dairy Foods Association (IDFA). These proposals, marked 
as Proposals 1 and 2 would: (1) Eliminate the producer-handler 
provision from all Federal milk orders; (2) increase the exempt plant 
monthly limit on disposition of fluid milk products from 150,000 to 
450,000 pounds; and (3) require unique labeling for fluid milk products 
distributed by exempt plants.
    This proceeding also considered 17 alternative proposals received 
in response to the initial proposals. These proposals suggested a range 
of amendments to the producer-handler, exempt plant and pooling 
provisions.
    The following summary of evidence presented during the proceeding 
is organized as follows:
    1. Elimination of the producer-handler provisions and amendment of 
the exempt plant definition to include an increased limit on monthly 
Class I disposition.
    2. Elimination of the producer-handler provisions and adoption of 
grandfathering.
    3. Adoption of producer-handler provisions to include a limit on 
monthly Class I disposition.
    4. Exemption of vertically integrated operations with retail and 
home delivery distribution.
    5. Exemption of own-farm milk.
    6. Establishment of individual handler pools.
    Elimination of the producer-handler provisions and amendment of the 
exempt plant definition to include an increased limit on monthly Class 
I disposition.
    Proposed by NMPF and IDFA, proposals published in the hearing 
notice as Proposal 1 and Proposal 2, seek to simultaneously eliminate 
the producer-handler definition from all Federal milk orders and 
increase the monthly Class I route disposition limit from the current 
150,000 pounds to 450,000 pounds and require unique labeling for fluid 
milk products distributed by exempt plants. Proposals published in the 
hearing notice as 19 and 22 reiterated the positions contained in 
Proposals 1 and 2.
    Representative members and supporters of NMPF including dairy 
farmer members, employees and representatives of Dairy Farmers of 
America (DFA), Mid-West Dairymen's Company (Mid-West), Lakeshore 
Federated Dairy Cooperative (Lakeshore), Michigan Milk Producers 
Association (MMPA), Prairie Farms Dairy (Prairie Farms), Maryland & 
Virginia Milk Producers Cooperative Association, Inc. (MD&VA), United 
Dairymen of Arizona (UDA), Northwest Dairy Association-Darigold (NDA-
Darigold), and St. Albans Cooperative Creamery, Inc. (St. Albans) 
supported either the elimination of the producer-handler provisions or 
an increase in the exempt plant Class I route disposition limit, or 
both during the hearing.
    A representative of NMPF testified in support of Proposals 1 and 2. 
NMPF is a trade association that represents 31 dairy farmer 
cooperatives. The witness was of the opinion that the exemption for 
producer-handlers was originally based upon the assumption that 
producer-handlers have limited sales of fluid milk products and little 
influence in the market. Using USDA data, the NMPF witness demonstrated 
that producer-handlers have a growing share of fluid milk sales in the 
markets that do not restrict the Class I disposition of producer-
handlers. Given that some producer-handlers now sell large volumes of 
fluid milk products and significantly impact the market, larger 
producer-handlers should not be exempt from pooling and pricing, the 
witness asserted.
    According to the NMPF witness, large producer-handlers have a 
regulatory advantage associated with the price at which they acquire 
milk for processing and the sales revenues they retain because of the 
exemption they enjoy. Specifically, the witness testified that 
producer-handlers are essentially able to acquire their milk at the 
uniform price rather than the Class I price and as a result, enjoy a 
cost advantage over fully regulated handlers in procuring milk. The 
witness asserted that the uniform price is effectively the market price 
for producer milk and as such, the appropriate transfer price (the 
price at which producer-handlers transfer their internal milk supply to 
their plant) for analysis of the regulatory impact of producer-
handlers. Additionally, producer-handlers' exemption from payment into 
the producer-settlement fund deprives Federal order pools of money that 
would otherwise be distributed among producers, the witness stated. 
Producer-handlers, the witness asserted, encounter the same costs from 
cow to bottle as other enterprises but are exempt from pool payment.
