Milk in the Mideast Marketing Area; Final Decision, 38536-38547 [2012-15670]

Agencies

• Agricultural Marketing Service
• DEPARTMENT OF AGRICULTURE

[Federal Register Volume 77, Number 125 (Thursday, June 28, 2012)]
[Proposed Rules]
[Pages 38536-38547]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-15670]


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Proposed Rules
                                                Federal Register
________________________________________________________________________

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

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Federal Register / Vol. 77, No. 125 / Thursday, June 28, 2012 / 
Proposed Rules

[[Page 38536]]



DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

7 CFR Part 1033

[Doc. No. AO-11-0333; AMS-DA-11-0067; DA-11-04]


Milk in the Mideast Marketing Area; Final Decision

AGENCY: Agricultural Marketing Service, USDA.

ACTION: Proposed rule; final decision.

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SUMMARY: This final decision recommends adoption of a proposal to amend 
the Pool Plant provisions of the Mideast Federal milk marketing order 
to reflect that distributing plants physically located within the 
marketing area with a Class I utilization of at least 30 percent, and 
with combined route disposition and transfers of at least 50 percent 
distributed into Federal milk marketing areas, would be regulated as a 
Pool Distributing Plant under the terms of the order.

FOR FURTHER INFORMATION CONTACT: Erin C. Taylor, Order Formulation and 
Enforcement Division, USDA/AMS/Dairy Programs, STOP 0231-Room 2963, 
1400 Independence Ave. SW., Washington, DC 20250-0231, (202) 720-7183, 
email address: erin.taylor@ams.usda.gov.

SUPPLEMENTARY INFORMATION: This final decision recommends adoption of 
amendments that will more adequately define the plants, and the 
producer milk associated with those plants, that serve the fluid needs 
of the Mideast market and therefore which producers should share in the 
additional revenue arising from fluid milk sales.
    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 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) (the Act), provides that administrative proceedings 
must be exhausted before parties may file suit in court. Under section 
608c (15)(A) of the Act, any handler subject to an order may request 
modification or exemption from such order by filing with 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, the U.S. Department of Agriculture (USDA 
or Department) would rule on the petition. The Act provides that the 
district court of the United States in any district in which the 
handler is an inhabitant, or has its principal place of business, has 
jurisdiction in equity to review USDA's ruling on the petition, 
provided a bill in equity is filed not later than 20 days after the 
date of the entry of the ruling.

Regulatory Flexibility Act and Paperwork Reduction Act

    In accordance with the Regulatory Flexibility Act (5 U.S.C. 601-
612), the Agricultural Marketing Service (AMS) has considered the 
economic impact of this action on small entities and has certified that 
this proposed rule will not have a significant economic impact on a 
substantial number of small entities.
    For the purpose of the Regulatory Flexibility Act, a dairy farm is 
considered a ``small business'' if it has an annual gross revenue of 
less than $750,000, and a dairy products manufacturer is a ``small 
business'' if it has fewer than 500 employees. For the purposes of 
determining which dairy farms are ``small businesses,'' the $750,000 
per year criterion was used to establish a production guideline of 
500,000 pounds per month. Although this guideline does not factor in 
additional monies that may be received by dairy producers, it should be 
an inclusive standard for most ``small'' dairy farms. For purposes of 
determining a handler's size, if the plant is part of a larger company 
operating multiple plants that collectively exceed the 500-employee 
limit, the plant will be considered a large business even if the local 
plant has fewer than 500 employees.
    During October 2011, the time of the hearing, there were 6,651 
dairy farms pooled on the Mideast order. Of these, approximately 6,169 
dairy farms (or 92.8 percent) were considered small businesses.
    During October 2011, there were 51 handler operations associated 
with the Mideast order (25 fully regulated handlers, 8 partially 
regulated handlers, 2 producer-handlers and 16 exempt handlers). Of 
these, approximately 38 handlers (or 74.5 percent) were considered 
small businesses.
    The Pool Plant provisions of the Mideast order define which plants 
have an association with serving the fluid milk market demand of the 
Mideast marketing area, and therefore determine the producers and the 
producer milk that can participate in the marketwide pool as well as 
share in the Class I market revenues. The proposed amendments could 
fully regulate handlers that currently fall under partial regulation. 
As a result, these handlers would be required to account to the Mideast 
order marketwide pool. Consequently, all producers whose milk is pooled 
and priced under the terms of the Mideast order would benefit from the 
additional revenue contributed to the marketwide pool by the newly-
regulated distributing plant. The Department anticipates that while 
these additional monies would be shared with all producers serving the 
market, the proposed amendments would not have a significant economic 
impact on a substantial number of small entities.
    AMS is committed to complying with the E-Government Act, to promote 
the use of the Internet and other information technologies to provide 
increased opportunities for citizen access to Government information 
and services, and for other purposes.
    A review of reporting requirements was completed under the 
Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35). It was 
determined that the proposed amendment would have no impact on 
reporting, recordkeeping, or other compliance requirements because it 
would remain identical to the current requirements. No new forms are 
proposed and no additional reporting requirements would be necessary.
    This final decision does not require additional information 
collection that

[[Page 38537]]

requires clearance by the Office of Management and Budget (OMB) beyond 
currently approved information collection. The primary sources of data 
used to complete the approved forms are routinely used in most business 
transactions. The forms require only a minimal amount of information 
which can be supplied without data processing equipment or a trained 
statistical staff. Thus, the information collection and reporting 
burden is relatively small. Requiring the same reports for all handlers 
does not significantly disadvantage any handler that is smaller than 
the industry average.
    Interested parties were invited to submit comments on the probable 
regulatory and informational impact of this proposed rule on small 
entities.

Prior Documents in This Proceeding

    Notice of Hearing: Issued September 2, 2011; published September 8, 
2011 (76 FR 55608).
    Recommended Decision: Issued February 24, 2012; published February 
29, 2012 (77 FR 12216).

Preliminary Statement

    Notice is hereby given of the filing with the Hearing Clerk of this 
final decision with respect to proposed amendments to the tentative 
marketing agreement and the order regulating the handling of milk in 
the Mideast marketing area. This notice is issued pursuant to the 
provisions of the Agricultural Marketing Agreement Act and the 
applicable rules of practice and procedure governing the formulation of 
marketing agreements and marketing orders (7 CFR part 900).
    A public hearing was held upon proposed amendments to the marketing 
agreement and the order regulating the handling of milk in the Mideast 
marketing area. The hearing was held pursuant to the provisions of the 
Agricultural Marketing Agreement Act of 1937 (AMAA), as amended (7 
U.S.C. 601-674), and the applicable rules of practice and procedure 
governing the formulation of marketing agreements and marketing orders 
(7 CFR part 900).
    The proposed amendments set forth below are based on the record of 
a public hearing held in Cincinnati, Ohio, pursuant to a notice of 
hearing issued September 2, 2011. At the hearing, evidence was also 
gathered to determine whether market conditions exist to warrant 
consideration of the proposal on an emergency basis.
    The material issues on the record of hearing relate to:
    1. Amendment of the Pool Plant Definition.