    The NMPF witness testified that the potential exists for large 
dairy farms to become large producer-handlers. A more than 100 percent 
increase in dairy farms with more than 2,000 cows from 1998 to 2007 has 
occurred, the witness stated, noting that the monthly milk production 
of a 2,000-cow dairy is nearly 4 million pounds. Collectively, farms at 
this level of production, upon conversion to producer-handler status, 
could capture a large share of the Class I sales in an individual 
market, or nationally, the witness asserted. The witness testified that 
both dairy farms and handler operations are threatened by the potential 
for large farms to become producer-handlers. According to the witness, 
producer-handlers are already disruptive in most Federal order 
marketing areas and particularly in the Central order (Order 32) 
marketing area. The witness acknowledged that producer-handlers are not 
currently disruptive in all orders but asserted that the preemptive 
adoption of some uniform standards regarding producer-handler 
operations is necessary.
    The NMPF witness explained that Proposal 2, seeking an increase in 
the exempt plant limit on monthly Class I disposition from 150,000 to 
450,000 pounds, is based in part on a three-fold increase in milk 
production at the farm-level since the time when the current exempt 
plant limit was set. The witness

[[Page 54388]]

testified that plants with less than 450,000 pounds of route 
distribution per month have trouble competing with larger plants on a 
cost basis even when exempt from full regulation because the milk 
procurement price advantage is outweighed by higher processing costs. 
The witness also testified that farm size and economies-of-scale should 
be considered in setting an exempt plant limit, citing evidence of cost 
disadvantages for producer-handlers with less than 500,000 pounds of 
monthly production.
    The NMPF witness testified that the unique labeling provision of 
Proposal 2 is designed to prevent milk buyers from exploiting exempt 
plants' price advantage through the purchase of a large supply of 
identically labeled milk at prices lower than those of other, fully 
regulated plants. Additionally, the witness testified that NMPF intends 
the 450,000-pound monthly limit on Class I disposition for exempt 
plants to apply to total sales rather than sales in a single market. 
According to the witness, Proposals 1 and 2 in combination would allow 
all but the largest producer-handlers to retain an exemption from 
pooling and pricing while newly exempting an additional 30 to 35 
regulated or partially regulated plants. Furthermore, the witness 
asserted, adoption of Proposals 1 and 2 would establish more equitable 
rules for dairy farmers whose milk is pooled and priced under the terms 
of Federal milk orders.
    A panel of three dairy farmer members of DFA, a separate witness 
representing DFA, and a witness representing both Mid-West and 
Lakeshore testified separately in support of Proposals 1 and 2. The DFA 
dairy farmer panelists own and operate separate farms in Wisconsin, 
Texas and Kentucky. DFA is a Capper-Volstead cooperative of 
approximately 10,500 farms that produce milk in 49 states. Mid-West is 
a Capper-Volstead cooperative representing 163 dairy farms. Lakeshore 
is comprised of Manitowoc Milk Producers Cooperative, Milwaukee 
Cooperative Milk Producers, Mid-West and Scenic Central Milk Producers 
Cooperative. Mid-West and Lakeshore are located primarily in Illinois 
and Wisconsin.
    Both the DFA dairy farmer panel and the Mid-West-Lakeshore witness 
testified that the producer-handler exemption reduces revenues for all 
dairy farmers whose milk is pooled on Federal orders. The DFA witness 
and the Mid-West-Lakeshore witness asserted that producer-handlers also 
disadvantage fully regulated handlers. Specifically, the DFA witness 
and the Mid-West-Lakeshore witness explained that producer-handlers 
retain the difference between the minimum Class I price and the 
statistical uniform price while fully regulated handlers that are 
similarly situated are required to account for milk at minimum class 
prices and pay into the producer-settlement fund. The Mid-West-
Lakeshore witness added some dairy cooperatives that own and operate 
fluid milk plants have assumed the same risk as producer-handlers 
without enjoying the ability producer-handlers have, because of their 
exemption, to balance surplus production by adjusting packaged milk 
prices relative to production volume. The Mid-West-Lakeshore witness 
asserted that a producer-handler in the Upper Midwest (Order 30) 
marketing area, for example, has a $0.14 per gallon ``advantage,'' on 
average, over fully regulated handlers due to its pool exemption. 
Similarly, the DFA witness testified that since a producer-handler in 
Order 32 began supplying a regional grocer about a year ago, its milk 
has consistently been the lowest priced brand. In some of the markets 
where DFA markets milk, price concessions, including premium discounts, 
have been needed to meet competition from producer-handlers, and some 
of DFA's processor-customers have expressed concern that producer-
handlers are marketing milk at such low prices that it is difficult to 
compete, the DFA witness stated.