Findings and Conclusions

    This final decision recommends adoption of a proposal, published in 
the Notice of Hearing as Proposal 1, with two modifications: one 
proposed at the hearing and one conforming change made by AMS. Proposal 
1, as published, would amend the Pool Plant provisions of the Mideast 
order so that any plant physically located within the marketing area 
would be fully regulated by the Mideast order if 50 percent of the 
plant's total combined route disposition and transfers fell within 
Federal milk marketing area boundaries and not more than 25 percent of 
the plant's route disposition were within any single Federal marketing 
area. This decision recommends striking the 25 percent in-area route 
disposition qualifier from the initial proposal, as proposed by 
Superior Dairy, Inc. (Superior Dairy) during the hearing. As such, any 
distributing plant physically located in the Mideast milk marketing 
area with combined total route distribution and transfers of 50 percent 
or more into Federal milk marketing areas would be regulated by the 
terms of the Mideast order. (As discussed below, a plant meeting this 
new standard could still become pooled by another order if it has total 
route distribution of at least 50 percent into one Federal marketing 
area for 3 consecutive months (as provided for in Sec.  1033.7(h)(3)).) 
Additionally, the regulatory text recommended in this decision has been 
modified by AMS to add clarifying text to ensure consistency with 
current order provisions.
    The Pool Plant provisions of the Mideast order define how plants 
demonstrate an adequate association with the fluid market, and 
therefore the milk associated with those plants that is pooled and 
priced under the terms of the order. The Pool Distributing Plant 
standard of the Mideast order first requires a plant to meet a minimum 
Class I utilization, which is the percentage of fluid milk physically 
received at the plant that is distributed or transferred as Class I 
(fluid) products. The Class I utilization standard for the Mideast 
Federal Milk Marketing Order (FMMO) is 30 percent. The plant must also 
show a reasonable association with the order's Class I market; that 
association is determined by the percentage of the plant's total Class 
I route disposition that is distributed or transferred within the 
marketing area, or ``in-area'' route disposition. In the Mideast order, 
25 percent of the plant's Class I route disposition must be to outlets 
within the Mideast marketing area. If a plant meets both the 30 percent 
Class I utilization and the 25 percent ``in-area'' route disposition 
standard the plant will be a fully regulated distributing plant. Once 
fully regulated, a distributing plant must account to the marketwide 
pool at classified use values and pay its producers at least the 
order's minimum blend price.
    A witness appeared on behalf of the proponents of Proposal 1, Dairy 
Farmers of America, Inc., Continental Dairy Products, Inc., Dairylea 
Cooperative Inc., Erie Cooperative Association, Foremost Farms USA 
Cooperative, Inc., Michigan Milk Producers Association, Inc., National 
Farmers Organization, Inc., Prairie Farms Dairy, Inc., and White Eagle 
Cooperative Association (collectively referred to as DFA et al.), in 
support of modifying the Pool Plant provisions of the Mideast milk 
marketing order. The witness stated that DFA et al. are all member-
owned Capper Volstead cooperatives that collectively market the 
majority of the milk in the Mideast milk marketing area.
    The DFA et al. witness estimated that more than 85 percent of the 
nearly 6,974 producers whose milk is pooled on the Mideast order are 
small businesses. The witness was of the opinion that the disorderly 
marketing conditions resulting from what they consider to be inadequate 
Pool Plant provisions are harming these small businesses and that 
failing to address these issues would be detrimental to their dairy 
farmer members.
    The DFA et al. witness testified that the intent of FMMOs are to 
create and preserve orderly marketing conditions by, among other 
things, maintaining classified pricing and a marketwide pooling system 
in which all handlers pay uniform minimum classified prices based on 
their milk utilization and producers receive a minimum uniform blend 
price. The witness testified that when marketwide pooling and 
classified pricing are jeopardized, FMMOs should be amended to maintain 
order in the market.
    The DFA et al. witness explained why they proposed a change to the 
Pool Plant provisions of the Mideast order. The witness testified that 
a large fluid milk bottling plant owned by Superior Dairy, located in 
Canton, Ohio, which had previously been fully regulated by either the 
Mideast or Northeast Federal milk orders, was able to become partially 
regulated under the current provisions of both orders. The witness 
testified that Superior Dairy's Canton plant was able to avoid full 
regulation by transferring packaged product ultimately bound for 
distribution in the Northeast marketing area through a smaller sister 
plant located in Wauseon,

[[Page 38538]]

Ohio, thereby reducing the route disposition from its Canton plant 
below the 25 percent in-area route disposition requirement.
    The DFA et al. witness was of the opinion that the Pool Plant 
provisions of the Mideast order allow Superior Dairy to avoid full 
regulation and consequently cause disorder in the market in two primary 
ways: (1) Producers who incur the additional costs of servicing the 
order's Class I market are not guaranteed a uniform blend price, and 
(2) similarly situated handlers are not assured the same raw milk 
costs. The witness reviewed the producer payment options available to 
partially regulated plants and explained how the ability of plants like 
Superior Dairy's plant to avoid full regulation causes disorder. The 
witness elaborated that one of the producer payment options, commonly 
known as the ``Wichita Option,'' for partially regulated plants 
requires plants to pay its producer suppliers, in aggregate, minimum 
Federal order classified values. The witness noted that while a 
Partially Regulated Distributing Plant (PRDP) has to pay aggregated 
classified values to it producers, it is not required to pay its 
producers uniformly on an individual basis. The witness said that if a 
plant demonstrates to the Market Administrator that this aggregate 
value requirement is met, then no additional payment into the order's 
producer settlement fund (PSF) is necessary. The witness testified that 
when partially regulated plants opt to pay their producer suppliers the 
minimum Federal order classified values, in aggregate, the plant can 
include over-order premiums in that calculation, whereas a fully 
regulated handler cannot. In orders such as the Mideast order, where 
significant over-order premiums are necessary to obtain a milk supply, 
the witness noted, this cost savings could be significant for a plant. 
The witness said that this savings could be used by the plant to 
increase market share for fluid milk sales, or to procure additional 
milk supplies to gain a competitive advantage with similarly situated, 
fully regulated pool handlers who are required to pay classified milk 
use values to the PSF (not including over-order premiums) and minimum 
blend prices to dairy farmers.
    The DFA et al. witness attempted to estimate the amount of money 
that Superior Dairy was able to retain from January of 2010 to July of 
2011 by avoiding full regulation on the Mideast order. The witness was 
of the opinion that Superior Dairy was able to retain approximately 
$0.93 per hundredweight (cwt) on average, the potential ``advantage'' 
over fully regulated handlers, equal to a cumulative monthly total 
savings averaging just under $289,000 (based on an assumed monthly 
plant volume of 30 million pounds). The witness added that a similarly 
situated fully regulated handler would have paid this money into the 
order's PSF to be shared with all producers servicing the market. 
However, Superior Dairy's partially regulated status allowed it to 
retain the money and, as a result, minimum blend prices to all the 
Mideast order's pool producers were reduced.
    The DFA et al. witness asserted that, over the years, Federal 
orders have been amended to reduce the disorder resulting from plants 
being regulated in areas different from the area in which they procure 
milk. The witness referred to a 1988 decision, ``Milk in the Ohio 
Valley and Louisville-Lexington-Evansville Marketing Areas'' (53 FR 
14804), that amended Pool Distributing Plant standards to correct a 
disorderly marketing condition which caused similarly situated plants 
within the same competitive area to have different raw milk costs. In 
this case, a plant that was located in the Louisville-Lexington-
Evansville marketing area, but had most of its route disposition in 
another marketing area, was regulated by the Louisville-Lexington-
Evansville marketing order. This change was premised on the idea that a 
plant should be regulated in the marketing area in which there is a 
reasonable assurance that it will have available an adequate supply of 
producer milk, which therefore promotes uniformity of prices to 
producers within the procurement area of the plant. The witness stated 
that the market disorder created by Superior Dairy's partially 
regulated status is similar to the issues addressed in the referenced 
1988 decision, and again urged the Department to recommend the adoption 
of Proposal 1 as an appropriate solution.
    The DFA et al. witness concluded by requesting that the Department 
consider this proposal on an emergency basis. The witness said that DFA 
et al. supplies milk to both Superior Dairy and other fully regulated 
plants. According to the witness, the difference in regulatory status 
between its buyers causes disorderly marketing conditions that directly 
impact its members. Additionally, Superior Dairy's competitive 
advantage due to its partially regulated status lowers the value of the 
order's marketwide pool, thereby reducing the minimum blend price to 
all the order's producers each month that Superior Dairy is not fully 
regulated.
    A second witness appeared on behalf of DFA et al. in support of 
Proposal 1. The witness reiterated the testimony of the earlier witness 
concerning the disorderly marketing conditions resulting from the 
Superior Dairy Canton plant becoming partially regulated. The witness 
said that the Department had taken steps in the past to restore order 
within the markets when there was evidence of plants engaging in 
uneconomic milk shipments and other business practices solely to avoid 
becoming fully regulated. The witness referenced regulatory changes 
made as a part of Federal order reform that closed loopholes that could 
be used to avoid regulation. Specifically, the witness highlighted 
amendments that prevented plants from using diverted milk volumes as 
part of the calculation used to determine eligibility for pooling.\1\ 
The witness implied that the Department addressed this loophole to help 
maintain an orderly market.
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    \1\ 64 FR 16025.
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    A witness representing Dairy Farmers of America (DFA) appeared in 
support of Proposal 1. The witness purported to have first-hand 
knowledge of the Wauseon, Ohio, plant before it was purchased by 
Superior Dairy. The witness testified that the plant had been closed by 
two prior owners who found the facility to be inefficient and 
economically nonviable. The witness claimed that the facility was the 
smallest in the region and that no other plants of similar size and/or 
logistical constraints existed in the area. The witness described in 
detail what they perceived to be logistical complications resulting 
from the limited size of the Wauseon plant. These complications, the 
witness asserted, were evidence that the plant was being used by 
Superior Dairy to facilitate the uneconomic movement of milk in an 
attempt to avoid regulation. The witness acknowledged that they had not 
entered into the Wauseon plant since Superior Dairy's acquisition of 
the facility and had no knowledge of Superior Dairy's internal business 
processes.
    A witness appeared on behalf of Michigan Milk Producers 
Association, Inc. (MMPA) in support of Proposal 1. MMPA is a member-
owned Capper Volstead cooperative which pools the majority of its 
producer milk on the Mideast order. The witness stated that MMPA was a 
supporter of Federal orders in that they provide equality for producers 
and an orderly market for handlers.
    The MMPA witness stated that the change in regulatory status of 
Superior Dairy's Canton plant was a concern that