    The DFA dairy farmer panel stated that if fully regulated 
processing plants were closed due to unfair producer-handler 
competition, outlets for milk would become fewer and located further 
away from producers, which would result in higher hauling costs. 
Ultimately, the DFA dairy farmer panel was of the opinion that the 
integrity of the order system would be undermined, and the future of 
dairy farmers jeopardized, if the producer-handler provisions were 
allowed to remain. The Mid-West-Lakeshore witness echoed this position, 
noting that while Mid-West and Lakeshore do not currently compete with 
any producer-handlers, a large farm under construction near a Mid-West 
plant was identified as a potential producer-handler whose operations 
could lower the revenues of Lakeshore dairy farmers. The DFA witness 
provided data on the number of ``larger'' dairy farms across the 
country, estimating the potential negative impacts on producer minimum 
blend prices if these farms were to become producer-handlers. 
Accordingly, the DFA witness asserted that Proposals 1 and 2, if 
adopted, would add stability to the order system, and assure regulated 
handlers that their competitors pay the same minimum prices.
    The DFA witness testified that many producer-handlers have 
maintained their businesses within the 150,000-pound per month exempt 
plant limit on Class I disposition and the proposal to triple this size 
limit for the exempt plant provision would allow a reasonable expansion 
path for many of these operations. Furthermore, the DFA dairy farmer 
panel and the DFA witness asserted that a 450,000-pound per month limit 
would provide a majority of dairy farmers the opportunity to try on-
farm processing and marketing, and if an operation is successful enough 
to grow the business beyond this level it would become fully regulated. 
The DFA witness also testified that the unique labeling component of 
Proposal 2 is essential because without it an incentive would exist for 
an integrator to ``daisy-chain'' a group of plants to process and 
package under the same label for the same customer. The DFA witness 
agreed with the position of NMPF and IDFA that the unique labeling 
provision would still allow for bottling under multiple labels as long 
as the labels were not shared across processors.
    Witnesses representing MMPA, Prairie Farms and MD&VA testified 
separately in support of Proposals 1 and 2. MMPA is a Capper-Volstead 
cooperative in Michigan. Prairie Farms is a Capper-Volstead 
cooperative, based in Illinois, operating 35 fluid milk and dairy 
product processing plants, 26 of which are regulated under 5 Federal 
orders. MD&VA is a Capper-Volstead cooperative with more than 1,500 
members, marketing member and non-member milk in 3 Federal orders in 
the Mid-Atlantic and Southeast. MD&VA owns and operates three fully 
regulated fluid milk plants, one balancing plant and has a majority 
interest in a second balancing plant.
    The MMPA, Prairie Farms and MD&VA witnesses provided testimony that 
was largely in agreement with the testimony of the DFA dairy farmer 
panel, and the DFA and Mid-West-Lakeshore witnesses. The MMPA witness 
testified specifically to the increased average size of Michigan dairy 
farms and the possibility that these larger dairy farms may become 
producer-handlers. The Prairie Farms witness joined in this concern, 
stating that while there are currently only a few ``large'' producer-
handlers in operation across the country, the potential for new ones 
exists. Similarly, the MD&VA witness asserted that despite the 
relatively small number of producer-handlers in the Appalachian and

[[Page 54389]]

Southeast (Federal Orders 5 and 7) marketing areas, the potential for 
growth in producer-handler numbers still exists. The MD&VA witness 
explained that the combined growth of large farms and discontinuation 
of smaller farm operations has created the potential for construction 
of bottling plants on large farms. Additionally, the MD&VA witness 
testified that the Appalachian and Southeast marketing areas, as 
deficit markets that source out-of-area milk, face the possibility of 
large farms located outside of the marketing areas obtaining producer-
handler status and gaining advantages over fully regulated handlers who 
consistently supply the two markets. The MD&VA witness was of the 
opinion that producer-handlers should pay the same minimum prices as 
MD&VA's customers.
    The Prairie Farms witness testified that as a fully regulated 
handler, Prairie Farms can compete with any other fully regulated 
handler but not with a producer-handler that has an unfair advantage 
owed to its exemption from full regulation. The MD&VA witness stated 
that MD&VA is billed on a monthly basis because of its pool obligation 
while producer-handlers are exempt, the MD&VA witness stated. Producer-
handlers' exemption from pool payment is equivalent to a price 
advantage of $0.23 per gallon in the areas in which MD&VA markets milk, 
according to the MD&VA witness.
    The Prairie Farms witness testified that adoption of Proposals 1 
and 2 would not harm those that want to process, package and sell own-
farm milk. Rather, the proposed changes recognize that when a handler 
reaches a certain size, the size of that operation could negatively 
impact fully regulated handlers and producers alike. Similarly, the 
MD&VA witness noted that the adoption of the NMPF proposals would 
provide protection to the pool which is necessary because marketwide 
pooling is the only way all producers and cooperatives share in the 
higher value associated with Class I products.
    The MMPA witness also testified that an increase in the exempt 
plant Class I route disposition limit to 450,000 pounds per month would 
allow relatively small processors to meet the needs of niche markets 
without causing disorder, and increase overall consumer demand for 
dairy products and encourage the development of new dairy products.
    A dairy farmer witness representing UDA testified in support of 
Proposals 1 and 2. UDA is the only Capper-Volstead cooperative in the 
state of Arizona. The witness testified in support of Proposal 1 as a 
preventative measure, and noted that producers in the Arizona (Order 
131) marketing area have realized higher blend prices since a cap was 
placed on producer-handler Class I dispositions in a prior rulemaking. 
The UDA witness stated that plants with 450,000 pounds or less of 
monthly Class I disposition serve small niche markets, are not 
disruptive and should not be subject to full regulation.
    A witness representing NDA and Darigold testified in support of 
Proposals 1 and 2. NDA is a Capper-Volstead cooperative comprised of 
530 producers located in Washington, Oregon, Idaho, Utah, and 
California. NDA and Darigold Inc., wholly owned by NDA, own and operate 
bottling plants and manufacturing plants in the Pacific Northwest 
(Order 124) marketing area and Idaho.
    The NDA-Darigold witness testified that the buyers in the region 
where NDA and Darigold operate are sophisticated and price conscious. 
Drawing from conversations with milk buyers, the witness illustrated 
that when buyers are presented the opportunity to buy Class I milk at a 
lower price, ruinous competition between fully regulated and 
unregulated handlers develops. The witness went on to explain that the 
combination of a buyer's desire for lower prices and the occurrence of 
similarly situated handlers competing on an uneven playing field 
creates disorderly marketing conditions within the market which drive 
prices below commercially reasonable levels.
    The NDA-Darigold witness stated that the disorderly marketing and 
unfair competition that led to the changes in Orders 124 and 131 no 
longer exist since the implementation of the 3-million-pound limit on 
monthly Class I disposition in the marketing areas. The witness also 
noted that producers now receive a slightly higher blend price and 
three of the producer-handler operations affected by the rulemaking 
continue to operate.
    The NDA-Darigold witness testified that handlers with 450,000 
pounds or less of Class I sales per month should be treated uniformly 
under the exempt plant provision. The witness asserted that this 
proposed change closely reflects the AMAA's intent that regulation 
should apply equally to all handlers. The witness offered that aside 
from grandfathering certain current producer-handlers, the exempt plant 
provision should be the only basis for exemption from pooling and 
pricing in the future.
    A witness appeared on behalf of St. Albans in support of Proposals 
1 and 2. St. Albans is a dairy Capper-Volstead cooperative based in 
Vermont that processes and markets milk pooled on the Northeast order 
(Order 1). The witness testified that the Northeast order has more 
producer-handlers and exempt plants than any other order. Relying on 
the Order 1 Annual Statistical Bulletin for 2008, the witness stated 
that the Class I sales from 15 producer-handlers and 46 exempt plants 
are not included in the marketwide pool. The witness was of the opinion 
that most of the exempt plants are also producer-handlers.
    The St. Albans witness testified that large producer-handlers 
impact Federal order pools and a producer-handler located outside the 
Northeast marking area marketed milk into that area during every month 
of 2008 in direct competition with fully regulated plants supplied by 
local producers. The witness asserted that while St. Albans currently 
faces no competition from producer-handlers located in the Northeast 
marketing area, the location of the producer-handler is irrelevant 
since milk shipped from outside the order competes with local 
production. As such, the witness stated that the rapid growth in volume 
of producer-handler milk sales represents a potential market 
disruption.