[[Page 38539]]

raised questions of competitive equity between similarly situated 
handlers. The witness also referenced an earlier witness' testimony 
that included an analysis revealing a possible competitive advantage 
that a partially regulated plant could capture in addition to examining 
the degree of inequity that could exist amongst similarly situated 
plants.
    The MMPA witness was of the opinion that Superior Dairy's purchase 
of a smaller distributing plant approximately 200 miles away in 
Wauseon, Ohio, was a business decision made to avoid full regulation 
under Federal orders by transferring packaged product from the larger 
Canton plant northwest to the smaller Wauseon plant and later 
transporting this product back east to its final destination. The 
witness stated that this uneconomic movement of product was an attempt 
to avoid full regulation of the larger distributing plant.
    A witness from the Southern Marketing Agency (SMA) spoke in support 
of Proposal 1. SMA is a Capper-Volstead marketing agency comprised of 
seven cooperative members operating in the southern United States. The 
witness explained that Superior Dairy was unique from other handlers 
due to its broad distribution footprint which spanned the Northeast, 
Appalachian, Florida, Southeast, Central, and Mideast milk marketing 
areas. The witness opined that few other handlers of conventional fluid 
milk products had such expansive route disposition. The witness 
asserted that Superior Dairy was in direct competition with other 
Mideast fully regulated handlers for farm milk supplies.
    The SMA witness testified that recent shifts in the manner of 
Federal order regulation of Superior Dairy has created market disorder. 
The witness testified that when a large bottling plant is able to 
escape full regulation by the order from which its raw milk supply is 
procured and utilized at the plant, dairy farmers and cooperative 
associations face difficulties in raw milk procurement planning. The 
witness explained how seasonal changes in demand for Class I milk 
products create the need for each plant to maintain a reserve supply to 
ensure that their Class I needs are always met. The witness said that 
cooperatives routinely schedule milk deliveries into certain plants to 
ensure that reserve requirements are met and producers remain qualified 
to participate in the order's marketwide pool. The witness described 
how the pooling of necessary reserve milk supplies is complicated when 
a large plant such as Superior Dairy changes its regulatory status, or 
regulated by a Federal order distant from its milk procurement areas. 
The witness further explained that because pooling requirements vary 
between orders, a situation can arise where a plant switches the order 
it is regulated on, but producers who normally supply and are pooled by 
the plant are not automatically qualified to be pooled on the new 
order. The witness explained how this misallocation of reserve supplies 
to handlers could unintentionally leave producers who regularly bear 
the cost of supplying the Class I market excluded from the order's 
marketwide pool.
    The SMA witness testified that the pooling of a plant in an order 
distant from the plant's physical location creates market disorder. The 
witness stated that ``lock-in'' type provisions are used to address the 
wide route disposition patterns of extended shelf life (ESL) products. 
The witness testified that Federal orders regulate plants that 
manufacture ESL products in the order that the plant is located, 
regardless of where the majority of milk is sold. The witness testified 
that the pooling of ESL manufacturers in this manner prevents market 
disorder that would result from the plant switching regulation between 
orders. The witness opined that similar regulation of plants similar to 
Superior Dairy would prevent disorderly marketing conditions.
    The SMA witness asserted that Superior Dairy has a clear advantage 
over its fully regulated competitors since it is able to avoid payments 
into any PSF under partial regulation. The witness testified that the 
uneconomic movement of milk from Superior's Canton facility west to its 
Wauseon facility for subsequent distribution in the Northeast order was 
designed to limit the route disposition of Superior's Canton plant into 
any marketing area, thereby avoiding full regulation. The witness 
testified that this practice should be prohibited to prevent the 
potential for further disorderly marketing conditions.
    A witness testifying on behalf of Superior Dairy spoke in 
opposition to Proposal 1. According to the witness, Superior Dairy is a 
handler of Class I fluid milk products processing about 40 million 
pounds of milk per month at its two facilities. The witness argued that 
the change in regulatory status of Superior Dairy between the Northeast 
and Mideast FMMOs and between partial and full regulation does not 
disrupt marketing conditions in sufficient measure to warrant 
regulatory change.
    The Superior Dairy witness said the majority of milk processed by 
the company is supplied by DFA. The witness testified that DFA charged 
PRDPs such as Superior Dairy classified prices plus an over-order 
premium based on the plant's raw milk utilization, as per industry 
practice. The witness noted that the company had an 82 percent Class I 
utilization and approximately 90 percent of its route distribution was 
in Federal milk marketing areas. The witness testified that Superior 
Dairy was regulated by the Mideast order until March 2010, the 
Northeast order from April 2010 to February 2011, and partially 
regulated on both orders since March 2011.
    The Superior Dairy witness testified that the company was able to 
increase sales in recent years by implementing new packaging 
technology. The witness testified that the new packaging technology 
allowed the company to gain large clients whose distribution networks 
were substantially larger than that of traditional buyers. The witness 
noted that the result of that growth was increased sales into, and 
subsequent regulation by, the Northeast milk marketing order in April 
2010. The witness explained that Class I sales to outlets within the 
boundaries of the Northeast marketing area increased to 28 percent of 
total Class I volume sold, which decreased the percentage of its Class 
I sales within then Mideast marketing area to around 20 percent. The 
witness testified that regulation on the Northeast marketing order 
required that Superior Dairy pay into the Northeast PSF, rather than 
the Mideast PSF, which in turn required a larger monthly pool 
obligation to the plant. The witness elaborated that the change in 
regulation from the Mideast order to the Northeast order harmed 
Superior Dairy's producers since the Northeast blend price, when 
adjusted to their location in Canton, Ohio, was $0.13 per cwt lower 
than the Mideast blend price. The witness said that this required 
Superior Dairy to increase the over order premiums paid to its Mideast 
raw milk suppliers to remain competitive while also paying into the 
Northeast PSF, thus increasing its total raw milk procurement costs. 
The witness noted that Superior Dairy preferred to be regulated by the 
Mideast order, rather than the Northeast, but was unable to expand 
their route distribution sufficiently in the Mideast marketing area to 
remain regulated by that order.
    The Superior Dairy witness explained how the Canton plant came to 
be partially regulated as opposed to being fully regulated on the 
Northeast or Mideast order. The witness testified that

[[Page 38540]]