    The following handler members and other supporters of IDFA 
including the Northeast Dairy Foods Association (NDFA), Worcester 
Creameries (Worcester), Elmhurst Dairy (Elmhurst), Mountainside Farms 
(Mountainside), Steuben Foods (Steuben), Harrisburg Dairies 
(Harrisburg), the Pennsylvania Association of Milk Dealers (PAMD), 
Anderson Erickson Dairy (AE), Price's Creameries (Price's), and Bareman 
Dairy (Baremen) testified in support of either the elimination of the 
producer-handler provisions or the increase of the exempt plant limit 
on Class I route disposition, or both.
    A witness appeared on behalf of IDFA in support of Proposals 1 and 
2. According to the witness, IDFA is a trade association representing 
manufacturers, marketers, distributors and suppliers of fluid milk and 
related products including ice cream, frozen dairy desserts and cheese. 
The witness noted that most of the milk purchased and processed by IDFA 
members is regulated under the Federal order system.
    The IDFA witness testified that the elimination of the producer-
handler provisions is necessary for a number of reasons, all of which 
give rise to disorderly marketing. According to the witness, exemption 
from pooling and pricing allows producer-handlers to, in effect, pay 
the uniform price rather than the Class I price for own-farm milk. As

[[Page 54390]]

a result, producer-handlers have a milk acquisition cost advantage over 
fully regulated plants, solely on the basis of a regulatory exemption, 
the witness stated. The witness asserted that disorderly marketing 
conditions arise when some but not all handlers are subject to payment 
of the Class I minimum price. According to the witness, handlers not 
subject to full regulation can use their artificial cost advantage to 
offer customers a lower price than can be offered by a fully regulated 
handler.
    The IDFA witness also asserted that the need for the elimination of 
the producer-handler exemption stems from significant structural 
changes which have occurred at all levels of the dairy industry. The 
witness explained that in 1998 only 235 farms reportedly had more than 
2,000 cows and by 2008 that number had increased to 730 and accounted 
for 30.5 percent of all U.S. milk production. Providing additional 
perspective, the witness noted that farms with more than 500 milk cows 
accounted for 58.5 percent of U.S. milk production in 2008. Cows in the 
top 5 milk producing states now produce on average, 23,000 pounds of 
milk per year, the witness stated. The witness illustrated that a 500-
cow farm in these states could have monthly production of, on average, 
nearly 1 million pounds. Additionally, the witness explained that a 
2,000-cow herd with the same average would be expected to produce 
nearly 46 million pounds annually, or 4 million pounds monthly. The 
witness was of the opinion that large farms, with milk production 
levels never contemplated when producer-handlers first became exempt 
from pooling and pricing, are present in the marketplace today.
    With regard to Proposal 2, the IDFA witness asserted that IDFA and 
NMPF jointly support an increase of the limit on Class I disposition 
for exempt plants. The witness further explained that an increase in 
the exempt plant limit is intended to preserve regulatory exemption for 
those plants too small to cause material market disruption, including 
those small plants previously exempted as producer-handlers. The 
current 150,000 pounds per month threshold was adopted in all Federal 
orders as part of Federal order reform as it was the highest volume 
threshold in existence at the time, the witness noted. Furthermore, the 
witness asserted that since 1990, the time period for which data was 
available when the exempt plant provision was adopted, the average 
volume of fluid milk products produced by U.S. fluid milk bottling 
plants operated by commercial processors has roughly doubled, from 93.9 
million pounds annually in 1990 to 189.8 million pounds in 2007. The 
witness noted that while the data might suggest a doubling of the 
threshold, the overall upward trend clearly shows that average fluid 
milk bottling plant volumes continue to increase over time, which 
warrants the adoption of a limit that allows for future growth while 
remaining tied to the structural trends of the industry.
    Proposal 2, according to the IDFA witness, also requires that an 
exempt plant sell its fluid milk products using unique labels, lest 
this exemption be abused through the establishment of numerous 
``small'' plants effectively linked together to market their milk 
jointly and to garner the advantages of a large plant without being 
subject to full regulation. The witness noted that this particular 
feature is not intended to prevent an exempt plant from marketing 
packaged fluid milk products under more than one label. The witness 
provided the example of an exempt plant with its own label and other 
labels distributed to a local grocery store and via home delivery to 
illustrate this assertion. Ultimately, the witness stated that an 
exempt plant should not be able to distribute fluid milk products under 
the same name used by any other handler.