the company purchased a small plant in Wauseon, Ohio, in early 2011. 
The witness affirmed that the addition of this facility allowed 
Superior Dairy to decrease route distribution from its Canton plant to 
below 25 percent in both the Northeast and the Mideast marketing areas, 
allowing it to become partially regulated on both orders. The witness 
also added that the new facility was of interest to the company in that 
it allowed them to expand its procurement area for raw milk into 
Western Ohio and Southern Michigan without adding administrative 
personnel.
    The Superior Dairy witness testified that one of the Federal order 
provisions available to handlers with limited route disposition into 
Federal order areas, sometimes referred to as the ``Wichita Option,'' 
requires handlers to pay dairy farmers, in aggregate, the Federal order 
minimum classified values. The witness argued that the partial 
regulation of Superior Dairy does not provide any competitive sales 
advantage over its fully regulated competitors. However, the witness 
said that Federal order provisions for PRDPs do not promote equity 
amongst dairy farmers since the price received by dairy farmers for raw 
milk sold to a partially regulated plant can differ from the price of 
milk sold to a fully regulated plant. The witness testified that if a 
handler is partially regulated under the ``Wichita Option,'' it 
essentially operates as an individual handler pool. The witness 
explained how producers who ship milk to a PRDP with a higher than 
market average Class I utilization can receive a higher price than 
producers who ship milk to a fully regulated plant and are in turn paid 
the order's minimum blend price. The witness testified that Superior 
Dairy's producer suppliers are, in fact, paid an ``in-plant'' blend 
price that is higher than the Mideast blend price. The witness further 
added that producers are in fact not harmed when a partially regulated 
plant is supplied by a cooperative (as is the case with Superior 
Dairy), as the cooperative (and its producer-members) then receive the 
higher in-plant blend price. The witness also said that these blend 
price differences have not caused market disorder since other Mideast 
fully regulated distributing plants have continued to receive an 
adequate supply of milk.
    The Superior Dairy witness explained how adoption of Proposal 1 
would harm its own independent producer suppliers. The witness 
testified that Superior Dairy purchases raw milk from approximately 120 
independent producers, most of which are small businesses. Those 
producers, noted Superior Dairy's witness, receive an in-plant blend 
price for their raw milk greater than the Mideast order blend price. 
The witness asserted that the price the independent producers receive 
for their raw milk would decrease should the Superior Dairy Canton 
facility be fully regulated because that plant would be required to 
account to the PSF for its Class I sales and that additional revenue 
would then be shared with all producers servicing the market, not just 
Superior Dairy's independent producer suppliers.
    The Superior Dairy witness testified that Proposal 1 should not be 
adopted and its Canton, Ohio, plant should remain partially regulated. 
However, the witness said, should the Department decide to fully 
regulate either the Canton or Wauseon plant, it would be preferred that 
both plants be regulated on the Mideast order. The witness noted that 
provisions exist in certain orders allowing plants producing ESL 
products to be locked into regulation on an order by virtue of 
geographic location rather than route distribution. The witness stated 
that since the route disposition patterns of Superior Dairy are similar 
to plants producing ESL products, it is reasonable to regulate Superior 
Dairy based on geographical location, not route disposition.
    Accordingly, the Superior Dairy witness offered two separate 
modifications to Proposal 1 that the witness believed would lock 
Superior Dairy's Canton plant into regulation on the Mideast order. The 
witness suggested that Proposal 1 be modified by removing the 25 
percent in-area route disposition qualifier so that plants physically 
located in the Mideast order with route disposition and transfers of at 
least 50 percent into Federal marketing areas would be regulated on the 
Mideast order. Alternatively, the witness suggested modifying Proposal 
1 so that plants located in the Mideast order that have route 
disposition and transfers of at least 50 percent into any Federal 
market orders and sales into at least four separate marketing areas 
would be regulated on the Mideast order.
    The Superior Dairy witness disputed multiple times the data 
assembled and analyzed by the DFA et al. witness. The Superior Dairy 
witness explained that the data used by DFA et al. in its analysis did 
not, among other things, address over-order premiums paid by Superior 
Dairy to their producer suppliers.
    The witness from Superior Dairy was of the opinion that there was 
no need for the Department to consider this measure under emergency 
rulemaking procedures.
    A post-hearing brief was submitted on behalf of DFA et al. 
reiterating their testimony that inadequate Pool Plant provisions in 
the Mideast order are causing disorderly marketing conditions and that 
a large fluid milk bottling plant should not be able to avoid full 
regulation by transferring fluid milk products between plants. The 
brief claimed that when using the analysis introduced in their 
testimony, the cost advantage to a hypothetical PRDP of similar size to 
Superior Dairy (a monthly plant volume of 40 million pounds) averaged 
$373,000 per month from January 2010 to July 2011. The brief reiterated 
that because Superior Dairy is able to include over-order premiums in 
its theoretical pool obligation calculation, this can amount to a large 
cost advantage to the plant. The brief explained that by Superior Dairy 
avoiding payments into the PSF, producer price differentials, on 
average, were reduced by approximately $0.028 per cwt in the Mideast 
order or $0.018 per cwt in the Northeast order, depending on how the 
plant was regulated. The brief reinforced the SMA witness' testimony 
regarding the disorder created in the pooling of reserve supplies by a 
plant changing regulatory status from one order to another. The brief 
also emphasized the importance of market-wide pooling and uniform 
producer and handler values and stated that these fundamentals are 
undermined if major participants in the market can avoid regulation.
    In brief, DFA et al. wrote that they were in support of the first 
alternate proposal offered at the hearing by Superior Dairy. The brief 
stated that the alternate proposal would resolve the market disorder 
that was the catalyst for the hearing request and that DFA et al. 
considers this the best option for producers supplying the fluid milk 
needs of the Superior Dairy Canton facility and Mideast marketing area 
as a whole. The brief stated that while typically a plant is regulated 
according to its route distribution, there have been exceptions made in 
order to regulate plants based on their procurement area. In these 
instances, DFA et al. wrote, milk procurement area and producer price 
equity became the integral, more important factor because of the need 
to stabilize the milk supply for plants with route distribution in 
multiple marketing areas. As a whole, DFA et al. viewed the first 
alternate proposal as the best amendment to resolve the issue and, if 
the Department did not recommend Superior Dairy's alternative proposal,

[[Page 38541]]

suggested that Proposal 1 as originally noticed be adopted.
    A post-hearing brief was filed on behalf of Land O'Lakes, Inc., 
Agri-Mark, Inc., Maryland and Virginia Milk Producers Cooperative 
Association, Inc., and St. Alban's Cooperative Creamery, Inc., 
(Northeastern Cooperatives), in support of Proposal 1. The Northeastern 
Cooperatives are member-owned Capper Volstead cooperatives that pool 
their producers' milk on numerous FMMOs. The brief reiterated the 
testimony of witnesses in support of Proposal 1 as originally noticed 
and reviewed current order provisions that distinguish where a plant is 
regulated based off of the plant's route disposition instead of the 
geographical location of the plant. The brief reasserted the testimony 
of a Superior Dairy witness who said that 28 percent of its route 
distribution was in the Northeast marketing area in comparison to 20 
percent in the Mideast marketing area.
    The Northeastern Cooperatives brief opposed the alternate proposals 
offered by Superior Dairy at the hearing. The brief stated that 
alternate proposals should have been offered when the initial request 
for additional proposals was made so they could be included in the 
Notice of Hearing. The brief emphasized the Northeastern Cooperatives' 
opinion that the alternate proposals would ``lock-in'' Superior Dairy 
to regulation by the Mideast order, even if its route distribution was 
25 percent or more into another Federal marketing area. The brief 
stressed that implementation of a supposed ``lock-in'' provision would 
be of economic benefit to Superior Dairy, not producers.
    The Northeastern Cooperatives brief also stressed that the 
alternative Superior Dairy proposal would not require a plant to meet 
the 25 percent in-area route disposition standard, even though the 
plant would become regulated by the Mideast order. The brief emphasized 
that it is important to always consider route disposition as a factor 
when determining the FMMO in which a plant should be regulated.
    SMA filed a post hearing brief reiterating that disorderly 
marketing conditions are occurring as a result of inadequate Pool Plant 
provisions. SMA, in brief, offered its support to the modifications of 
Proposal 1 advanced by Superior Dairy during the hearing as a method 
for alleviating the disorderly marketing conditions. The brief noted 
that the disorder results from the disruption of uniform pricing, the 
switching of the regulatory status of plants from one order to another, 
the improper pooling assignment of reserve supplies, and the uneconomic 
movements of milk. SMA, in testimony and in written brief, urged the 
Department to consider the matter under emergency procedures, asserting 
that confidence in the Federal milk marketing order pricing system 
could otherwise be compromised.
    A post-hearing brief submitted on behalf of Superior Dairy 
reiterated many of the points made at the hearing and recommended 
adoption of the first modification it had offered at the hearing. 
Superior Dairy asserted that their modified proposal would ``lock-in'' 
the Superior Dairy Canton plant as a Mideast pool plant by virtue of 
its geographic location notwithstanding its failure to meet the 25 
percent in-area route distribution qualification. The brief stated that 
the purpose of the amendment was to regulate Superior Dairy as a pool 
plant under the terms of the Mideast order regardless of whether or not 
it also qualified as a pool plant in any other order. The brief 
summarized that the modified proposal sets as qualification standards 
(1) distribution and transfers of 50 percent or greater of a plant's 
fluid milk products into Federal milk marketing areas, and (2) plant 
location within the Mideast marketing area. Superior Dairy wrote that 
adoption of modified Proposal 1 would ensure the marketwide pooling of 
revenue for all producers and give Superior Dairy regulatory stability.
    In brief, Superior Dairy acknowledged that shifts in plant 
regulation create disruption and challenges in producer pooling and 
milk supply coordination. The brief also acknowledged that partially 
regulated plants such as Superior Dairy enjoyed certain advantages over 
fully regulated plants as they had price advantages in the procurement 
of raw milk. The brief explained that because distributing plants have 
a high Class I utilization, producers supplying the PRDP will always 
receive a higher price than those serving fully regulated distributing 
plants, who in turn receive the order's minimum blend price. 
Consequently, the brief noted, producers serving the PRDP do not 
equitably share in the burden of balancing the market's milk supplies.
    Superior Dairy's brief continued to refute the information provided 
by the DFA et al. witness regarding pricing assumptions and Superior 
Dairy's purported raw milk cost advantage. Superior Dairy stated that a 
price advantage did exist to them from being partially regulated; 
however, the calculation of that advantage as provided by DFA et al. 
was overstated.

Comments and Exceptions

    Four comments were filed in response to the recommended decision. 
DFA et al. filed a comment in support of the recommended decision, with 
one exception. DFA et al. supported the Department's finding that all 
major distributing plants selling milk in Federally regulated areas 
should be fully regulated to ensure that orderly marketing is 
maintained. DFA et al. also agreed that procurement competition between 
similarly situated handlers could be used as a factor in determining 
where a handler should be regulated.
    DFA et al. took exception to the portion of the recommended 
decision that addressed how current regulations (Sec.  1033.7(h)(3)), 
which would allow a distributing plant (including Superior Dairy's 
Canton plant) to be pooled on another order if 50 percent or more of 
its route distribution was in the other order, would apply. DFA et al. 
explained how under current regulations, when blend price relationships 
across Federal orders allow for a procurement area price advantage, a 
handler can alter their distribution patterns to enjoy this advantage 
and become regulated by the favorable Federal order. DFA et al. 
suggested that the Department de-link the proposed order language so 
that Sec.  1033.(h)(3) would specifically not apply to distributing 
plants whose route distribution into other Federal orders exceeded 50 
percent.
    A second comment, filed on behalf of Superior Dairy, expressed 
support for the proposed amendment contained in the recommended 
decision. Superior Dairy stated that in proposing its alternative that 
was ultimately recommended for adoption by the Department, it relied on 
its interpretation of the Department's regulatory precedence where 
similar procurement considerations were used to establish other ``lock-
in'' provisions, such as those for ESL plants.\2\ Superior Dairy wrote 
that in these situations procurement competition outweighed 
distribution competition, and therefore a plant became regulated based 
on its procurement area, not its distribution pattern.
---------------------------------------------------------------------------

    \2\ 1XXX.7(b) specifically refers to the production of ultra-
pasteurized or aseptically-processed fluid milk products.
---------------------------------------------------------------------------

    Similar to comments submitted by DFA et al., Superior Dairy took 
exception to the Department's explanation of how current market order 
provisions would continue to apply (any distributing plant, including 
Superior Dairy, who has route distribution greater than 50 percent into

[[Page 38542]]

another Federal order for 3 consecutive months would become fully 
regulated in that order). Superior Dairy argued that if this provision 
were applied, competitive equity between handlers would no longer be 
assured because the ability of plants to shift regulation from one 
market to another would still exist. Superior Dairy reiterated its 
contention that its alternative proposal was designed as a ``lock-in'' 
provision similar to the ``lock-in'' provision contained in all FMMO's 
for ESL plants.
    A third comment, filed on behalf of SMA, expressed support for the 
proposal contained in the recommended decision. SMA wrote that the 
proposed amendment would restore orderly marketing in the Mideast milk 
marketing area.
    A final comment was filed on behalf of Guers Dairy, Galliker Dairy 
Company, Schneider's Dairy, and Dean Foods Company (Guers et al.). The 
comment did not express support or opposition to the findings made in 
the recommended decision. Instead, Guers et al. requested that in the 
final decision, the Department explicitly state that the proposed 
amendment is a result of unique conditions found in the Mideast milk 
marketing area, and that the hearing record contains no evidence as to 
whether or not PRDPs located outside of the Mideast milk marketing 
area, including in unregulated areas, cause disorderly marketing 
conditions.

Discussion and Findings

    At issue in this proceeding is the consideration of proposed 
amendments to the Mideast FMMO Pool Plant provisions to more adequately 
define the plants that should be fully regulated by the terms of the 
Mideast order. This final decision continues to recommend that the Pool 
Plant provisions be amended to reflect that distributing plants located 
within the marketing area with a Class I utilization of at least 30 
percent and with combined route disposition and transfers of at least 
50 percent into Federal milk marketing areas would be regulated as a 
pool distributing plant under the terms of the Mideast marketing order 
(not withstanding other order provisions as discussed below).
    The Pool Plant provisions of the Mideast order \3\ define how 
plants demonstrate an adequate association with the fluid market, and 
subsequently how the milk associated with those plants is pooled and 
priced under the terms of the order. There are several types of plants 
defined in the Pool Plant provisions. This final decision recommends a 
change to the definition of a Pool Distributing Plant (a plant that 
processes milk for fluid uses).
---------------------------------------------------------------------------

    \3\ 7 CFR 1033.7.
---------------------------------------------------------------------------

    The Pool Distributing Plant standard \4\ of the Mideast order first 
requires a plant to demonstrate an adequate association with the fluid 
market by meeting a minimum Class I utilization. This is determined by 
the percentage of fluid milk physically received at the plant that is 
distributed or transferred as Class I (fluid) products. The Class I 
utilization standard for the Mideast FMMO is 30 percent. The plant must 
also show a reasonable association with the order's Class I market; 
that association is determined by the percentage of the plant's total 
Class I route disposition that is distributed or transferred within the 
marketing area, or ``in-area'' route disposition. In the Mideast order, 
a plant is fully regulated if at least 25 percent of its Class I route 
disposition and transfers are within the Mideast marketing area. If a 
plant meets both the 30 percent Class I utilization standard and the 25 
percent in-area route distribution standard (termed the ``30/25 percent 
standard''), the plant is fully regulated as a distributing plant under 
the terms of the Mideast order. Once fully regulated, a pool 
distributing plant must account to the marketwide pool at classified 
use values and is required to pay its producers at least the order's 
minimum blend price. This process ensures that similarly situated 
handlers have the same minimum raw milk costs and that the dairy 
farmers supplying the market share in the revenue generated from all 
fluid milk sales within the marketing area.
---------------------------------------------------------------------------

    \4\ 7 CFR 1033.7(a).
---------------------------------------------------------------------------

    FMMOs rely on the tools of classified pricing and marketwide 
pooling to assure an adequate supply of milk to meet the market's fluid 
needs and to provide for the equitable sharing of the revenues arising 
from the classified pricing of milk. Classified pricing assigns a value 
to milk according to how the milk is used; Class I (fluid) generally 
being the highest, followed by Class II (soft products), Class III 
(cheese), and Class IV (butter and nonfat dry milk). Regulated handlers 
who buy milk from dairy farmers account to the order's marketwide pool 
at classified prices according to how they use the milk. Dairy farmers 
are then paid a weighted average or ``blend'' price. The blend price is 
derived through the marketwide pooling of all class uses of milk in a 
marketing area, thus each producer receives an equal share of each use 
class of milk and is indifferent as to what class their milk is used. 
Since it is primarily the higher-valued Class I use of milk that adds 
additional revenue to the marketwide pool, it is reasonable to expect 
that the producers who consistently bear the costs of supplying the 
market's fluid needs should be the ones to share in the returns arising 
from higher-valued Class I sales.
    FMMOs have unique provisions for handlers that have route 
distribution into a marketing area but do not meet the standards for 
full regulation under the terms of the order. A handler that does not 
meet the minimum standard for full regulation under a specific FMMO 
(30/25 percent in the Mideast FMMO) but has route disposition within 
that marketing area and therefore competes with other fully regulated 
handlers for their Class I sales is known as a Partially Regulated 
Distributing Plant (PRDP). USDA has determined that some minimum 
regulation of PRDPs is necessary to maintain orderly marketing 
conditions and ensure that the order's classified pricing and 
marketwide pooling provisions are not undermined.
    There are three regulatory schemes, which may require a PRDP to 
account for route disposition into a marketing area: (1) A PRDP may pay 
into an order's PSF the difference between the Class I price and the 
market's blend price on its route disposition within the marketing 
area; (2) The PRDP pool obligation is calculated as if the plant were 
fully regulated and this obligation is compared to what the PRDP 
actually paid its milk suppliers in aggregate. If the obligation is 
greater than what it actually paid, the PRDP must pay the difference to 
the order's PSF. If the pool obligation is less than what the PRDP 
actually paid to its milk suppliers, then no additional payment to the 
order's PSF is necessary. This is often referred to as the ``Wichita 
Option;'' or (3) If a PRDP is subject to a State order with classified 
pricing and marketwide pooling, then it must pay into the order's PSF 
the difference between what it was required to pay into the State order 
and the applicable Class I price at the PRDP's location. An 
administrative assessment is collected by the Market Administrator 
regardless of which payment scheme the PRDP falls under and whether or 
not a payment into the PSF is required.
    The proponents of Proposal 1 requested this rulemaking proceeding 
based on their opinion that the current Pool Plant provisions of the 
Mideast FMMO have allowed a plant with significant route distribution 
throughout the Mideast and other Federal marketing areas to become a 
PRDP, which in turn has resulted in disorderly marketing conditions. 
The proponents described,