    A witness appeared on behalf of NDFA in support of Proposal 22 
seeking elimination of the producer-handler provisions. NDFA is a trade 
association based in New York, representing dairy processors, 
manufacturers and distributors The NDFA witness provided testimony 
similar to others regarding the outdated nature of the producer-handler 
exemption. The NDFA witness added that an exemption for both producer-
handlers and exempt plants is inappropriate because producer-handlers 
and exempt plants are in direct competition with fully regulated 
handlers. The witness cited the procurement of raw milk at lower 
prices, ease of balancing and the ability to make pricing adjustments 
more quickly as advantages that accrue to exempt handlers. Furthermore, 
the NDFA witness asserted that exempt handlers retain the difference 
between the Class I price and uniform price which reduces the blend 
price to producers. However, the NDFA witness was not opposed to the 
current exempt plant provision.
    A witness appeared on behalf of Worcester, Elmhurst, Mountainside 
and Steuben (Worcester et al.). With the milk of approximately 200 
producers and additional purchases of cooperative milk, Worcester 
supplies Elmhurst, Mountainside and Steuben, all of which are fluid 
milk plants. The witness echoed the testimony of the NDFA witness in 
support of the elimination of producer-handler and exempt plant 
provisions. The Worcester et al. witness testified in exclusive support 
of Proposal 1 in the event that the exempt plant provision was not 
eliminated.
    By example, the Worcester et al. witness asserted that an existing 
New York producer with 4 million pounds of monthly production would 
have a cost advantage as a producer-handler and would reduce the amount 
of business that proximate fully regulated handlers could secure. The 
witness also testified that any increase in exempt plant volume would 
further contribute to handler inequity.
    A witness representing Harrisburg and PAMD testified in support of 
Proposals 1 and 19. Proposal 19 would adopt the 450,000 pound per month 
limit on Class I disposition for exempt plants as proposed jointly by 
NMPF and IDFA. The witness testified that Harrisburg is a member of 
PAMD. Harrisburg is fully regulated under Order 1 with monthly Class I 
route distribution of 4 to 6 million pounds.
    The Harrisburg witness stated that Harrisburg Dairies is not 
presently in direct competition with producer-handlers. The witness 
asserted that there is a threat presented by Western Pennsylvania 
producer-handlers servicing the same type of retail chains as 
Harrisburg Dairies. The witness testified that their operation would 
not survive in its current form if producer-handlers move into eastern 
Pennsylvania. Based on Harrisburg Dairies' experience as a regulated 
handler, the witness estimated that a producer-handler of similar size 
would have an average cost advantage of $100,000 per month over a fully 
regulated plant because of the pool payment exemption. The witness 
testified that Harrisburg Dairies was recently asked to become a 
producer-handler and declined. The witness asserted that it is not 
reasonable for some processors to enjoy regulatory privileges that 
other processors do not.
    A consultant witness, a witness representing AE and a witness 
representing Price's, each testified to the characteristics and impacts 
of producer-handlers. The consultant witness appeared on behalf of 
Prairie Farms, Dairy Institute of California, NDFA, AE, PAMD, Dean 
Foods Company (Dean), National Dairy Holdings, LP, Shamrock Foods 
Company (Shamrock), Shamrock Farms and partner farms.
    The consultant witness has had involvement in the dairy industry 
for more than two decades and is currently

[[Page 54391]]

a shareholder in Wilcox Farms (Wilcox), a large fluid milk processor 
and the witness' former employer. AE is private family business with 
525 full-time employees and a processing plant in Order 32. AE offers 
fluid milk and other dairy products that are distributed in Iowa and 
portions of six other states. Price's, a division Dean, has 170 
employees and serves the El Paso, Texas, area.
    The consultant witness and the AE and Price's witnesses did not 
testify in specific support or opposition to any proposals under 
consideration. Rather, each of the witnesses provided examples of 
producer-handler competition with fully regulated handlers. The 
consultant witness testified that in 1974, a large regional grocery 
chain asked Wilcox to build a fluid processing plant and qualify as a 
producer-handler as a means of supplying the customer at a lower cost. 