[[Page 38543]]

in their hearing testimony and post-hearing brief, a situation where 
Superior Dairy, which had previously been fully regulated by either the 
Northeast or Mideast orders, was able to circumvent full regulation by 
either order.
    The proponents provided great detail as to how a loophole in the 
Mideast Pool Plant provisions has allowed a large, previously fully 
regulated plant with significant fluid milk sales into Federally 
regulated areas to avoid full regulation on any Federal order and 
outlined the market disorder this has created: (1) Similarly situated 
handlers who compete for fluid milk sales within the marketing area are 
no longer assured that they pay the same minimum prices for raw milk; 
and (2) Producers who service the order's Class I market are no longer 
sharing in all the proceeds from the order's Class I sales. The 
proponents argued that if this loophole is not closed, other handlers 
with more than one distributing plant could set up similar distribution 
patterns between their plants to also avoid full regulation.
    Along the same line, the SMA witness described a third disorderly 
marketing condition, the improper pooling of reserve milk supplies. 
This witness described a situation where reserve supplies associated 
with a plant can lose association with the order's marketwide pool as a 
result of a plant being able to change regulation between orders with 
different pooling standards.
    The Superior Dairy witness testified at the hearing that newly-
patented filling and packaging technologies used at their bottling 
facilities have given them a competitive advantage in the marketplace 
and as a result, the ability to expand their distribution into numerous 
Federal marketing areas. According to the Superior Dairy witness, after 
expanding their route disposition into the Northeast marketing area in 
April 2010, they became a fully regulated handler in the Northeast 
order. Superior claims that it quickly found regulation on the 
Northeast order to be financially difficult to sustain because the 
Northeast order blend price payable to producers at the Canton location 
was lower than the Mideast order blend price at the same location by an 
average of $0.13 per cwt. The Superior Dairy witness testified that in 
early 2011 it purchased a small distributing plant in Wauseon, Ohio, 
which allowed it to adjust its distribution patterns between the two 
plants so that the Canton plant was no longer regulated by any Federal 
order.
    At the hearing, Superior Dairy offered two alternate modifications 
to Proposal 1. In their post-hearing brief, Superior Dairy supported 
adoption of their first modification which would fully regulate any 
distributing plant physically located within the geographic boundary of 
the Mideast marketing area if its total fluid route disposition into 
all Federal orders was greater than 50 percent. This modification would 
eliminate the stipulation, contained in Proposal 1 as originally 
noticed, that a plant's sales within any individual marketing area had 
to be less than 25 percent of its total route distribution.
    The pooling standards of a FMMO are represented in the Pool Plant, 
Producer, and the Producer Milk provisions. Performance based pooling 
standards provide the only viable method to identify the milk of those 
producers who service the Class I needs of the market and therefore 
determine those eligible to share in the marketwide pool. If a pooling 
provision does not reasonably accomplish this end, the proceeds that 
accrue to the PSF from the market's fluid milk sales are not equitably 
shared with the appropriate producers. The result is the unwarranted 
lowering of returns to those producers who actually incur the costs of 
servicing and supplying the needs of the fluid milk market and the 
reserve supplies that are necessary to ensure that fluid demands are 
met.
    The hearing record reflects, and this final decision continues to 
find, that the current Mideast Pool Plant provisions (7 CFR 1033.7) do 
not adequately define the plants and the producer milk associated with 
those plants, which serve the needs of the fluid milk market and should 
therefore share in the additional revenue arising from fluid milk 
sales. The hearing record reflects that in the Mideast marketing area, 
disorderly marketing conditions have arisen because a handler that has 
significant route distribution into Federally regulated areas is able 
to avoid regulation by altering its distribution patterns. FMMOs, 
through the fundamental tools of classified pricing and marketwide 
pooling, serve to minimize disorderly marketing conditions like the 
ones presented in this proceeding. A plant's ability to avoid 
regulation by altering its distribution pattern undermines the 
classified pricing and marketwide pooling fundamentals that are 
essential in maintaining orderly marketing.
    FMMOs require that distributing plants meeting the Class I 
utilization and in-area route distribution standards be fully regulated 
under the terms of the appropriate order. Along the same line, plants 
with minimal sales into a regulated area and therefore minimal impact 
on the market fall under partial, not full, regulation. The record 
reflects that prior to March 2011 Superior Dairy was fully regulated by 
either the Mideast or Northeast order. Superior Dairy revealed at the 
hearing that it was the purchase of the Wauseon, Ohio, distributing 
plant and the subsequent change in distribution patterns between the 
two plants that enabled the Canton, Ohio, plant to become a PRDP, not 
because its overall milk sales decreased to a volume where it no longer 
had an association with the fluid market. In fact, the record shows 
that Superior Dairy's Class I utilization has remained around 80 
percent regardless of its regulatory status and 90 percent of its sales 
are into regulated Federal milk marketing areas.
    The Ohio region where Superior Dairy's plants are located is in 
relative proximity to five other Federal milk marketing area 
boundaries. This unique location lends opportunity to adjust route 
disposition to avoid meeting the in-area route standard of any one 
Federal order.
    The record reflects that Superior Dairy utilizes the ``Wichita 
Option'' to account for its Class I sales into regulated areas. This 
choice allows the Canton plant to operate as an individual handler 
pool. The hearing record documents a unique situation present in the 
Mideast marketing area. Superior Dairy's operation as an individual 
handler pool, after having been regulated continuously for decades as a 
fully regulated distributing plant with a significant volume and an 
overwhelming majority of its Class I sales into Federally regulated 
areas, undermines the order's classified pricing and marketwide pooling 
system--essential principles for orderly marketing and competitive 
equity. Additionally, handler equity, which the FMMO system strives to 
maintain, can be evaluated on two fronts: where handlers compete in 
route distribution and where handlers compete in milk procurement. Both 
factors are important. However, when the balance of competition is 
disrupted through uneconomic movements of milk, one factor may become 
more important in order to restore competitive equity amongst competing 
handlers.
    The classified pricing system ensures regulated handlers that their 
competitors are paying uniform minimum raw milk costs. In this way, no 
competitor has an advantage or disadvantage in its raw milk costs 
because of its regulatory status. While a fully regulated handler must 
account to the pool for its classified use value and pay its producers 
the market's blend price, a PRDP using the ``Wichita Option''--as in 
the case of Superior

[[Page 38544]]

Dairy--must only show that it paid its producer suppliers, in 
aggregate, the classified use values of its raw milk supply. A PRDP 
operating essentially as an individual handler pool that has a higher 
in-plant Class I utilization than the market has a competitive 
advantage when it comes to raw milk procurement over a regulated 
competitor since it is able to pay its suppliers a higher in-plant 
blend price. At the hearing, a Superior Dairy witness testified that 
their Class I utilization was approximately 82 percent. The Class I 
utilization for the Mideast order in October 2011 (the month the 
hearing was held) was 38.1 percent. Superior Dairy's raw milk cost 
advantage due to its partially regulated status is equal to the 
difference between the in-plant blend price and the market's blend 
price. This is revenue that a fully regulated handler would have been 
required to pay into the order's PSF to be shared with all the market's 
producers, but which Superior has available to pay directly to its 
producers because of its partially regulated status.
    Additionally, since Superior Dairy can include over-order premiums 
as part of the calculation relied on to prove to the Market 
Administrator under the ``Wichita Option'' that minimum classified 
prices are being paid, similarly situated handlers are not guaranteed 
the same raw milk costs. The record reflects that the payment of over-
order premiums is prevalent in the Mideast marketing area. While a 
regulated handler must pay the order's minimum blend price plus any 
over-order premium negotiated with its suppliers, a PRDP is able to use 
the over-order premium to offset its regulatory PSF payment obligation 
to its suppliers. For example, assume a prevailing over-order premium 
of $2.00 per cwt on all Class I milk is charged by cooperatives 
servicing distributing plants and the order's Class I price for the 
month is $19.00 per cwt. A fully regulated handler would account to the 
PSF at $19.00 per cwt for any Class I milk utilized and pay the 
additional over-order premium of $2.00 per cwt directly to the 
cooperative--meaning that it is actually paying $21.00 per cwt for 
Class I milk. A PRDP can include the $2.00 per cwt over-order premium 
paid directly to its suppliers when calculating whether it has an 
additional pool obligation under the ``Wichita Option.'' In effect, the 
PRDP pays $19.00 per cwt while the fully regulated plant must pay 
$21.00 per cwt. This theoretical $2.00 per cwt advantage can be used by 
the plant in any way it deems fit: To procure additional milk 
suppliers, to pass the money on to its suppliers, to create a sales 
advantage over its competitors, or to simply keep as company profit.
    This final decision also finds that marketwide pooling principles 
are undermined because of Superior Dairy's PRDP status. It is clear 
that Superior is able to retain monies that it otherwise would pay into 
the PSF if it were fully regulated. The hearing record reflects 
attempts by proponents to estimate Superior Dairy's cost advantage, and 
taken a step further, monies that would otherwise be paid into the 
marketwide pool. In its post-hearing brief, Superior Dairy refutes some 
of the proponents' assumptions and argues that its cost advantage is 
lower. Estimating the exact amount of Superior Dairy's purported cost 
advantage gained by avoiding full regulation is difficult without 
disclosing confidential business information; furthermore, determining 
the exact level of that advantage is not necessary to demonstrate its 
existence and consequent market disorder. What is important is that 
money is not being equitably shared with all producers supplying the 
Class I market. Even if Superior Dairy was sharing that money with all 
its producer-suppliers, it is money that should be shared with all 
producers servicing the market. Consequently, producers serving the 
market are receiving a lower blend price than they otherwise would if 
Superior Dairy were fully regulated.
    This final decision continues to recommend the adoption of Proposal 
1 as modified by Superior Dairy as an appropriate solution to the 
current market disorder in the Mideast marketing area. While FMMOs 
typically regulate (pool) plants based on where their fluid milk sales 
occur, the hearing record reflects that it is not unprecedented for a 
plant to be regulated based on competing milk procurement areas. A 1988 
decision (53 FR 14804), for example, regulated a plant into the then 
Louisville-Lexington-Evansville FMMO, in spite of the plant having 
greater route disposition into another FMMO. This finding was based on 
the fact that, despite having greater sales into another FMMO, the raw 
milk procurement area of the plant was the same as other handlers who 
were regulated by the Louisville-Lexington-Evansville FMMO.
    Additionally, all Federal orders contain provisions to regulate 
plants that primarily process ultra-high temperature or ESL milk 
products in the Federal order where the plant is physically located. 
Plants producing longer shelf-life products are regulated by the order 
where they are physically located \5\ primarily because the wide and 
ever changing geographic distribution patterns of their products can 
lead to regulation under multiple orders over time. This is not unlike 
Superior Dairy, who distributes product into seven marketing areas.
---------------------------------------------------------------------------

    \5\ 7 CFR 10----.7(b).
---------------------------------------------------------------------------

    The record reflects that Superior Dairy's Canton, Ohio, plant is 
located in the middle of the Mideast marketing area and competes for a 
raw milk supply with other pool distributing plants that are regulated 
by the Mideast order. Furthermore, the record reflects that while 
Superior Dairy has been able to stay below the 25 percent in-area route 
distribution standard in other marketing areas, its route distribution 
into some Federal marketing areas exceeds 20 percent. Given that the 
plant has route distribution into 7 marketing areas, a 25 percent route 
distribution threshold could cause future market disorder if the plant 
shifts regulation from one order to another. Therefore, this final 
decision finds it appropriate under the facts presented in this 
rulemaking proceeding to more heavily rely on milk procurement area, 
not route disposition, as the fundamental primary determinant in 
recommending changes to the Pool Plant provisions of the Mideast FMMO. 
Consequently, this decision recommends that distributing plants 
physically located in the Mideast marketing area who do not meet the 25 
percent in-area route distribution standard (the current pooling 
standard for distributing plants to be regulated by the Mideast order), 
but have a majority (50 percent or more) of their fluid milk sales into 
Federally regulated areas, be regulated by the Mideast order.
    In its post-hearing brief, Superior Dairy reiterated its opinion 
that a modified Proposal 1 would ``lock-in'' the Superior Canton plant 
into regulation under the Mideast order, regardless of future route 
distribution patterns. However, FMMO's contain a provision in each 
order (Sec.  1033.7(h)(3) in the Mideast order) which specifies that if 
a pool plant has route disposition greater than 50 percent into another 
Federal order for at least 3 consecutive months then that plant will 
become regulated by that Federal order. This decision does not amend 
that provision. If at any time a pool plant regulated by the Mideast 
order has route disposition of greater than 50 percent into another 
Federal order for 3 or more consecutive months, that plant would then 
become regulated by the order where it has a majority of its sales.
    Superior Dairy argued in their post-hearing brief that a different 
provision

[[Page 38545]]

contained in each order, (Sec.  1033.7(h)(5) in the Mideast order) 
could be relied upon to ``lock-in'' Superior Dairy to the Mideast 
order. This provision allows the Mideast order to regulate a pool plant 
even if it meets the pooling standards of another order--essentially it 
allows the Mideast regulations to control if the plant is ``required'' 
to be pooled by the Mideast order. Although this decision recommends 
changes to the Pool Plant provisions of the Mideast order based on 
clear evidence of disorderly marketing conditions resulting from the 
partial regulation of Superior Dairy and relies heavily on milk 
procurement area as one of the reasons behind this change, this 
decision does not permanently ``lock-in'' or require Superior Dairy, or 
any other handler, to be regulated by the Mideast FMMO. This decision 
simply modifies the Pool Plant provisions so that any plant located in 
the Mideast marketing area that does not meet the in-area route 
distribution standard, but has at least 50 percent of its total route 
distribution into Federal marketing areas, becomes regulated under the 
Mideast order. To be clear, a situation could arise where a plant 
physically located in the Mideast marketing area meets the in-area 
route distribution standard of another order but is still regulated on 
the Mideast order. However, as current regulations already provide for, 
any plant located in the Mideast marketing area that has more than 50 
percent of its route distribution into another Federal order for 3 
consecutive months would still become regulated by that other Federal 
order.
    Exceptions to the recommended decision filed on behalf of Superior 
Dairy and DFA et al. asked the Department to reconsider its findings on 
how Sec.  1033.7(h)(3) would continue to apply to all pool distributing 
plants regulated by the Mideast order. Both Superior Dairy and DFA et 
al. stated that the modified proposal was designed to lock Superior 
Dairy into regulation on the Mideast order regardless of its future 
distribution patterns. Both indicated that without the permanent 
``lock-in,'' Superior Dairy, or any other distributing plant that meets 
the newly amended Pool Plant definition could switch regulation back 
and forth between orders, and advocated that the proposed amendment be 
exempt from Sec.  1033.7(h)(3).
    This final decision continues to find that an unconditional ``lock-
in'' provision is not warranted and any plant located in the Mideast 
marketing area that has more than 50 percent of its route distribution 
into another Federal order for 3 consecutive months would become 
regulated by that other Federal order. This rulemaking proceeding 
contains no evidence that application of Sec.  1033.7(h)(3) to a plant 
with more than 50 percent of its route disposition into Federally 
regulated areas will lead to a plant switching regulation between 
orders in a way that would be disorderly. A regulated plant knows well 
in advance if its distribution into another Federal order exceeds 50 
percent. In fact, it would not be until the third consecutive month of 
a plant having such distribution pattern for it to become regulated on 
another order. Therefore, it will have two months to alter its 
distribution to fall below 50 percent. This lag between first crossing 
the 50 percent distribution threshold and when a plant would become 
regulated by the other order should prevent the arbitrary switching of 
regulation between orders.
    The FMMO system was designed so the revenue from a market is shared 
amongst all the producers who service the market. Without the 
application of Sec.  1033.7(h)(3), a situation could arise where a 
distributing plant located in the Mideast order could have 98 percent 
of its sales into another Federal order, yet it still be regulated by 
the terms of the Mideast order. In this case, the revenue from the 
plant's Class I sales into the other order would not be shared with 
those producers, but would instead be transferred to Mideast producers 
who in fact have no other association with the other order's market. 
This decision finds that such a situation undermines the intent of the 
FMMO order system and could create further disorderly marketing 
conditions. Therefore such a loophole should not knowingly be adopted. 
Commenters who took exception to this interpretation cited the ``lock-
in'' provision contained in the all order's for ESL plants. The ``lock-
in'' provision for ESL plants was adopted, in part, because of the wide 
geographic distribution and marketing patterns of those plants due to 
the longer shelf life of ESL products. In the case of how Sec.  
1033.7(h)(3) would apply in this instance, a plant must demonstrate a 
regular and consistent association with another order for three 
consecutive months before becoming regulated in the other order. This 
differentiates plants subject to the current rulemaking proceeding from 
ESL plants, whose ``lock-in'' was designed to accommodate ESL plants 
with distribution patterns varying widely by both volume and geography 
on a monthly basis.
    This final decision finds that the recommended amendment contained 
in this decision will reestablish orderly marketing conditions in the 
Mideast marketing area, while at the same time ensure that producers in 
other markets will not be harmed by the potential removal of 
significant Class I revenues from their marketwide pool.
    Lastly, in their post-hearing brief the Northeast Cooperatives took 
exception to the two modified proposal options offered by Superior 
Dairy. The Northeast Cooperatives were of the opinion that the two 
modified proposals presented at the hearing were not properly noticed 
and that interested parties did not have the opportunity to offer 
evidence regarding the modifications. This decision finds that the 
modifications offered by Superior Dairy at the hearing were in fact 
reasonable given the scope of the initial hearing request and that all 
interested parties in all Federal orders were given notice and had 
ample opportunity to offer evidence at the hearing and comment in a 
post-hearing brief.
    Proponents and supporters of the originally noticed Proposal 1 
requested that the Department consider this proceeding on an emergency 
basis because of the ongoing market disorder. The Department finds that 
issuing a decision on an emergency basis is not warranted. This 
decision recommends adoption of Proposal 1 as was modified at the 
hearing. It is appropriate to give all interested parties the 
opportunity to consider the Department's findings and file written 
comments and exceptions to this decision before requesting producers to 
vote on the order, as amended. Additionally, this rulemaking will 
adhere to the Supplemental Rules of Practice that were issued as a 
result of the Food, Conservation and Energy Act of 2008 \6\ (as 
contained in 7 CFR part 900.20-.33). These newly established rules 
provide specific timeframes that the Department must adhere to when 
amending Federal milk marketing agreements and orders. Therefore, there 
is insufficient justification for issuing this decision on an emergency 
basis as the market disorder can still be addressed in a timely manner 
while allowing for maximum public input before any regulatory changes 
are made.
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    \6\ Public Law 110-234, 110th Congress.
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    AMS has made a conforming change to the regulatory text as offered 
by Superior Dairy and as recommended for adoption in this final 
decision. The reference to the 30 percent Class I utilization standard 
that is already contained in the Pool Distributing plant definition has 
been added to the proposed amendment. This addition clarifies that a 
pool plant physically located in the Mideast marketing area that meets 
the 50 percent route