During the period that Wilcox was a producer-handler, the grocer was 
able to balance supply through another source, the consultant witness 
stated. The consultant witness further testified as to the nature of 
customer-driven competition, noting that after conversion to fully 
regulated status in 1987, Wilcox was occasionally asked to lower its 
price to meet a competitor even when the competitor could serve only a 
small number of stores.
    The Price's witness testified to having recently lost business to a 
producer-handler in the El Paso area. The Price's witness opined that 
the producer-handler's processing capacity to be as much as 752,000 
gallons per week--enough to supply 80 percent of the demand in the 
area. In March and April 2009, Price's stopped supplying several stores 
in the El Paso area when an operation that had gained producer-handler 
status in January 2009 assumed that portion of a national retailer's 
business, the witness testified. According to the witness, the national 
retailer had been purchasing 66,000 gallons per week from Price's 
before it switched to the producer-handler supplier. The witness was of 
the opinion that Price's lost business to the producer-handler solely 
on the basis of price. The witness further stated that after Price's 
lost the account, a Price's employee observed a $0.34 per gallon 
reduction in the customer's retail price, translating to a wholesale 
loss of about $4 per hundredweight (cwt) However, the Price's witness 
acknowledged that lower milk prices in El Paso were not solely 
attributable to the producer-handler in the area.
    The AE witness testified that AE shares a large customer in the 
Kansas City area with Heartland Creamery (Heartland), a producer-
handler. The witness went on to explain that the shared customer 
traditionally uses a bid process to secure a supply of milk for two 
private labels and in 2007, AE successfully bid on the account 
consisting of the two private labels in addition to the branded product 
account AE already held. According to the AE witness, the customer's 
pricing scheme is such that the brand name product is priced about 
$0.10 above the private label product displaying the store's name while 
the private label product with the more generic name is priced about 
$0.20 below the store name product. Based on observations of the dairy 
cases in a number of locations and additional knowledge as to 
purchasing practices of the customer, the witness offered that AE 
continued supplying the customer with the generic label product until 
it was gradually replaced by Heartland's branded product at a lower 
price point. The witness testified that AE went from annualized sales 
of 185,000 to 40,000 gallons of the generic label in one year, and the 
generic label product is now no longer produced.
    It was noted by the AE witness that the replacement of a low-cost 
generic labeled product with a branded product is somewhat unusual. 
Given that AE continues to supply the customer with the AE branded 
product and the private label store name product, the fact that, the AE 
generic label product was replaced by the Heartland branded product and 
the AE generic label product was in the most price sensitive category, 
the witness concluded that Heartland's ability to obtain the customer's 
business was solely on the basis of price not quality or service. In 
addition, based on AE employee conversations with the retailer, the 
witness asserted that the retailer account was lost on the basis of 
price, and in particular because of Heartland's pricing strategy of 
supplying the account at a lower price than the AE price.
    The AE witness further asserted that sales of the AE-produced 
private label store name product have decreased approximately 200,000 
gallons annually since the Heartland product was introduced. The 
witness estimated that Order 32 has lost approximately 3.25 million 
pounds from the pool due to the discontinuation of the AE private label 
generic name product and the reduction in sales of the AE private label 
store name product attributable to Heartland's direct competition.
    The consultant witness and the AE witness both testified that 
regulated handlers are able to compete with producer-handlers in terms 
of service, quality, advertising and packaging, but producer-handlers 
have a clear advantage in terms of price. The AE witness specifically 
noted that AE is able to respond to more efficient operations but the 
presence of regulation which creates inequality is not something that 
can necessarily be overcome.
    The consultant witness went on to testify regarding producer-
handler proliferation. For a producer with 10,000 cows it is 
comparatively easier to add a processing plant than for a processor 
with the capacity to process the milk of 10,000 cows to add dairy 
cattle, the consultant witness stated. In support of this assertion, 
the consultant witness testified that in the late 1990s, Wilcox built a 
plant with capacity for the milk of 5,000 cows for less than $7 
million, and the investment to double that capacity would likely have 
been less than $3 million. The consultant witness stated that a recent 
University of Florida study found construction of a processing plant 
for the milk of a 10,000-cow herd would require about $40 million.
    The consultant witness described several recent trends that enhance 
producer-handler viability: many dairy farms are large enough to 
exclusively supply a processing plant; producer-handlers are attractive 
investments; and many milk buyers have multiple suppliers capable of 
balancing producer-handlers' supply. The witness testified that 
uncertainty of the future regulation of very large producer-handlers 
has constrained investment in these businesses, but if USDA does not 
modify the producer-handler provisions as a result of this proceeding, 
the number of producer-handlers will grow.
    A witness representing Bareman, a fluid processer in Michigan, 
testified in support of Proposals 1 and 2. According to the witness, 
Bareman purchases milk from cooperatives and is fully regulated under 
the Mideast order (Order 33). The witness noted that Bareman competes 
against a number of large fluid milk processors and Country Dairy, a 
producer-handler.
    The Bareman witness reiterated the testimony of others regarding 
the advantage created by the producer-handler exemption and its 
associated effects on pooled producers and fully regulated handlers. 
The witness added that Bareman, as a fully regulated handler, is 
assured that other fully regulated handlers pay minimum prices in the 
same manner that it does.
    The Bareman witness testified to having lost some accounts to a 
producer-handler, often on the basis of

[[Page 54392]]

price. The witness provided an example wherein Bareman engaged in price 
competition with Country Dairy (a producer-handler) for a convenience 
store account during the spring flush. Bareman, the witness testified, 
was ultimately unable to meet the low price offered by the producer-
handler. The disruption noted in this example, the witness asserted, 
arises because of producer-handlers' need to balance sales with milk 
production and their resultant willingness to turn to ``fire sales'' 
for established customers and any others that might be receptive.
    Additionally, representatives of the Federation of Organic Dairy 
Farmers (FOOD), Cornucopia Institute (Cornucopia), National All Jersey 
(NAJ), and the State Departments of Agriculture in New Hampshire (NH), 
New York (NY), Pennsylvania (PA), Vermont (VT), and Wisconsin (WI), 
testified in support of the elimination of the producer-handler 
provisions, the increase of the exempt plant limit on Class I route 
disposition, or both.
    A panel of three dairy farmers representing FOOD and a witness on 
behalf of Cornucopia testified in support of Proposal 2. FOOD is an 
umbrella organization that represents the Western Organic Dairy 
Producers Alliance (WODPA), the Midwest Organic Dairy Producers 
Alliance (MODPA) and the Northeast Organic Dairy Producers Alliance 
(NODPA). According to the panel, FOOD represents nearly two-thirds of 
the organic dairy farmers in the country. The Cornucopia witness 
testified that the Cornucopia Institute is a charitable organization 
serving the organic industry.
    By example, the Cornucopia witness illustrated the ways that Aurora 
Organic Dairy's (Aurora) exempt status as a producer-handler is 
disruptive. The Cornucopia witness was of the opinion that Aurora used 
the regulatory loophole to establish one of the largest market shares 
in the organic dairy industry. The witness testified that adoption of a 
limit of 450,000 pounds of Class I sales per month for exempt plants, 
as suggested by Proposal 2, would be reasonable and sufficiently large 
to accommodate ``legitimate'' family farmers seeking to engage in 
processing and marketing dairy products, while minimizing disruption 
associated with the current producer-handler provisions.
    The FOOD panel testified in support of a hard-cap limit of 450,000 
pounds of Class I route disposition per month for both producer-
handlers and exempt plants. The FOOD panel was of the opinion that a 
450,000-pound per month limit on Class I disposition would honor the 
original intent of the producer-handler exemption. Furthermore, the 
FOOD panel testified, an exempt plant limit of 450,000 pounds of Class 
disposition per month would ensure a level playing field while allowing 
small scale operations to package and sell their product locally.
    The FOOD panel also testified that Aurora has been able to use the 
scale of its operation in combination with its exemption from full 
regulation to capture a great deal of the organic market in the 
Northeast. According to the FOOD panel, Aurora's significant presence 
in the Northeast marketing area has negatively impacted the price local 
organic producers receive for their milk and threatened the viability 
of the handlers that purchase local milk supplies.
    A witness representing NAJ testified in agreement with Proposal 2. 
The witness testified that NAJ is a membership organization that 
represents over 1,100 dairy producers and is an affiliate member of 
both NMPF and IDFA. The NAJ witness testified that the current Federal 
order producer-handler and exempt plant provisions are inequitable. The 
witness was of the opinion that handlers with own-farm milk production 
can be treated very differently for outside purchases of milk depending 
on the marketing area where they have disposition. The witness 
testified that some Class I milk should be exempt from Fed