[[Page 38546]]

disposition into Federally regulated marketing areas must still meet 
the 30 percent Class I utilization standard in order to be regulated on 
the Mideast order.

Rulings on Proposed Findings and Conclusions

    Briefs and proposed findings and conclusions were filed on behalf 
of certain interested parties. These briefs, proposed findings, and 
conclusions and the evidence in the record were considered in making 
the findings and conclusions set forth above. To the extent that the 
suggested findings and conclusions filed by interested parties are 
inconsistent with the findings and conclusions set forth herein, the 
requests to make such findings or reach such conclusions are denied for 
the reasons previously stated in this decision.

General Findings

    The findings and determinations hereinafter set forth supplement 
those that were made when the Mideast order was first issued and when 
it was amended. The previous findings and determinations are hereby 
ratified and confirmed, except where they may conflict with those set 
forth herein.
    (a) The tentative marketing agreement and the order, as hereby 
proposed to be amended, and all of the terms and conditions thereof, 
will tend to effectuate the declared policy of the Act;
    (b) The parity prices of milk as determined pursuant to section 2 
of the Act are not reasonable in view of the price of feeds, available 
supplies of feeds, and other economic conditions which affect market 
supply and demand for the milk in the marketing area, and the minimum 
prices specified in the tentative marketing agreement and the order, as 
hereby proposed to be amended, are such prices as will reflect the 
aforesaid factors, insure a sufficient quantity of pure and wholesome 
milk, and be in the public interest; and
    (c) The tentative marketing agreement and the order, as hereby 
proposed to be amended, will regulate the handling of milk in the same 
manner as, and will be applicable only to persons in the respective 
classes of industrial and commercial activity specified in, the 
marketing agreement upon which a hearing has been held.
    (d) All milk and milk products handled by handlers, as defined in 
the tentative marketing agreements and the orders as hereby proposed to 
be amended, are in the current of interstate commerce or directly 
burden, obstruct, or affect interstate commerce in milk or its 
products.

Rulings on Exceptions

    In arriving at the findings and conclusions, and the regulatory 
provisions of this decision, each of the exceptions received was 
carefully and fully considered in conjunction with the record evidence. 
To the extent that the findings and conclusions and the regulatory 
provisions of this decision are at variance with any of the exceptions, 
such exceptions are hereby overruled for the reasons previously stated 
in this decision.

Marketing Agreement and Order

    Annexed hereto and made a part hereof are two documents, a 
Marketing Agreement regulating the handling of milk, and an Order 
amending the order regulating the handling of milk in the Mideast 
marketing area, which has been decided upon as the detailed and 
appropriate means of effectuating the foregoing conclusions.
    It is hereby ordered that this entire decision and the two 
documents annexed hereto be published in the Federal Register.

Referendum Order To Determine Producer Approval; Determination of 
Representative Period; and Designation of Referendum Agent

    It is hereby directed that a referendum be conducted and completed 
on or before the 30th day from the date this decision is published in 
the Federal Register, in accordance with the procedures for the conduct 
of referenda [7 CFR 900.300-311], to determine whether the issuance of 
the order as amended and hereby proposed to be amended, regulating the 
handling of milk in the Mideast marketing area is approved or favored 
by producers, as defined under the terms of the order, as amended and 
as hereby proposed to be amended, who during such representative period 
were engaged in the production of milk for sale within the aforesaid 
marketing area.
    The representative period for the conduct of such referendum is 
hereby determined to be October 2011.
    The agent of the Secretary to conduct the referendum is hereby 
designated to be the Market Administrator of the Mideast marketing 
area.

List of Subjects in 7 CFR Part 1033

    Milk marketing orders.

Order Amending the Order Regulating the Handling of Milk in the Mideast 
Marketing Area

    This order shall not become effective unless and until the 
requirements of Sec.  900.14 of the rules of practice and procedure 
governing proceedings to formulate marketing agreements and marketing 
orders have been met.

Findings and Determinations

    The findings and determinations hereinafter set forth supplement 
those that were made when the order was first issued and when it was 
amended. The previous findings and determinations are hereby ratified 
and confirmed, except where they may conflict with those set forth 
herein.
    (a) Findings. A public hearing was held upon certain proposed 
amendments to the tentative marketing agreement and to the order 
regulating the handling of milk in the Mideast marketing area. The 
hearing was held 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 (7 CFR part 900).
    Upon the basis of the evidence introduced at such hearing and the 
record thereof, it is found that:
    (1) The said order as hereby amended, and all of the terms and 
conditions thereof, will tend to effectuate the declared policy of the 
Act;
    (2) The parity prices of milk, as determined pursuant to section 2 
of the Act, are not reasonable in view of the price of feeds, available 
supplies of feeds, and other economic conditions which affect market 
supply and demand for milk in the aforesaid marketing area. The minimum 
prices specified in the order as hereby amended are such prices as will 
reflect the aforesaid factors, insure a sufficient quantity of pure and 
wholesome milk, and be in the public interest; and
    (3) The said order as hereby amended regulates the handling of milk 
in the same manner as, and is applicable only to persons in the 
respective classes of industrial or commercial activity specified in, a 
marketing agreement upon which a hearing has been held.

Order Relative to Handling

    It is therefore ordered, that on and after the effective date 
hereof, the handling of milk in the Mideast marketing area shall be in 
conformity to and in compliance with the terms and conditions of the 
order, as amended, and as hereby amended, as follows:
    The provisions of the order amending the order contained in the 
Recommended Decision issued by the Acting Administrator, Agricultural 
Marketing Service, on February 24, 2012, and published in the Federal 
Register on February 29, 2012 (77 FR 12216), are adopted and shall be 
the terms and provisions of this order. The revised order follows.

[[Page 38547]]

PART 1033--MILK IN THE MIDEAST MARKETING AREA

    1. The authority citation for 7 CFR part 1033 continues to read as 
follows:


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

    2. Amend Sec.  1033.7 by revising paragraph (a) to read as follows:


Sec.  1033.7  Pool Plant

* * * * *
    (a) A distributing plant, other than a plant qualified as a pool 
plant pursuant to paragraph (b) of this section or Sec.  ------.7(b) of 
any other Federal milk order, from which during the month 30 percent or 
more of the total quantity of fluid milk products physically received 
at the plant (excluding concentrated milk received from another plant 
by agreement for other than class I use) are disposed of as route 
disposition or are transferred in the form of packaged fluid milk 
products to other distributing plants. At least 25 percent of such 
route disposition and transfers must be to outlets in the marketing 
area. Plants located within the marketing area that meet the 30 percent 
route disposition standard contained above, and have combined route 
disposition and transfers of at least 50 percent into Federal order 
marketing areas will be regulated as a distributing plant in this 
order.
* * * * *

    Dated: June 22, 2012.
David R. Shipman,
Administrator, Agricultural Marketing Service.
[FR Doc. 2012-15670 Filed 6-27-12; 8:45 am]
BILLING CODE 3410-02-P